RAIL COMPETITION AND SERVICE

(110–70)

HEARING

BEFORE THE

COMMITTEE ON 

TRANSPORTATION AND 

INFRASTRUCTURE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

SEPTEMBER 25, 2007

Printed for the use of the 

Committee on Transportation and Infrastructure

(

RAIL COMPETITION AND SERVICE

RAIL COMPETITION AND SERVICE

RAIL COMPETITION AND SERVICE

RAIL COMPETITION AND SERVICE

RAIL COMPETITION AND SERVICE

RAIL COMPETITION AND SERVICE

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38–170 PDF 2007

RAIL COMPETITION AND SERVICE

(110–70)

HEARING

BEFORE THE

COMMITTEE ON 

TRANSPORTATION AND 

INFRASTRUCTURE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

SEPTEMBER 25, 2007

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 

JULIA CARSON, Indiana 

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 

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 

RICHARD H. BAKER, Louisiana 

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 

(II)

(III)

CONTENTS Page

Summary of Subject Matter .................................................................................... v

TESTIMONY 

Buttrey, W. Douglas, Vice Chairman, Surface Transportation Board ................ 21

Clayton, Kenneth C., Associate Administrator, Agricultural Marketing 

Science, U.S. Department of Agriculture ........................................................... 21

Diehl, Susan M., Senior Vice President, Logistics and Supply Chain Management, Holcim, Inc. ................................................................................................ 70

English, Glenn, Chief Executive Officer, National Rural Electric Cooperative 

Association ............................................................................................................ 70

Harper, Ronald R., Chief Executive Officer and General Manager, Basin 

Electric Power Cooperative ................................................................................. 70

Hecker, Jayetta Z., Director, Physical Infrastructure Issues, Government Accountability Office ................................................................................................ 21

Hurst, Wayne, Vice President, Idaho Grain Producers Association, on behalf 

of the National Association of Wheat Growers .................................................. 70

Huval, Terry, Director, Lafayette Utilities Service ............................................... 70

Marshall, Charlie, Vice President of Development, Farm Rail System, Inc. ...... 97

Mulvey, Francis P., Board Member, Surface Transportation Board ................... 21

Nottingham, Charles D., Chairman, Surface Transportation Board ................... 21

Rennicke, William, Director, Oliver Wyman, Inc. ................................................. 97

Spitzer, Gary, Vice President and General Manager, Chemical Solutions Enterprise, DuPont ................................................................................................... 70

Young, Jim, Chairman, President, Chief Executive Officer, Union Pacific ........ 97

PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS 

Baker, Hon. Richard H., of Louisiana .................................................................... 119

Brown, Hon. Corrine, of Florida ............................................................................. 121

Carnahan, Hon. Russ, of Missouri ......................................................................... 392

Cohen, Hon. Steve, of Tennessee ............................................................................ 393

Cummings, Hon. Elijah E., of Maryland ............................................................... 394

Lampson, Hon. Nick, of Texas ................................................................................ 403

Mitchell, Hon. Harry E., of Arizona ....................................................................... 404

Rahall, Hon. Nick J., of West Virginia .................................................................. 406

Salazar, Hon. John T., of Colorado ........................................................................ 410

Smith, Hon. Adrian, of Nebraska ........................................................................... 418

Walz, Hon. Timothy J., of Minnesota ..................................................................... 419

PREPARED STATEMENTS SUBMITTED BY WITNESSES 

Buttrey, W. Douglas ................................................................................................ 420

Clayton, Kenneth C. ................................................................................................ 425

Diehl, Susan M. ....................................................................................................... 434

English, Glenn ......................................................................................................... 443

Harper, Ron .............................................................................................................. 450

Hecher, JayEtta Z. ................................................................................................... 455

Hurst, Wayne ........................................................................................................... 487

Huval, Terry ............................................................................................................. 502

Marshall, Charles N. ............................................................................................... 518

Mulvey, Francis P. ................................................................................................... 529

Nottingham, Charles D. .......................................................................................... 541

Rennicke, William J. ............................................................................................... 608

Spitzer, Gary W. ...................................................................................................... 645

Young, James R. ...................................................................................................... 658

Page

IV

SUBMISSIONS FOR THE RECORD 

Brown, Hon. Corrine, a Representative in Congress from the State of Florida, 

a sample of 2,000 letters sent to Members of the House and Senate in 

opposition to H.R. 2125 and S. 953 .................................................................... 126

A sample of letters sent to the Committee in support of H.R. 2125 ................... 295

Kagen, Hon. Steve, a Representative in Congress from the State of Wisconsin:

Letter to the Congressman from Badger-CURE, Wisconsin Consumers 

United for Rail Equity ...................................................................................... 400

Letter to the Congressman from Wayne Toltzman, Mayor of the City of 

New London, Wisconsin ................................................................................... 402

Salazar, Hon. John T., a Representative in Congress from the State of Colorado:

Letter to the Congressman from Timothy J. Larsen, Senior International 

Marketing Specialist, Colorado Department of Agriculture, Markets Division ..................................................................................................................... 413

Letter to the Congressman .................................................................................. 417

Surface Transportation Board, W. Douglas Buttrey, Charles D. Nottingham, 

Francis P. Mulvey, responses to questions from the Committee ..................... 421

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

to questions from the Committee ........................................................................ 563

Young, Jim, Chairman, President, Chief Executive Officer, Union Pacific, 

responses to questions from the Committee ...................................................... 684

ADDITIONS TO THE RECORD 

Air Liquide, L. Richard Pedersen, Director, National Distribution and Logistics, written statement ......................................................................................... 686

Alliance for Rail Competition, American Soybean Association, American Sugarbeet Growers Association, National Associations of Wheat Growers, National Barley Growers Association, National Farmers Union, United States 

Beet Sugar Association, USA Dry Pea & Lentil Council, US Dry Bean 

Council, USA Rice Federation, written statement ............................................ 693

Association of American Railroads, written statement ........................................ 695

BASF Corporation, NAFTA Logistics, David McGregor, Senior Vice President, 

written statement ................................................................................................. 718

Minnesota Municipal Utilities Association, written statement ........................... 728

National Corn Growers Association, written statement ....................................... 732

Rhodia Inc., James Harton, President, written statement .................................. 741

Steel Manufacturers Association, written statement ........................................... 744

Total PetroChemicals USA, Inc., Richard L. Charter, Senior Vice President, 

written statement ................................................................................................. 747

U.S. Department of Transportation, Tyler D. Duvall, Assistant Secretary 

for Transportation Policy, written statement .................................................... 751

UPM Blandin Paper, Joseph C. Maher, General Manager, written statement . 753

Washington State Potato Commission, Chris Voigt, Executive Director, Paul 

Vander Stoep, Consultant, written statement ................................................... 755

Waterfront Coalition, Ezra Finkin, Legislative Director, written statement ..... 759

Wisconsin Agri-Service Association, Inc., John Petty, Executive Director, written statement ....................................................................................................... 761

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(1)

HEARING ON RAIL COMPETITION AND 

SERVICE 

Tuesday, September 25, 2007

HOUSE OF REPRESENTATIVES, COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE, Washington, DC. 

The Committee met, pursuant to call, at 10:10 a.m., in Room 

2167, Rayburn House Office Building, the Honorable James L. 

Oberstar [Chairman of the Committee] presiding. 

Mr. OBERSTAR. The Committee on Transportation and Infrastructure will come to order, with apologies from the Chair for not being 

on railroad time. Unfortunately, I had more meetings this morning 

to attend to than I could fit in the requisite time in order to start 

this hearing on order. 

October 14 marks the anniversary of the passage of the Staggers 

Rail Deregulation Act. I remember so well in the days leading up 

to that vote and on the day of the vote itself being in some indecision about whether this was a good policy for the Country or 

whether it would, in the end, turn around to be harmful to us. 

I could understand we had already passed trucking deregulation, 

intercity bus deregulation. We had enacted aviation deregulation. 

It made an awful lot of sense that trucks could move and enter 

markets and compete with each other. Intercity buses could do the 

same. Airlines could compete with one another through different 

airports. 

But I found it difficult how you would be able to pick up a set 

of rail tracks, move them around to different cities and actually 

compete. We had 60 Class I railroads. The argument was we would 

have an awful lot of competition if we just took the Government 

out of deciding market entry and pricing. In the end, I voted for 

it. 

Well, today, we have seven Class I railroads. The freight rail network in 1980 was 178,000 miles. Today, we have 140,810 route 

miles. Abandonments, spinoffs to short lines, all have caused a deterioration in the miles and in the market opportunities. 

Railroad fortunes also had a dramatic turnaround. Many railroads were on the brink of bankruptcy in those years just prior to 

the Staggers Act, and that stands in stark contrast to their financial today. In the last 10 years alone, the combined income of the 

Class I railroads, seven Class I railroads, has increased over 104 

percent, $3.7 billion to $7.6 billion. 

I think we have a slide on that to put up. It shows how revenues 

are going up. It also shows a rather paltry investment in capital 

expenditures, and that has antecedents in the marketplace. When 

2

railroads were not doing as well, the shareholders were insisting on 

withholding on capital investments. 

You can see a little tilt upward now in 2006, a pretty substantial 

investment in that year, but it does not by any means compensate 

for the years of low investment, somewhat reflective of what the 

Federal Government has done with the rest of our transportation 

infrastructure. 

On paper, we have seven Class I railroads, but in reality the railroad industry has consolidated, has evolved into two regional duopolies, essentially east of the Mississippi, CSX and Norfolk Southern, and one in the West, Union Pacific and BNSF. 

In that market setting, shippers with access to two rail carriers 

offer counter rail rates closer to those of a captive shipper. A shipper operating in a duopoly market is like a captive ship. A railroad 

enjoys greater opportunity to assign costs to a shipper who has little to do with the actual cost of service. 

A report in 2006 by the GAO found that railroads increasingly 

are transferring costs onto shippers, costs that are not reflected in 

their rates. Since 1985, rail car ownership has shifted nearly 20 

percent to shippers, so that today shippers own a majority of rail 

cars in use. 

GAO found that shippers are paying other costs such as infrastructure upgrades, fuel surcharges, congestion fees. Unfortunately, 

the Surface Transportation Board does not track these charges, and 

that led GAO to conclude that shippers in those markets may be 

paying excessive rates for rail service. 

The railroads contend that the system works, and they say that 

any shortfalls in the system will lead to unacceptable reductions in 

their revenue and a decrease in capital investment. They contend 

vigorously that despite the benefits of the Staggers Act, they are 

struggling to arrive at financial health, reflected by the Surface 

Transportation Board’s analysis that the industry as a whole is 

revenue-inadequate. 

Since the Staggers Act, the rail industry as a whole has never 

been found to be revenue-adequate. The Association of Railroads 

reports that the Staggers Act and the years since its enactment, 

the difference between the industry’s return on investment and 

cost of capital has not substantially narrowed. What should follow 

from such a record would be significant capital shortages and disinvestment in the rail sector. 

The ICC’s 1981 decision implementing the current Revenue Adequacy Test calls ‘‘Any firm that earns less than its cost of capital 

will be unable to compete in the market for funds. Its owners will 

neither wish nor be able to keep the enterprise’s capital intact. 

They will withdraw their capital as quickly and as expeditiously as 

they can.’’

However, the railroads continue to get capital from Wall Street, 

from the marketplace. They earn substantial profits. They invest 

billions of dollars in their systems despite the constant shortfall of 

meeting the regulatory standard for revenue adequacy. 

That discrepancy between the railroad reports of revenue shortfall and the continued availability of investment capital is understandable if you examine the regulatory method used to determine 

the railroads’ revenue adequacy. There are many methods to deterVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
3

mine, but the model implemented in 1981 fell out of favor with 

Wall Street some time ago. The marketplace views it as overly pessimistic in the railroads’ cost of capital and their financial health. 

In 1995 and again 1999, Standard and Poor’s industry surveys 

reported that the rail industry ‘‘is actually fit as a fiddle’’; ‘‘explain 

that the ICC’s definition of cost of capital is not particularly meaningful, given the many flaws in the design of the financial test.’’

When Wall Street measures revenue adequacy of an investment, 

it uses a newer and more accurate tool to measure revenue adequacy, the Capital Asset Pricing model. You have to spend a little 

time and get close up to this and put your arms around it and 

spend a little time reading late at night and early into the morning. But it is also the system that the Canadian counterpart to the 

STB uses. 

According to that analysis, the railroads are financially healthier 

than reported by the Surface Transportation Board. In fact, the 

Board recently announced it is updating its revenue adequacy 

methodology to reflect the marketplace. 

Any economist will tell you that for the regulatory purposes, it 

is better for the railroads’ profits to remain revenue-inadequate. 

This gives them a favorable regulatory environment from the Surface Transportation Board. That then allows them to charge higher 

rates to their captive customers without coming under the threat 

of an adverse rate decision. 

While the railroads’ financial health continues to improve and 

their pricing power increases, the current regulatory environment 

still reflects an industry closer to its position that existed prior to 

passage of the Staggers Act, and that works to the detriment of 

shippers seeking rate relief. 

Now when Congress passed the Staggers Act, it did not wash its 

hands of oversight by the Executive Branch or the Legislative 

Branch of rail operations. It created the successor entity, the Surface Transportation Board, much more limited authority but still 

allowed market pricing and market entry to be determined by the 

railroads themselves in the context of the marketplace, but it retained, the Staggers Act retained authority in the Surf Board to 

protect captive shippers from unreasonable rates. It granted broad 

authority to monitor the performance of the railroad industry. 

Shippers tell me, however, over many years now that the Board 

is not effectively exercising their responsibility to protect or at least 

give voice to the concerns of captive shippers. The GAO report of 

2006 reinforces the shippers’ claims. GAO found ‘‘There is little effective relief for captive shippers because the Surface Transportation Board’s standard rate relief process is largely inaccessible.’’

Contesting a case now is so expensive, is so time-consuming, so 

loaded with paperwork that only the egregious cases have a chance 

to come to the Board’s attention. Since 2001, shippers filed 11 cases 

with the Board. All but one of these 11 is a coal rate dispute case. 

Of that 11, the Board settled and dismissed 3, 1 was withdrawn 

and 1 is still pending. Of the remaining six, the Board issued decisions in favor of the railroads. 

The Surface Board reports that these cases, on average, took 

nearly three years to decide. Shippers report that they spent upwards of $5 million contesting rate cases, only to lose. 

4

GAO then reports that traffic traveling at rates substantially 

over the threshold have not had rate relief. That is why Mr. Baker 

of Louisiana and I introduced H.R. 2125, the Rail Competition and 

Service Improvement Act. 

The railroads claim it to be re-regulation. That is a cute bumper 

sticker phrase. It is not. 

It is using the existing authority to give shippers the opportunity 

of access to the Board under reasonable terms without excessive 

cost to file a rate case, without excessive time to pursue it—even 

if you won, you have already been out of pocket a huge amount of 

money—and to use the residual authority to give shippers a fair 

hearing. 

The Board is not meeting its responsibilities. This legislation will 

ensure that the Board does a better job of carrying out its rate relief responsibility. 

Now there is also another historical context that I think we want 

to keep in mind as we begin this hearing. The railroads received 

enormous grants of land in the 19th Century in the public interest 

to develop rail service for the public use, convenience and necessity. 

They received some 278,000 square miles of public land. That is 

about 8 percent of the total land surface of the United States. 

That map shows those land grants. They were given the surface 

timber rights, surface mineral rights, subsurface mineral rights, 

coal, oil in some cases, gas in others that they could use for themselves or to sell off, worth billions of dollars. 

I think it is important to keep this public interest in mind and 

the claim that the public still has on the railroads to serve the 

broad public interest. 

Mr. MICA. Well, thank you and good morning and I would like 

to welcome all of our Members and witnesses to this hearing this 

morning on rail competition. 

I have got a couple of comments, some that may agree with some 

of the comments of the Chairman and others that disagree, but this 

is indeed an important topic. 

Thirty years ago, our Nation’s rail system was literally falling 

apart. Twenty-five percent of the system had to be operated at reduced speeds due to dangerous track conditions and more rail lines 

were bankrupt than in any time since the Great Depression of the 

1930s. In fact, the Nixon Administration seriously considered at 

that time nationalizing both freight and passenger rail service. In 

fact, they did nationalize passenger service by creating a company 

called Amtrak, and we all know what a success that has been. 

Now today, the United States freight rails are one of the least 

subsidized and best operated and actually profitable systems in the 

world. Most countries still have very high subsidies of their freight 

rail systems. 

I know none of us would like to revert to an all government or 

some type of Soviet style system and total re-regulation. I know 

that is not the question before us. 

Luckily, however, instead of nationalizing our freights, Congress 

decided back then to attack the root of the problem which was, in 

fact, excessive government regulation that brought down our rail 

service. We passed the Staggers Act which allowed the railroads to 

respond to the free market and rebuild the system without big govVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
5

ernment subsidies in any of the operations that we see today. In 

fact, it is almost zero according to the information that my staff 

has compiled. 

Our Nation’s rail system is now running well, but our regulatory 

system still creeps along like it is in the 1890s. Over the last decade, STB regulations have denied small shippers an effective forum 

to challenge excessive rates, and that is one of the reasons for this 

hearing here today. STB proceedings have been so complex that, in 

fact, it has cost millions in legal and consulting fees just to bring 

a case, and the Chair cited some of the problems that we have in 

trying to get some resolution. 

The STB, as we know, has recently taken some steps to simplify 

their proceedings and also to reduce litigation expenses. We have 

also seen a speedup of some of the processes, but there are still difficulties for some people to access what they consider fair rates. We 

do need to have some time to see how the STB new protocols work 

and give them the opportunity to succeed. 

I am looking forward to learning more about the new STB procedures that we will hear about at this hearing. 

While I recognize the difficulty of some captive shippers and 

some current flaws in our system and the inability to sometimes 

seek the lower costs that some feel are fair, we must be very careful in looking at what options we adopt. Also, I think this will be 

a good opportunity to look at reasonable options to improve the system that has already seen some improvement with STB’s recent action. 

As you can tell, I am clearly against re-regulation of our national 

railroads. Government rail regulation has proven, without a doubt, 

not to work. Unfortunately, too, some government re-regulation can 

reverse some of the great successes our rail system has enjoyed. 

Actually, I think it can also result in further reducing shippers’ 

choices and also the long term effect may be increasing rates again 

in the longer period of time for everyone including those we are trying to help. 

I come from a business background. You look at investment in 

any type of industry or business activity, but railroads have one of 

the highest capital costs and lowest returns of equity, and that is 

not my finding. We have got a little chart here we will pass out: 

Capital Intensive, Low Returns. So that does create some difficulties for them. 

But if we want a strong efficient, financially viable rail system, 

I believe the answers lie in working with the rail industry to create 

some additional competition, that Congress adopt a tax policy that 

insists that we encourage better planning and that we also support 

even more private investment in an industry that is very capital 

intensive. 

I look forward to a full airing of the issues today, and I thank 

you for bringing this important subject before the Committee. 

Mr. OBERSTAR. I appreciate the gentleman’s comments and his 

perspective and well thought out remarks, and that is why we have 

hearings. We have differences of view, but they are matters that 

we can resolve in the course of the hearing. 

Other Members of the Committee will have opening comments, 

but in respect for Senator Dorgan’s schedule, I know he is already 

6

overdue back in the other body. We welcome you back to this house 

where you started your service in Congress. Thank you for coming, 

making the long journey across the way from the other body. 

Thank you for coming. You are the sponsor of comparable legislation in the Senate, and we thank you very much, Senator. 

Senator DORGAN. Mr. Chairman, thank you very much. I will be 

mercifully brief this morning and then depart. 

As I was sitting here, I was thinking about the description of a 

journalist who couldn’t distinguish between a bicycle accident and 

the end of civilization. I was thinking in some ways the politics of 

this railroad issue are that. Some would suggest there is just a 

minor flaw or two here, and other would suggest that this is a catastrophe. It is, of course, somewhere in between. 

Let me describe to you where that somewhere is for me. Because 

I assume there are people in this room, representing the railroads, 

let me be quick to say that I like railroads. I like trains, in fact. 

I grew up in a town of 300 people. When you grow up in a very 

small town, we actually named the train that came through our 

town, the Galloping Goose. 

Every time the Galloping Goose would come in twice a week, we 

would go down where they stopped and pick up the cream cans, 

and I just thought it was wonderful to have a train coming through 

our town, bringing new people. So I have a long history with trains 

including the Galloping Goose. 

I understand that railroads are very important to this Country. 

This Country runs in a significant way on rails, and we want a 

railroad industry that works. 

I also believe at the same time that we are off-track in some significant ways. This is an industry, I think, that would be better 

with competition and is, in some ways, devastating to captive shippers without competition. We have ended up now a couple of decades past the 4R Act with the worst of all possible worlds: near monopolies and no regulation. 

I know there are people here that have an epileptic seizure when 

you mention regulation. Well, the fact is you either have competition, which is the way the marketplace is supposed to work in a 

free market, or you must have some sort of sensible regulatory authority, one or the other. 

The fact is, as the Chairman indicated, we have fewer and fewer 

Class I railroads. We have now four Class I railroads that handle 

90 percent of the freight rail in this Country. Rural areas, especially, are frequently left with one carrier who decides here is what 

I want to charge you. If you don’t like it, tough luck. 

Well, that is defined as a lack of competition. It is clogging the 

arteries of the free marketplace, and it begs for the Congress to 

take a look at it and decide to do something to deal with it. 

Now I think the lack of competition not only affects and victimizes, in many cases, rural areas. It affects the profitability of other 

industries. It also affects the pocketbooks of the consumers in this 

Country. 

It seems to me that we have created something called the Surface Transportation Board which was I guess the divine interpretation of what Congress felt should succeed the Interstate Commerce 

Commission. Again, without offending anyone I hope, I think the 

7

Surface Transportation Board has been largely an irrelevant Federal agency. It consistently does nothing and yet seems unaffected, 

perhaps even satisfied, by this paralysis. 

I think it is safe to say there are a whole lot of Americans that 

are not satisfied by the paralysis of an agency that is supposed to 

be looking after the public interest. I have often said the STB is 

dead from the neck up, but I probably should stop saying that because there is clearly life there but precious little effective capability to intervene on behalf of consumers and on behalf of competition. 

Let me just mention to you quickly the experience of a resident 

of Dickinson, North Dakota, a farmer from Dickinson, North Dakota. He said to me, you know, I am told by the railroad that I 

must truck my grain 200 miles east to put on the railroad in order 

to move it west, and they move it right back through my farmyard 

and, in fact, with a terminal in the community next to me, but I 

have to truck my trail 200 miles east to get the lowest rate from 

this carrier. 

When he said, I asked the carrier why that was the case, the carrier said it is strategic planning. I said, I am from a small town. 

I don’t understand strategy or strategic, but I understand what 

doesn’t make any sense, and there is simply no common sense in 

this. 

When you talk to people, it is hard to describe to them why all 

of this happens the way it happens. 

I will give you one more example, and I don’t know whether 

these numbers are accurate. They used to be. 

You put a carload of wheat on the railroad in Bismarck, North 

Dakota, move it to Minneapolis, and you will pay about $2,300. The 

same carload of wheat from Minneapolis to Chicago, about the 

same distance, you will pay $1,000. 

Why would we be more than double charged for the same distance? Because on one segment, there is one carrier; on the other 

segment, there is competition, huge difference. Where there is no 

competition, the consumers are victimized in my judgment. 

Let me just mention briefly that I have passed a piece of legislation in our Appropriations Committee that changes the cost of challenging the railroads with respect to rates. As I think the Chairman mentioned, it is currently now $178,000 for a significant shipper to challenge the rates. I have passed an amendment through 

the Senate Appropriations Committee, reducing to $350. That is 

the cost of filing an action in Federal Court were you able to do 

such action. 

Finally, the fuel surcharge issue gives, I think, evidence of substantial concentration in this industry. There is, by most evidence, 

about a $6 billion overcharge for fuel on the fuel surcharges. The 

regulatory authorities have said stop it, you can’t do it anymore, 

but the railroads are allowed to keep the overcharge. I don’t understand that, but that is where we are. 

I want a healthy railroad system. I want competition, either competition or regulation, but I want a healthy rail system that serves 

this Country, and I also want fairness to this Country’s consumers. 

Regrettably, at this point, we don’t have fairness to consumers. 

8

So my hope is that we will be able to advance legislation that 

you have offered here in the House of Representatives, and in the 

Senate we have introduced and are moving similar legislation. I 

serve on the Commerce Committee. We are going to be holding a 

hearing on our legislation and hopefully moving it. 

We just passed legislation out of the Judiciary Committee, introduced by Senator Kohl on which I was a co-sponsor, dealing with 

the antitrust issues. That bill will allow the review of railroad 

mergers and acquisitions to remain with the STB, but it allows the 

Department of Justice to enjoin the merger in Federal District 

Court if the merger as approved would violate the Nation’s antitrust laws. 

So I think we are working on a number of issues that I think 

are very, very important. Some very significant groups of industries 

and businesses representing the shippers have formed to say, look, 

all we want is we want fair opportunity. I think they want, as well, 

a healthy railroad industry, but they fair rates, and that is a reasonable thing to do. 

Finally, I would just say at the end of a long period of time, let 

us decide what we are going to do. We are either going to have 

some competition or regulation. You can’t have near monopolies 

and no regulation. If we change those near monopolies to a competitive environment, this Country would be a whole lot better off. 

If not, we should have a series or steps of regulation that affect and 

safeguard the consumers in this Country. 

Mr. Chairman, thank you for allowing me to come by. You have 

a long hearing today, and you have a lot of Members, but I did 

want to tell you that we are working on similar issues in the Senate and wish you well in the House as you address these important 

issues. 

Mr. OBERSTAR. Thank you very much for your statement, your 

comments. I look forward to meeting you in conference on this legislation. 

Your example of the farmer who trucked his grain east to have 

it shipped west, I have a similar situation in the southern end of 

my Congressional district, the Peterson Mill. Because the railroad 

doesn’t serve it any longer, because they wouldn’t meet an ever increasing threshold for quantity to be shipped, now grain is hauled 

by truck. 

I stood there with Jerry Peterson as the trucker handed the 

farmer 86 cents. That was all that was left from his shipload of 

grain trucked 100 miles with no back haul. That is not acceptable. 

That is not service in the public interest. 

You have given us good fodder for the future. 

Does anyone have a question of Senator Dorgan? 

It looks like you scared them all off. 

[Laughter.] 

Mr. OBERSTAR. Thank you. 

Now we will go to Members. Mr. Rahall. 

Mr. RAHALL. Thank you, Mr. Chairman for recognition and for 

holding today’s hearing. 

This particular gentleman from West Virginia has a long and intimate relationship with the Staggers Rail Act of 1980, primarily 

over the issue of captive shipper protections. The Staggers Rail Act, 

9

of course, being named after the senior Member of Congress from 

West Virginia from the House side at that time, Harley Staggers 

from West Virginia, then Chairman of the Interstate and Foreign 

Commerce Committee. 

There are many in this room, pushing this legislation, who were 

pushing similar efforts back in those days. I guess they sent their 

kids to college on this issue back then, and now it is time to send 

their grandkids to college. We are revisiting this issue again. 

The publication of Traffic World once described me in my sophomore as coming ‘‘within a coal lump’s distance of derailing the 

Staggers Rail Act.’’

Indeed, when the legislation that was to become the Staggers 

Rail Act was being considered by the House back in 1980, our 

former colleague, Bob Eckhardt, of Texas, and myself teamed up 

with a captive shipper amendment. It was so successful—indeed, it 

passed the Floor—that the bill’s Floor manager at that time, Jim 

Florio from what was then called the Committee on Interstate and 

Foreign Commerce, pulled the bill from further consideration. 

Mr. Chairman, I recall returning to my office on that fateful day 

and seeing a railroad lobbyist in the front foyer, literally crying like 

a baby. I guess those were the days when lobbyists were perhaps 

more in touch with their inner selves and allowed to display emotion. 

Subsequently, however—and it was not due to the tears of the 

railroad lobbyist, I might add—a compromise was reached on the 

captive shipper issue in the form of the Staggers-Rahall-Lee-Loeffler Amendment which paved the way, as you will recall, Mr. 

Chairman, for the House passage and ultimately the enactment of 

the Staggers Rail Act. 

It was no secret that post-enactment, I became extremely dissatisfied with the way the Interstate Commerce Commission was implementing the law. Every railroad, regardless of profitability, was 

deemed revenue-inadequate. I recall a time when Norfolk Southern 

was the darling of Wall Street, but the ICC described N-S in those 

days as being revenue-inadequate. 

The means for devising revenue to variable cost was corrupted. 

Determining what was market dominance was a joke. According to 

the ICC, there was always, always product and geographic competition. For example, a coal-fired power plant conceivably could convert to oil—yeah, right—and a power plant in Colorado could conceivably ship coal in from West Virginia instead of its neighboring 

Wyoming. 

During the decade of the eighties and into the nineties, I was the 

flagbearer for re-regulating the railroads, offering bill after bill, 

amendment after amendment, only to be stonewalled by the now 

Energy and Commerce Committee, much to the consternation of 

my truly captive shippers of coal. 

Let me say one thing, Mr. Chairman. By golly, if the Republicans 

did one thing right when they ran this place, it was transferring 

the jurisdiction over the railroads from the Energy and Commerce 

Committee to this Committee under your leadership, if they did 

anything right. 

[Laughter.] 

10

Mr. RAHALL. As we got well into the 1990s, however, something 

happened. My shippers stopped complaining. Appalachian coal producers and those in West Virginia stopped being the subject of railroad predatory pricing practices, and with that reality I became a 

recovering re-regulator. 

I will conclude with this note: Cross subsidization in the parlance 

of the railroad regulatory scheme known as differential pricing is 

part and parcel of maintaining a healthy and viable railroad network which is in the national interest. 

I accepted that concept back in the 1980s and throughout my efforts to re-regulate the railroads. I always accepted that concept. 

During the course of this hearing, I hope the issues involving the 

matter are clarified. 

Again, Mr. Chairman, I thank you for having the hearing. I yield 

back. 

Mr. OBERSTAR. Thank you for those eye-opening remarks. We appreciate your candor. 

The gentleman from Pennsylvania, Mr. Shuster. 

Mr. SHUSTER. I thank the Chairman. 

I would wish that we go in order of seniority, so I would defer 

to Mr. Baker to go first before me in the order of seniority. 

But, first, I want to just mention that Ranking Member Mica had 

to depart to go to a ceremony to honor some American soldiers that 

served in Iraq. 

With that, if it is all right with the Chairman, go to Mr. Baker 

first. 

Mr. OBERSTAR. The gentleman from Louisiana, Mr. Baker. 

Mr. BAKER. I thank the Chairman and the Ranking Member for 

the courtesy. I certainly want to express appreciation to the Chairman for his keen interest in the subject and his sponsorship of the 

legislation which addresses many of the concerns which I am sure 

will be discussed in the course of the hearing today. 

For the purpose of balancing the record and those who have been 

critical of the legislation pending, I would quickly establish that I 

am not a pro-regulatory kind of guy. I am very much a free market, 

believe in competition, let the best guy with the best product sell 

it at whatever price he deems appropriate and let consumers make 

educated choices. 

I am not a proponent of re-regulation the rails. I am for expressing the best market operation that will enable more competitors to 

provide more consumer choices to those who, under the current 

system, have none today. 

I do believe that competition, where competition exists in the rail 

industry, has in fact brought rates down, but were you to establish 

two charts, one of the rates paid by captive shippers over the last 

decade and hold it up next to a chart of rates paid by those in the 

competitive marketplace, you would find two very divergent trend 

lines. 

Captive shippers are what the name says. They are captive. They 

have no market choice. 

Whether one be Republican or Democrat, the consequences of 

being a captive shipper in a marketplace which is internationally 

competitive has real world consequences. Where you can no longer 

11

manufacture your product, put it into a rail car and sell it in the 

United States, people will vote by moving their plants elsewhere. 

It was, at best, a modest inconvenience in years past, but with 

fuel charges where they are today, which legitimizes the rate underlying assessment for the rails, it is becoming a factor in making 

decisional locations which are of extreme importance to all of us 

who want to keep as many people employed in this Country as is 

practical. 

I don’t know that there will be arguments made that the current 

STB methodology is fair in its handling of these difficult decisions, 

but regardless of whether one takes that position or not, it is certainly justifiable to conduct a thorough examination of how it 

works and the consequences of the pricing regulatory methodologies. It is important to note that in the current environment that 

the STB is now in a period of receipt of public comment over making a significant change in the way they determine cost of capital. 

For Members who haven’t spent a lot of time looking at capital 

assessment formulas—I know that people were probably doing that 

over the weekend, getting ready for this hearing—this is a significant component in establishing the rate base. 

The capital asset model methodology is now subject to public 

comment which will close in mid-October by the STB to move away 

from the discounted cash flow methodology. The manner in which 

that new structure is constructed will have considerable affect on 

rate-making as we go forward. 

Having said that, there are many other elements of this problem 

that the legislation the Chairman has offered, that are outside simply the cost of capital, the bottleneck problem. Yes, you have the 

right to move freight and to get quotes from competitive rail carriers, but if you happen to hit a bottleneck where there is only one 

provider of service through that short distance between where you 

are located and where your ultimate goal is located, you have a significant problem. You can’t even force a rate quote unless you meet 

certain contractual obligations to that provider. 

We do not have an open market in rail service in the United 

States. It is a significant economic concern, but then there is one 

other important matter. As consolidation has occurred in the financial services sector, consolidation has occurred in the rail industry. 

Despite that consolidation and the efficiencies that has brought 

about, fewer miles to maintain with fewer competitors, the rails are 

in fact undervalued in the market, and that is the reason why significant hedge fund operators have begun to target acquisition of 

stock in rails because of that analyst view that these are assets 

that the market has ignored and underpriced. 

That has led the rails to reacquire their own stock, which I do 

not have a problem with, but it has diverted their investment practices from putting it into infrastructure and hoping to forestay the 

takeover of those in the hedge fund world who see them as undervalued assets. 

All of that is to point out that smart people on Wall Street say 

the rails are in extraordinarily good condition. In fact, they are in 

such good financial condition, it is the kind of industry those smart 

investors are wanting to get a significant piece of. 

12

The rail industry is sound. We need them to continue to succeed, 

but there are significant sectors of our economy who are now subject to predatory pricing. The remedy is not to re-regulate the industry but merely to carefully evaluate the process the STB engages in and ensuring, as a regulated utility, that the rates they 

charge are in fact representative of a competitive marketplace. 

I sincerely appreciate, Mr. Chairman, the courtesies extended 

and your leadership in this matter. I yield back. 

Mr. OBERSTAR. I thank the gentleman for his very thoughtful 

and well conceived statement and elaboration of the intricacies of 

this legislation and of the rail marketplace. 

The gentlewoman from California, Mrs. Tauscher. 

Mrs. TAUSCHER. Thank you, Mr. Chairman. 

I find myself as somebody who spent 14 years on Wall Street as 

a very small child looking at the arcane valuations for this industry 

and scratching my head and, at the same time, understanding that 

in California, where 60 percent of the goods that are shipped into 

ports of Oakland and Long Beach and L.A. are moved out of state, 

how desperately we need a robust rail network and infrastructure 

that is have to have, not a nice to have. 

I think that what is very clear to me is that, on the one hand, 

we need to assure that private investment has some predictability 

in their ability to look forward for their rates of return and to look 

at regulatory scheme that isn’t obsessing so much that it prevents 

them from getting that rate of return and feeling as if they can do 

the kinds of investments that are going to keep their own people 

happy. But, at the same time, when you have a squeeze on the 

credit capital and capital formation, you find yourself without the 

ability to make these investments. 

So I think we need to look at lot more at public-private partnerships, innovative financing, the kinds of things that are a little out 

of the box and different from the traditional kinds of financing that 

we have looked at in the past. 

In the Bay Area, we tax ourselves. Almost every one of our counties, we tax ourselves for highway infrastructure. 

Many of the companies that are in the Bay Area are companies 

that are high tech companies, just in time inventories. They are not 

only companies that have short rail but long rail for finished products. They need things delivered on time, so they can put them together and then ship them out. 

A lot of our products, obviously, some of our sourcing comes from 

overseas too. So we need things to come out of the ports quickly. 

This is a very, very vexing, complicated issue. I think I stand 

very similar to Mr. Baker in a place where I want to solve for the 

issues of having competitive railroad companies that are good investments for Americans, not only for their investment portfolios 

but for good jobs so that we can have a 21st Century railroad network. At the same time, I want to help the people that are captive 

shippers who find themselves unable to be competitive because 

they don’t have enough competition to get better pricing to ship. 

That is the sweet spot, I think, that we have to find. We have 

to find some place in there. I am not for more regulation, but I certainly am for competition, and I am certainly for helping the people 

13

that need to ship goods to markets that are not only my constituents but the consumers of my district too. 

So I look forward to this hearing. Once again, I think that it is 

always better to amplify these things and have as much as we possibly can in front of us. 

I appreciate all of the folks that are going to be testifying in the 

hearing today, and I look forward to working with everybody to 

find that place, that tension between too much regulation but the 

ability at the same time to help the captive shippers so that we can 

have the kind of robust market that we need. 

I yield back. 

Mr. OBERSTAR. I thank the gentlewoman for her statement, and 

that is the purpose of this legislation, to try to find that proper balance. 

The gentleman from Wisconsin, Mr. Petri. 

Mr. PETRI. Thank you very much, Mr. Chairman, for holding this 

important hearing. 

I also want, if I could, I don’t know if I need unanimous consent 

or not but to submit for the record a statement by the Wisconsin 

Agri Service Association on the subject of this hearing. 

Mr. OBERSTAR. Without objection, so ordered. 

Mr. PETRI. Thank you. 

I would also like to make just a point of thanking the chairman 

of the Surface Transportation Board who is on the first panel, Mr. 

Nottingham, for taking a day and a half of his time to come out 

to Wisconsin to meet with and listen to the representatives of a 

number of shipping associations in our region and a number of concerned people affected by the things that have happened in the 

transportation industry. 

I would like to also associate myself with the spirit of the remarks of our colleagues, Mrs. Tauscher and Mr. Baker. 

No one is really or few are looking for a return to strict top-down 

regulation of the rail industry, but everyone is looking for an improvement in service in the rail industry so that actually it can be 

used more to do higher value added shipments and provide service 

to the just in time economy in addition to bulk shipments. 

Everyone is looking for fairness in pricing. Of course, fairness is 

always in the eye of the beholder, and there are a number of different ways in looking at costs and how this should be assessed. 

I appreciate Chairman Nottingham making a number of changes 

in the procedures of the Surface Transportation Board so as to enable smaller and medium size shippers to not only have theoretical 

but to have practical access to the Board’s processes, so that they 

can have their situations looked at in a timely and cost-effective 

fashion and either get some understanding of the process or some 

satisfaction and sense that they actually are being dealt with fairly. 

I would urge that if there is anything that can be done to help 

rail management through I don’t know if it is a regulatory process 

or what kind of process to improve the quality of service and of information in the rail industry, so that people are not confronted 

with the trains stopping on Friday at 5:00 and not knowing that 

the scheduled shipment is not going to come. No one even being 

told for two or three days. 

14

You just can’t operate a modern economy without a lot of unnecessary costs if a modern ability to communicate is not shared by 

the employees and the railroad industry. This is an area where we 

really could get good efficiency or improvement in our whole situation. 

Beyond that, I appreciate your looking at the investment in the 

rail industry to make sure that, in fact, everyone involved is trying 

to make sure we have first-rate rail industry, and I thank you, Mr. 

Chairman. 

Mr. OBERSTAR. I thank the gentleman. 

Ms. Brown, the Chair of our Rail Subcommittee, the gentlewoman from Florida. 

Ms. BROWN. Thank you, Mr. Chairman, and I want to thank you 

for your leadership as Chair of this Committee. I think this Committee has been one of the most productive Committees in Congress, and I am proud to serve as Chair of the Rail. 

Today’s hearing is important because we always need to consider 

ways to improve competition in every business sector, and there is 

room for some improvement in the railroad business. But I am concerned that many of the rail sector fixes being discussed by shippers would be devastating to the industry, and there are lots of 

shippers that support the railroads. 

In fact, I have over 2,000 letters from shippers who oppose any 

new regulations for the rail industry, and I ask unanimous consent 

to have them submitted to the record. 

Mr. OBERSTAR. Without objection, so ordered. 

Ms. BROWN. Our Nation’s railroads were in the red for a very 

long time and have only recently started to make a reasonable 

profit and should be given time in the black before making major 

changes to their business model. 

I feel that the loss or railroad earnings that is expected with the 

decline in rates will have many negative consequences. Less money 

being spent on capacity will slow growth and put many more 

trucks on the highways, compounding safety issues and harming 

the environment. We will soon have an additional 3,000 trucks a 

day leaving the Jacksonville port. 

If we can’t find a rail solution, which I am working on, it will 

jeopardize our entire community. Decline in profits will also prevent the industry from hiring more employees for good paying jobs 

that we know can’t be shipped overseas. 

I also believe that the Surface Transportation Board which, for 

a long time was not operating to full capacity and in fact had only 

member, is starting to address many of the issues that are priorities for shippers. In talking with the members and visiting with 

the Board, I know that they are planning to continue to look at 

ways to protect shippers from unreasonable rates. 

Mr. Chairman, at the proper time, this is the first time they have 

had an opportunity to testify before the Congress. The fact that so 

many of us have mentioned them, I am hoping that we can give 

them additional time when it is time for them to address the Committee. 

A significant increase in capacity would also help eliminate many 

of the problems facing customers and the industry, and we all need 

15

to work together to find ways to provide serious reasons for capacity expansion. 

I look forward to hearing from today’s panelists on ways that we 

can improve competition in a way that is fair to both shippers and 

the railroad and ensures a sound national rail transportation system. 

As I yield back my time, let me say in visiting with many countries all over the world, our railroad freight is the envy of many 

of those countries, and I want us to keep that in mind. 

Thank you and I yield back the balance of my time. 

Mr. OBERSTAR. Mr. Shuster. 

Mr. SHUSTER. Thank you, Mr. Chairman, and thank you for holding this hearing this morning. 

I want to welcome everybody to this hearing on rail competition. 

I want to point out to my colleagues, for those that have been deeply immersed in rail issues in the past, this is an extremely complicated issue. I would encourage and I am glad to see many of you 

here, asking questions and understanding. 

You are going to hear terms that were Latin to me before I started to talk to many of the people in the industry, things like revenue to variable cost, differential pricing, the revenue shortfall allocation method. When you start talking about these things, as I 

said, at first they don’t make sense. Quite frankly, I have an MBA 

and still to me they are difficult to comprehend and understand in 

this complicated system that we have in this Country for railroad 

freight. 

I believe in free markets. When we look at the rail industry, I 

would love to have a rail industry that was based on free markets, 

but because of the way it has developed over the years, it is very 

difficult for us to have a completely free market system because to 

build railroads, new lines in this Country, having two and three 

railroads serve different areas, it is just not possible because of the 

difficulty in getting the rights to build them, getting through the 

government regulatory or our legal system. For us to move to what 

would be a completely free market system, as I said, just isn’t in 

the realm of possibility. 

What we have, we have to work with, and we have to make it 

work as best we can. Having competition, having government regulation work efficiently, and hopefully we can decrease that, but 

today our railroad system is the most efficient in the world. 

As the Chairwoman mentioned in her travels around the Country, it is the envy of the world. Our shipping rates are lower than 

any other developed country. Our freight railroads require virtually 

zero Federal Government capital, no taxpayer dollars. Our railroads are so efficient that we can move a ton of freight 423 miles 

on a single gallon of fuel. 

But it hasn’t always been like this. The Chairman, as he always 

does, gave us a very comprehensive history lesson of what has happened since the Staggers Act. As I said, as always, very comprehensive and informative, but I think we need to also focus on 

what happened before the Staggers Act. 

On June 21st, 1970, one of the largest companies in the world, 

the Penn Central Railroad went bankrupt. At the time, it was the 

largest bankruptcy in the history of the world. Penn Central which 

16

was headquartered in my home State of Pennsylvania had thousands of employees. They owned over 4,000 locomotives, 200,000 

freight cars and 5,000 passengers car. The Penn Central bankruptcy was, to say the least, a financial disaster. 

It also dragged down other companies: The Buckeye Pipeline had 

7,000 miles of pipeline; the Arvida Corporation which was developing 35,000 acres in Florida; the Great Southwest Corporation 

which had realty ventures across the Nation and, of course, had 

numerous property holdings in New York City. 

Congress and the Nixon Administration spent years, thinking 

about ways to save the rail system. They drafted legislation to 

come up with loan programs, but in the end it didn’t go forward. 

Meanwhile, things continued to get worse. In 1972, five Class I 

railroads went bankrupt. In 1976, 25 percent of our Nation’s tracks 

were under slow orders. In my home State, conditions became so 

bad that parked rail cars literally fell off the tracks. 

In the 1960s, in Blair County, Pennsylvania, we had 2,500 folks 

that worked for Penn Central, later to become Conrail. Today or 

after the Penn Central bankruptcy and with Conrail being absorbed into a few other railroads, we have about 1,000 people employed there today. 

The root cause of the Penn Central bankruptcy and the decline 

of the entire rail industry was government regulation. The government set the shipping rates. The railroads could not respond to the 

free market and could not recover their costs. Every day, the railroads lost more business to trucking companies. 

Finally, in 1980, Congress deregulated railroads or I should say 

partially deregulated the railroads under the Staggers Act, and 

since then the turnaround has been amazing. It has been done 

mostly with private capital. I think that is extremely important for 

us all to realize. By and large, private capital is what turned this 

around, not Federal funds, not a huge injection from our Federal 

Government. 

Our rail system now earns a profit. It is gaining business, and 

I believe it has a very bright future, but government regulation is 

still a problem. 

We have to admit that over the years the STB has acted like we 

were still in the steam engine era. Challenging a rate has cost 

shippers millions of dollars and, in fact, because it was so expensive, they didn’t challenge some of the rates. The STB regulations 

effectively denied smaller shippers any relief from excess rail rates 

or poor service. 

Thankfully, the STB has finally taken steps to bring the Agency 

into the 21st Century. The new STB small rate case procedures 

will shorten and simplify the regulatory process, and we will be 

watching very closely as that moves down the road. Also proposed 

is a new way of calculating the cost of capital which has promised 

to make rates more reasonable. We need to give these procedures 

a year or so to see how they work. 

I am against re-regulating the railroads because the private sector always can run things better than the government, and I think 

we have seen that since 1980. A great concern of mine is that reregulation would return us to the days of low or no profits of our 

railroads, and no profits mean no private investment. 

17

Our railroads are already one of the Nation’s most capital intensive industries. In 2006, they spent $10.6 billion on capital projects 

and right of way maintenance. 

The Chairman also pointed out that revenues are going up. His 

statement was that it is a paltry reinvestment, but as a number, 

if you look at other industries, it is probably a smaller number. 

What you have to look at is the percentage. I think the percentage 

is the real measure. 

The rail reinvests 18 percent of every revenue dollar while other 

industries such as chemical and auto manufacturers are between 

5 and 7 percent. So a significant amount of their revenue is going 

back into their system. 

If we move towards re-regulation, I am very concerned that these 

private investments in railroads will disappear, and then we have 

to ask ourselves some really big questions. If that private money 

disappears, are we willing to ask the government to replace the 

spending with taxpayer dollars? 

If we pass re-regulation now, in five or ten years, if we don’t 

have the kind of private investment in our railroads, are we going 

to be looking to the government for a bailout plan as we did in the 

seventies? 

These are huge questions, and this hearing is extremely important to talk about these issues and understand that what we do 

today is going to affect us down the road. 

While I am against re-regulation, I want to make it clear that 

I am not against fixing a broken STB. If the STB’s new procedures 

and guidelines don’t work, we need to revisit this issue and we 

need to work to make sure that the system, the STB, works to the 

betterment of all our industries in this Country. 

I want to thank the Chair for indulging me to go over my time. 

Thank you. 

Mr. OBERSTAR. I thank the gentleman for his comments. The history pre-Staggers Act to which I devoted just a few sentences, the 

gentleman elaborated on and is quite right. The purpose of this 

hearing is to explore all these issues and to fix the Surface Board 

so that we don’t have calls for re-regulation. 

The Chair will acknowledge the gentleman from Florida, Mr. 

Mica, our Ranking Member, for a personal statement. 

Mr. MICA. Thank you. First of all, I want to apologize for leaving 

right after my opening statement, but I had the opportunity. I 

wanted to meet a young man from my district, also from Ms. 

Brown’s district. He is from DeLand, Florida. 

Every once in a while, you get to meet heroes, and we have got 

one of them with us today. He is from our district, Ms. Brown’s and 

mine. His name is Jonathan Chad McCoy. He is a Staff Sergeant. 

Listen to this. He is one of 12 Outstanding Airmen of the Year. 

Staff Sergeant McCoy was named the Air Force Special Operations 

Command Non-Commissioned Officer of the Year, awarded the 

Bronze Star Medal with valor and a second Bronze Star Medal. 

Sergeant McCoy demonstrated courage and leadership during 

Operations Enduring Freedom and Iraqi Freedom. The point man 

in a high risk compound assault, he fiercely fought hand to hand, 

defeating an enemy guard and enabling the capture of a high value 

18

target. Twice, he deliberately risked his life, braving deadly small 

arms fire to treat and evacuate severely injured teammates. 

Part of a sniper element, Sergeant McCoy established climbing 

routes over a 15 foot compound wall, allowing access of the assault 

force. Commanding a 17 man joint combat search and rescue team, 

he led a daring complex mission to recover the crew of a downed 

helicopter submerged in an Iraqi lake. 

These are just a few of his accomplishments. 

Sergeant McCoy and his wife are here. I would like him to stand 

and be recognized. 

[Applause.] 

Mr. MICA. I yield back. Thank you, Mr. Chairman. 

Mr. OBERSTAR. I join our Ranking Member and congratulate our 

guest for his great service. 

The bell has rung, but we have plenty of time before the vote. 

There is a motion to suspend rules. 

We will go to Mr. Salazar of Colorado. 

Mr. SALAZAR. I want to thank you, Mr. Chairman. 

I ask unanimous consent to submit my full statement for the 

record and a couple of letters that I have from the Colorado Department of Agriculture. 

Mr. OBERSTAR. Without objection, so ordered. 

Mr. SALAZAR. I want to thank you, Mr. Chairman, once again. 

I understand the issue. It is a very difficult issue. I hear from 

both sides. I hear from railroad, and I hear from my grain shippers. 

The Colorado Governor, last month, issued an executive order in 

order to be able to comply with the transportation needs of Eastern 

Colorado where we had over 10 million bushels of wheat on the 

ground. 

In looking at the chart that the Chairman put up on the board, 

I see the profitability doesn’t seem to coincide with the added needed infrastructure, I think, that the railroads or the money they are 

putting into infrastructure. 

I am very pleased to have the Surface Transportation Board 

here. The Senator actually made pretty strong remarks against the 

STB. I really am looking forward to hearing your comments. 

I am a strong proponent of free enterprise. I know it has been 

only in the last few years that the rail industry has become profitable again, and I would really also like to see those profits put back 

into the infrastructure. As the Senator said, rural areas are especially affected by the lack of rail capacity. 

With that, Mr. Chairman, I look forward to today’s hearing and 

I want to thank you. 

Mr. OBERSTAR. I thank the gentleman. 

Members on the Republican side, Mr. Diaz-Balart, welcome. 

Mr. DIAZ-BALART. Thank you very much, Mr. Chairman. Again, 

thank you for your leadership. 

Really, a comment, Mr. Chairman: Obviously, the need for further investment in our rail infrastructure has become a front page, 

front burner issue in recent months particularly. Part of this discussion is, obviously, who should make the investment in the rail 

infrastructure. Should it be the private sector as it is now or should 

it be the taxpayer? 

19

The rail industry is the one industry in our Country that does 

not rely on public investment—Mr. Shuster already talked about 

that—but rather builds, operates and maintains its own infrastructure, very expensive infrastructure, spending as much as 18 percent of its revenues on capital expenditures. That is a serious investment. 

This is an industry that again, until very recently, was not making a profit, and yet they are reinvesting up to 18 percent into infrastructure. But it is obviously clear that we need more investment in the rail infrastructure—we talked about that—to meet the 

growing needs of our economy. 

So I guess this is the question: Where should we look for that 

investment? 

If we are going to continue to rely primarily on the private sector, on their investment to increase our Nation’s freight rail capacity, it is obviously essential—this is not rocket science—that we 

provide further incentives for businesses to make these huge investments. 

I am assuming that any bill that deals with rail would go 

through the Subcommittee that I sit on, chaired by the Honorable 

Congresswoman Corrine Brown from Florida, who is extremely 

knowledgeable on rail issues. 

Mr. Chairman, I look forward to working on this very, very important, and I thank you for your allowing me this time. 

Mr. OBERSTAR. Thank you for your comments, your observations. 

Before I go to Mr. Kagen, I do want to acknowledge and introduce to the Committee, our newest Member, Laura Richardson of 

California, the 37th District. She holds the seat that was once held 

by our colleague on the Committee and recently deceased, Juanita 

Millender-McDonald, who was a great asset to this Committee and 

delightful Member of Congress, a treasured friend. 

We welcome Congresswoman Richardson who had the opportunity at one point to work for Juanita Millender-McDonald, considers her a mentor. She served in the California State assembly 

and was appointed Assistant Speaker Pro Tem. 

We welcome you to the Committee. 

Now, Mr. Kagen. 

Mr. KAGEN. Thank you, Chairman Oberstar and Ranking Member Mica for holding this critically important hearing today. 

I would also like to thank the Members of the panels that will 

be appearing here, and I look forward to hearing and reading your 

testimonies. It is my sincere hope that the witnesses will enlighten 

us, everyone on the Committee, about how important it is to deliver rail services at prices everyone can afford to pay. 

I have two particular concerns that I will share with you now. 

The first concern is the impact that the high rates for delivering 

products by freight and the declining standards of service are having on doing business in Wisconsin. 

I am also very concerned about how the railroads are using what 

appears to be their monopoly power to effectively tell customers 

what will be shipped, when it will be shipped and what rates with 

very little negotiation being offered. 

These are not just my concerns. These are concerns of companies 

that do business in Wisconsin, companies like Georgia-Pacific, 

20

Green Bay Area Chamber of Commerce, Green Bay Packaging, 

Neenah Foundry, Procter and Gamble, Sadoff Metals, Stora Enso, 

the Wisconsin Farm Bureau, Wisconsin Farm Union, Wisconsin 

Manufacturers and Commerce, Wisconsin Paper Council and also 

the Wolf River Lumber Company which I will address now. 

In the State of Wisconsin, we received a grant in our district in the City of New London, $350,000 to extend a rail line to the City 

of New London. In my several conversations and meetings with our 

mayor there, Mayor Wayne Toltzman, he indicates that the Wolf 

River line is imperiled, that they only were able to ship three carloads of their product to Chicago because the excessive cost in the 

last year. That occurred after Canadian National took ownership of 

the line. 

Sturm Foods, which is located 12 miles west of New London in 

the City of Manawa, is currently finishing a major expansion on 

their facility, and they are going to add 200 very important jobs to 

our region. A lack of adequate rail service would significantly impede this progress that they are making. 

Additionally, the Bemis Corporation has two plants, two manufacturing plants in my area. New London is this home. They have 

had 250 carloads of plastic resin delivered to them last year, and 

the State of Wisconsin granted $200,000 to add a spur to their 

plants several years ago. They are interested in enhancing their 

transport of their product over the rail service. 

As such, I share the concern of Mayor Toltzman and other manufacturers in Wisconsin, that the railroad may soon request in the 

very near future that this line, this single access line, may be abandoned due to continuing losses of revenue on the part of the railroad company. 

This would be a crippling blow to the economy of my district and 

the people living in the region, not just the agriculture industry but 

our manufacturing base as well. It would displace another industry 

and many, many jobs. Unfortunately, many areas of Wisconsin are 

held captive by a single larger railroad that will provide limited 

services. 

I believe in improving our railroad competition. I believe railroads are necessarily not just for improving the health of our local 

economy, the State and our Nation but also to help combat global 

warming and reduce traffic by trucking. 

To this end, I am very proud to be a co-sponsor of H.R. 1650, the 

Railroad Antitrust Enforcement Act which was introduced by my 

colleague, Congresswoman Tammy Baldwin, and H.R. 2125, the 

Railroad Service and Improvement Act which is sponsored by our 

Chairman. 

I look forward to working with my colleagues on this Committee 

and across party lines to guarantee that these measures are advanced and succeed, and I look forward to listening and reading 

your testimonies. 

I yield back my time. Thank you. 

Mr. OBERSTAR. I thank the gentleman for his comments. 

We have a series of four votes pending on the House Floor. We 

will recess until the conclusion of those votes. I suspect that will 

take the better part of an hour. 

I say to the witnesses, be refreshed, be ready for a long sitting. 

21

[Recess.] 

Mr. OBERSTAR. The Committee on Transportation and Infrastructure will resume its sitting. 

There are still some two Members of our first panel who are 

missing, but they will arrive in due course, I am quite sure. 

Mr. Nottingham, the Chair of the Surface Transportation Board, 

thank you for being with us. We look forward to your testimony. 

You may present it in full or summarize it as you wish. The entire 

statement will be included in the record. 

TESTIMONY OF CHARLES D. NOTTINGHAM, CHAIRMAN, SURFACE TRANSPORTATION BOARD; W. DOUGLAS BUTTREY, 

VICE CHAIRMAN, SURFACE TRANSPORTATION BOARD; 

FRANCIS P. MULVEY, BOARD MEMBER, SURFACE TRANSPORTATION BOARD; KENNETH C. CLAYTON, ASSOCIATE ADMINISTRATOR, AGRICULTURAL MARKETING SCIENCE, U.S. DEPARTMENT OF AGRICULTURE; JAYETTA Z. HECKER, DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, GOVERNMENT 

ACCOUNTABILITY OFFICE 

Mr. NOTTINGHAM. Good afternoon, Chairman Oberstar, Ranking 

Member Mica and Members of the Committee. My name is Charles 

Nottingham, and I am Chairman of the Surface Transportation 

Board. This is my first appearance before this Committee since becoming Chairman of the STB in August, 2006, and I appreciate the 

opportunity to appear before you today to address the important 

issues of rail competition and service, the relationship between railroads and shippers, the state of the railroad industry and the role 

of the STB in resolving disputes between railroads and their customers. 

I will briefly summarize my written testimony. 

Ensuring effective competition is one of the central goals of the 

Nation’s rail transportation policy. Yet, throughout railroad history, there have been some rail customers who do not enjoy the full 

benefits of a competitive market. 

What do we mean when we refer to captive traffic that falls 

under the jurisdiction of the STB’s regulation of rates? 

Our most recent data indicates over 71 percent of the Nation’s 

rail traffic moves at rates deemed by statute to have been a product of a competitive market. 

Of the remaining 29 percent, some is traffic that is exempted 

from regulation because the particular commodities and services 

involved, such as intermodal traffic, have competitive transportation alternatives available, and some is traffic that moves under 

private contract and is therefore outside the Board’s jurisdiction. 

Less than 10 percent of the Nation’s freight rail traffic is recognized as captive and eligible for STB rate regulation. As we focus 

on this important but relatively small portion of rail traffic at the 

STB, we strive to assess and anticipate how our regulatory and policy decisions might impact the broader universe of rail customers 

as well as national transportation policies such as the development 

of an efficient system of interstate commerce. 

As is the case in many markets, some freight rail customers pay 

higher rates than others. Under the principle of differential pricing, 

railroads with high sunk costs and with fierce competition for most 

22

traffic are expected to charge more, even substantially more from 

their captive traffic than from their competitive traffic if they are 

to achieve enough revenues to cover their costs and invest in necessary facilities. Although differential pricing is practiced in many 

other industries as well, it is understandable that shippers on the 

captive end of this differential pricing scale would not be satisfied 

with the status quo. 

As policymakers examine alternatives to this longstanding differential pricing system, several important questions merit consideration including: If the railroads’ ability to differentially price 

their services based on the market forces of supply and demand is 

significantly constrained, who will make up the difference? 

Who will end up paying more? 

How will the railroads in this highly capital intensive industry 

maintain their existing infrastructure, not to mention attract additional private investment needed to expand their capacity to meet 

projected dramatic growth and future demand for access to the rail 

network? 

The Board recently commissioned the economic consulting firm, 

Christensen Associates, to conduct an extensive study on the extent 

of competition in the railroad industry. The study will also assess 

various policy issues including current and near future capacity 

constraints in the industry, how competition and regulation impact 

capacity investment, how capacity constraints impact competition 

and how competition, capacity constraints and other factors affect 

the quality of service provided by railroads. 

The study team will have the full benefit of all of the STB’s powers to inquire into and gather information from the freight rail industry. I look forward to briefing this Committee on the results of 

this study next year. 

Examples of ways that the STB promotes competition can be 

found in our major merger rules in cases where we impose competition-protecting conditions such as in previous merger cases, in 

other cases where the board has prevented larger carriers from 

interfering with the ability of smaller carrier to meet their obligation to provide service, in our management of the Federal Environmental Review Process required for the proposed construction of 

new rail lines and in decisions authorizing the construction of those 

new rail lines. 

With regard to the financial condition of the Nation’s rail system, 

I can report that our data reinforce what others will report today. 

The rail industry has gradually recovered from its pre-Staggers Act 

state of ruin, and the industry is currently in good health. 

The Board is currently awaiting final comments on an important 

rulemaking that proposes to change a key measure of the financial 

health of the railroads, the annual cost of capital determination. 

That calculation ties into our entire annual determination of the 

railroads’ revenue adequacy and is also a significant factor in rate 

cases and other Board proceedings. 

I believe that the Board must continue to examine all of our procedures and to constantly explore improvements, no matter how 

controversial the issue may be to stakeholders. 

The Board’s procedures for handling rate disputes are particularly important, and I will now turn to that issue. 

23

Under our statute, the Board must ensure that rates are reasonable while, at the same time, not preclude railroads from obtaining 

adequate revenues, but balancing these potentially conflicting objectives is not an easy task. Rates that are too high can harm raildependent businesses while rates that are too low will deprive railroads of revenues sufficient to pay for the infrastructure investments needed. 

The Board has recently improved its procedures for handling rate 

cases. In the fall of 2006, we made some significant changes in how 

we apply the stand-alone cost test and calculate the amount of relief in large rate cases in an effort to reduce litigation costs, create 

incentives for private settlement of disputes and shorten the time 

to litigate large rate cases. 

Also, in the small rate case resolution process, our new rules 

allow smaller cases to proceed on one of two tracks. First, freight 

rail customers may seek up to $1 million in relief, using a revised 

version of the three benchmark test with more predictability built 

into it. Under a second approach, customers can seek up to $5 million in relief. 

Another important issue that the Board is keeping a close eye on 

relates to fuel surcharges imposed by railroads. In January of this 

year, we issued a decision declaring it an industry-wide unlawful 

practice for carriers to use a fuel surcharge to recover more than 

the increased fuel cost attributable to the particular movement to 

which the surcharge supplied. 

Mr. Chairman, I will wrap up. I realize the time is running. 

This action ended an industry practice of charging fuel surcharges as a percentage of the shipper’s base rate regardless of the 

actual fuel cost associated with the transportation of the shipper’s 

goods. The Board will aggressively use the authority granted to us 

by statute to stop unreasonable practices, thereby protecting shippers and advancing the public interest. 

It is worth noting that the Board investigated and acted on the 

fuel surcharge problem on our own initiative and without any formal complaint. This Board has not received a single formal complaint about fuel surcharges. We will remain vigilant on this issue 

and will expeditiously review any formal complaints related to fuel 

surcharges or other unreasonable practices or unreasonable rates. 

Moreover, in addition to our process for adjudicating formal disputes, we also have an effective informal dispute resolution process 

which we encourage stakeholders to take advantage of. 

In sum, the STB is actively engaged in the pursuit of enhanced 

competition, the implementation of accessible and affordable dispute resolution procedures and continuous process improvement 

aimed at making our Agency a more effective economic regulator 

of the freight rail industry. 

Our initiation of a major national study of the state of rail competition and related policy alternatives along with our recently improved dispute resolution procedures, our pending rule on how the 

railroads’ cost of capital should be measured and the other 

proactive steps outlined in my full statement all combine to demonstrate this Board’s strong commitment to providing robust regulatory oversight of the freight rail industry. 

24

I look forward to the opportunity today to discuss our record of 

reform in more detail and to returning to this Committee in the future to report on our progress. 

Thank you. 

Mr. OBERSTAR. Thank you, Mr. Nottingham. We look forward to 

those initiatives and the report on your several reviews that were 

enumerated in your testimony. You can rest assured, we will invite 

you back. 

Vice Chairman of the STB, Mr. Buttrey. 

Mr. BUTTREY. Good afternoon, Mr. Chairman. Thank you very 

much for this opportunity to be here today before the Committee. 

I commend you for holding the hearing. 

I think to have a conversation about this issue from time to time 

is probably very useful to everybody, the Congress and the shippers 

and railroads and other people who are interested in the railroad 

industry, including investors and potential investors and shareholders. 

I do not have a separate statement. In the interest of time, I will 

dispense with any kind of formal statement. I have associated myself with the remarks of the Chairman who is the normal spokesman for the Agency, and I will be very happy to answer any questions you might have. 

Thank you very much. 

Mr. OBERSTAR. Thank you. We will certainly have questions for 

you. 

Mr. Mulvey, welcome back to the Committee where you once 

served and served with great distinction, preceded by a very long 

and distinguished career with the General Accounting Office, now 

the Government Accountability Office, and the Inspector General’s 

Office and our own Committee on Transportation and Infrastructure. 

We welcome you back here. It is good to have you on the other 

side of the table now. 

Mr. MULVEY. It feels a little different being on the other side of 

the table, but thank you very much for having me. 

Good afternoon, Chairman Oberstar, Chairwoman Brown, Ranking Member Shuster and other Members of the Committee. 

In 1995, the Surface Transportation Board was created to balance the needs of shippers, who must rely on railroads for reasonable rates, with the need for the railroads to earn adequate revenues. 

The overall questions we face today are: How well has the Board 

met its charge to balance those interests and what is the state of 

competition in the transportation of those bulk commodities that 

are largely captive to the railroads? 

I don’t think I am understating it when I say that many people 

believe the Board could do more to promote competition, ensure 

reasonable rates for captive shippers and improve the reliability 

and quality of railroad services. 

For a long time following the Stagger’s Act, the ICC and the 

Board, after 1995, focused on ensuring that the railroads recovered 

their financial health. It has been well documented, the state of the 

industry before Staggers in the seventies and eighties. 

25

In October, 2005, the STB held a hearing on the state of the railroad industry, and that testimony revealed there was nearly unanimity that the industry had largely recovered from the financial 

malaise that plagued it during the sixties and seventies. 

As Chairman Nottingham has mentioned, the Board has taken 

a number of initiatives at balancing the scales between railroads 

and shippers, and there are a few areas where I believe some real 

progress has been made. 

It was already mentioned, fuel surcharges and that the railroads 

were charging the shippers fuel surcharges based upon a percentage of their rates. This meant that the captive shippers who already paid high rates had to pay higher fuel surcharges as well despite the fact that their shipments did not necessarily engender 

greater fuel use. The Board found this to be an unfair practice and 

directed the railroads to compute surcharges to more closely reflect 

actual fuel consumption. 

Secondly, with regard to access to rate relief, the cost to bring 

a case before the Board and using its stand-alone cost guidelines 

can cost a shipper several million dollars. It is not the filing cost. 

It is the cost of the lawyers and the cost of all the consultants necessary for the shipper to undertake a stand-alone cost procedure. 

Shippers, whose traffic does not warrant the expense of bringing 

cases under the stand-alone cost guidelines, believe they have no 

access at all to the Board for relief. 

For 20 years, the Board and its predecessor, the ICC, studied 

how to make the Board’s procedures available to small shippers. Finally, the Board has now acted to address both the cost and timeliness issues for the large rate cases as well as finally establishing 

new procedures for small rate cases. 

In October, 2006, the STB issued new large rate case guidelines 

that were designed to reduce the cost of bringing a case significantly and to speed up the process. Just last month, we issued new 

procedures. In fact, earlier this month, we issued for bringing small 

rate cases before the Board. 

These rules give the shipper the option of selecting how they 

want to proceed to challenge their rates but, as the Chairman 

pointed out, they do set limits on recovery depending upon which 

process is selected. 

I am committed, Mr. Chairman, to monitoring the results of 

these initiatives to make sure they work as intended and to make 

changes if necessary. 

Thirdly, the cost of capital, the Board has consistently found that 

the Nation’s railroads are revenue-inadequate despite the fact that 

Wall Street has found the railroads to be profitable. The reason for 

this disparity lies in the way the Board has taken to determine the 

cost of capital, especially equity capital. 

The discounted cash flow approach that was used has long lost 

favor with the financial community. The Board staff reviewed the 

academic literature. We held hearings on this issue, and we have 

come up with the decision, proposed rulemaking rather, to adopt 

the capital assets pricing model. If this change is adopted, it could 

reconcile the Board’s estimation of revenue adequacy of the railroads with that which prevails on Wall Street. 

26

However, there are still a number of areas that still concern me, 

first of all, paper barriers. Paper barriers are contract provisions 

that arise when a Class I railroad sells or leases some of its light 

density track to a short line. Often, the short line must agree to 

interchange traffic only with the Class I carrier that leased or sold 

them the track. Interchanging with any other railroad would result 

in severe penalties. The restrictions generally continue on into perpetuity. 

I have found this practice to be anti-competitive and I have dissented from the majority of the Board in several cases where paper 

barriers were contained in sales or lease agreements. 

With respect to the status of competition, I believe the GAO 

study on railroad competition was a very worthwhile and well done 

effort. However, I do feel that it inaccurately claimed that the extent of captivity was declining. Even if relative captivity—which is 

what I think they mean—the percentage of traffic that is captive 

has declined, there is no evidence that competitive options have increased for captive shippers. 

The GAO also suggested the Board undertake a study of competition in railroad industry, and the Board has recently, as the Chairman pointed out, contracted with a private firm to have such a 

study done. 

I personally regret that those resources were not committed to a 

study that was authorized in the SAFETEA-LU legislation which 

would have focused on how well the Board has handled its mission 

rather than the larger issue of competition in the industry. How 

well has the Board acted on its mission, and that study would have 

been undertaken by the Transportation Research Board of the National Academy of Sciences. 

I have a few suggestions for improving rail service and competition. If we as a Nation are serious about shifting traffic off our 

highways and onto rail, we need to devote more resources into improving our rail infrastructure. The railroads favor an investment 

tax credit for this purpose, but I personally believe the amounts 

that will be needed would be far greater than what a tax credit 

could realistically produce. 

I believe that a railroad trust fund of the type recommended by 

former Representative and T&I Committee Member, Bill Lipinski, 

could generate the monies. A railroad trust fund could generate the 

monies needed to upgrade and build our Nation’s rail transportation infrastructure. 

Also the Board currently exercises regulatory oversight only over 

about a third of the traffic. Much traffic is exempt from our regulations because it is presumed to be competitive with other modes of 

transportation. But as times change, so does the competitive landscape. I believe we need to examine the class exemptions periodically to determine whether those premised on the availability of 

intermodal competition remain warranted in the 21st Century. 

Finally, the Board may begin an investigation of a potential violation of the rail portions of its statute only on complaint. If the 

Congress wants the Board to continue to actively seek out and stop 

problems, it might be appropriate to revise this language by striking the word ‘‘only’’ and adding ‘‘on its own initiative.’’

27

I thank you for the opportunity to testify today. I look forward 

to answering any questions you may have. 

Mr. OBERSTAR. Thank you very much, very crisp and thoughtful 

set forth testimony. I appreciate that. 

From the U.S. Department of Agriculture, Associate Administrator in the Agricultural Marketing Service, Mr. Kenneth C. Clayton, welcome and thank you very much for being with us. 

Mr. CLAYTON. Thank you, Mr. Chairman, and Members of the 

Committee, thank you too for the opportunity to appear before you 

today to share USDA’s views regarding rail competition and service. 

As Associate Administrator of USDA’s Agricultural Marketing 

Service, I oversee a variety of domestic and international marketing programs for American food and fiber including our work on 

agricultural transportation issues. 

There are many reasons for the productive and competitive 

strength that the U.S. agricultural sector has enjoyed over the 

year. Three factors, I think, stand out as particularly important. 

First, we have been blessed with an extremely productive natural 

resource endowment. Second, we have an impressive record of technological development in the production, harvesting and processing 

of agricultural products. Third, we have benefitted from a transportation system that has facilitated the efficient and effective movement of agricultural products from farms to destinations both at 

home and abroad. 

Clearly, rail is a critical component of our overall transportation 

system. In fact, the agricultural industry in the United States is 

highly dependent on a viable rail network, particularly producers 

in more remote locations with long distance transportation needs. 

USDA shares the view of many that the deregulation of the rail 

industry under the Staggers Act and related legislation was of positive effect in preserving the industry. At the same time, in regaining their economic standing, the railroads have taken steps that 

have reduced service levels and shifted costs to the users of their 

service. 

Consequently, as important as rail rate measures may be for 

judging the exercise of market power, changes in rail rate are not 

fully reflective of either the costs associated with movement of 

products from origin to destination or the impact on the international competitive position of industries like agriculture. 

USDA has heard and continues to hear from many in the agricultural industry regarding their concerns about rail competition 

and service. For many grain producers, rail is virtually the only 

cost-effective bulk shipping alternative, and agricultural shippers 

continue to express concern about decreased rail to rail competition, increased rail rates, poor rail service, rail capacity constraints 

and the fair allocation of rail capacity. 

Compounding this concern, of course, is the fact that agricultural 

producers have little influence over prices that they receive for 

their commodities and typically must absorb cost increases. Thus, 

increasing transportation costs translate into lower producer incomes which can have important implications for the production of 

food and fiber as well as the vitality of rural and regional economies. 

28

One of the key assumptions underlining deregulation of the rail 

industry in 1980 was that there would be sufficient competition, at 

least in most markets, to promote reasonable rates and discourage 

the abandonment of branch rail lines vital to agricultural producers. However, rail competition has declined over the past quarter century due to rail consolidation. 

The implications of this decline are somewhat difficult to assess, 

given incomplete and inconsistent data. To provide a clearer perspective on the state of competition in the rail industry, USDA 

notes and supports the GAO recommendation and subsequent STB 

action to take onboard a study of national rail competitiveness. 

Let me conclude, Mr. Chairman, by thanking you and the Committee for holding this hearing today. An efficient and effective 

transportation system is clearly important to the U.S. economy, 

particularly for our agricultural producers and shippers. 

Thank you. 

Mr. OBERSTAR. Thank you very much. Your complete statement 

will, of course, be included in the record. Your summary was very 

well presented. 

Mr. CLAYTON. Thank you. 

Mr. OBERSTAR. Ms. JayEtta Hecker has been in front of our 

Committee on many occasions and on many subjects, and we greatly appreciate your learned analysis of the transportation issues. 

Thank you for being with us again. 

Ms. HECKER. Thank you, Mr. Chairman. I am very pleased to be 

here to speak before you and the other Members of the Committee. 

The topic is, of course, as we heard, an extremely important one, 

and we are pleased that we can speak on the basis of two very recent and very comprehensive reports. We were most recently asked 

to look at 25 year retrospective on the impact of the Staggers Act 

and what kind of overall effects there have been. So I am basing 

a lot of my comments on that report as well as a more recent update looking at an additional year of rate changes. 

The three topics I will cover are, first, the major changes in place 

post-Staggers with this very broad perspective; second, I will talk 

about the protections, the balance that was always envisioned for 

the protection of captive shippers; and then, finally, I will briefly 

address the actions that the Board has taken. 

I will try to go through those very quickly because I think you 

are familiar with our report, and I am sure questions will be more 

useful as an exchange. 

If you look at page two, I do have a slide. It is unequivocal and 

all have recognized that the financial condition of the railroads was 

grievous before 1980. It was very important to our overall economy 

and our performance, and in many senses Staggers had a remarkably positive impact over a long period of time of allowing the industry to return to financial health through a number of the measures that are indicated there. 

The next slide, and again many people recognize this. One of the 

extraordinary things with the nature of the competition, the kind 

of measures that the railroads took, rates went down, went down 

for over 15 years, almost steadily every year, every commodity. We 

developed an index to try to make that a pure basket of goods, so 

it didn’t deal with changes in geography or changes in the product, 

29

but rates consistently went down and went down even more if you 

look at it, as this chart does, relative to GDP price index. 

It has gone up. There is no doubt, and I am sure you have heard 

this from many shippers, that rates have started to turn up slowly 

in 2000 and rather significantly, the most significant single year 

rise between 2004 and 2005. But in real terms, railroad rates, the 

cost to move shipments by rail are still below 1985 levels. 

I might say that one of the views maybe that this deregulation 

and the competition and the measures the railroads were enabled 

to undertake to streamline their operations wasn’t just in their performance, but these increases in the efficiency of the industry have 

actually been a macroeconomic factor in overall economic growth. 

The improvements in the performance of the logistics sector, several Members talked about the fact that we are one of the countries 

that is the cheapest in the world to move goods, and that was part 

of the benefits, not just the rate issue but the kind of efficiencies 

that we saw the railroads undertake and put in place with the 

flexibilities they were given. 

Slide four, again as you know, while all rates went down, they 

went down at different rates for different commodities, and this 

slide basically showed that the least decline has been in the grain 

area. The next one that started moving up more recently is miscellaneous mixed shipments which is largely containers. The bottom one where the rates were the lowest, coal has ticked up. You 

have got a number of increases occurring differentially in different 

commodities. 

Now some of our analysis is you can’t immediately infer this to 

monopoly power or whatever. There are lots of real factors in the 

industry. As many of us are well aware, capacity constraints have 

really become a reality in railroads, and that obviously turns into 

rate increases. 

The railroads made new investments, as was discussed. They expanded employment. They changed some of the mix to focus on different traffic, and there was a demand growth that was consistently occurring. So there are lot of reasons, and you can’t necessarily have a nefarious concern when you see the rates ticking 

up. It is a difference in a competitive and economic environment. 

Now, in looking at the overall picture, we also wanted to try to 

look behind the rates because you, Mr. Chairman, noted there had 

been a transfer of a number of costs to shippers. One of the areas 

we looked at, because we thought it would be useful to understand 

a rarely examined factor, is this miscellaneous revenue. 

As you see from this chart, slide five, miscellaneous revenue has 

skyrocketed. It has gone up 10-fold in just 5 years. Now a big factor 

in there is fuel surcharges, but one of the concerns that we had 

that related to one of our recommendations is this very inconsistent 

reporting by railroads. This isn’t good data, and so we recommended that the Board take some action to improve the consistency of data and the transparency of this information. 

On slide six, I quickly go into some of the information on captive 

shippers. You yourself have noted that while slide six uses this 

proxy for an indicator of captivity and uses the statutory definition 

which just opens access to rate relief. With this global factor, the 

30

share, whether it is in tonnage in revenue of potentially captive 

shippers, has gone down. 

But then to try to probe a little further, we looked in a more isolated subset at traffic which was traveling at substantially above 

the statutory threshold, and that was a ratio of 300 percent of revenue to variable cost. We found that has been rather significantly 

increasing. 

And, we looked at it on a geographic basis. You see differences 

in where those very high revenue to variable cost ratios occur, and 

it is in States like Montana, New Mexico, North Dakota and West 

Virginia. 

The key question that we had was, I think as several people said, 

we really did not believe that effective relief had been provided for 

shippers. In the 25 year history, in the balancing that was envisioned and while there was always the concern about the revenue 

adequacy, there really was very little effective relief provided. 

It is true that the Board very recently has started to take some 

actions. You have heard those, and I don’t need to recount them. 

I will say that some of them, particularly this change in the calculation of revenue adequacy, could be very substantial. Really, it 

is too soon to tell what kind of impact some of these changes would 

have. 

What we did do in our report was recognize that in our view 

there were a number of alternatives that have been proposed and 

that I know you and others are aware of that could promote competition. That is the really the interest in these alternatives. They 

are not giving up on the marketplace working. They are trying to 

efficiently intervene to promote competition. 

Although each of these have been argued as opportunities to do 

that, each has real costs and benefits. We did not feel we had the 

information to recommend any particular action by the Board. That 

combined with our concern with the absence of relief and the continued presence of some captive shippers led us to recommend that 

the Board more comprehensively, using its full authority, evaluate 

this situation. 

The conclusions then on slide 10, the Staggers Act has had farranging benefits not only to railroads but to our economy and to 

consumers and to many shippers. We did conclude that widespread 

changes in the relationship between the railroads and their customers are not needed. 

We did observe and do believe that there are pockets of potentially captive shippers that remain and that more examination is 

needed to determine whether some of those rates were really justified by market conditions or reflected in abuse of market power. As 

I said, that led to our recommendation for a more comprehensive 

study by the Board and some specific improvements in data as 

well. 

That concludes my statement, and I apologize for going over. 

Mr. OBERSTAR. Oh, no, not at all. It is an excellent statement. 

We expect that thorough review from the GAO. Thank you very 

much. 

Chairman Nottingham, you referred in your statement that earlier this month the Board issued new guidelines for small and medium size rate disputes. Shippers are saying, well, the new guideVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
31

lines, they welcome some action. There hasn’t been much over 

many years on this issue. 

But they do not reflect any of their recommendations. What recommendations were made that you think were useful and what recommendations were not? 

Mr. NOTTINGHAM. Thank you, Mr. Chairman, and I will say that 

issue stands out. 

That rulemaking where we endeavored to, with a lot of effort and 

time put into this by the career staff at the STB and hearings and 

a period of years of observing a system that really did not work, 

endeavored to put together a set of new procedures so that the 

Board can be more accessible to smaller and medium size rate 

cases, and that is what the recent rulemaking was all about. 

I will say that a number of shipper groups have already asked 

and we have given them some more time to decide whether they 

want to begin the process of appealing that decision. I believe some 

of the railroads have already filed some legal paperwork indicating 

intent to appeal. Somehow we have managed to attract concerns on 

all sides of the issue. 

But we think we have, by setting up two new channels to bring 

smaller cases, putting the shipper in the driver’s seat—the shipper 

can choose which one to take advantage of—and allowing a shipper 

to receive up to $5 million in damages under what we call the midlevel review or up to $1 million under the most simplified, we have 

greatly improved a situation that really wasn’t working. 

We had no cases resolved under the preexisting special procedures for simplified rates, and that was over a period of many 

years. Clearly, that is not because there are no shippers who believe they have cases. It was because of some problems with the 

dispute resolution process that existed. 

It will be interesting to see as time goes by whether shippers 

take advantage of this opportunity, how it works. We do have one 

significant shipper. I believe it is the DuPont Company that has already filed several complaints, and I know they are before you later 

today. I will let them speak for themselves. 

Time and experience will tell whether we are on the right track, 

but I do believe we have made a big improvement. 

Mr. OBERSTAR. It is an ongoing process is what you are saying. 

Mr. NOTTINGHAM. Yes, sir. Until we see a case play out, that is 

when we really know whether it works. 

Mr. OBERSTAR. You made reference to hedge funds and other 

large investors that are in your words, showing extraordinary interest in railroads. I met with the AAR Board earlier this year. 

That issue was brought up. Two major railroads, two of the Class 

Is have suddenly found themselves the target of investment. 

I would have concerns about hedge funds investing significant 

amounts at least up to the ability to have control over the railroad 

from the experience that I have had with a paper company in my 

Congressional district, the one that acquired Boise Cascade. 

Then what this hedge funds do with some regularity is spin off 

assets, cut down workforce, trim the company, increase its apparent profitability and then sell it off at that higher value. But, in 

this case, they sold off the woodlands that have been for 100 years 

in company ownership. 

32

If you are in the pulp and paper business, your asset is wood. 

It is trees. You sell your asset off, then you deprive the company 

of the ability to counterbalance forces in the marketplace. Those 

hedge fund guys didn’t care a hoot about that. 

Now I can envision hedge fund operators coming in. Everybody 

welcomes increased capital investment, but when that capital investment comes in and strips the asset, its viability, then you have 

a serious situation. In this case, the serious situation is the future 

ability of the railroad to serve the public. 

Have you at the Board given thought to reviewing the potential 

effects of hedge fund investments in the railroads? 

Mr. NOTTINGHAM. We have, Mr. Chairman. It is an issue and an 

area we are looking at closely, and it represents really an example, 

probably one of the most glaring examples of how fast changing 

this industry and this marketplace really is. 

We are living through incredibly dynamic times where after 

many years of disinterest by large segments of the financial community in the rail sector as an attractive place to invest money, we 

are seeing huge amounts of resources pouring into the railroads 

from large investors. 

Some of them go by the general name, hedge fund. Some of them 

don’t. Some of them are prominent individuals like Warren Buffett 

who have earned a lot of respect generally over the years for being 

a wise investor, and others are people like Bill Gates, and people 

who just seem to have significant capital and they want to invest 

it. 

We want to be sure, though, that anyone who does get involved 

in the railroad business, and we will ensure that anyone who does 

get involved in the business of railroading, has the public interest 

at heart and is not interested in just cashing out tomorrow and 

leaving shippers stranded. 

Mr. OBERSTAR. I think that is a very good perspective, but the 

question that I would like the Board to be asking is: Do these investors bring an increase in capital to the railroad for investment 

in its capital needs or are they just playing around with the shares, 

taking hold and getting a controlling interest in the railroad to further their own pocket, not to advance the cause of the railroad 

itself? That is what I would like the Board to be asking. 

Mr. Mulvey, your statement, I think, makes a profound observation. The Staggers Act greatly reduced economic regulation of the 

industry. It didn’t take away economic regulation. 

Mr. MULVEY. It did not. It greatly reduced by allowing, especially 

allowing the railroads to enter into contracts with shippers. Historically, before Staggers, all railroad rates were the tariff. With 

contracts, the deal was the rich could be more competitive. They 

could make agreements, et cetera, and the railroads could become 

more competitive. 

But you know you always have to be careful what you wish for 

because some of those contracts the railroads entered into back in 

the days when they were still financially in distress, were very, 

very lucrative for the shippers. They went on 10, 15, 20 years and, 

over time, these contracts became a real burden on the railroads. 

33

Now, of course, as these contracts are coming due, the railroads 

turning that around and raising rates 50, 60, 100 percent in order 

to make up for the years when these contracts were bad. 

Staggers also allowed the railroads to abandon lines much more 

easily. It sped up the abandonment process. So they were able to 

reduce their costs, reduce the size of their infrastructure, continue 

to cut back on the labor force until they are a fraction of what they 

were 30 years ago. 

There is good with that—they are more efficient—but there is 

bad with that because today we have a railroad system that is not 

well positioned to meet the demands in the future. 

Mr. OBERSTAR. Thank you. 

The conclusion we could draw from that is attempts for the 

Board to exercise its inherent authority, more authority or encourage the Board to vigorously use its authority is not re-regulation. 

Regulation remains but at a diminished level, right? 

Mr. MULVEY. Yes, and there is a new question as to what the 

Board’s authority is. We have a general counsel. They have views 

of what our authority is. We don’t want to overstep the authority 

that Congress has given us, but there have been some cases where 

we have been questioned as to whether or not we had the authority 

to do what we did. 

Fuel surcharges, for example. A lot of people believe the Board 

did the right thing in fuel surcharges, that the railroads action was 

unreasonable, but some of the railroads’ claim that the Board had 

overstepped its authority in the fuel surcharges. We didn’t have authority to do what we did. 

I recommend that the Board be able to initiate investigations on 

its own. Right now, we don’t have the authority to initiate investigations on our own. We have to wait until a complaint is filed. 

That, again, would strengthen us. 

Mr. OBERSTAR. I definitely think that is an initiative we should 

take and should be an outcome of this legislation. 

Mr. Nottingham, do you disagree with subsequent witnesses who 

will come before the Committee, who have already many times 

said, filing fees are excessive, cost of proceedings are excessive, 

time consumed in proceeding on a rate case is excessive? 

Do you disagree with that? 

Mr. NOTTINGHAM. I sympathize with those concerns because 

looking back at the record over the years, in some cases over a 

hundred years, in some cases more recently, what I have had to do 

as a new chairman, 13 months into my appointment here, I will 

say I have been distressed to see that it has gotten to this point. 

But I am pleased to say that my colleagues, well before I came 

onto the board, initiated a number of very sweeping, important reforms that I was pleased to join with, and almost all of our major 

actions have been unanimous and bipartisan in those reform areas. 

We are changing fast for a regulatory agency, and I just ask the 

Committee’s forgiveness to judge us on what this Board, these 

three members and the staff, actually accomplish and have accomplished. 

Mr. OBERSTAR. You are moving in the right direction. I appreciate that. 

34

I would say that on those issues, even railroads that disagree 

with other provisions of my legislation will say those filing fees are 

too high, the barriers are unreasonable, the time consumed is unreasonable. That ought to be adjusted. 

I have one question that I want to ask, and then we will go on 

with other Members. 

Is there or could there be a rate that is so high a percent of variable cost that it would be appropriate for the Surface Transportation Board to use its powers to declare the rate unreasonable? 

Mr. NOTTINGHAM. Mr. Chairman, I assume you would like me to 

take a first stab at that. Yes, sir, we get that question a lot. It 

seems pretty straightforward that if a rate got to a certain level 

percentage-wise that common sense would say the Board would de 

facto deem it to be unreasonable. 

I will say, though, we don’t do that, and I have to be careful how 

I speak here because we do expect this kind of issues to come before us in an active litigation context. 

How high is too high is the question we often get. What is the 

big magic number? Should it be 300 percent, 189, 450, 600? 

Really, it is important that we look at the facts and circumstances of each case and apply the modeling and the tests that 

have withstood Federal Court approval to make sure there is not 

a width of randomness or arbitrariness in the way we do that because these are multimillion dollar disputes and we prefer not to 

see them dragged out in appeals unnecessarily. 

Mr. OBERSTAR. Thank you. 

Mr. Mulvey, do you have a comment on that? 

Mr. MULVEY. I would agree that we have a process, and any particular number would be somewhat arbitrary. So we do have a 

process, and we do look at the stand-alone costs. If the rate is higher than that which would be necessary for the railroad to continue 

operations and reinvest in itself for its investment, then that rate 

is too high and we will roll the rate back. 

In some of the cases that came before us, some of the large rate 

cases, it is true that I don’t think we have ever given a shipper a 

complete win, but we have rolled back the rate somewhat in some 

of these cases. But I am not sure there is a magic number. 

Mr. OBERSTAR. Ms. Hecker, have you had GAO consider that 

issue? 

Ms. HECKER. No, we haven’t explicitly, but I have to say in our 

discussion of the problem with the revenue to variable cost ratio, 

we point out and discuss explicitly in the report that the nature of 

a ratio can have perverse effects. You can have a rate decrease 

where the entire decrease is passed on to individual shippers, but 

the ratio will change and the revenue to variable cost ratio will go 

up. 

So it is very dangerous to not have it be case specific. 

If I may, I wanted to add a point, though, about authority which 

I think is a very important one and clearly a legislative issue. In 

our report, we basically observed and we put a lot of our lawyers 

on this issue, that we though the Board’s authority did reach to its 

ability to inquire into and report on railroad practices and to study 

and to monitor and take action to promote and enhance competition. 

35

One of the statutory objectives of Staggers and the formation of 

the STB is about ensuring effective competition. While some of the 

measures that are being explored are the subject of prior 

rulemakings where they decided one thing, there is the potential 

where circumstances have changed where we think the Board has 

the authority. 

In early discussions of our recommendation, there were some 

issues about whether the Board could even undertake the study 

that we were recommending. At the end of the day, they finally 

agreed that they could do that. 

We would be happy to have our lawyers talk with you at the 

same time with the STB lawyers. We think there is a lot of authority there, and it has been a question of the balance that we really 

haven’t seen in the past. 

Mr. OBERSTAR. Thank you. That would be very useful. We could 

do that. 

Ranking Member Shuster. 

Mr. SHUSTER. Thank you. 

Chairman Nottingham talked a lot about the new procedures and 

processes he just put in place to handle rate cases. It is my understanding you attempted the Board attempted to do that in the 

1990s and it failed. 

What is in these new procedures that is going to assure us that 

they will succeed and can you talk about a few of the changes you 

have made to those procedures that you think are going to come 

out with positive world changes where we will see success as we 

move forward? 

Mr. NOTTINGHAM. Yes, sir, I would be happy to. Under our recently adopted rulemaking in the area of creating a simplified process for small and medium size rate case dispute resolution, what 

is of, I think, most interest to me and should be of high interest 

to shippers is that for a $150 filing fee, which is a pretty routine 

filing fee you see in a lot of courts, you can bring a $1 million complaint. You can choose to do that or you can choose to pay a higher 

fee and bring a $5 million complaint. 

Under the three benchmark approach, which is the smaller $1 

million and less approach, we basically set up almost a small 

claims court type model, that you don’t have to bring in four law 

firms and five consulting firms and spend millions of dollars arguing over 99 different assumptions. 

We make a lot of the assumptions for you. It is laid out in the 

rule. You just bring your case, and within eight months you are 

guaranteed an answer. 

Now that is assuming that the parties don’t prevail upon the 

STB to extend which we hope that we don’t see requests for extension, but that is the reality that you may want to ask future panels 

about today because you will hear a lot about the lengthiness of 

procedures. Very often, it is borne out by the repeated requests for 

extensions by both shippers and railroads. 

Mr. SHUSTER. What is the time frame? 

Mr. NOTTINGHAM. So it is eight months gets you a decision under 

that. Under the slightly more complicated $5 million simplified 

stand-alone cost procedure, you get an answer in 17 months, which 

36

for complex civil litigation with $5 million on the table is a great 

improvement. We are going to do our best to stick to that. 

Today is probably a good opportunity with the audience we have 

through the internet and here for me to say that we will be looking 

at extensions very tightly and we will not, if I have anything to do 

with it, just be granting them as quickly as we may have in past 

years. 

Mr. SHUSTER. As the Chairman said, I am sure we will be calling 

you back because we will be watching, watching closely. I think it 

is extremely important that we do streamline it and get it down 

to where small shippers can get in there and get relief if it is necessary. 

The fuel surcharge situation, I have seen some advertisements 

on the Hill. You commented it on it briefly, and I think Dr. Mulvey, 

you had commented on it. Can you explain that again to me? 

Did shippers come in and file cases or not? I am not quite sure 

I understood that. 

Mr. NOTTINGHAM. A lot of this transpired before I was on the job, 

but I am told by our staff, who searched the records very carefully, 

that we have to this date never received, this Board in the last period of years when this issue has been playing out, a formal complaint from any shipper about a specific case of fuel surcharge, misconduct or abuse or unreasonableness. 

Now the Board, under its own authority—and I would be happy 

to let my colleagues address this because they should get the credit 

for this—actually heard about this issue because we are constantly 

meeting with shippers and stakeholders and others, that this was 

a problem. Under our own authority, we actually initiated a sweeping industry-wide investigation and hearings and put an end to the 

practice. 

It was an outrageous practice, personally, if I might say, where 

railroads were actually asking shippers to pay something called a 

fuel surcharge that had no relation necessarily to the use of fuel 

by those shippers. How it lasted and played out as long as it did 

is a mystery to me, but I am pleased to be part of the group that 

actually put an end to it. If we ever do see a formal case brought 

to us, we will take a good look at it. 

Mr. SHUSTER. Dr. Mulvey. 

Mr. MULVEY. The advertisement that you saw in Roll Call, I 

guess the other day, didn’t refer to the STB’s finding that the fuel 

surcharge was an unreasonable practice which we did find. It complained that we didn’t make it retroactive, that the shippers had 

already paid all these fuel surcharges and they did a calculation 

which said that the railroads made $6.4 billion above and beyond 

what was justified with these fuel surcharges. 

Now you will be hearing from the railroads later, and they very 

much dispute the calculation. Clearly, to the extent that these fuel 

surcharges were unreasonable, while they were in place they were 

unjust, but we decided to go forward with the fuel surcharges rather than try to rebate those that were already paid. But that is what 

the complaint in that ad was. 

Mr. SHUSTER. Dr. Mulvey, I wonder if you could shed some light 

on the 180 percent of revenue to variable cost rates. We keep hearing that talked about, and it is my understanding it wasn’t develVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
37

oped very scientifically as many things on Capitol Hill aren’t developed very scientifically. So can you talk a little bit about that? 

I think a lot of people and I don’t know about other Members of 

the Committee’s understanding of it, but I think it is important as 

to where did the 180 percent, what does it mean, is it a scientific 

number. 

Mr. MULVEY. Well, the actual number itself, 180 percent of variable cost, it is my understanding that it was decided on by one of 

the staff people on the Hill many years ago late at night. 

Mr. SHUSTER. You are pointing to John. 

Mr. MULVEY. It wasn’t John, but it was a staff person apparently, but there was a lot of evidence it had to be somewhere near 

that number. 

Revenue had to be greater than variable cost obviously because 

it has to cover fixed costs. The presumption is how large are those 

fixed costs and how much more then the fixed costs must revenues 

be to make sure they are covering all the out of pocket or variable 

costs as well as making a return on investment and having enough 

money to replace capital. 

The actual number, people talked about different numbers, and 

then finally it was set at 180 percent. It is not based on any kind 

of scientific knowledge that I know, but basically it is somebody’s 

best guess. 

Mr. SHUSTER. Mr. Chairman, I wonder if I may ask one more 

question. My time has expired. 

Mr. OBERSTAR. Sure. 

Mr. SHUSTER. Ms. Hecker, you had mentioned that there has 

been no effective relief to the shippers. At the same time, you said 

the rates are actually below what they are 1985 rates. When I hear 

that, I think, well, rates have been reasonable. So is there relief 

necessary? 

At the same time, my understanding is there have been very few, 

especially small shippers, relatively few cases. Can you explain 

that to me? 

No relief has occurred. Is that because there have been no cases 

brought because it is too expensive or is there no relief because the 

rates have been relatively low? 

Ms. HECKER. I think if you are able to stay for the next panel, 

I am sure people will tell you far more eloquently than I can the 

specific concerns. 

Mr. SHUSTER. I intend to. 

Ms. HECKER. Basically, as I mentioned, while we report aggregate data, that when you go deeper into it, there are these pockets 

where there appear to be captive shippers, and it is indicative. It 

is illustrative. The kind of work that we were able to do, given our 

data that we had access to, but there appear to be some captive 

shippers who are paying substantially more, so even though overall 

on an aggregate basis, rates might be going down 

Don’t forget there are these costs transferred. I am sure you will 

hear more about that too. 

So you have to look at a complete picture. There are these pockets where there could be shippers who are totally captive and while 

there is the rationale for differential pricing, there is the process 

that is supposed to be there to protect from unreasonable or excesVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
38

sive prices. Basically, as you have heard, nothing has ever gotten 

through the process. 

Mr. SHUSTER. That is obviously a big, big concern of ours here. 

You mentioned out West, I believe it was, 300 percent of revenue 

to variable cost. Does that include large fixed or large capital investments? 

I know out west they have double and triple tracked out there 

to try to move coal. 

Ms. HECKER. I don’t believe it is just the western areas. I remember that West Virginia was one of the States, and there are pockets. Those were just States that there were some pockets of it. So 

it is not just one area. 

Again, that was just an illustrative piece of data, and that is why 

we are pleased that the Board is commissioning a far more comprehensive and rigorous study. 

Mr. SHUSTER. Thank you. 

Thank you, Mr. Chairman. 

Mr. OBERSTAR. The Chair of the Rail Subcommittee, Ms. Brown. 

Ms. BROWN. Thank you, Mr. Chairman. 

I guess what still stands out most in my mind is that the rail 

industry is operating in the black and that is exactly what we 

want. I have been reading these 2,000 letters that I received, and 

it is surprising that it is comprehensive where I have gotten them 

from, particularly the number of letters I have gotten from people 

in agriculture, grain, coal. 

One of the statements is that this bill is a one size fits all type 

of remedy that will not achieve the desired goal. What is the desired goal? 

I guess I want to go to the Board and ask, in the instance that 

you have enacted some additional relief for the shippers, can you 

expand on that? Does that address most of the pricing that the 

small shippers have expressed their concern? 

Mr. NOTTINGHAM. Madam Chairman, if I could, first of all, your 

reference to the thousands of letters that you reference, it is a good 

reminder. I know here at the Board, we, of course, spend most of 

our time working with folks who are not happy with the current 

system of regulation, and that is understandable. People who are 

not satisfied are the first ones to come to Washington and petition 

for change, and that is the way it should be. 

Our system of rail transportation, though, is so big and enormous 

and so important to our economy. It is always important to not forget that there are thousands, hundred of thousands of other shippers busy moving product by rail in a system that overwhelmingly 

works well and is a model in the world for an effective freight rail 

system. 

Yes, we have got challenges and problems. Yes, this Agency, 

STB, has its work cut out for us, and we embarked on an extensive 

series of reforms. That gets to your question. 

I believe that our new simplified procedures for resolving small 

and medium size rate disputes will give shippers a significant new 

avenue to come to the Board and actually bring cases and get results. 

I believe that our pending—and we are waiting for comments to 

get finalized this week—rule on the cost of capital decision, and we 

39

are keeping an open mind, of course, as the Administrative Procedures Act requires until we see all the comments and responses. 

We will come in during October and by the end of this year we 

hope to have something to say in final form on that. 

These actions and others will make a real difference for shippers. 

Now I am not going to sit here and say that when you have this 

hearing in six months or a year or one month, that you are going 

to have a room full of 100 percent happy witnesses. Looking at the 

history, going back to the 1800s of this Agency and our predecessor, that would probably be unreasonable for me to say that to 

you. 

Ms. BROWN. I would like to hear from the other board members. 

Also, it is still going to take about eight months. Is there anything 

that you can do to cut that time down? 

The cost is a factor, but how long it takes these things to be resolved is another factor. 

Mr. NOTTINGHAM. I know. We are sympathetic. Eight months is 

a long time. We put the challenge to our staff and tested them over 

and over again. Give us the fastest process that, remember, allows 

for discovery. 

This is still complex civil litigation with discovery back and forth, 

and the parties tell us that they do need some time to make their 

case, and to bring it. The railroads do get the procedural opportunity, obviously, to provide information and make their case. And 

so, that literally was the shortest feasible time period. 

We wish it could have been a lot less, but that was the quickest 

amount of time we felt we could have a reasonable process that 

would survive, frankly, survive the kind of appeals that we expect 

are coming. Anytime you try to change something in Washington, 

in a number of ways, we are getting challenged every step of the 

way in the courts of appeals from all sides. 

It is kind of interesting. Somehow, you are making all sides unhappy. You are either doing something right perhaps or maybe not, 

but we think we are on the right track. 

Ms. BROWN. Dr. Mulvey. 

Mr. MULVEY. Yes, I agree that we do get a lot of complaints 

though not only about rates. On rates, we do hear from the captive 

shippers. But other shippers, who aren’t captive or have alternatives but rely heavily on rail, also complain about cost of availability, how long should things take, delays, et cetera. 

We don’t have formal procedures for all of these. We do have informal procedures. We have a grain car council that we meet with 

a couple of times a year to make sure that the grain cars are going 

to be available to meet shipper needs, so they have an understanding of what the crops are going to look like and what the 

needs are going to be, where they are going to be. 

We have a group called the Rail Shipper Transportation Advisory 

Council or RSTAC that discusses some of the upcoming shipper 

needs and how shippers are viewing the quality of service, and 

they meet quarterly. 

We just established a new Committee called the Rail Energy 

Transportation Advisory Committee which will focus very much on 

the availability of rail cars and equipment to meet the energy 

40

transportation needs, not only coal but also biofuels and other materials. 

We try to work with the railroads and the shippers to resolve 

some of those complaints and some of those issues in an informal 

manner. 

Ms. BROWN. Did you want to respond to that, Ms. Hecker? 

Ms. HECKER. No, I have nothing to add. 

Ms. BROWN. My last question, the Board is currently dealing 

with some competition barriers. What additional issues with competition does the Board plan to do to address these additional 

issues? 

Mr. NOTTINGHAM. Thank you, Madam Chairman. 

We do continue to see competition problems and challenges 

across the Country. It is one of the reasons we commissioned this 

million dollar study, and we expect our consultants out of Madison, 

Wisconsin to go out and spend quality time with many stakeholders, GAO, others, shippers and railroads to really help us come 

up with some more recommendations in those areas. 

I don’t have the complete menu of solutions in my mind yet, but 

we have our work cut out for us. 

Of course, in our work as we see mergers, which in recent years 

have mostly been coming out of the short line sector, we do make 

sure that shippers are protected. 

We have a big merger heading our way. The paperwork hasn’t 

been filed yet, but it has been in the press involving the Canadian 

Pacific and the Dakota, Minnesota and Eastern railroads. That 

could have some important consequences for competition, particularly the possibility of getting a third major railroad into the Powder River Basin. 

Our Agency has already done much of the environmental work 

which has taken years to develop, and we survived huge lawsuits 

from communities and individuals who don’t want to see additional 

railroad track put through their towns. 

And so, that brings me back full circle to what we really need 

to see here which is some serious construction of new railroad track 

across our Country. We are so far past the day when our top problem is too much track in too many communities that needs to be 

abandoned. I look forward to the day when we don’t have any 

abandonments in our docket, and we have got nothing but applications for new line construction. 

That is what we need both in your port community of Jacksonville which you were kind enough to show me the real opportunity 

you had there to get some of that traffic off of the trucks and the 

highways and really develop the rail system. Unlike some other 

systems out there, there is really room for the rail system to grow 

in many important places. 

Ms. BROWN. Thank you. 

Mr. Chairman, are we going to have another round? 

Mr. OBERSTAR. Oh, yes, we will. 

Ms. BROWN. All right, thank you. 

Mr. OBERSTAR. Mr. LaTourette. 

Mr. LATOURETTE. Thank you very much, Mr. Chairman, and 

thank you all for you testimony. 

41

When Ms. Hecker was speaking, I wrote down a couple of things, 

and one was I wrote down at one point she said small pockets of 

captive shippers and another time, pockets of captive shippers. 

That leads me, I think, to my first line of inquiry with you, Chairman Nottingham. 

She also indicated it is difficult to get around what is a captive 

shipper and what isn’t a captive shipper. 

But from your perspective, you know there is a number of pieces 

of legislation floating around here, one by the Chairman, that attempt to address the issue of captive shippers. When you, as the 

Board, look at rail shipments as a whole, what percentage of those 

shipments do you consider to be captive? 

Mr. NOTTINGHAM. When you actually look at everything that is 

moving under contract that is outside of our review, everything 

that is moving under an exemption because it is intermodal, for example, and has the benefit of competitive options, and you peel it 

all away as I outlined in my statement, Mr. LaTourette, we are 

really talking about less than 10 percent of all the Nation’s rail 

traffic that is viewed by us from a technical perspective as captive. 

Now are there others who feel captive sometimes? Probably yes. 

Are all those captive on every day of the week all year long, feeling 

completely mistreated? Probably not. 

That is where it might be a pocket to some but, of course, if you 

are that captive and it is your family farm or your family business, 

you are not in a pocket. You are in a huge hole, and it is understandable why those folks feel the way they do. 

Mr. LATOURETTE. Then that gets to my next question. When you 

used the word, intermodal, some members of this coalition that are 

behind Mr. Oberstar’s bill, the C.U.R.E. Coalition, I think they are 

called. I know I speak at my peril because Mr. Baker is to my left 

as I ask this question. 

There was a box company from my district. I said, well, if you 

are complaining about the rates that the railroads are charging, 

why don’t you put it on a truck? 

They said, well, because the truck is more expensive. 

My question to you is do you consider someone who defines himself in that circumstance, that has an intermodal option to meet 

the definition of a captive shipper? 

Mr. NOTTINGHAM. Well, one of the important considerations we 

look at, of course, is does the shipper have a meaningful alternative. I am not an expert on the box industry, but typically if it 

is just boxes and they are not made out of heavy steel or something, trucking probably could be an option. 

We look at each market, though, in each specific case to make 

that determination, to see whether a shipper really does have a 

meaningful option. 

If you are a coal mine, though, in the Powder River Basin of Wyoming or Montana, trucking is just not a reasonable option to move 

your coal a thousand miles. So we have seen most of the big cases 

in recent years have been right there in the Powder River Basin 

and dealing with coal and utilities unhappy with the rates they are 

paying. You will hear much more about that this afternoon. I know 

from having seen some of the statements. 

Mr. LATOURETTE. Okay, thank you. 

42

Commissioner Mulvey, my question to you is that in light of the 

fact that the STB has come up with recent decisions on the cost 

of capital and the small shipper rate relief that has been discussed 

by Chairman Nottingham in response to other questions, would 

you say that most of the issues, at least that I get into my office, 

the complaints by the shipper groups, have been addressed by the 

actions that the Board has already taken? 

Mr. MULVEY. I guess in a word, no. We hope that will be the 

case. I mean it was meant to do that. My suspicion, of course, is 

that while these will go partway in meeting some of their needs, 

I think there will be still be complaints about the Board processes. 

Some of the shippers feel that, for example, our relief numbers, 

$1 million under the three benchmark approach, $5 million under 

simplified guidelines, are too low. That is a five year figure. It is 

only $200,000 a year under the first and a million a year for the 

second. So I think there will still be complaints. It goes part of the 

way, but I would be very, very surprised to see our phones stop 

ringing. 

With regard to one thing the Chairman said, I want to make it 

clear about captive traffic. Some of the traffic that is captive is 

under contract, and we do not regulate that. It may still be captive, 

but it doesn’t come into our purview until the contract expires and 

it comes down to a common carrier rate. 

Then there is also traffic that is captive to railroads, that is to 

railroads by traffic, but it is not really feasible for that traffic to 

move by barge or by truck. 

Mr. LATOURETTE. Okay, thank you for that clarification. 

Ms. Hecker, to you, towards the end of your testimony, you indicated that the STB has taken some actions, and I assume that you 

are talking about the two improvements that I just asked Mr. 

Mulvey about. You also indicated that it may be too soon to pass 

judgment on how those changes affect the issues that are under 

study by your organization and also the issue that is before this 

Committee today. 

How long do you think we would need to wait to determine 

whether or not those changes are actually working and if Mr. 

Mulvey’s answer in a word, no, might be in a word, yes, after it 

has had some time to work? 

Ms. HECKER. Well, let me preface by saying that we haven’t even 

had the opportunity, given our work was completed a number of 

months ago, to systematically review the major actions. So I answer with only a broadest brush of what the measures are and 

therefore what kind of time frame might be necessary to assess 

them. 

The main one that we had recommended was the study, and that 

is not done for a year. Surely, I think, there could be very meaningful results. I was encouraged that the study group would have the 

same authority and access that the Board had. That was one of the 

concerns we had in the study being contracted out. 

So that time frame is one that I think the Congress would be in 

a position to have very high expectations from the Board to not 

only forward you a copy of the study but to comment themselves 

what their strategy is, what they read in it, what they see, whether 

43

there is consensus or whether there is a mix of views about proceeding. I think that is a very important window. 

These measures, I think there are still some legal disputes on 

the way. Obviously, one often has to wait to see whether even new 

processes are upheld. So I think it is certainly at least a year to 

look at the potential impact of new procedures. 

The one not yet done, as I mentioned I think could be the most 

important of all, and that is changing the way revenue adequacy 

is defined. 

Mr. LATOURETTE. I thank you. 

Mr. Chairman, I am still smarting over the theft of my chief of 

staff by the Surface Transportation Board, but I tried to be tried 

to be polite to them notwithstanding. 

Mr. OBERSTAR. Cross-fertilization is important, though, in this 

town. 

[Laughter.] 

Mr. OBERSTAR. Mr. DeFazio, since the gentleman was called to 

other duties during the opening remarks, if the gentleman wishes 

to make an opening statement. 

Mr. DEFAZIO. Well, thank you, Mr. Chairman. At this point, I 

would just proceed to questions if I could. I appreciate the offer. I 

had to run to the Homeland Security Committee for their minor 

portion of the Coast Guard Reauthorization. They are building on 

our good work over here. 

I just want to further pursue this definition of captive. I am a 

bit puzzled to tell the truth. 

Rail is much more fuel efficient generally than truck. I don’t 

know how it compares. I mean basically if we are looking at lumber, it is two and a half truckloads on one rail car. I think it is 

about three times as fuel efficient, as I understand, over a longer 

distance. I have a lot of lumber producers in my district. 

So the question is if they have access to trucking but trucking, 

because of the laws of physics, is going to be much more expensive 

than the rail, we still consider because someone could theoretically 

put it on a truck, they are not captive. Is that the way it works? 

Mr. MULVEY. Well, theoretically, almost anything can be carried 

by truck. 

Mr. DEFAZIO. Right. 

Mr. MULVEY. If you go to the Powder River Basin, for example, 

you will see that when the coal comes out of the ground, the first 

thing it goes on is a truck with eight foot wheels. Theoretically, 

they could go on the highways. The highways wouldn’t last very 

long, but theoretically that could happen. 

But the reality is there are some commodities for which truck or 

other modes of transportation just aren’t feasible. Coal, for example, virtually has to travel by rail. 

The cost, we have a process called exemptions, class commodity 

exemptions. We decided that a number of commodities are modally 

competitive and therefore we do not regulate them. Now, we made 

those decisions back in the eighties and the nineties. One of the 

things I had in my statement was that we need to look at those 

commodity exemptions. Over time, circumstances change and with 

rising fuel rates, with the shortage of truck drivers, et cetera, it 

44

may very well be true that some things that we have said historically are modally competitive may not be. 

I think we need to review those exemptions periodically to decide 

whether or not things are captive or whether or not they are modally competitive. 

Mr. DEFAZIO. Right, but if there is a contractual obligation because it spun off a short line, there is no way to void that contractual obligation and/or can you regulate in that area if you determined that they are captive but they are only captive by virtue of 

a short line which is under contract to deliver to one Class I? 

Can you do anything in that case? 

Mr. MULVEY. If they are under a contract to a short line which 

is under a contract to a Class I, once they are into contracts, we 

cannot do anything until the contracts expire. We did talk about 

the short line being under contract, the paper barrier issue. Again, 

too, it is one of those things. 

Mr. DEFAZIO. Some of those are perpetual. 

Mr. MULVEY. Some of those are preventable. As I said, I have 

been very critical of paper barriers. I have dissented on several 

cases when paper barriers have been involved. Right now, they are 

accepted and, no, we can’t do anything about that then. 

Mr. NOTTINGHAM. Mr. DeFazio, the so-called paper barrier or 

interline agreement issue is very much with us from a regulatory 

perspective. We hope to have something to say publicly soon. Hearings were held last summer in 2006, and it is a very important 

issue. We are going to have something to say about that. 

Mr. DEFAZIO. Does that apply only to future agreements or is 

there any way? I mean there is contract law and all that. I don’t 

know whether there is any way to deal with existing agreements. 

Mr. NOTTINGHAM. As much as I would like to have a full discussion on this today, I really have to be careful or my lawyers will 

worry. 

Mr. DEFAZIO. You are in the rulemaking process. 

Mr. NOTTINGHAM. We are in the rulemaking process, but let me 

say something to answer your question. 

Hypothetically, a shipper who only has a rail option and that rail 

option is tied up, for lack of a better word or phase, in an agreement with a Class I, that could, hypothetically, be a captive scenario, so depending on the facts and everything. We could see a 

case like that in the future. 

Mr. DEFAZIO. When will we see a rule? When do you think there 

will be a rule on the paper barrier issue? 

Mr. NOTTINGHAM. I think within a month. I always need a second vote. I am always careful to point that out. It is a three person 

board as you see here. We should have something out very soon. 

Mr. DEFAZIO. Okay. I am trying to drill down to what is real and 

what is theoretical. 

We want to become more fuel efficient as a Nation and, in many 

cases, being more fuel efficient is also going to be more cost efficient because of the cost of fuel. In many cases for a lot of heavier 

products, that means movement by rail, but if there are other impediments to better utilizing the rail system which relate to contractual agreements between Class IIs and Class Is or other things. 

45

I mean the reality is in my district. I have a lot of people who 

are on a contracted short line. Burlington Northern comes to the 

north of Eugene, but they can’t get to Burlington Northern. So they 

can only go to UP because they are not allowed to get to BN unless 

they want to truck to north of Eugene which becomes pretty inefficient with the unloading. 

That is one side. 

The other side we have to consider is how do you provide for an 

industry that is stable and can generate the revenues it needs to 

make investment. But, in a deregulated environment, of course, we 

aren’t guaranteed that the profits that might come from captive 

shippers or access charges are going to necessarily flow to investment because you can’t direct them to make investments, right? 

That is beyond the role of the STB at this point and time. 

Mr. NOTTINGHAM. Correct. 

Mr. DEFAZIO. In the old days, of course, it was a whole different 

system. 

I guess the question, in listening to Mrs. Tauscher and some of 

the other remarks here, is how we can be creative and balance 

these interests, both helping the shippers and assuring the Country 

that we are going to best utilize this resource which is more fuel 

efficient, which is the interest of our businesses and our national 

economy. 

Yes, I guess that probably gets beyond your rulemaking, but I 

would be interested in any ideas you have along those lines outside 

of your normal day to day activities. 

Mr. NOTTINGHAM. We would be happy, sir, to come brief you as 

soon as we get this rule out. That should be a little better time procedurally. We can have a good, full, open discussion about it and 

explain to you what is in there. 

Mr. DEFAZIO. Sure. 

Mr. MULVEY. We also talked about the investment tax credit that 

the railroads are looking for, and I also mentioned former Congressman Lipinski’s suggestion for a railroad trust fund, whereby 

you would fund it similarly to the way the highways and airplanes 

and roadways trust funds are financed and use those monies to invest in the infrastructure to expand the capacity to meet the projected growth needs. 

There are a lot of difficulties in how you would actually do it, but 

nonetheless there needs to be more money put in the infrastructure 

than the railroads can afford to do out of retained earnings. 

Mr. DEFAZIO. Right, that would get to the unique partnerships 

that Mrs. Tauscher was referring to. 

My State is doing that with something called ConnectOregon 

where they are partnering with a freight railroad to build more sidings, to mitigate congestion in the hope of avoiding more trucks on 

the highway and other costs that flow through to the rest of society 

and also hopefully to more efficiently move the passenger trains 

through that same congested area. 

Partnerships like that, I think, could be very valuable. I am open 

to ideas along those lines. So thank you. 

Thank you, Mr. Chairman, for the time. 

Mr. OBERSTAR. I thank the gentleman. 

46

That is an interesting observation that the gentleman from Oregon made. The State is engaged in building sidings and other capital facilities for railroads. Is that a subsidy to railroads? 

Is that a kind of government intervention that the railroads 

would not welcome? 

Mr. DEFAZIO. Well, I think these days, there is a new generation 

of management that is more interested in creative partnerships 

like that with the State of Oregon or at least in our part of the 

Country they are interested in it. 

Mr. OBERSTAR. Let us hope that is the case. I thank the gentleman. 

The gentleman from Louisiana, Mr. Baker. 

Mr. BAKER. Thank you, Mr. Chairman. 

Ms. Hecker, I was recently provided a copy of an executive summary by the American Chemistry Council of a study engaged by 

them with Snavely King, which looked at fuel surcharges over the 

period of 2003 through the first quarter of 2007. The simplified 

conclusion of this lengthy report was that over the period, it appears that there was about $6.4 billion in rail overcharges coming 

from fuel assessments. 

Have you had opportunity to become familiar with it as far as 

the GAO look at the fuel surcharge issue previously? 

Ms. HECKER. No, I have not looked at that. I think you heard 

quite explicitly, though, from the board members about their concern about this, their action, and I think Dr. Mulvey made clear 

that one of the issues here whether there is a retroactivity in some 

of the actions of the Board. 

I think there is a recognition that there was a very inequitable 

application of the way the surcharges were levied and that it was 

to the serious detriment of the more captive shippers because it 

was percent-based on the revenue. 

Mr. BAKER. I just really wanted to establish as to whether the 

GAO had opportunity to examine it. 

If not, Mr. Chairman, at the appropriate time, I am sure you 

have this data, but I would provide you with this information and 

perhaps request could be made of the GAO to examine this issue 

because I think it goes toward the overall governance question 

about how matters of this import should be addressed. I will discuss that with the Chairman at the appropriate time. 

Mr. OBERSTAR. I would suggest the gentleman submit the data 

to GAO, and we will direct them to respond to the Committee. 

Mr. BAKER. I thank the Chairman for that assistance. 

Mr. Nottingham, there is some question as to how frequently the 

STB has found significantly in a shipper’s favor. For the record, I 

note that there has been representations made that the findings 

are relatively balanced. 

In looking at the record from my perspective, in 2001, in the case 

of Wisconsin Power and Light, the STB is generally viewed in that 

instance as having made a measurable decision in favor of the 

shippers. Since the 2001 decision to date, is there another decision 

of similar scope and consequence to Wisconsin Power that you 

could make us aware of? 

Mr. NOTTINGHAM. Congressman Baker, most of the attention we 

see in this area—we have had some comments and I know you will 

47

hear much more from later panels—does focus on this one type of 

major, major case. These are multimillion dollar, sometimes tens of 

millions. Sometimes the amount in dispute can be upwards of over 

$100 million, and you think about the possibility of the Board being 

asked to put a 10 or 20 year rate prescription in place. 

In my look at the record, having come to the Board just 13 

months ago, there seems to have been a period of years in the nineties where there were a number of shipper wins, so to speak, followed by a period of years more recently, since 2001, where there 

have been some shipper defeats. 

I was told before I came to the Board, don’t fall victim to the appeal of trying to decide one case one way and another the next just 

so you can say that there is sort of some kind of 50-50 ratio. We 

have to look at these cases, obviously, in a very exhaustive manner. 

They are fact-specific. 

I will say, though, while those cases get a lot of notoriety because 

they are big and because law firms and consultants convince their 

clients to part with millions of dollars to pursue the cases in a way, 

frankly, we never require or ask anybody to spend millions, but the 

process has somehow developed out there to become that which is 

a problem that we continue to work on. 

Remember, we have about 1,300 cases and proceedings and actions we do in an average year. I would say hundreds of those are 

to the benefit, if not most, of shippers. You may never hear about 

them because they might be small from a national perspective. 

But if you are a shipper in Defiance, Ohio, and you petition the 

Board, which is a case we decided against a major Class I this past 

year about a Class I cutting off a short line’s access, hurting shippers potentially. We forced that Class I to put that connection back 

in place at a significant cost and immediately. That is just one example. I could give you a list of 1,300 cases. 

But, yes, in the very large, hard-fought major cases, we have 

seen a string of railroad wins in recent years. 

Mr. BAKER. That brings to the forefront the question of conditions to file with regard to fees that are necessary. Can you give 

the Board’s apparent thinking with regard to the relatively high 

rates for filing as contrasted with, say, an action in district court 

where it may be protracted litigation? 

There may be a series of expert witnesses, but generally the 

court does not require filing fees that prepay all future anticipated 

administrative costs. 

I know you are working toward an imposition of a new system 

which has only been recently deployed for small filers, but I am 

really asking the question from the big filers’ side. What rate relief 

could be given there on facilitating access to the Board in a more 

financially painless way? 

Mr. NOTTINGHAM. Thank you for that question because we do see 

a lot of misinformation out in the popular media about fees. 

Let me be the first to say, we take no pleasure in imposing fees. 

Personally, I wish we didn’t have to charge a fee to anybody. It is 

aggravating, and it just creates, frankly, some ill will that we prefer not to engender. 

We do this because there is a statute that requires Federal agencies that are charged with resolving private sector disputes, such 

48

as our Agency, the Independent Agencies Act, that requires that we 

seek to recover our costs. Because these cases require enormous 

STB time and money, we have had a policy consistent with statute 

to charge fees. 

Sometimes they are as low as a dollar a page for some small pro- ceedings, $35 fees and now in the small cases for up to a million 

dollars, it is $150. Then it goes as high as merger fees for railroads 

merging which are very high. In major cases that you probably 

have heard most about from your chemical industry constituents 

and others, it is a high fee. 

I would say we have written to the Congress on this issue, that 

if we get some type of statutory relief or some type of appropriations relief that relieves us from that obligation, we would be 

happy to get out of the fee business, but until it happens, we feel 

like it is our obligation to follow the law. 

Mr. BAKER. Well, the bill now pending would reduce that fee to 

the common district court filing rate which you would not necessarily find an objectionable modification. 

Mr. NOTTINGHAM. Sir, with one key proviso because I know your 

constituents and our stakeholders want prompt action by the STB 

and have complained about how long it has taken. Be sure we have 

the resources coming through the appropriations process to counterbalance that because if we can’t hire up the staff to pursue and 

resolve those cases, you will just be creating another problem. 

Mr. BAKER. You raise an extremely good point. I am concerned 

about the current three year period to get a decision out typically, 

which I think is an unreasonable regulatory constraint on an applicant. Whether the fees are high or not, the time to get a yes or no, 

you at least ought to be able to get a friendly no in a few months. 

Mr. OBERSTAR. Would the gentleman yield? 

Mr. BAKER. I would be happy to yield. 

Mr. OBERSTAR. Just supplementing the question, a very, very appropriate question and a very thoughtful comparison with U.S. District Court filing fees, what relationship is there between these fees 

and documented real costs to the Board of processing a case? I 

have never seen anything on that. 

Mr. NOTTINGHAM. We would be happy to follow up in writing on 

that, sir, because it is a question we have fielded before. 

We did a very extensive and exhaustive hour by hour workload 

assessment study. We have updated it recently, and I checked it 

out because I was astounded when I first heard about these fees, 

to be honest. It is unusual. I can tell you there is solid data and 

documentation to back it up. The fees are directly proportionate to 

the amount of time required by these cases. 

Remember, these are taxpayer hours, your Federal employees at 

work, and it is to resolve a private sector dispute often between 

Fortune 100 or 500 companies who do have a lot of resources. It 

is a policy question. Who should bear the cost of those cases, the 

taxpayer completely or litigants through the fee? 

We will implement whatever the law tells us to do. Right now, 

it tells us to collect a fee. 

Mr. BAKER. I thank the gentleman. 

I would merely point out that the application of the fee is not objectionable as long as it is related to services rendered, but it is the 

49

up-front collection before we have gone through the process. Even 

some staged fee assessment would be helpful to people. At least 

they know what they are getting into. 

It is like sitting down with a lawyer to get advice. You want to 

know when his clock starts, and you want to know what it costs 

per hour. You may have a 10 minute conversation or it might be 

10 days, but at least you know going into it where you are. 

In this case, somehow the Board is predicting the overall resolution cost at the time of filing, which seems a bit out of step with 

the likely consequences of all the complications that the Board is 

engaged in, in making these judgments. 

A bigger question, what is your view, Mr. Chairman, of the STB’s 

jurisdictional reach in relation to all operating rails? 

Is every rail in the Country subject to your review? 

Do you see yourself only as a responsive entity where differing 

parties come before you? 

How do you define the jurisdictional scope of the STB? 

Mr. NOTTINGHAM. If I could just real quickly say and commit 

that I will look at the staged fee suggestion. Frankly, it is the first 

time I have heard that proposal. I think it makes good sense. We 

do waivers of fees for local governments and public entities and 

other extraordinary cases, and staged fee collection is something 

we can take a look at. 

Mr. BAKER. You can do it in relation to credit risk. If it is Fortune 500, you have got a pretty shot you are going to find. They 

are not going to want to make you mad. 

Mr. NOTTINGHAM. Obviously, we don’t spend all of our hours in 

the first week. So it makes good sense. Thank you. 

On your actual question,—I appreciate your patience—I believe 

the Board has broad scope to look at especially practices, as Ms. 

Hecker mentioned, looking into the records and gathering information from the freight rail sector in its entirety to look at practices 

in a very sweeping way. 

We have broad, broad powers. Of course, we have a hugely important power which is to review mergers, and that is where we 

actually have the ability to put in conditions that really can provide meaningful reforms in the area of access or shared right of 

way and other arrangements that we have seen play out in different merger approvals. 

In our more discrete area of rate disputes, there, the Congress 

has limited our jurisdiction, and so we are mindful of those limits. 

But I am not one to say that the Board can’t address or take on 

the big issues of the day because there is some technicality that 

says we can’t. 

Generally speaking, I am the kind of leader and manager that 

wants to take on the challenges, fix the problems and sort of don’t 

ask permission. If we have got a responsibility consistent with the 

spirit of the law and statute, we will move forward. 

Mr. BAKER. A reason for asking that is to make sure I understood the implications in your September 5th STB release talking 

about simplification of rail rate dispute mechanisms. 

In the fact sheet that accompanies that release, there is a statement that this new mechanism—I am paraphrasing that from the 

earlier page—provides access to rate reasonableness process for all 

50

sizes of rail rate disputes, in particular to the estimated 73 percent 

of challengeable rail traffic for which the large rate case process 

would be financially impractical. 

That struck me that if your jurisdiction is national in scope and 

the finding in this release is that 73 percent of rail traffic which 

would not be able to normally utilize the large rate resolution process, I am trying to create an understanding with the Board. 

There is a reason why people feel frustrated and call themselves 

captive for whatever reason. If they are physically captive and 

there is only one rail in and out or if they are financially captive 

and don’t have the resources to come to you with an application for 

relief because there is price gouging involved, they are still 

trapped. 

I think this speaks to the urgency of why, at least I know I am 

and I believe Chairman Oberstar is proposing the legislation that 

is being remedied, it is more than casual discomfort. There is a 

business consequence. 

I have four plant managers who were in an internationally competitive market and when assets are depreciated in the current site 

because of the cost of rail traffic in for raw material and finished 

product out, which is the lifeline of the industry, they are considering, strongly, relocating outside the United States. Now there are 

other contributing factors, of course, but the rail issue is at the top 

of the list. 

We need to have some way of expanding the scope of reasonableness in examining these rate applications. Certainly, we have to 

get past the stand-alone construction idea where you are going to 

build your own rail system and prove to the STB that that is more 

economical than what your current provider is giving you. 

Some of those machinations that we require people to go through 

don’t yield logical results because they are not capturing the current state of economic factors, and I think that is the frustration, 

but that 73 percent figure really jumps. 

I know I am out of time. I have one last thing. Well, actually, 

I have much more, but I have got one thing I really need to get 

to. 

In the bill before us today, H.R. 2125, it makes some really simplistic changes. It doesn’t re-regulate anybody. It doesn’t diminish 

the STB’s review right or process. It doesn’t even tell you that you 

need to go to a different capital asset model. It doesn’t do any of 

that. 

What is it in the bill, in your opinion, that creates any problem 

for the administration of STB business? 

Mr. NOTTINGHAM. Thank you for the question. If I could quickly 

just address the 73 percent issue, if that is okay, because I felt personally that was important that we put that in our press release. 

Mr. BAKER. I was surprised. 

Mr. NOTTINGHAM. People would often tell me, often Members, 

when I was a staff rep in this body, and some of my happiest professional memories are from working in this body. People tell me 

all the time: Try to simplify what the STB is doing. Make it understandable and make it work. 

That is what I have been focused on the last 13 months. We 

looked at this issue of how to come up with a simpler and streamVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
51

lined and cheaper procedure to resolve rail rate disputes. Nothing 

stood out more to me than the fact that the major rate case dispute 

process had gotten so expensive, three to four or more million dollars per side, railroad and shipper. 

When you look at the average shipments around the Country, 

the amounts that were being disputed in a case, basically 73 percent of all the shipments out there in the Country are lower than 

that three or four million dollar threshold, meaning why would 

they ever bring a case if they couldn’t get at least some money back 

out of it. And so, that underscores to me the importance of this new 

forum that we have created, two options and a shipper gets to 

choose and one only costs $150 and you get an answer in eight 

months. 

Now, H.R. 2125, we have not as a Board, as far as I know, been 

asked for any formal views on that. We are not on record. I won’t 

speak for my colleagues. I know we probably have different views 

on it. 

I will say just personally as one board member, I do have some 

concerns with some of the provisions in the bill. At a time of great 

change, when we are moving forward with several critical regulatory initiatives, not the least of which is our pending cost of capital measurement, to see the Congress moving forward, sort of 

changing the rules. Now, we will earnestly and in good faith implement any set of rules the congress puts in place, and so we respect 

that completely. 

But you asked the question. I need to say, and it is really in the 

area of access to private property and how we ask the railroads or 

tell the railroads that they have to allow competitors access to private property. 

Mr. BAKER. Well, I will follow this opportunity up with correspondence to ask in the manner that is best appropriate, whether 

the Board chooses to do it as a Board. Whether you as an individual choose to give us your personal observations, I would just 

like to have the view of the experts about the mechanisms in the 

bill that will create in your view any operational problem on either 

side of the fence. 

What we are trying to accomplish is an appellate process to give 

people options and to facilitate lower cost access to regulatory relief. Nothing in the bill, and I have thought about this for some 

time, would affect the capital asset model nor any decision the 

Board might make about the cost of capital. So I would hope that 

we can follow this up with correspondence quickly and that we 

could get some indication from you as to how we could work together on the remedy. 

Thank you very much, sir. I yield back. 

Mr. OBERSTAR. I thank you, Mr. Baker, for a very thoughtful line 

of questioning. I would observe that if the Congress and the Board 

are working on the same issues toward the same objective, then 

legislation should not preclude Board action. 

Mr. Larsen, you have been very patient. 

Mr. LARSEN. Thank you, Mr. Chairman. 

Ms. Hecker, first off, between all the questions that have been 

asked and the issues currently before the Board that we can’t talk 

52

about, I have run out of a lot of questions to ask, but I do have 

some that haven’t been asked yet. 

For Ms. Hecker, you had a statement in your report regarding 

a divergence, so I would like you to explain it for me. How do you 

explain the divergence of a decrease of potentially captive traffic 

while traffic traveling at rates above the threshold for rate relief 

have increased? 

It seems to me that those are divergent statements. How can 

those two exist? Can you explain to me? 

Ms. HECKER. Well, first of all, I want to go back to Dr. Mulvey’s 

criticism that the information, the data on the amount of traffic 

traveling over 180 is an illustrative piece of data, but it is a factual 

piece of data. It is the amount of traffic paying a certain rate in 

that ratio. 

A subset of that is actually paying more. It is that simple. The 

universe is actually going, but there is a smaller group that is paying more. So you have captivity potentially going down, but for the 

ones who are captive they potentially may be paying far more, significant rates over that ratio. 

Mr. LARSEN. A smaller subset is paying more while there is an 

overall number going down? 

Ms. HECKER. Potentially. 

Mr. LARSEN. Potentially? 

Ms. HECKER. It is an illustrative piece of data. It is a rough 

proxy for captivity. 

Mr. LARSEN. Mr. Mulvey, does that then get at your statement 

to say no evidence that competitive options have increased for 

these so-called captive shippers? 

Mr. MULVEY. I think what JayEtta is referring to is relative captivity. In other words, the relative amount of traffic that is captive 

as to the expansion in traffic for the railroads is recent years has 

largely been intermodal traffic. That is where the real growth has 

occurred. That is not captive. So, therefore, captivity as a percent 

of total traffic would be going down. 

But it would be difficult to infer from that that the number of 

captive shippers, the absolute number of captive shippers has gone 

down. That probably isn’t the case because that would have required more firms entering the industry or existing firms going into 

those other markets, and we haven’t really seen that happening. 

So the number of captive shippers has probably stayed the same, 

but the relative importance of them compared to the overall market 

has gone down. In that sense, we don’t disagree. I was concerned 

more about how it could be taken and how it was represented, that 

maybe things are getting better for captive shippers when I don’t 

think that is the case. 

Mr. LARSEN. I appreciate that. It is important for at least me to 

understand that as we discuss this concept of captive shippers. 

I will also just note that every time I read captive in GAO’s report, there are quotes around it. So I am assuming that the term, 

captive, is term of art. It is not really a legislative or regulatory 

term, is that correct? 

Mr. MULVEY. That is correct. 

Mr. LARSEN. Mr. Mulvey, you make an argument for a general 

power to investigation. Now are there other models and other indeVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
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pendent administrative or legal boards in the Federal Government 

that you can point to that would be a model of language for a general power to investigate? 

Mr. MULVEY. I am not a lawyer, so I would not want to posit an 

answer to that. I can come back to you with some examples, but 

I am sure there are other agencies that do have investigative powers. 

We had them, but they were taken. The ICC had them, but in 

1995, in the ICC Termination Act, we lost those powers. Now if you 

look, for example, in our fuel surcharge action, we pretty much behaved as if we had that because it was on our own initiative. 

Mr. LARSEN. Right. 

Mr. MULVEY. But we could have been challenged on that, and we 

were not, but it could have been challenged. We think the Congress 

should clarify what our investigatory powers are. 

Mr. LARSEN. Mr. Nottingham, when does the STB project completion of this independent analysis that we have been discussing? 

Mr. NOTTINGHAM. In one year. We launched it a couple weeks 

ago, and they have been given a year. I believe the actual might 

be 13 months to be specific. I wanted to give them time to get 

around the Country, to get their hands around this issue. 

It is a daunting enough issue that GAO, with all its skill and 

staff and having done an excellent job with their report for many, 

many months, even today says they couldn’t actually get their arms 

completely around it, and they actually came forward with the idea 

to us, the recommendation to do this study. 

It does take time, but we look forward to seeing the results. 

Mr. LARSEN. Let me get my last question. 

Ms. Hecker, with this study, have you examined the parameters 

of the study and is the methodology adequate and you believe it 

will get to some of these answers about an analysis of competitive 

markets that GAO requires to take a look at? 

Ms. HECKER. We have not been given an opportunity to review 

it, and I have no information other than the press release announcing it, what the scope of the study is and the representations made 

by the Chairman today that the group would have the same authority and access to data, which was our concern when we made 

the recommendation. 

Mr. LARSEN. Is that of concern or importance to you to be able 

to look at the parameters of the study as they move forward? 

Ms. HECKER. Well, I would imagine it is kind of moot if the contract has been let. It would be what scope it is. I would imagine 

that we may be asked after the fact to review. 

Mr. LARSEN. It might be moot if you say it is. It may not be moot 

if we say it isn’t. 

Ms. HECKER. I have no information to speak to the scope of the 

work. 

Mr. LARSEN. Do you want to see the scope of the work? 

Ms. HECKER. If you would like us to review it, we would be 

happy to review it. 

Mr. NOTTINGHAM. Mr. Larsen, if I could just interject, we have 

tasked our consultant team as one of their first orders of priority 

to spend some quality time with GAO. They obviously haven’t 

called Ms. Hecker yet—they will be—and your staff, so that the 

54

consultant team can fully understand the report and vice versa to 

give an opportunity to brief GAO on anything GAO would like to 

know about the report. 

Any recommendations or advice we get formally or informally 

from GAO, we will take a good look at. My general attitude is if 

the GAO gives some good thought to something, makes a recommendation, we are going to go ahead and implement it. 

Mr. LARSEN. We want to be very encouraging in that. 

Thank you, Mr. Chairman. 

Mr. OBERSTAR. Thank you. 

Mr. Moran, thank you for your patience. 

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

Generally, I know we are talking about captive supply here at 

this hearing, and clearly Kansas is not immune from those concerns with coal and grain shipments and chemical shipments, but 

let me ask about a broader topic. 

It seems to me that rail capacity in this Country is less than it 

needs to be. My impression is that is a given, although I assume 

the markets ultimately determine what that capacity will be. But 

the demand for services exceeds the ability of the railroads to meet 

that demand. 

Is there any measure that says that we are moving in the right 

direction or that demand for services and capacity will intersect in 

the near future? I guess this would be for the Chairman. 

Mr. NOTTINGHAM. Thank you, Congressman Moran. 

We held a major hearing on this issue in April, looking at traffic 

forecasts nationwide, short term and long term, the state of capacity. We actually asked a very diverse group of stakeholders. The 

hearing went, I think, 14 hours just as an example of the level of 

interest in this issue. It probably could have gone on longer. Just 

people got worn out finally. 

What we heard from railroad CEOs, and you will have one of 

them before you shortly, and also leading shipper groups was complete—this is amazing actually—agreement on at least one issue, 

which is that we are not on pace as a Country to meet our rail infrastructure needs especially in the mid and the longer term, out 

10 and 20 years. 

While the railroads are spending, and you will hear more about 

this today from the railroad themselves, we are spending more 

than we ever have before. You have got to really dig into those 

numbers because the need is so much bigger than before. It is not 

just enough, in my personal view, to say great, we are on track because more is being spent than last year. 

We have really got to look at these choke points in the system, 

the Chicagos, the Houstons, the Port of L.A., Long Beach and others, not to mention in agricultural country, to hold the railroads accountable for what they are really delivering in the way of meaningful infrastructure and investments. 

But I would say that is the number one top rail policy challenge 

before us as a Country—how will we step up and actually build 

enough track in this Country to keep our economy moving because 

we pretty well know, I know from having labored in the highway 

sector for eight plus years at the State and Federal level, the highway system and the best planners there are assuming that the rail 

55

system will continue to carry its share of the load. If that assumption starts to not hold valid, we have just an incredible problem in 

this Country. 

Mr. MORAN. Mr. Clayton, one way that Congress attempted to 

address infrastructure needs in the rail industry is on the short 

line side. This Congress, three years ago, passed a tax credit for 

short lines and/or their shippers to utilize in improving the road 

bed, the rail line, bridges and try to move the short lines up to the 

capacity to carry 286,000 pound cars. 

Any evidence at USDA that we are better meeting the needs in 

regard to agriculture, utilizing short lines, capacity increasing? Are 

things improving or continued problems into the future? 

Mr. CLAYTON. Thank you, Mr. Moran. 

I think the evidence is positive in terms of progress that has 

been made with short lines filling in, and certainly that plays a 

role. 

I think also the evidence is fairly clear that overall capacity in 

our transportation network is really being strained. It doesn’t apparently take much, a good hurricane, for example, where the 

barge lines have to shut down and we look to the rail system to 

pick up the slack and it is not able to do so. That, to me at least, 

suggests that we are running on kind of a razor’s edge here in 

terms of margin of error and in terms of the state of capacity that 

is out there. 

So, certainly, to your question, the short line piece is important. 

There has been progress there, but I think one still needs to look 

at the larger issue of capacity particularly as it interacts between 

the modes of transportation. 

Mr. MORAN. That short line tax credit is set to expire in the near 

future, and there is legislation that I would encourage my colleagues to act on that would renew that tax credit. It is my impression it has made at least some difference in our ability to invest. 

Mr. Mulvey, you are shaking your head. I am looking for an ally. 

I am happy to hear you saying something positive. 

Mr. MULVEY. When I was working for Mr. Oberstar, I worked 

very hard on that bill, and I am very proud of the success we 

achieved with it. The short line railroads, for the most part, have 

taken advantage of it, and the legislation does need to be reauthorized this year. 

Mr. MORAN. The reason I think this is so important is in part 

what Mr. Baker said. We often decry the fact that we are losing 

jobs to other countries, that we are outsourcing employment. Factories, plants and facilities are moving abroad, and our infrastructure is a significant component in the business decision that will 

be made as to whether or not a business remains in the United 

States. 

Let me go down one other line of questioning before my time is 

totally gone. 

I do care a lot about biofuels, and the rail infrastructure is critical to that industry. In addition to hearing concerns about a captive shipper, I often hear concerns and complaints about the quality of service. 

So my question is two-prong. What role does the Surface Transportation Board have? Mr. Mulvey mentioned this perhaps more 

56

than just in passing but the role that you have in addressing lack 

of rail cars, the timeliness, the shipment. 

I know that in Kansas we produce a lot of flour, wheat flour, and 

the timeliness of those shipments and bottleneck is often described 

to me as the cars sat outside of Los Angeles waiting for their turn 

to be unloaded at the ports. So what role does the Surface Transportation Board play in trying to improve the quality and timeliness of the service? 

Secondly, in regard to the biofuels issue, explain to me the role 

that this phrase, common carrier, has in requiring or determining 

that service must be provided to a new ethanol plant, for example. 

Mr. MULVEY. Well, the common carrier obligation for a railroad 

goes to any commodities that are regulated. If a commodity is not 

regulated as it stands right now, the railroad does not have a common carrier obligation. Ethanol would be regulated by us and 

therefore a common carrier obligation would apply. Anybody who 

offered cars for shipment, the railroad would have to serve them. 

Now in terms of the quality of the service, that is basically between the railroad and the shipper. If the service quality declined, 

the Board could open an investigation. 

The Board also has its group offices. We have group which focuses on railroad and shipper issues. They would call the railroad 

up and try to work with the railroad in order to get the problem 

resolved. 

The railroads will tell you later on that it is in their interest and 

they want to be cooperative with shippers. We try to facilitate that 

cooperation through our Office of Compliance and Enforcement. 

Mr. NOTTINGHAM. I would just like to add, Congressman Moran, 

that this is the work that we focus on probably more than anything 

else, the day to day, week to week service complaints that we field. 

We have an office of Consumer Assistance. Calls come also directly 

into commissioners’ offices. We send people out around the Country 

on occasion, and each of us gets around and looks at service situations. 

We have a number of tools available to us. I will just give you 

a couple of examples. One, you touched on the common carrier obligation. That is the touchstone in freight transportation as to really 

what the shipper can expect and should expect, which is reasonable 

service upon reasonable request. 

Now there are some general words in there, and people can have 

pretty serious arguments about what those words all mean in a 

specific case. But we take those cases very seriously, so seriously, 

in fact, that in an agricultural-oriented situation down in Texas recently, we actually ordered a railroad that was not providing adequate service to get out of the rail business and we forced them to 

sell their business. It is now with us. Two interested railroads are 

considering buying that railroad now. 

That is an example of how far we are willing to go as a board. 

We are literally in the process of putting a non-performing railroad 

out of the rail business, and we are replacing it with someone who 

is willing to serve the shippers. 

But we have other means at our disposal too, and these issues 

get particularly complex and interesting when you look at materials and commodities that the railroads, on occasion, would prefer 

57

not to have to carry like hazardous materials and materials that 

sometimes trigger large insurance premiums for the railroads. 

Mr. MORAN. Thank you for responding to my questions. 

Thank you, Mr. Chairman. 

Mr. OBERSTAR. Thank you for your very thoughtful line of questioning. 

The gentleman from Tennessee, Mr. Cohen. 

Mr. COHEN. Thank you, Mr. Chairman. 

I have tried to understand a bit about this issue just reading 

some of the statements, including getting ahead of myself and 

reading Mr. Spitzer’s statement, and I kind of get the picture of 

this being the railroads on one hand and the shippers on the other. 

But all politics are local. In my situation, local is Tennessee 9. 

Tennessee 9, though, is America’s distribution center which makes 

it national. Our distinguished Vice Chairman has knowledge of 

Tennessee 9, and I would like to ask the Honorable Mr. Buttrey 

what his advice would be for me and the Country on how these different bills. Particularly, 2125 would affect Tennessee 9 and therefore the entire Country. 

Mr. BUTTREY. Thank you, Congressman, and thank you, Mr. 

Chairman. It is an honor to be here and to answer or try to answer 

the Congressman’s question, my good friend from Tennessee. 

I think I would start by saying that etched in concrete on a 

building not too far from here, there are the words—and I am paraphrasing here—that the right of the citizens to petition their government for redress of their grievances shall not be abridged. One 

of my strong points at the Board has been to make sure that people 

have access to the regulatory process. 

I think we have gone a long way during my short tenure at the 

Board, which will come to an end before too long because appointees don’t stay around forever and that is probably good. We 

have tried very hard to create a regulatory process that is accessible to everyone and to keep the fee levels, Congressman Baker, 

down to levels that aren’t egregious while trying to understand the 

prescriptions that are placed on us by the GAO in determining 

what our fees shall be. 

We will be getting back to you, Mr. Chairman, on that as we said 

earlier. 

Your district in Tennessee is a huge crossroads for the railroads 

of this Country, and you don’t have to live there to know that. I 

mean people who are in this business, people who are shippers 

know that if the weather is bad in Memphis for some reason, which 

it usually isn’t by the way. It is usually great. That is why another 

company is located there that I have some knowledge of. 

The infrastructure that is there is very important to the way the 

commerce in this Country works, and Chicago and other places are 

the same way. Long Beach, California and others are out there. 

I think a lot of the complaints that I have heard even before coming to the Board and certainly after arriving at the Board. I think 

what we have tried to do in the recent past anyway, certainly since 

the three of us have been members of the board, has been to work 

very hard and to keep that phrase on that building very uppermost 

in our minds and to work very hard to try to come up with imVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
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proved access, along with the expert advice of our staff which is 

very expert and I take my hat off to them. 

They are very hardworking, talented, knowledgeable professionals, if you will. I think we would all agree. We may disagree 

on other things, but I think we certainly agree on that. 

Taking their advice and counsel and doing our very best job in 

coming up with new rules and procedures that will facilitate reasonable access to this regulatory process. 

As Senator Dorgan said this morning, I think his statement was 

eloquent. As he said this morning, earlier today, where there is a 

lack of competition, there must be regulation. 

In the situation that we have today with the railroads the way 

they are structured in this Country, which is a product of many, 

many years of development and metamorphosis, if you will, evolution—choose your word—we have come to a point now where 

competition is not as great as it once was, and so we have to have 

a system of regulation that works. We are trying very hard to do 

that. 

The bill has some ideas about that. I think we have gone a long 

way in the very recent past to implement a lot of the things that 

the Congress is concerned about and that shippers are concerned 

about. 

Are we going to make everybody happy? No, we are not. We are 

not. The way this economy of ours continues to develop and to 

evolve and to restructure itself and re-engineer itself, there are 

going to be pockets out there where the system is not going to 

serve those pockets as well as we would all like for it to happen. 

There are going to be organizations, companies, small and large, 

that are going to suffer some severe disruptions, if you will, from 

time to time in the way they operate their business. 

Someone earlier today said is a truck a better way to carry cardboard? I don’t know. I am not in the cardboard business. I have 

never been in the cardboard business, but I suspect that people 

who are in that business keep a pretty close eye on how they operate their system and how they structure their supply chain. 

Today’s supply chain is very rapid, very fast, very time-sensitive. 

If one mode of transportation doesn’t meet my objective in terms 

of time sensitivity, I am going to find one that does or I am going 

to move my business or I am going to do whatever I need to do so 

that my supply chain is not disrupted. 

The Board, on the other hand, has a responsibility to try to look 

into those situations. When someone comes to us with a complaint, 

to look into those situations to see if there is not some regulatory 

response to what is going on. Sometimes there is and sometimes 

there isn’t. 

All I can say is, as I said in the recent past, we have tried to 

develop rules and procedures that makes the regulatory process accessible to them so that shippers, not only in Memphis but all 

around the entire Country and all around the entire globe as a 

matter of fact because our trade is so global now, get the service 

that they need. 

That is a long way around to try to answer your question, but 

those are just some thoughts that I had, and I hope in some way 

they may be responsive. 

59

Mr. COHEN. It is a long way to Capleville. 

Mr. BUTTREY. Yes. Nobody knows where that is but us. 

Mr. COHEN. It is where all the rails are. 

Chairman Nottingham, Mr. Spitzer says in his testimony that 

evidence suggests the STB process is skewed in the railroads’ favor. 

He also quotes a report from a coal and energy price report that 

says that people realize they can’t win with the current STB, so 

they have to take it back Congress. 

Do you think Mr. Spitzer’s comments are accurate? 

Mr. NOTTINGHAM. Well, I prefer not to argue with individual witnesses today. He will have his opportunity to speak. 

I would just like to say that it does occur to me that too often, 

whether it is in some of these advertisements we see floating 

around the town, in the press or in some of the advocacy pieces 

that come across our desks, this Committee see plenty of them, it 

occurs to me that a lot of stakeholders wrote their talking points 

a couple years ago probably and haven’t actually spent quality time 

looking at the actual work and performance of this three person 

Board in the last 13 months and the number of sweeping reforms 

and changes we have initiated. 

I can understand why they don’t want to do that because if they 

actually look at our reforms and our proposals and give them the 

credit, I think with all due respect, that they are due, it does call 

into question some of the talking points that you have heard already earlier today and you will hear again about the history of the 

Board and what some past Board did or didn’t do. 

It is frustrating for those of us who are actually in the arena day 

to day, wrestling with real cases and real disputes and moving forward real reforms over the objections, in many cases, of the railroads who are dragging us into the courts as we speak, trying to 

appeal many of these, and on occasion some shipper groups who 

have concerns. 

I just encourage everybody to take a fresh look at what is actually going on. I know this Committee will. Because I think there 

is a real story to be told about meaningful reform and an Agency 

that is committed to improving the way we do the people’s business. 

Mr. COHEN. Thank you. 

Thank you, Mr. Chairman. 

Mr. OBERSTAR. We certainly will watch very closely what the 

Board is doing and follow it. I must say that the Board is moving 

in ways that it has not done since its inception. 

The gentlewoman from California, Mrs. Napolitano. 

Mrs. NAPOLITANO. Thank you, Mr. Chair, and thank you for 

holding this very important hearing on railroads. 

My district has a lot of small business, a lot of manufacturing, 

small manufacturing. The companies there in my district rely on 

moving their goods for fair rates and adequate service. In the past, 

I have had businesses complain about the issue of demurrage. I 

haven’t heard that recently for a number of reasons. I guess because I will pick up a phone and I will call a railroad, very simple. 

But given the fact that in my district, the whole Alameda Corridor East traverses and the increase in traffic and the already 

burdened rail traffic going through my district kind of sets back 

60

some of the small businesses’ needs to move their goods. So how 

do we do that? 

Another question I would pose to the three gentlemen from the 

Board is how do I tell my businesses, here is a number, if you have 

an issue that you feel is hurting your business to use to call? 

I don’t know that they know. I didn’t know. Some of those things 

that are important to my district, to the continuing economy in my 

district, that it is not going to be overshadowed by the increase in 

traffic of imported goods to the rest of the United States is a big 

concern. That is one question. 

Mr. NOTTINGHAM. Thank you. I will take a stab. I know my colleagues probably have plenty to say on this and more experience 

than I do working on these issues. 

Demurrage, you mentioned, is still a very active area of concern. 

We hear concerns all the time about demurrage charges or charges 

for storing, basically, cars on property. An effective and efficient 

rail system depends on empty cars getting put back into commerce 

quickly, and we see it on both sides. Sometimes we hear from shippers, saying, hey, I unloaded a car three days ago. I want to get 

rid of it, and now I get a demurrage fee sent to me. 

We actively work these out. We do have a phone number. We will 

make sure we get that to you right away. Board commissioner offices handle calls regularly. We actually have a very active consumer assistance program. 

You are right, Congresswoman Napolitano, describing your district. You are really in that kind of proverbial ground zero of international commerce. You know that, and you don’t need me to tell 

you that. I know, having been out in that area, the challenges that 

that evokes for neighbors, residents, businesses. You have got the 

whole world, in some ways, coming through in freight cars and 

intermodal containers. 

It is so important that we keep that system moving, and at the 

same time, that we don’t treat any community as just a crossroads, 

but that the community knows it can have access to the system of 

interstate commerce as well and get that service provided. 

So if you ever get concerns from shippers or complaints about 

any of those issues, please put them in touch with us. Call any of 

us. Call my office. We will get on it right away. 

Mrs. NAPOLITANO. Thank you. 

Anybody else? 

Mr. MULVEY. This has become a problem, especially with railroad 

capacity and getting more and more constrained. The railroads 

have been changing their rules on demurrage and tightening the 

rules on demurrage as well as raising charges. 

Sometimes you have bunching problems where the shipper needs 

five cars a day and all of a sudden gets no cars for four days and 

then 25 cars show up at one. He can’t handle them all or they come 

at times when they can’t be unloaded because the shipper has 

problems with his workers and when they can work. This is an ongoing problem. 

As the Chairman said, we do have a number which shippers can 

call. We will get that number to you. We often are able to work 

with the railroads and work out these problems, but they are ongoing. 

61

Mrs. NAPOLITANO. Anybody else? 

Mr. Chair, we recently did a Congressional delegation visit to 

three countries on high speed rail, London and Paris and Spain. 

One of the interesting things, and I heard the Chairman address 

this in his comments, was that all those high speed rail groups specifically spoke to the fact that they own the property. The government owns the property. So for them, mass transit is a priority for 

people to move. 

The United States leads in being able to move product, but we 

fall desperately short in moving people. And so, how do we come 

to a balanced approach? 

Not to say back to the railroads, we are going to take our land 

back and utilize it for the benefit of the people who pay the taxes 

but rather be able to say how do we address without being heavyhanded and ensuring that we look at not losing the economy that 

is created by the transportation of goods. 

Mr. NOTTINGHAM. I am glad to hear about your trip. I had a 

chance in my past job at the Federal Highway Administration to 

manage several offices, one which was the International Programs 

Office, and I had a chance to occasionally get overseas and see 

what other countries are doing in the area of both highways and 

transit and rail, including China and riding the Maglev Train with 

Secretary Peters and exploring how those projects and systems get 

paid for and what the tradeoffs are. 

In our Country, you are right, we have put a premium on using 

our rail system to move freight, and we have a world-class model 

that nobody outperforms in productivity and efficiency of moving 

freight rail, large amounts of tonnage across large distances. So we 

can take a lot of pride in that as a Country. 

As we talked earlier today, it is threatened by capacity constraints and some under-investment that needs to be addressed 

over the years, but it sets up a real challenge in how we then try 

to transpose onto that system, as many people often suggest, a 

world-class passenger rail and a high speed passenger rail system 

onto the freight system as opposed to building up a separate system or a side by side system. 

I do think that it is not just a question of our current freight system not serving people. The freight, of course, is going to people. 

It is going to the shelves of the stores we all shop at, and it is employing people, creating jobs. More importantly, from a transportation perspective, it is getting trucks off the highways. 

So if we aren’t extremely careful how we encourage the expansion of passenger rail, which I am personally a strong believer in 

and live two blocks from an Amtrak station in Fredericksburg, Virginia. I would love nothing more than to see higher speed, better 

passenger rail. 

We have to be very careful that we don’t just drop a big unfunded band-aid or a burden onto the railroads with the result that 

they can’t manage their freight business. That traffic then goes 

back onto the highways, and then we actually have a worse problem. We have a less efficient railroad system, we still have a marginal passenger rail system, and we have an even worse highway 

system. 

62

The issues and the stakes are extraordinarily complex and high, 

but it needs to be addressed. 

Mrs. NAPOLITANO. Any suggestions? 

Mr. NOTTINGHAM. The Board, I just would say we don’t hold ourselves out as experts in passenger rail and transit. Each of us 

brings experience. I will let my colleagues speak to that. 

I just would say it gets back to my major point earlier about the 

need to build more infrastructure. We are not going to be able to 

have a world-class passenger rail system if we don’t build some 

new track because if we just ask the freight railroads to make it 

happen, we are going to see all kinds of unintended consequences 

that will hurt everybody: highway users, consumers, freight railroads, railroad passengers. 

We have got to set up some programs and procedures and polices 

that actually result in getting some new track built. 

Mr. MULVEY. As something of an expert on passenger rail, I did 

my Ph.D. thesis on Amtrak when it was first getting started. So 

I had been in this business for a while when I worked with Mr. 

Oberstar on the high speed rail bills, et cetera. 

But I think it is fairly clear that if you are going to have high 

speed rail systems like you have in France and Germany and Italy, 

you are going to have to have dedicated right of way. It can be in 

the same right of way as freights, but it has to be on dedicated 

track. 

It is going to take an enormous investment. Many of the proposals to expand higher speed services in the Country bring the 

speeds up from 40,50 miles an hour to 70, 80 miles an hour. That 

is an improvement, but it doesn’t give you the kind of service that 

you are seeing over in Europe. To get that, you need an enormous 

amount of investment in rail transportation infrastructure. 

I would hope that you could make investments in rights of way 

that would benefit both the freight and the passenger services simultaneously so that the freight railroads see the high speed passenger stuff as something that benefits them as well. By doing 

that, you can get the freight railroads and the passenger railroads 

to work together and make that investment. 

But to try to put high speed passenger trains on today’s freight 

railroads would only bring the problems that Chairman Nottingham talked about, and you would have no winners. 

Mrs. NAPOLITANO. Thank you. 

Mr. Chair, I have a whole bunch of other questions, but I would 

like to submit them in writing if I may. 

Mr. OBERSTAR. Thank you. We all have a lot more questions than 

we have time with which to engage the Board. 

Mrs. Capito? 

Mrs. Capito defers at the moment. 

I just want to pick up on Dr. Mulvey’s observation about passenger rail. While this is not a hearing on that subject, that is always an issue before this Committee and one to which we will devote time at later hearings in the Rail Subcommittee. 

It was the railroads, which in the 19th Century in a period of 

roughly 20 years, we see nearly 8 percent of the land surface of the 

United States. It held onto that land. It kept that right of way inVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
63

stead of selling it off. For whatever money they made or wherever 

that money went, we have those rail corridor rights of way. 

Mr. MULVEY. A lot of it was sold off and a lot of it was developed. 

A lot of the monies that went to made the railroad captains of industry, or the robber barons as they were called, rich but did not 

necessarily help the railroads. As you said, a lot of those rights of 

way are gone now. 

Mr. OBERSTAR. Mr. Clayton, we have hardly laid a glove on your 

today. 

Mr. CLAYTON. That is okay. 

[Laughter.] 

Mr. OBERSTAR. You made some very pertinent observations in 

your testimony. The average freight revenue per carload for major 

trains has increased 39 percent while the average freight revenue 

for all commodities increased only 24 percent. Now if we had excluded grain from that number, it would been even less, right? 

Rates on corn, sorghum, soybeans, wheat have gone up 41, 38, 

53, 31 percent, respectively, you say. Grain shippers bear a greater 

responsibility for car supply and other functions that railroads formerly provided. Senator Dorgan made an observation of those. 

Is it appropriate for a company like, say, Cargill to have to be 

the owner of 19,600 rail cars and store them on its property? 

Mr. CLAYTON. I am not sure exactly how I want to answer that 

question. I do think, Mr. Chairman. 

Mr. OBERSTAR. Well, our job is to make you uncomfortable. 

Mr. CLAYTON. You will get me there. I am sure. 

I will make a couple of observations, though, if I could. One, I 

think there may be good business reasons why a grain company, 

in fact, might want to invest in cars. 

Mr. OBERSTAR. None of them willing, though. 

Mr. CLAYTON. Well, there may good business decisions along 

with that. 

The more important point, I think, that I tried to raise earlier 

on in the hearing is that from agriculture’s point of view, what is 

important is the total cost of moving the commodity. In part, rail 

rates play a role in that, but to the extent that certain functions 

have been rolled off to others to incur the costs, those don’t get reflected in rail rates. Those are additional costs. 

Ultimately, in terms of the competitive position of agriculture in 

this Country, it is the total cost of moving a product that matters. 

I would just hope as we look at some of these issues that, while 

I can appreciate the interest, the need to focus first specifically on 

a given mode of transportation as you are doing, from the standpoint of the transportation user community, it is the total cost of 

moving a product that ultimately matters and the components matter as well, but one needs to be holistic, I think, in looking at that 

kind of a question. 

Mr. OBERSTAR. Yes, that is true. 

But you go on to say rail emphasis on unit trains causes shippers 

to make more significant capital investments in sidings, grain inventory, storage capacity, and loading facilities—shippers to make 

those investments—and that USDA is concerned about the percentage of grain tonnage and revenues moving at rates exceeding revenue to variable cost. 

64

Now we know that grain, in some cases, moves in international 

markets on as little as an eighth a cent a bushel, right? 

Probably the world’s most significant grain export facility is New 

Orleans. 

Mr. CLAYTON. Yes, sir. 

Mr. OBERSTAR. If you look at a map of the two hemispheres, 

North and South America, and you look at Recife, Brazil, the point 

of Brazil that sticks out into the South Atlantic Ocean, it is 2,500 

miles closer to markets than New Orleans. That is a five-day sailing advantage at least. 

Now if rail rates in the United States are so high as to impose 

costs on grain shippers, they are that much less competitive in 

those markets that Brazil serves competitively with U.S. shippers. 

Soybeans, for example, in that delta region of Brazil, the Brazilian Government and the States of Brazil accelerated their exploitation of the soil and of the development of soybeans, a major competitor for the United States. If soybean rates have gone up 53 percent, according to your testimony, we have been that much less 

competitive in the international marketplace with East Africa, 

West Africa and the Pacific Rim, if shippers from Brazil have that 

kind of a shipping advantage. 

That has got to be a concern to the U.S. Department of Agriculture. It has got to be a concern to the Board. It is certainly not 

a concern to the railroads. They are shoving the rates up ever higher as they can. 

For the record, it will be noted that Mr. Clayton is nodding. 

Mr. CLAYTON. I was searching for the question, Mr. Chairman, 

but I did agree with what you said. 

Mr. OBERSTAR. I expected you to draw your own conclusion. 

Dr. Mulvey and Mr. Nottingham, one of the requirements in a 

rate case for an appellant is to create a virtual railroad. In the 

days when they were losing lots of money, I wonder why in God’s 

name you would ask them to do that and ask them to lose that 

amount of money in creating a virtual railroad. 

But in the days that they are making a lot of money, how do you 

expect a shipper, a chemical company, a power company, an REA 

to create a virtual railroad in order to pursue their case? 

Isn’t that an unreasonably high, steep hill to climb to make your 

case or do you think this is a justifiable responsibility of an appellant in a rate case? 

Mr. NOTTINGHAM. Let me take a stab, Mr. Chairman, at an answer, and then I will also ask Commissioner Mulvey to help. He 

has more years experience on the Board and expertise on this. 

It is. It is a tall order. It is a high mountain to climb, I must 

say, and there are reasons for that. Some of these major disputes 

get up into the tens and I mentioned even eclipse a hundred plus 

million dollars when you look at the Board’s power to prescribe a 

rate for 10 or 20 years in support of shippers in the past, unfortunately for them not real recently. 

Most days, I think it would be a lot easier to come up here and 

say we have an exact 50 percent ratio. On any day of the week we 

have 50 percent shipper wins, 50 percent railroad wins, but it is 

never that simple with complex cases that get brought forward. 

65

We have to have a test. We have to be basically the opposite of 

arbitrary and capricious. We have to show, before we are forcing 

a private sector business, a railroad, to actually change their rates 

and pay millions of dollars to a customer, that we have actually 

done an extremely quantitative economically-based analysis. That 

is how this so-called stand-alone cost model has developed, and it 

has been endorsed by the courts under appeal a number of times. 

I would welcome suggestions for a better model if people want to 

come forward. It has got to meet that test, though, of not being arbitrary and capricious. It is the model that I walked in and inherited. It seems to be very economically sound, but we are always 

open to new ideas as well just as we are with the very major and 

controversial issue of our measurement of cost of capital. 

Dr. Mulvey, anything? 

Mr. MULVEY. The reality, of course, is whether or not somebody 

could come into the industry, have a railroad, operate a railroad for 

less and charge the shipper less than the railroad is asking to 

charge. 

What you are asking the shipper in building this virtual railroad 

is say: Look, if you put together a railroad with certain kinds of 

traffic and certain kinds of routes that carry traffic, other traffic as 

well as your own traffic, and if you meet all the expenses that the 

railroad needs to make to pay its crews, to pay for the materials, 

to keep the railroad operating and to replenish capital, if you took 

all of those costs, what rate would you charge yourself in order to 

cover your costs and is the rate the railroad asking for on those 

bases, unreasonable? 

That results in rates that are many times or a couple of times 

higher than 180, the 100 percent revenue to variable cost ratio because we say that railroads are allowed to differentially price and 

to take captive traffic and extract from them a premium to cover 

in those markets where the ratio is less than 180. 

Is it a good model? It is the model that the courts pretty much 

approved. It is not necessarily what the Board wanted to do, but 

it is what the court in the McCarty Farms case said is a model that 

comports with current economic bearing. 

I agree with Chairman Nottingham. We would if there was a 

simpler less costly model that would pass muster with the courts. 

Our hope is that our simplified standards and our three benchmark 

approach will be one the courts will accept and not say that that 

is arbitrary and that the new approaches do comport with economic 

bearing. 

Mr. OBERSTAR. There is a great deal of work for the Board to do 

yet on this subject matter. At least in the last year, the Board has 

begun to address this issue and to think it through and reassess, 

but the 180 percent factor seems to me needs to be adjusted. 

Mr. MULVEY. As I said before, it is not something that we can 

ever find out where it came from or what the science was. I think 

you can best call it the best guess at the time. But I think that 

you are right, that it is something we ought to look at and see 

whether or not that is the correct standard. 

Mr. OBERSTAR. Maybe it should be removed from law. 

Mr. MULVEY. That is certainly an option. 

66

Mr. OBERSTAR. In the Civil Aeronautics Board cases, where airlines were competing for market entry and rates and where rates 

were challenged, I don’t think the CAB required the challenger to 

go through such hoops. My recollection is that was not the case. 

Mr. MULVEY. No, it was not. They didn’t have the same kind of 

standard as we do. It was different. Of course, David Heymsfeld on 

your staff would be very expert on that issue. 

Mr. OBERSTAR. Mr. Shuster, no further questions? 

Mr. Baker? 

Mr. BAKER. I will be real brief. 

Mr. Chairman, just by way of an authority question, does the 

STB have any control over ownership issues or an ability to affect 

ownership issues, for example, the hedge fund acquisition of controlling interest of rail stock? 

The reason for bringing the question is that we do have Federal 

prohibitions on ownership control with the airlines for evident reasons. I worry about the same consequences to much less consumer 

volatility but from the standpoint of delivery of vital services and 

goods. 

What could you do if an Iranian investment group wanted to buy 

out five of the big railroads? 

Mr. NOTTINGHAM. The best way to answer that is to say we have 

broad authority in cases not like the one you are proposing, in 

cases where a railroad seeks to merge or buy another railroad. We 

have extremely broad powers there to approve, disapprove, approve 

with conditions, force line-sharing arrangements in certain areas 

for certain reasons, just very broad power. 

The discussions we are seeing out in the business press and elsewhere talk about hypothetical cases that we have not yet seen yet, 

but we have seen the real development of something exciting from 

a level of investment perspective, that major firms with access to 

private capital, not taxpayer dollars, are actually putting those 

monies into the freight railroads to help pay expenses and expand 

the system, we hope. 

Now if some of those entities were to then actually decide they 

want to get actively involved in the railroad business and start 

managing a railroad, seek control of a board of directors, for example, making a play as they call it in the industry at control of a 

railroad, we would not have, if they are non-railroad, we don’t have 

much to say about that. 

Mr. BAKER. There is a concerted effort because the rails have a 

relatively low debt to asset basis compared to traditional leverage 

in the marketplace. They are significantly under-leveraged, and 

that is why Buffett and others are aggressively seeking rail ownership, to try to leverage themselves up, spin up the value of those 

shares and reap the profit and leave them to deal with it later. We 

can see that repetitively through other areas. 

So it is a two-pronged concern: Structurally as a board, being 

logically constrained by due process, whether it is advisable for us 

to consider granting authority paralleling that granted to the airlines regulatory process to specifically prohibit foreign ownership, 

given these terrorism concerns. 

Then, secondly, as a business matter, to worry about the long 

term as the Board properly does, is it advisable to allow an investVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00082 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
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ment takeover group to come in and drive the debt ratios up and 

then leave town? 

I worry about that from a generational perspective of safe and 

sound operations. If you don’t have the authority for prudent financial governance or if there is a question, that is something I think 

we should seriously investigate. 

With that, I yield back, Mr. Chairman. 

Mr. NOTTINGHAM. Mr. Chairman, could I just try to respond 

briefly to that? 

Mr. OBERSTAR. Briefly. 

Mr. NOTTINGHAM. Thank you, Mr. Chairman. 

I just want to clarify because this is a very important area and 

an emerging area. As soon as a non-railroad actually enters the 

business, though, and takes control under your hypothetical, then 

of course that railroad will be completely under the existing regulatory oversight of the STB. You don’t get some kind of carte 

blanche because you came in as an outsider. 

But you are right. You touched on an interesting gap in the statute. It is an apparent gap that basically we don’t have broad approval of a transaction. It could happen overnight before we would 

necessarily even know about it. 

I would just urge the Committee to proceed with great caution 

on doing anything that would discourage non-U.S. funds from coming into our infrastructure, our rail infrastructure. The Canadians, 

for example, are heavily involved currently in moving freight and 

running railroads in the U.S. 

From the perspective of looking at a situation that needs investment, if we say that non-U.S. investment is not welcome here, I 

think we want to be very careful and understand how it is going 

to impact our ability to meet the challenge of building out our system. 

Mr. BAKER. No. I don’t deny that. We love people’s money. We 

just don’t necessarily want voting control. In the same form and 

fashion that we considered the airlines constraint, it may be warranted in light of the essential necessity of the rail service to the 

economic function. 

It is just a question for review and, if appropriate, comment at 

a later time. Thank you. 

Mr. OBERSTAR. I thank the gentleman for raising those issues, as 

usual, in a thoughtful questing manner. 

The matter of rail is an under-leveraged sector attractive to 

hedge funds, as you pointed out, something I raised earlier, we saw 

the devastating consequences in aviation when Northwest Airlines 

was the subject of a takeover. At the time, the two investors put 

together with $25 million a piece. For $50 million, they acquired 

an airline. 

I was asked about this, and I said, well, why would you spend $150 million for a 747 when you could buy a whole fleet of them 

for $50 million? 

That is what these two investors did, Checchi and Wilson. They 

took an airline that had two billion dollars in equity and a billion 

dollars in debt and turned it into one that had two and a half to 

three billion dollars in debt and less than a billion dollars in equity, and it went precipitously downhill from there. 

68

You wouldn’t want to see that happen to the rail sector. There 

are comparisons. One aircraft engine is equal in cost to at least 

that of a locomotive in the railroad sector. 

Let me return, Dr. Mulvey, to the question I posed earlier. Public 

utility commissions in all of our States regulate the power entities, 

and they set reasonable rates, and they do so without forcing rate 

payers to establish what it would cost. If a new utility were to 

come into this area and build a facility to compete with the existing 

one, does that model apply here? 

Mr. MULVEY. It is traditional utility regulation, and it differs 

from what we do. It is basically cost-based. What is the cost of providing the service. There is a markup to give a return to investors, 

and that is what the rate is. It is much simpler. It is more straightforward, but that is not what the law. 

Nobody presumes at all that there is any competition in the utility industry. Pretty much, for the most part, it is a monopoly where 

as the argument is that much of railroading is not a monopoly and 

only part of it was monopolistic areas. So we are trying to regulate 

industry that is a part of an industry rather than regulating the 

entire industry as you do with utilities. 

You don’t have the same kind of cross subsidization issues with 

utilities as you do with the railroads also. In some ways, the railroads are more complex and more difficult to deal with. Yes, the 

utility form of regulation is one in which you could put back on the 

railroads, but that indeed would be re-regulation. 

Mr. OBERSTAR. Thank you. 

That is just the start of the vote, and I have one question for Ms. 

Hecker. 

Are you aware of other Federal Government agencies that selfinitiate cases similar to those of the Board rate cases? 

Ms. HECKER. I am also responsible for conducting studies of Federal communications regulations, and just last year we completed 

a review that, interesting, had very parallel findings to what we 

observed in the review of rail rates and the STB role. 

Basically, we had concern that there had been such a commitment to deregulate local markets, that there was no focus on the 

effect on competition. We demonstrated that there was a severe 

lack of competition. We then talked about the commission’s obligation that in our view the commission had an obligation, in fact, to 

be affirmatively examining competition and couldn’t write itself out 

of the picture by having a rulemaking that basically declared markets competitive that weren’t. 

So it is interesting because it is another network industry. It is 

like STB in some senses, largely deregulated but some remnant 

regulation and it is that careful balancing. But like our observation 

about the STB, we felt the Congress had built a structure that left 

a remnant responsibility to monitor the state of competition and, 

in fact, much as has happened here, we have actually the commission focusing on these issues. These are local competition rates or 

rates for very large businesses. 

If or you staff is interested, we could share it. Because I also do 

airlines and telecom and railroads, it is very interesting to look at 

some of the differences of the remnant regulatory structures that 

were established, the different authorities. But the presumption 

69

that this competition in our view, in summary, is one that merits 

continuing oversight whether there really is. 

Mr. OBERSTAR. I think there is a strong appeal for self-initiation 

authority with the Board. GAO has that authority. You don’t have 

to wait for Congress or a Committee or a Member of Congress to 

ask you to inquire into something. You have authority to look over 

the entire scope of Government agency activities and see whether 

they are living up to their mandate under the law. 

Ms. HECKER. That is quite right. While we don’t use it lightly, 

I think the Controller General has used it in a very strategic sense 

to raise major issues about the fiscal condition of the Country, and 

it is one that no single Committee was raising those issues for us. 

Mr. OBERSTAR. There could be a question then in extending the 

authority of the Board that we might have runaway Board or they 

might exceed their authority. Perhaps it would be useful if you 

meditated on that matter and gave us some thoughts about limits 

to such authority. 

Ms. HECKER. We would be glad to reflect because open-ending 

that somehow there is a new regulator and that there is regulation 

potential would have a chilling effect on the performance of the industry. So it can’t be done lightly, but we think the statute already 

has an investigatory initiating authority that is in place. 

Mr. OBERSTAR. I concur with that, but I think we need to approach it with further thought. 

With that, I will call the second panel and thank our first panel 

for very long endurance at the witness table and for your very constructive responses to Members’ questions and hold you excused. 

Our next panel consists of Glenn English from the NRECA; Ron 

Harper for Basin Electric Power; Gary Spitzer for Chemical Solutions Enterprise, DuPont; Terry Huval for Lafayette Utility Service; Susan Diehl for Holcim; Wayne Hurst for the Association of 

Wheat Growers. 

We will stand in recess for a period of time. It could well be an 

hour. I will say to all we will pursue the hearing until whatever 

time it takes in the day to conclude hearing from all the witnesses. 

Whatever refreshment you need right now, take care of it. 

[Recess.] 

Mr. OBERSTAR. The Committee on Transportation and Infrastructure will resume its sitting. 

The Chair has already called the panel, panel two, but the Chair 

at this time will recognize the gentleman from Louisiana, Dr. 

Boustany, to introduce a constituent. 

Mr. BOUSTANY. Thank you, Mr. Chairman. 

It is my privilege to introduce a constituent of mine, Mr. Terry 

Huval, who is a panelist today. Mr. Huval is the Director of the Lafayette Utility System in Lafayette, Louisiana, which is also my 

hometown. LUS, Lafayette Utility System, is the largest public 

power provider in Louisiana, serving 60,000 electric, water and 

wastewater customers. 

He also serves as this year’s Chair of the American Public Power 

Association, the industry trade organization representing the Nation’s 2,000 plus publicly-owned electric utility systems. 

Since the beginning of his service to LUS as Director in 1994, 

LUS has propelled itself to be recognized as one of the leading elecVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00085 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
70

tric utility companies in the Country, setting benchmarks for customer responsiveness and competitively priced services. He was 

awarded the APPA James Donovan Award in 2007 for his innovative leadership on Lafayette’s Fiber to the Home Initiative. 

Terry has previously testified on rail issues affecting our community in Lafayette, Louisiana, in the Senate Commerce Committee, 

the House Transportation and Infrastructure Committee as recently as 2004. He has served as a member of the Executive Committee of Consumers United for Rail Equity in 2005 and 2006. 

I would like to formally welcome Mr. Terry Huval to the Committee. Thank you. 

Thank you, Mr. Chairman. 

Mr. OBERSTAR. Mr. Huval, with that splendid introduction, big 

things will be expected of you. 

[Laughter.] 

Mr. OBERSTAR. We will begin with our former colleague, Mr. 

English, my classmate of 1974 and the 94th Congress. It is good 

to see you back here in the halls of the House. Although we didn’t 

serve on the same Committee together, we certainly served together with great affection and friendship and great admiration for 

the gentleman from Oklahoma. 

Please proceed. 

TESTIMONY OF GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, 

NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION; 

RONALD R. HARPER, CHIEF EXECUTIVE OFFICER AND GENERAL MANAGER, BASIN ELECTRIC POWER COOPERATIVE; 

GARY SPITZER, VICE PRESIDENT AND GENERAL MANAGER, 

CHEMICAL SOLUTIONS ENTERPRISE, DUPONT; TERRY 

HUVAL, DIRECTOR, LAFAYETTE UTILITIES SERVICE; SUSAN 

M. DIEHL, SENIOR VICE PRESIDENT, LOGISTICS AND SUPPLY CHAIN MANAGEMENT, HOLCIM, INC.; WAYNE HURST, 

VICE PRESIDENT, IDAHO GRAIN PRODUCERS ASSOCIATION, 

ON BEHALF OF THE NATIONAL ASSOCIATION OF WHEAT 

GROWERS 

Mr. ENGLISH. Thank you very much, Mr. Chairman. I appreciate 

that, and it is certainly a pleasure to be here and to see that you 

have ascended to such a powerful position here within the House 

of Representatives, a classmate of mine. 

Mr. OBERSTAR. Well, elevation, yes. 

Mr. ENGLISH. It is always good to see classmates. 

Mr. OBERSTAR. You just wait around long enough, good things 

can happen. 

Mr. ENGLISH. I appreciate that, Mr. Chairman, and I appreciate 

the opportunity to testify before the Committee. 

I think most Members of the Committee know that I am the 

Chief Executive Officer of the National Rural Electric Cooperative 

Association. I also have the honor of being the Chairman of the 

Consumers United for Rail Equity. I am wearing two hats today, 

Mr. Chairman. 

Some of that, though, I think it is worthwhile to think back just 

a little bit about 1980. We were both here. Most of the Members 

of the House were here, but there is something to be said, I think, 

for understanding what the intent was of the law and what was 

71

promised, and that is really where I think so much of this should 

come from. 

I noticed the time that I was in Congress, one of the things I became very frustrated about and anybody who has been very active, 

I think, in the legislative process understands the frustration I am 

talking about. When you see a piece of legislation pass, it goes over 

to the Administration or some regulatory body and you see a group 

of people interpreting it differently than what you intended whenever you passed it. That is a very frustrating thing to take place. 

If you recall back in the late 1970s, when we had a little effort 

on a legislative veto, you remember that, in which you would have 

one house veto and you would have these rules and regulations 

come back and you could bring them to the Floor of the House. If, 

in fact, the Congress found they were not in keeping with the intent of the law, what the Members passed, they could veto it. 

Unfortunately, the Supreme Court said that was unconstitutional, but that does not, I think, set aside the importance of Members of Congress being able to see their legislation carried out in 

the manner intended. I would suggest to you that is the real issue 

that we have before us today. 

Now everyone has talked about the Staggers Rail Act and the 

success it had in bringing back vitality to the rail industry. I think 

there is a lot of truth to that. I really do. 

But there is that little piece, that little provision with regard to 

captive shippers, and that one little piece has not been in keeping 

with what Harley Staggers intended, and I don’t think anyone can 

disagree with that. I don’t care what side you are on. I don’t think 

anyone can say that this thing has been carried out in the manner 

in which it was intended. 

If you remember back at that time, we had the Interstate Commerce Commission, and they were a very active and powerful commission at that time. They were really aggressively enforcing what 

they saw as the requirements of the law as it was passed. 

Now the Interstate Commerce Commission is gone. We have got 

the Surface Transportation Board, and in all honesty I don’t think 

it has the same kind of attention that we saw with the Interstate 

Commerce Commission, nor do I think they have been as active, 

nor do I think they have been as aggressive. 

That brings us back to the problem that we are facing and the 

reason that your legislation, Mr. Chairman, is so important, and 

that is the fact that we deserve, those people who are subjected to 

this law, those who are captive shippers, we deserve to have the 

Staggers Rail Act carried out as intended by the author. 

That means that we deserve to have those protections that Harley Staggers wrote into this legislation. We deserve to have that 

enforced, and that is not taking place today and that is what the 

problem is. That is the bottom line. 

Now if you recall at that time, we had, as you pointed out earlier 

today, Mr. Chairman, about 60 railroads. We were going to bring 

competition in, and we were going to see all these improvements 

take place. Well, 60 railroads competing, now that is real competition. I think we would all agree that is a lot of competition. You 

have got 60 Class I railroads competing. 

72

But over the years, we have seen this thing shrink down. Now, 

we don’t have 60 Class I railroads. We don’t have 40. We don’t 

have 20. We don’t have 10. We don’t even have five. We have got 

four that have about 90 percent of the business in this Country. 

That is what this thing has come down to, only about four are left. 

Anybody that is not served on a rail line on which you have got 

two of those railroads operating, there is no competition, and that 

is what is known as monopoly. You have got monopoly power in 

those areas. Whenever you have got a monopoly power, then you 

have opportunities for abuse and whenever you have a regulator 

that refuses to regulate. 

Mr. Chairman, I would like on page three to amend my statement. I think there is an error in there. It says the rail industry 

continues to be protected by the Surface Transportation Board that 

is either unable or unwilling to provide adequate oversight. 

I think we ought to strike that unable. I think they are just unwilling. I think that is where we are right now. That has been the 

history of the Surface Transportation Board for 20 years. They 

have been unwilling. 

Now, as I understand it, the reason that they say they have been 

unwilling is because of the fact, well, we have got to take care of 

the rail industry. The rail industry will go broke. The rail industry 

is vital to the economy of the Country. 

That has been the case all along. We suffered this for about 20 

years. 

Now, all of a sudden, the rail industry is not going broke. They 

are in the black. They are the darlings of Wall Street. Everybody 

wants to buy into them, take advantage of them. So, obviously, 

they have done very well financially. 

We have waited 20 years, Mr. Chairman, 20 years to see the Surface Transportation Board—it started out as the ICC, but the Surface Transportation Board—carry out promises that were made in 

the Staggers legislation. That is what we deserve to see happen 

today. 

Now the GAO concluded that the rate relief process under the 

Surface Transportation Board is largely inaccessible and rarely 

used. Rarely used, now why would it be rarely used? Well, I would 

suggest the reason it is rarely used is because those who are 

stranded shippers see little hope in the Surface Transportation 

Board taking care of the needs of the stranded shippers. 

Mr. Chairman, we have got record profits, record share prices, 

and we have got enough revenue in the rail industry to buy back 

billions of dollars worth of their stock, and we are seeing that happen today. That is where we are today. 

We have a situation in which the bulk of that money is coming 

from stranded shippers. It didn’t come from those shippers where 

you have got competition. 

You saw the GAO’s graph up here where it showed in real money 

how the rates were going down. You see the railroads will produce 

a chart similar to that showing the rates are going down. 

What we should see is a chart that shows the difference between 

those shippers where there is competition and those where there 

is no competition. The rates are going down steeply for those where 

73

there is competition. Where there is no competition, what we see 

is the rates are going up. 

That chart shows four different industries. That is just the first 

quarter of this year. Look at the difference in those rates. Now tell 

me that is what Harley Staggers intended. Just tell me if that is 

what Harley Staggers intended. 

I would suggest to you there is no way that this is meeting the 

intent of the law. There is no way that the promise that was made 

27 years ago is being carried out here, and that is what I think this 

Committee needs to address. 

We have got a little issue here, Mr. Chairman, of the integrity 

of the Congress—the integrity of the Congress. The question that 

we have here is: Is the Congress simply going to allow any group, 

I don’t care who they are or what part of this government, to ignore 

what Congress writes into the law, to interpret it in their own way 

and to go merrily down the road? Is Congress going to turn their 

back on that? 

Now I would suggest to you if you disagree with that provision 

in the Staggers Rail Act, the honest thing to do is to offer an 

amendment to the Staggers Rail Act to repeal that provision. Either Congress insists on its will being carried out, the law that it 

passed being carried out, or repeal it, get rid of it. But don’t get 

into the sham that we have been in for 20 years to pretend like 

there is some kind of protection for stranded shippers, some little 

fig leaf out there. 

We keep hearing the promise, next year, next year, next year. 

We even heard it again today, Mr. Chairman. We heard people 

promise, oh, we are going to change. Oh, we have got a new approach. Oh, we have got a study underway. 

Well, it is 20 years. My goodness, how many years do we have 

to go before the Congress says enough is enough? 

I would also suggest to you, Mr. Chairman, what we need to 

have done here is look for results. What is the bottom line? 

You heard members of the Surface Transportation Board say, oh, 

we got some wins for the shippers and we got some wins for the 

railroads, and I don’t know when. It has been 2001 since we had 

a win for the shippers. Before that, well, we had some wins for the 

railroads—all this kind of stuff. 

What it really comes down to, bottom line, the bottom line it 

comes down to is what kind of relief has been provided to those 

shippers? How much? 

What they classify as being a win, most people classify as being 

a loss. If you shave off 5 percent of a proposed rate that is going 

to be increasing by 50 percent, I wouldn’t call that a win, but the 

Surface Transportation Board does, and that is not right. It is not 

right. 

The 180 percent of variable cost is an issue that was raised 

today. Where did that 180 percent come from? Well, what we heard 

was it was pulled out of thin air or some staff thought it up during 

the conference. 

Mr. Chairman, I will tell you this. I will tell you this. Anytime 

we go through the legislative process, what we are looking for is 

fairness. We are trying to do the right thing, and I would suggest 

to you that is where the 180 percent came from. 

74

Now you think about it in terms of where Harley Staggers was 

and what the legislation. Remember when you put that together. 

You were on this Committee when they were talking about coming 

up with this. 

What they were trying to find was a place in which we knew that 

it was abusive. You were getting up in the range that it was just 

hard to see why it wasn’t abusive and somebody needed to take a 

look at it. One hundred and eighty percent sounds pretty darn abusive to me, if you are looking at 180 percent of variable cost. 

I would suggest to you that Harley Staggers, Members of Congress back in those days would look at that and say, well, that 180 

percent, somebody ought to take a look at it if it is in excess of 180 

percent. They were, in effect, saying well, we will give you 180 percent. Anything above 180 percent ought to be looked at by somebody because the chances are pretty good that that is abusive. 

What we are finding today is that this whole concept has been 

turned on its head, Mr. Chairman. The Surface Transportation 

Board comes back and says, you can’t charge less than 180 percent. 

Anybody ever heard the Surface Transportation Board come back 

and saying, golly gee, you have got too much? No. In fact, now the 

question is: Is it too little? That is contrary to what Harley Staggers had in mind. 

The question is Congressional intent. The question is: Is Harley 

Staggers’ provision going to be carried out as it was intended? 

The real question that we come down to is not re-regulation. The 

question is are you going to enforce the darn law as you wrote it? 

If you are not going to enforce it, then repeal it. Repeal it, Mr. 

Chairman. 

I have heard a lot of discussion, a lot of talking take place here 

today. I am against regulation. Oh, I am against regulation. I am 

for a free market. 

I haven’t heard anyone profess that they are opposed to monopolies. I haven’t heard anyone who has professed I am opposed to 

abusing consumers. 

I represent a consumer-owned organization. We have got 40 million consumers that own electric cooperatives. We are being abused 

by each and every day by the actions of the railroads, and the Surface Transportation Board could care less. That is a fact. 

Mr. Chairman, I want to commend you for your legislation. I 

hope that you will continue to press forward. We want to work with 

you and do everything that we can. We want to make sure that the 

intent of the law as passed under the Staggers Rail Act is fully carried out, every provision, and the Surface Transportation Board be 

made to follow that intent. 

Thank you very much. 

Mr. OBERSTAR. If this were a tent revival, we would all be saved. 

[Laughter.] 

Mr. OBERSTAR. I thank the gentleman. 

Mr. ENGLISH. You can be saved, Mr. Chairman, and I will be 

happy to lay hands on if it does any good. I have got some folks 

over here will be happy to lay hands on. 

Mr. OBERSTAR. Thank you very much for that compelling presentation. 

Mr. Harper. 

75

Mr. HARPER. Yes, thank you, Mr. Chairman. 

To start with, I am the CEO and General Manager of Basin Electric Power Cooperative. I stand before you today, representing the 

Missouri Basin Power Project which otherwise is known as the Laramie River Station in Wheatland, Wyoming. 

I want to put a couple stakes in the ground. When we got into 

this process, and I will go through that here in a minute, we took 

a position that we all recognize that we must have a financially 

viable and strong rail system in this Country. That is not the issue. 

We have been consistent in that message. 

The second thing is I would like to applaud the STB for recognizing that they need to be doing something to change the processes. Unfortunately, some of their changes prejudiced our case, 

and I will talk a little bit more about that in a minute. 

A little information about the Laramie River Station, it is approximately 175 miles south of the Powder River Basin in Wyoming. We are exclusively captive to the Burlington Northern-Santa 

Fe Railroad. 

We had a 20 year contract that was due to expire in October of 

2004. Our negotiation process, if you will, started at a reception 

that I was in attendance at in November, 2003, when then an executive from Burlington Northern walked up to me and said, Ron, I 

just want to let you know that you have enjoyed a below market 

20 year contract. Now it is our turn to get it all back. 

I found it interesting that you would start negotiations for rail 

service under those terms. So needless to say, through the process 

of close to a year, we were unsuccessful in negotiating and that is 

why we then filed a complaint before the STB on October the 19th, 

2004. 

Since that time, it has been quite an adventure to say the least. 

We learned things about the rate-making process that continues to 

make me scratch my head. I have spent 22 years in Wyoming 

under rate regulation, and I understand how to make cost-based 

rates and so on, but to create a fictitious and mysterious rail system to justify rates, I find quite amusing. 

But having said that, I would like to recognize that we went 

through this process. It started again on October 19th, 2004, and 

lasted until February of this year. February 26th, I believe it was. 

We spent $5.1 million on this case. 

At that time, the February date, is when the STB decided to suspend our case along with three others and propose to go through 

rulemaking. The outcome of that rulemaking cost us another 

$870,000, and again our case was prejudiced because of that, because they changed the rules in the process. So, again, we are quite 

concerned about that outcome and what it did to our case. 

We, obviously, on September the 10th did get a ruling, and it 

was not good in our favor. It was ruled that we were unable to 

prove that Burlington Northern’s rates were unreasonable and actually even questioned why we filed the case, that the rates were 

very attractive and we should have basically accepted those. So, 

again, it was bothersome from that standpoint. 

We have been involved in this process. It has been grueling. It 

has been frustrating, and it has been expensive, again right at $6 

million that we have had to go through. 

76

Now, I don’t know whether you consider this a small or medium 

or large case. I am trying to define that in all the discussion that 

took place earlier, but I consider it a large case because I represent, along with the other five owners on the Missouri Basin 

Power Project, the people at the end of the line, and $6 million to 

file a rate case in their minds is pretty excessive. 

Here is one volume of the opening remarks. Over there is just 

a sampling of the documents that we had to produce in this case 

because once they went through the rulemaking we had to go back 

and redo our case and refile it because, again, the rulemaking process. That was that $870,000. 

Now where we are at today is that the ruling that they gave us, 

we have 30 days in which to decide whether or not we want to 

refile because they recognize in their ruling that we were prejudiced as a result of their rulemaking. So they are giving us this 30 

days to decide whether or not we want to spend another half a million to a million dollars in this process. Hopefully, through that we 

could get a positive outcome. 

So, Mr. Chairman, I would submit to you that something needs 

to be done for the fairness because I understand in talking with 

Mr. English here for quite some time that the purpose of the STB 

is to find a balance between the rail industry and the shippers. I 

would hope through this process that you are going through—and 

I very much applaud your efforts along with all the other Members—that we can reach that positive outcome. 

Mr. Chairman, I would close by simply thanking you on behalf 

of the Missouri Basin Power Project, the consumers that exist in 

the nine States that we represent and thank you again for your efforts. 

Mr. OBERSTAR. Thank you very much, Mr. Harper. That file of 

documents is very compelling, silent but powerful testimony to the 

concerns the shippers have. 

Mr. HARPER. Thank you. 

Mr. OBERSTAR. Mr. Spitzer. 

Mr. SPITZER. Chairman Oberstar and distinguished Members of 

the Committee and the panels, I am Gary Spitzer, Vice President 

and General Manager for a global segment of the DuPont Company. A competitive and efficient rail distribution system is vital to 

DuPont’s business and future. I want to thank you for allowing me 

to discuss our railroad experiences and the reforms that we believe 

are necessary. 

DuPont is a global corporation founded in 1802 with revenues of over $27 billion and operations in 70 countries. In the U.S., we employ 36,000 people in 33 States. We market over 70,000 products 

and services for many markets including agriculture, energy, national defense, housing and transportation. 

When Congress passed the Staggers Act in 1980, there were over 

40 Class I railroads. Today, the four largest account for over 90 

percent of U.S. freight rail revenues. Competition between them 

has essentially been eliminated, resulting in issues with pricing 

and service. 

At 80 percent of our U.S. ship points, DuPont is captive, served 

by just one railroad. In many cases due to volume, distance traveled or material characteristics, alternative transportation modes 

77

are not viable. Our recent experience as a captive shipper shows 

that these railroads are fully determined to exercise their monopoly 

pricing power even if it means driving us and our customers out 

of certain businesses. 

In an effort to combat excessive and unreasonable rate increases, 

some exceeding 176 percent, DuPont has filed three small rate 

cases with the STB. 

Costs go beyond simple rail rates. A recent study commissioned 

by the American Chemistry Council found that between 2005 and 

the first quarter of 2007, the five major U.S. railroads overcharged 

on fuel surcharges by $6.5 billion. 

On service, we cannot reliably predict product transit times or 

arrival times. Some of our plants have come dangerously close to 

shutdown because of late deliveries. As a result, we have added rail 

cars, raised inventory, all further increasing our costs. 

When Staggers was passed in 1980, Congress could not have envisioned that 50 mergers and consolidations would lead to the current lack of competition or that the STB would fail to restrain railroad monopoly power. One such example is the bottleneck issue. 

The STB has ruled that carriers are not required to facilitate competition to or from captive locations by offering a reasonable rate 

to the nearest interchange with another carrier. 

We suffer the effects of this at our Niagara Falls plant in New 

York. In a competitive scenario, CSX, the only carrier serving our 

plant would be required to provide a reasonable rate for the 26 

miles from our plant to the Norfolk Southern interchange in Buffalo, New York. Instead, we are forced to use CSX, all the way from 

our plant to Chicago at much higher rates. In effect, the anti-competitive decision of the STB has helped DuPont remain a captive 

shipper. 

DuPont believes the time has come for reform which must begin 

with a broken and ineffective STB. Passage of H.R. 2125, the Railroad Competition and Service Improvement Act, would remove 

many barriers to competition between railroads and require the 

STB to fulfill its Congressional intent, promote effective competition, prevent excessive and unreasonable rates, and ensure efficient 

and reliable service. 

DuPont also supports passage of House Bill 1650, the Railroad 

Antitrust Enforcement Act. The Justice Department and the FTC 

should be permitted to review railroad mergers under antitrust law 

as they can in other industries. Railroads should be subject to the 

same antitrust laws and consequences as other industries. Unnecessary protections for the railroads must end before their monopoly 

power harms U.S. competitiveness and our economy. 

In closing, Chairman Oberstar, I want to thank you and Members of the Committee for allowing me to share DuPont’s views on 

this important issue. It is time for the railroad industry to join 

with Congress and its customers to achieve a balanced, marketbased system serving the common interests of carriers, shippers 

and our Nation. DuPont has participated in such efforts before and 

stands ready to participate again. 

Thank you. 

Mr. OBERSTAR. Thank you, Mr. Spitzer, for your testimony. 

Mr. Huval. 

78

Mr. HUVAL. [Phrase in foreign language]—and thank you to Congressman Baker for his help and support through the years. 

I am Terry Huval from the heart of Cajun Country in Lafayette, 

Louisiana, and I am representing today the American Public Power 

Association for which I serve as Chair at this particular time and 

LUS, the Lafayette Utility System, which is a municipal-owned 

utility system in Lafayette, Louisiana. 

I want to take the issue to talk about our customers. I want to 

talk about my senior class high school English teacher, Mrs. Moss, 

84 years old, lives in Lafayette. She is a widow. She called me the 

other night to thank me for what I am trying to do to make life 

better in Lafayette, but she doesn’t know that $300 of her annual 

utility bill goes to pay for the cost of rail captivity as it affects the 

delivery of coal to Lafayette’s Rodemacher power plant. 

Then to my friend, Matt Stellar, who is an entrepreneur and decided to build his own jewelry manufacturing business which is 

amongst one of the largest in the world and has multiple locations. 

He hired 1,700 people in Lafayette. Matt doesn’t realize that last 

year he paid an extra $120,000 more in his electric bill because of 

the cost of rail captivity. 

Then our education system in Lafayette, the university, the 

schools, the elementary schools, the high schools paid 1.3 million 

more last year because of the cost of rail captivity. 

Cost alone is not the only issue that affects our customers and 

affects the customers of other entities that are served by coal 

power. Seventy percent of our power in Lafayette comes from our 

coal plant. The reliability of service has suffered so much in the 

last several years, that we have had to take extraordinary measures in order to ensure that that plant was capable of operating to 

serve our customers. 

We had barge-delivered Venezuelan coal that we had to bring to 

Louisiana to help us. We had to truck-deliver Northwest Louisiana 

lignite. Now we have to make the decision to move forward with 

spending 19 million on aluminum rail cars so that each rail shipment that we have of coal can bring us more coal in the event that 

there is a disruption in rail traffic that it doesn’t impede our ability 

to operate our plant. 

We are one of those entities, like Mr. Spitzer, that is suffering 

from the bottleneck. We have a 1,500 mile trek from Wyoming to 

our power plant of which 20 miles is the only section that is captive. But because of the rules that the STB has in place, all 1,500 

miles are subject to a captive rate. We don’t think that is fair. 

We can’t get competing offers from the other rail provider because there is no need to do that. They don’t poach each other’s 

rates. 

The STB rules, in my opinion, don’t make sense. As a regulated 

utility, we have rules that we have to follow that require our rates 

to be approved ahead of time. In the case with STB, that is not how 

it works. The customer has all the burden of having to test out 

what the rates are. We believe that is senseless. 

Public service commissions in this Country regulate captive arrangements, captive monopolies in a different way, and we believe 

the same thing should happen here. 

79

What has happened also as we have seen it evolve, I have been 

testifying on this and this is my third time. Five years ago I testified before the Senate Commerce Committee. At that time, captive 

customers were dealt with differently, completely differently than 

competitive customers. 

Now we have what I call the small town, two gas station analogy 

where the two gas stations owners collude with each other as to 

what the price of the gasoline is going to be at their station. As 

soon as one puts his price up a little bit higher, the guy across the 

street does the same thing. What is happening is almost all the 

coal providers and many others, all coal shippers who have power 

plants are now in a position that they are paying substantially 

higher. 

When I hear some of the testimony raised earlier today about 

that it takes these captive customers to help to cover the cost of 

expansion. It makes me wonder if anyone really realizes that it is 

people like Mrs. Moss and Stellar Settings and our school systems 

that are paying the tab for that. They are paying an involuntary 

tax to be able to support the costs of the railroads’ daily operations. 

We don’t understand why the rates go up. It just turns out that 

way. We wonder where is the money really going. Is it going to 

help out competitive routes and at the same time all we are going 

to do is end up paying the bill for increased costs of running the 

railroad companies? 

We don’t know, but we do believe that it is up to the Surface 

Transportation Board to do their job, to be able to look at non-competitive markets in a way that ensures that the customers at the 

tail end are properly served, both from a reliability perspective and 

a pricing perspective. 

I thank you for your attention. This is a major issue for our community and for many utility companies around this Country. I look 

forward to your further comments. [Phrase in foreign language.] 

Mr. OBERSTAR. Thank you very much, Mr. Huval. 

[Phrase in foreign language.] 

Mr. HUVAL. [Phrase in foreign language.] 

Mr. OBERSTAR. [Phrase in foreign language.] 

Mr. HUVAL. [Phrase in foreign language.] 

Mr. OBERSTAR. [Phrase in foreign language.] 

Ms. Diehl. 

Ms. DIEHL. All the French speaking, I don’t know. I need to go 

take French now, I think. 

Good afternoon, Chairman Oberstar, Ranking Member Shuster 

and Members of the Committee. 

My name is Susan Diehl, and I am the Senior Vice President of 

Logistics and Supply Chain at Holcim, U.S. Inc. I am here to speak 

to the Committee about Holcim’s experience as a captive shipper of 

a strategic building material, mainly cement. 

Cement is the critical component of concrete, an environmentally 

responsible building product used to build and repair our Country’s 

vital infrastructure. Concrete is the second most consumed product 

in the world after water. 

Although it is not the subject of today’s hearing, Mr. Chairman, 

we pledge to work with you and your Committee as you take on 

the very serious challenge of rebuilding our Nation’s infrastructure. 

80

Holcim is one of the largest producers of cement in the United 

States with operations across the Country. Reliable and cost-effective transportation options are critical to our industry. Truck transportation increases our carbon footprint, clogs our already crowded 

highways and is not economical much beyond 150 miles. Simply 

put, we are reliant on railroads to deliver our products. 

Today, as a captive shipper at over 95 percent of our origin destination carriers, we are forced to deal with near monopolistic railroads that impose arbitrary and excessive fees. We daily face uncertainty in rail service reliability, and the prospect of new entrants to create competition is grim. 

To remain competitive, we consistently make significant capital 

investments in our company and our own infrastructure to meet 

the demands of our customers. In the last decade, Holcim has invested over $1 billion to upgrade its capacity and better service 

customers while improving its environmental performance. 

Holcim is investing $1 billion additionally in Sainte Genevieve, 

Missouri, on what will be the largest cement plant in the United 

States. A major reason for this investment in the location that it 

is, is on the Mississippi River which will allow us to ensure costeffective, environmentally-friendly and reliable transport of our inbound raw materials and finished cement by barge. 

Because we must locate at or near our primary raw material 

source, we count on and pick sites with rural rail service. True to 

our experience, we will be captive to one railroad at Sainte Genevieve. 

Like its customers, we believe that the railroads must also reinvest to serve customer needs in the years to come. However, that 

investment cannot be conditioned on a continuation of current monopolistic practices. 

Throughout the rail competition debate, we have long sought to 

be part of the solution and have taken action. In 2003, we created 

HolRail for the purpose of constructing and operating a 2.3 mile 

common carrier rail line to establish competition at our cement facility in Holly Hill, South Carolina, which was captive to a single 

rail line with CSX. 

Interestingly, our two cement competitors, operating with in five 

miles of our facility, are both dual served. This captivity has allowed CSX to provide poor and unresponsive service while charging 

unreasonably high rates to Holcim. Holcim determined that it 

could obtain competitive rail service at Holly Hill by constructing 

its own railroad over that distance to connect with Norfolk Southern railroads. 

As we petitioned the STB to build that railroad, CSX has attempted to stop our railroad by blocking the only environmentally 

acceptable route. The STB has done little to protect shippers or restrain the increasingly consolidated rail industry. Given the track 

record of the STB, serving as a virtual rubber stamp for the Class 

I railroads, it was not surprising that after well more than two 

years and hundreds of thousands of dollars of legal and consulting 

fees, our petition was denied. 

We cannot always pick sites with dual rail service. True to our 

experience, we will be captive to one railroad at Saint Genevieve. 

81

Like its customers, we believe that the railroads must also reinvest to serve customer needs in the years to come. However, that 

investment cannot be conditioned on a continuation of current monopolistic type practices. 

Throughout the rail competition debate, we have long sought to 

be part of the solution and have taken action. In 2003, we created 

Whole Rail for the purpose of constructing and operating a 2.3 mile 

common carrier rail line to establish competition at our cement facility in Holly Hill, South Carolina, which is captive to a single railroad, the CSX. Interestingly, our two cement competitors, operating 

within five miles of our facility, are both dual served. This captivity 

has allowed CSX to provide poor and unresponsive service while 

charging unreasonably high rates to Holcim. 

Holcim determined that it could obtain competitive rail service at 

Holly Hill by constructing its own railroad over that distance to 

connect with the Norfolk Southern Railroad. We petitioned the STB 

to build that rail line. CSX has attempted to stop our railroad by 

blocking the most environmentally acceptable route. 

The STB has done little to protect shippers or restrain the increasingly consolidated rail industry. Given the track record of the 

STB serving as a virtual rubber stamp for the Class I railroads, it 

was not surprising that, after well more than two years and hundreds of thousands of dollars of legal and consulting fees, our petition was denied. 

While our company has the resources to take on this challenge, 

many companies do not. It should not fall to shippers to engage in 

litigation to become modern day trust-busters. If competition is to 

be restored, we believe the Congress must change the system to 

create a more level playing field. 

What is currently being proposed in H.R. 2125, under your leadership, Mr. Chairman, and that of your Committee, has many key 

proposals that help strike the balance between rail growth and 

oversight. The re-regulation argument made by the rail industry 

presents a false choice. Indeed, we would not advocate for reform 

that would deter growth of our critical rail infrastructure. We believe that Congress must especially consider provisions that promote rate competition and expand the STB’s authority over servicerelated issues. 

Thank you, Mr. Chairman, Ranking Member Shuster, and Members of the Committee. We deeply appreciate this opportunity to 

speak about issues that are not only vital to our industry, but to 

our national infrastructure and future growth as well. 

Chairman OBERSTAR. Thank you very much for your testimony. 

I observe that the Latin origin of the word cement, camentum, 

means to link together. And the product into which it is made, concrete, ceconcraetum in the Latin, is to connect together. Let us 

hope that you can connect some things together here with your testimony. Thank you. 

Mr. HURST. Mr. Chairman and Members of this Committee, my 

name is Wayne Hurst. I farm in southern Idaho and produce 

wheat, sugar beets, potatoes, feed barley, alfalfa, silage corn, and 

dry edible beans. I am the past president of the Idaho Grain Producers Association and a member of the National Association of 

Wheat Growers Budget Committee. 

82

I am honored and pleased to be here today on behalf of the Alliance for Rail Competition and the agricultural community. The 

members of the Alliance for Rail Competition include utility, chemical, manufacturing, and agricultural companies, and agricultural 

organizations all working together. Producers of the commodities 

as wide ranging as soybeans, dry beans, lentils, rice, barley, peas, 

and sugar beets all have expressed concerns similar to those I will 

share with you today. Together these organizations represent growers of farm products in more than 30 States. 

I have submitted for the record a full statement and I would like 

to summarize that statement for you in the five minutes allotted 

to me. I would ask that the statement be accepted into the record. 

Also, recently a letter was sent to the Committee in support of H.R. 

2125, and I would ask that the letter be accepted into the record 

as well. The letter was written by the Alliance for Rail Competition, American Soybean Association, American Sugar Beet growers 

Association, the National Association of Wheat Growers, the National Barley Growers Association, the National Farmers Union, 

United States Beet Sugar Association, USA Dry Pea and Lentil 

Council, U.S. Dry Bean Council, and the USA Rice Federation. 

First, the importance of rail to agricultural producers. Wheat 

growers know that an effective railroad system is necessary for the 

success of the wheat industry. As captivity levels have risen, a 

larger and larger share of the cost of transportation has been shifted to rail customers and State and local governments. Here is the 

bottom line. We have between us and our markets a railroad with 

the economic power to take away our profits any time it wants. We 

captive shippers are tired of subsidizing commodity movements 

that have rail-to-rail competition and an STB that rules in favor 

of railroads and against captive rail shippers. 

Second, effects of growing rail captivity. Since the passage of the 

Staggers Rail Act of 1980, the degree of captivity in many wheat 

growing regions has increased dramatically and today whole 

States, whole regions, and whole industries have become completely captive to single railroads as a result of many railroad 

mergers. What is clear is that the areas of the country served by 

single railroads are experiencing drastic increases in rate levels 

that are not found in areas that have some rail-to-rail competition. 

The farm producer bears the cost of transportation and cannot pass 

it along to anyone else. So when we say agriculture is captive, we 

are truly captive. 

Third, the transportation cost shift. We have reports of railroads 

raising their rates just to drive off unwanted rail traffic, thereby 

abandoning common carriage. We also have reports of the railroads 

refusing to service locations that the railroads deem operationally 

unacceptable. The result appears to be that railroad market power 

is being exerted to create haves and have-nots in the shipping community. Every one of the crops I produce is having trouble with the 

level of rail rates and service. Let us look at just the crops I raise 

on my farm and some of the transportation issues associated with 

each crop, because what we find is a pattern that exists in all facets. 

Wheat. Following the wheat harvest in July of this year, there 

were more than 10 million bushels of Colorado wheat stored on the 

83

ground, primarily in areas where there was a lack of adequate rail 

service—captive branch line areas. Such wheat lying on the 

ground, exposed to the elements sustains an economical loss or 

poses a food safety risk and threatens its marketability. The elevator I sell to has told me that delays in service are threatening its 

existence because railroad delays cause cash flow problems. This 

company is one of the pioneers in identity preserved wheat marketing, which matches wheat varieties and characteristics to individual customer-specific needs. Shipments in smaller lots like identity preserved wheat are not what the railroads demand in their 

business model. Yet the identity preserved business practice holds 

one of the future keys for American agriculture to maintain market 

position in the world. 

Sugar. I am a member of a grower-owned co-op, the Snake River 

Sugar Company which supplies about 10 percent of our nation’s 

sugar. When the railroad decided it did not want to haul sugar 

beets about 10 years ago, it just quit hauling. Now, with one exception, all the beets in Idaho have been forced to truck. 

Potatoes. In the potato industry, we supplied potatoes to the G.R. 

Simplot plant in Heyburn, Idaho for many years until the plant 

was shut down several years ago and moved to Canada, resulting 

in the loss of hundreds of local jobs. Mr. Simplot told us the reason 

was high freight costs. And indeed, most of the shipment of frozen 

and fresh potatoes in my area today has been forced to trucks. 

Barley. Idaho feed barley used to easily capture 50 to 60 percent 

of the California dairy feed and grain market, amounting to between 60 and 70 million bushels annually, but today amounts to 

less than 200,000 bushels. What happened? The railroad serving 

Idaho chose not to allow barley movements into the traditional 

market over moving corn. It is no secret today that the monopoly 

railroads have no desire to move barley and will price these movements as high as needed to eliminate what would otherwise be 

competitive barley markets. 

Loss of malting barley markets. Rail rates and service failures 

have also closed off access to traditional U.S. malting markets to 

U.S. barley producers. They have been replaced by Canadian supplies with lower freight rates. This has resulted in a 20 to 30 percent cut in contracted acreage in 2006. Why? The U.S. market 

dominate railroads focused their resources on shuttle trains and 

were not willing to participate in shipments that did not conform 

to the shuttle configurations. 

In conclusion, agricultural growers together with members of the 

Alliance for Rail Competition truly believe that a healthy and competitive railroad industry is essential for their continued viability. 

However, increased captivity levels with poor service, a lack of 

available cars, increased rail rates, and a regulatory agency that 

does not meet the needs of shippers has made it increasingly difficult for agricultural producers to remain competitive in a world 

marketplace. We believe that the Government needs to be the 

facilitator and the catalyst for increasing competition in this historically strong industry. We believe the railroad industry can survive and prosper in a competitive environment. Indeed, we know 

from history, that competition breeds innovation and efficiency. 

84

Wheat growers and other producers along with the members of 

ARC believe that both railroads and shippers would be better off 

with more competition in the marketplace. They support provisions 

in H.R. 2125, a bill that calls for increasing competition without increasing regulation. We fervently believe that the final offer arbitration, as outlined in H.R. 2125, will produce a host of benefits 

where competition cannot physically be created. 

Providing for final offer arbitration and the removal of paper barriers will restore balance to the commercial relationship between 

the railroads and their customers. Both of these remove the STB 

from the process, an organization that seems only interested in the 

welfare of the railroads and not the shippers, and, furthermore, 

provides a commercial solution between the railroad and the shippers. We in agriculture and the members of ARC believe this legislation will improve rail transportation by providing fairness and 

openness to the negotiations between railroads and their customers 

over rates and service. Thank you. 

Chairman OBERSTAR. Thank you very much for a very comprehensive statement and very detailed. Your full statement of 

course will appear in the record. Thank all the members of the 

panel for their presentations. 

Mr. English, are there members of the NRECA who own their 

own rail cars to haul coal? 

Mr. ENGLISH. Indeed. Mr. Harper here is a member of NRECA 

and certainly Basin Electric has to own their own cars. Many of 

our members do. Obviously, we have seen a substantial reduction 

in the amount of rail equipment, talking about percentage-wise, of 

rail cars that are available through the railroad. If I recall correctly, about a 20 percent reduction. Back in 1980, if I remember 

correctly, Mr. Chairman, we had about 60 percent of the rail cars 

owned by the railroads. Today, it is about 40 percent. Certainly 

that has been the case for a lot of our members. 

Chairman OBERSTAR. That is a cost shifted to a consumer, on the 

one hand, and to a shipper, on another. When you went out to acquire your cars, Mr. Harper, did the railroads offer you a reduction 

in rates? 

Mr. HARPER. Actually, the 20-year contract that I spoke of earlier 

did have incentives in there for us to make investments in the assets, of which we did with cars and our rates got lower. Today, they 

require us to purchase the cars with no incentives, no lowering of 

rates. In fact, we just spent a little over $10 million for a fourth 

train sent to the Laramie River Station in order to get our coal 

supply out. 

Chairman OBERSTAR. Over $10 million to acquire cars? 

Mr. HARPER. Yes, Mr. Chairman. 

Chairman OBERSTAR. But no compensation on the other side in 

the form of a rate reduction? 

Mr. HARPER. No, Mr. Chairman. 

Chairman OBERSTAR. That is cost-shifting. 

Mr. HARPER. Pretty much. 

Chairman OBERSTAR. Mr. English, you discussed the high cost of 

bringing a rate case to the board. What recommendations do you 

have on lowering these costs and improving the fairness of the rate 

proceeding at the board? 

85

Mr. ENGLISH. Obviously, Senator Dorgan spoke to that this 

morning and he is addressing this issue. I think there is no question that this is exorbitant. There is no reason for cost of this magnitude. Now we got into some discussion here about, well, they 

have to pick up the cost of the Surface Transportation Board. If I 

recall correctly, that is an entity of the Federal Government that 

is here to provide a service. And if you go back again to the original 

intent of the legislation, they are supposed to be here to hear these 

kind of disputes and to deal with the injustices in accordance with 

the intent of the law. I think it has to raise questions, Mr. Chairman, given the exorbitant amount, if this is here not to pick up the 

costs of the proceedings but instead to discourage people from 

bringing proceedings. 

Again, this goes back to the issue, what is the Surface Transportation Board here for? If they are not here to address these issues 

and to hear from those who have grievances and, in effect, find the 

proper solution in accordance with the law, then I do not know why 

they are here. This again raises the issue and goes to the heart of 

your legislation. I want to commend you and Mr. Baker both for 

working on this. You had some very nice questions, Congressman 

Baker. Great job. Thank you. 

Chairman OBERSTAR. As Dr. Mulvey said in his testimony, the 

Staggers Act greatly reduced the economic regulation of the industry. It did not eliminate it. It did not totally take the Government 

out, but provided a safety valve for the shippers and consumers. 

Just a further question. You own the cars. Who maintains them? 

Mr. HARPER. We do. We have to pay for the full maintenance, 

whether it is the wheels, the cars themselves, or whatever. The 

cost for maintaining those train sets is the responsibility of the 

owner. 

Chairman OBERSTAR. That is a sweet deal. 

Mr. HARPER. Depends on which side you are on. 

Chairman OBERSTAR. For the railroads, a sweet deal. 

Mr. Spitzer, you described a number of situations that were painful for your industry and for your company. But I recall that period 

of time when the Union Pacific acquired the Southern Pacific, 

whose rail infrastructure was in very bad shape; the roadbed was 

in bad condition, the rolling stock had deteriorated. As one person 

at a meeting I presided over in Beaumont, Texas said, one of the 

customers, it was held together with chewing gum and baling wire 

and then it all fell apart when the UP acquired it because the SP 

management somehow knew how to keep it going even though they 

were losing money and it was not a very profitable operation. And 

then when the UP acquired it, the average transit time on coal 

shipments was seven miles an hour. There was a meltdown on 

chemical shipments from the West Coast to the Gulf. Chemicals 

were being off-loaded from large vessels onto smaller vessels and 

shipped through the Panama Canal and up the Gulf of Mexico and 

into the Gulf Coast. Were you affected by that period of time? 

Mr. SPITZER. I do not have the specific details on that, Mr. Chairman. I would be happy to get back to you in writing with how that 

specifically impacted us. If I may say, while over time there have 

been benefits of the Staggers Act and perhaps improvements in inVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00101 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
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frastructure in some cases, today we are seeing a number of service 

issues. 

[Subsequent to the hearing, Mr. Spitzer added the following: DuPont experienced major rail service disruptions and delays from the 

Union Pacific-Southern Pacific merger. It took years to recover 

from the merger and some geographic areas continue to have lingering service issues.] 

As with Mr. Harper on the panel here, we too have seen a shift 

in costs to us for rail cars, a large fleet that we own and maintain 

in our company as well, and a number of service issues, as I detailed in my testimony, into and out of our sites. 

Chairman OBERSTAR. You recently filed three rate cases with the 

board. What has been the outcome and your experience in that? 

Mr. SPITZER. I think our experience before, as has been discussed 

today, is the large and medium rate cases have largely been prohibitive. Way too long and too expensive. Since this is ongoing litigation there is not a lot I can say. The rate cases are on the STB 

website. I heard a lot of discussion earlier about 180 revenue to 

variable cost. In these cases we have 300, 400 percent revenue to 

variable cost. And on an overall basis, both with CSX and what we 

have recently experienced, we have seen increases from on average 

30 percent up to 176 percent. 

Chairman OBERSTAR. The American Chemistry Council issued a 

report which I have claiming that fuel surcharge by the five Class 

I carriers overcharge shippers by more than $6.5 billion dollars. 

The Association of American Railroads takes issue with the study, 

with the premise on which it was founded. What is your response 

to that issue? 

Mr. SPITZER. In addition to that report by the American Chemistry Council, it has been discussed here today that the GAO also 

took a look at it and validated a significant increase in miscellaneous charges. We are now paying fuel surcharges. In the past in 

some agreements it was imputed as part of the overall underlying 

rate. Now, as contracts expire, we are seeing the fuel surcharges 

come in. And they are just part of a number of miscellaneous 

charges that are coming up. If I may, Mr. Chairman, add one more 

point. One of the reasons for concern and I believe the timeliness 

of action is that many contracts are expiring. When you read some 

of the Wall Street analysts talk about legacy contracts and the 

great profit opportunities for the railroads due to triple digit increases, that is currently what we are experiencing today, those triple digit increases. 

Chairman OBERSTAR. Thank you. Ms. Diehl, do you have any 

data that would reflect percentage of the cost of a ton of cement 

represented by the transportation cost of that cement? 

Ms. DIEHL. Yes, Chairman Oberstar. Before I proceed with my 

answer, I just want to correct something on the record. I inadvertently said that we have invested over a million dollars. It has been 

over a billion dollars in the last decade. So my colleagues have informed me that there is a big difference between the two and I just 

want to make sure it is right on the record. 

Chairman OBERSTAR. As Ev Dirksen was fond of saying. 

Ms. DIEHL. In terms of our overall transportation costs, not just 

rail, they used to be one-quarter of our overall costs. We are lookVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00102 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
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ing at rates that are almost double that as a component of our 

overall cost of cement. So it is something that is of great concern 

to our company. What we are looking for is really to level the playing field so we have opportunities. And we have tried to be part 

of the solution. We tried to create our own competition using our 

own investment dollars and we were denied that opportunity. 

Chairman OBERSTAR. Thank you. I will withhold further questions. 

I now recognize the gentleman from Pennsylvania, Mr. Shuster. 

Mr. SHUSTER. Thank you very much. And all of you can feel very 

comfortable I will not ask any questions in French. I do not speak 

French. 

[Laughter.] 

Mr. SHUSTER. I certainly do believe that we need to make some 

changes at the STB and I think they have started down that road, 

at least this board that we had in front of us today has put some 

things in place. Also, as I said in my opening comments and I think 

all of us have to be cognizant of, if we pass something we may get 

some unintended consequences and one of those may be going back 

to the way the rail system was before 1980. I do not think anybody 

sitting on this panel or anybody in this room or this country wants 

to see us go back there. So with that being said, a couple of specific 

questions and then a general question that I want to ask you, because I am trying to figure out how we move forward without potentially going back to 1980 or before the Staggers Act was put in 

that, from my standpoint, saved the railroad industry in this country. 

The first thing is on the fuel surcharges. Again, I think I know 

the answer but I am not quite sure because I get conflicting information when I read things. It is $6.5 billion in surcharges. Nobody 

filed, from my understanding, with the STB to get a remedy there. 

The question I guess is, is that accurate? And why did not anybody 

file? Was it the cost was too much and you did not think it was 

worth it. Anybody can take a stab at it or everybody can take a 

stab at it if you wish. Yes, Mr. English? 

Mr. ENGLISH. I think it is an indication of the lack of confidence 

that people have in the Surface Transportation Board. That is the 

whole point. And I think we have seen that throughout the history 

of the board. We have waited for 20 years and you have not finished implementing the legislation that was passed in 1980. That 

is what this is all about. The Surface Transportation Board is not 

cutting it. There is no other way around it. So the question is 

whether the Congress is going to fix, whether in fact you are going 

to complete the 1980 legislation and make certain that it does the 

job, or whether in fact you just scrap the whole thing and forget 

it, because I do not think it is going to make a whole lot of difference. 

Mr. SHUSTER. Did not the STB come forward and say the railroads did not account for it properly and thus everybody is getting 

some remedy? 

Mr. ENGLISH. That is correct. Now what would you expect out of 

that? I would think you would expect——

Mr. SHUSTER. Well, $6.5 billion is a lot of money. 

88

Mr. ENGLISH. That is correct. Would you not also expect that if 

any body, respected body in this town who has this kind of responsibility and obligation made such finding, would you not expect 

that they would insist that money be turned back to the shippers? 

But they took no such action. The second thing, would you not also 

expect that they would suspend that kind of abuse immediately? 

They did not suspend it immediately. 

So the question is—that is correct, they found it—but the question is, what did they do about it? How did they deal with it? 

Mr. SHUSTER. From what I understand from the testimony today, 

you got some of that money back and some they said they just 

moved forward. Which is not a very good answer for your industry. 

Mr. ENGLISH. I am not aware that they put any back. They said 

they were going to stop it going forward. But that is $6.5 billion. 

That is a lot of money. 

Mr. SHUSTER. Anybody else want a crack at that? 

Mr. HUVAL. What I heard of the testimony today is that actually 

some shippers approached the STB to let them know this was taking place. I think it is good that the STB did take a look at it themselves. But they did not come up with it on their own. There were 

some shippers that pointed out that this was becoming an issue because these prices continued to go up. So I commend them for looking at it. But I think it is the sort of thing the STB should have 

been doing all along. And, again, it does raise a lot of questions 

when an industry is allowed $6.5 billion, or whatever the number 

is, anything over-collected is over-collected and it is improperly 

done, it should be refunded back to the shippers that were harmed 

by that. 

Mr. SHUSTER. Absolutely. I agree with that. Again, my question, 

I would have thought somebody would have said hey, let us file a 

case, let us all band together and do something to get this stopped. 

So that is really the question I had. Because I agree with you that 

if something was done improperly it should have been addressed. 

It was. It was not maybe going through the proper channels, but 

something was addressed. 

The second thing on car ownership. When did the shift occur on 

car ownership? I am not quite sure I know that some industries 

today are buying more, some I think in the past have. Your industries, have you always owned your own cars, have you recently, are 

you buying more, are you buying less? 

Mr. HUVAL. In our particular case, we always owned our own 

cars. We had some steel cars in place that still probably had another 10 years of useful life left to them, but because of the reliability of getting coal, the reduced reliability, we felt that we needed to move forward to replace those cars with aluminum cars so 

that every shipment brings us in more coal. And that is just because of lack of maintenance of the rail lines. But we always took 

the position of wanting to own our own cars. We are just now in 

the position of having to prematurely replace those cars with aluminum cars. 

Mr. SHUSTER. Right. What about DuPont, have you always 

owned your own cars? 

89

Mr. SPITZER. For us it began in the mid-1980s. At this point, we 

feel it is necessary to have them to ensure availability and timeliness. 

Mr. SHUSTER. What about liability? 

Mr. SPITZER. Reliability? 

Mr. SHUSTER. The concern that you wanted cars, you wanted to 

make sure that they were your cars, and that if something happened you knew and were responsible. I am talking about legal responsibility. Liability. 

Mr. SPITZER. I would say the Department of Transportation, the 

FRA have clear regulations and guidelines relative to car design 

that we think industry on an overall basis is held accountable to 

meeting. In our case, it has grown since the mid-1980s to approximately 5,000 today. 

Mr. SHUSTER. Yes, sir? 

Mr. HARPER. Yes. I believe our ownership can track back to the 

mid-1980s as well. As I said a minute ago, there was recognition 

of incentives in the contract that we had at the Laramie River Station. But since that time, we have also had to buy, because we own 

the Dakota gasification synthetic fuels plant in North Dakota, we 

have had to buy ammonia cars, so on and so forth, we have had 

to buy many cars. So we have a lot of ownership in cars that we 

do not really want to be in, but we are there. 

Mr. SHUSTER. Portland Cement industry, has that industry always owned its own cars? 

Ms. DIEHL. I know that we have owned our own cars for at least 

the last decade. We currently own about 2,000 cars. And there have 

been some times in the past where we have not been able to use 

those cars. Certainly our concern is, as we divert our own investment dollars towards rail cars, we are not investing in our own capacity and infrastructure, and that if the capacity turns, and now 

the railroads have extra rail cars, we may be stuck because they 

are utilizing their capacity and we are not utilizing ours. 

Mr. SHUSTER. Right. Mr. Hurst? 

Mr. HURST. Well, I do know that some agriculture companies do 

own their own cars and service is tough to get. Just last week I 

was unloading a load of beans at a local warehouse and they said, 

you know, from the time we order cars, it is often 21 days to sometimes 30 days before we get the cars, and often we have to fix them 

when they show up, and then it is 3 days from the time we have 

them loaded until that order arrives at our customer. So, 60 days 

usually. 

Mr. SHUSTER. I guess the last question I have, it is a pretty 

broad question and it is why we are here today. And I understand 

each of you is here representing your own companies, your own industries. I was in business before and I certainly wanted the best 

deal. But we are looking at a system which is a national system. 

A couple of people I think mentioned today about the days when 

there were 60 railroads out there. I do not know that any of them 

really provided national service that we can get today. And I do not 

know if anyone really wants to go back, as I mentioned early, back 

to pre-1980. We do have seven Class I railroads in this country. It 

has been reduced, consolidations have occurred, and now we have 

90

a profitable industry that is spending 18 percent of its revenues to 

build the infrastructure, reinvest. 

If we are going to start the change—and differential pricing is 

something that I am trying to get my head around. I understand 

how the airline industry does it. That is what is happening in the 

rail industry and some people feel they are paying unfairly. But we 

have a railroad system that is the envy of the world. It is the most 

efficient system in the world. Overall, the prices that you pay are 

lower than in the rest of the world. And as the Chairman mentioned earlier, it is to serve broad public interest. And in my view, 

the taxpayers are not paying money to support the system. So how 

do we move forward without disrupting that and go back to 1980? 

Mr. English? And Mr. English, please be brief because the Chairman is going to start to whack the gavel on me and I want to make 

sure I get your response. 

Mr. ENGLISH. I will put in a good word for you. 

Mr. SHUSTER. I know, it is a tough, big question. 

Mr. ENGLISH. Very quickly, the point is just this. The problem is 

with the Surface Transportation Board. The problem is with the attitude. And certainly I think what you can do is this Congress can 

send a very strong message that you expect that the Surface Transportation Board carry out their responsibilities. Now you go strictly 

to the issue of fairness. Why is it that 20 percent, and I am using 

that 20 percent figure that Professor Grimm from the University 

of Maryland testified here in 2004 and said it was 20 percent, unlike the 10 percent you heard here today, probably more today, but 

why should that 20 percent pay for everything? That is who this 

thing is resting on. We are already at 180 percent of the value that 

was laid out earlier under the Staggers Act. That is the threshold 

before the Surface Transportation Board even gets involved. Now 

why should it be 300 percent, 400 percent, 500 percent, 700 percent? Why is there no limit? 

Mr. SHUSTER. I think the answer to that question is, somebody 

said earlier who is much smarter than I am, you have to look case 

to case, what were the capital investments. And I understand that. 

Mr. ENGLISH. But only the captive shippers get stuck. 

Mr. SHUSTER. Mr. English, if I did not know it, I would think you 

were a former Member of Congress. 

[Laughter.] 

Mr. ENGLISH. Thank you very much. 

Mr. SHUSTER. And if you were a Member of the House, you would 

be in a filibuster now. 

Mr. ENGLISH. And your father was a great man. 

Mr. SHUSTER. I appreciate that greatly. Could everyone just take 

a quick crack at that. 

Chairman OBERSTAR. Very briefly, because we are going to have 

votes in just a few minutes and I want to get to other Members. 

Mr. HARPER. Mr. Shuster, as I said a while ago, I think what the 

STB has to do is find that balance. I do not think there is any one 

of us sitting here who is not willing to pay for good service. We all 

recognize that, period. 

Mr. SHUSTER. Okay. Thank you. 

Mr. SPITZER. I come back, Congressman, to what Chairman 

Oberstar said, that if the railroads are there to serve in our naVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00106 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
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tional interest, it is hard for our industries and businesses to be 

globally competitive when there is a monopoly power in the middle 

of our supply chains. It is remarkable to me that with the bottleneck issue, competitive switching, and paper barriers, the STB has 

over many years made decision after decision that has served to reduce competition. I believe it needs to be addressed if we are going 

to turn it around. In the chemical industry alone, there has been 

a $30 billion change in imports and exports in the trade balance. 

It still remains a very vital industry in this country. 

Mr. HUVAL. As Senator Russell Long would say, ‘‘Don’t tax me, 

tax the man behind the tree.’’ Well, the man behind the tree in our 

industry is the customer. The customers are paying the cost, a substantial cost for these investments that railroad companies are getting. That is an important thing we cannot forget. It is not just 

coming from just free market operations. The customers are forced 

to pay for that because they are only being served by one utility. 

So we need to make sure we consider all of that in the big scheme 

of this. 

Mr. SHUSTER. Ms. Diehl? 

Ms. DIEHL. From our perspective, we certainly believe that we 

need the railroad going forward and it is a key decision point when 

we decide whether or not we are going to continue to reinvest in 

capacity. The STB, as ineffective as it stands today, and given our 

recent experience which has happened in the last 13 months, we 

do feel like we are not getting the attention of the STB to create 

competition when they opportunity has been provided to them. And 

so from that perspective, all we want is to level the playing field. 

We have monopolistic railroads who are not regulated and, as I 

heard this morning, we cannot have the worst of both worlds, 

which is monopoly and no regulation. And that is all we are looking 

for is just to level the playing field so that the railroads are playing 

under the same sets of rules and whatever oversight body is striking that balance to make sure that we can promote the growth but 

also to make sure that things stay fair. 

Mr. HURST. From agriculture’s perspective, we need and have to 

have a strong railroad. The Staggers Act basically had two things. 

One was to improve the financial state of the railroad, and they 

have done that very well through the STB. Secondly, it was to protect captive shippers that would come from deregulation. That has 

failed to happen in the last 27 years. 

From our perspective, the answer to the STB problem is to give 

us final offer arbitration. That is a mechanism whereas we have 

the tool to solve our own problems with the railroad outside of regulation, outside of Washington even. We can take care of it on a 

commercial level. And so that is why we feel so strongly about final 

offer arbitration. 

Mr. SHUSTER. Thank you all very much. Thank you, Mr. Chairman. 

Chairman OBERSTAR. Ms. Brown. 

Ms. BROWN. Thank you, Mr. Chairman. Mr. Spitzer, I have got 

a couple of quick questions for you. DuPont recently announced it 

would have a buy back of $1.1 billion in stock. Since you are doing 

it, what is wrong with share buy backs by freight railroad if DuPont is doing the same thing? 

92

Mr. SPITZER. We do not have an objection to that. On the other 

hand, we are not out there, as some railroad companies are, talking 

about difficulties in investing in capital and in infrastructure while 

at the same time doing multibillion dollar buy backs. There seems 

to be somewhat of an incongruity in those two statements. 

Ms. BROWN. I do not know. The hedge funds are moving in and 

they are buying up some railroads. One of the things they want to 

do is for them to raise the price of the shippers, which is just the 

opposite of what you are saying here today. 

Mr. SPITZER. We are currently——

Ms. BROWN. I mean the market is part of our discussion here. 

Mr. SPITZER. Yes. I would just say, Madam Chairwoman, that we 

are, both in the rate cases that we brought—I mean, I will just say 

that in the negotiations that took place with CSX, as an example, 

I just want to share what it is like dealing with being a captive 

shipper. We shared the impact that these rate increases would 

have on our customers, on our business, and they were ignored. 

Ms. BROWN. What percentage of your pricing is established by a 

third party? Arbitration, what percentage? 

Mr. SPITZER. To my knowledge, and I will get back to you with 

anything different, I am not aware of prices that have been established through arbitration in our particular case. 

[Subsequent to the hearing, Mr Spitzer added the following: 

Prices within DuPont are generally set by competitive market conditions or through negotiations with our more significant customers. Alternative Dispute methodology, including arbitration, is 

generally used to resolve disputes. The rail industry that we face 

is distinguished from our market-based rate setting in that no competition exists that would otherwise curtail or limit monopoly-based 

pricing practices. In the absence of true competition, mediation, 

under the supervision of a government sponsored agency, is one 

method by which reasonable pricing that satisfies the needs of both 

parties and the public good might be achieved.] 

Ms. BROWN. In your particular case. Anyone else on that issue? 

Okay, the other question. Good or bad, lower rates are not going 

to deal with the significant capacity problem that we have in the 

United States. What suggestion do you have for funding rail expansion? 

Mr. SPITZER. I would say in one word, it is competition. I believe 

that we need the infrastructure——

Ms. BROWN. Do you think competition is going to help expand 

the system? 

Mr. SPITZER. Yes, I do. 

Ms. BROWN. It surely did not do it with the telephone industry. 

Mr. SPITZER. I would just say that in the——

Ms. BROWN. A lot of people made money and you do not know 

who to call. 

Mr. SPITZER. Well, yes, there are those rare exceptions. But I 

would say that my experience in the industry that I am in and 

dealing with customers that span everything from electronics to 

food to a whole variety of industries, our Nation is based upon competition. We would see, I believe, innovation, we would see new 

technology, we would see competition between railroads. If I may 

also add, the whole idea of having infrastructure and expanded caVerDate 0ct 09 2002 10:33 Feb 29, 2008 Jkt 000000 PO 00000 Frm 00108 Fmt 6633 Sfmt 6633 P:\DOCS\38170 HTRANS1 PsN: JASON
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pacity, we also want to be sure that we have U.S. produced goods 

to put on those expanded railroads that have occurred. 

Ms. BROWN. Absolutely, and jobs. And this is something that we 

cannot send overseas. Thank goodness. But, for example, you talk 

about what you ship. You have the capacity to use trucks, which 

I am not encouraging it, as an alternative to rail. Let us say as 

with plastic, for example. Certain goods, like coal, coal needs to go 

rail. But you have the capacity with, as you just said, your diversity to use other kinds of alternatives. 

Mr. SPITZER. Well, yes, we do use a variety of means of transportation. However, (1) rail is one of the safest means to transport material; and (2) based upon the long distances that may be involved 

or the volume, in many cases truck is simply not a viable option 

for many of the products that we move. And I believe that is why 

when we are in these negotiations it is very clear to the carrier 

that we do not have a viable alternative and therein comes the 

take it or leave it offers or the triple digit types of price increases. 

Ms. BROWN. Mr. Hurst, you mentioned beans and corn. I am no 

expert on any of that. But my question is why would it matter to 

the railroads what you are shipping? I am just curious. You said 

that they did not want you to ship barley, they wanted you to ship 

corn. Why would they care? 

Mr. HURST. Because I understand they load, say, Nebraska corn 

in large shuttle trains and they deal in 100 car shuttle trains instead of dealing with 25 cars at a time with barley. They prefer 

corn. They are set up for corn and that fits their model, so they 

just basically said to Idaho barley, forget it, we do not want to 

mess with you. 

Ms. BROWN. I thought you said you have your own cars. 

Mr. HURST. Some companies do. But producers, we do not own 

our own cars. We sell to an elevator or a grain buyer and some of 

them do. 

Ms. BROWN. Would someone else like to address the expansion 

capacity? You know, we do have a problem. I want to see more passenger rail. We have an explosion, which is exciting, but we do 

have an explosion as far as products, goods and services. We need 

to be competitive with China and other places. But no matter who 

I talk to, whether it is the Russians or the Europeans, they think 

we have the number one rail in the world. But I am listening and 

I hear you saying that there are some problems. But this industry 

has just started operating in the black. I see a couple of hands and 

I guess I have got a couple of minutes. So, yes, sir. 

Mr. HARPER. Very quickly. I think what we want are fair and 

reasonable rates and have and understand that there is someplace 

to go to air our concerns. I am in the electric utility business. I am 

not in the rail business. I want to have a supplier that has my best 

interest at heart. And if he has that, then he is out there building 

the infrastructure that is necessary to get our products to market 

and get coal to my power plants. That is my biggest concern. 

Ms. BROWN. He is investing 18 percent of his product back into 

the industry. DuPont is not doing that. Nobody is putting that 

amount back into the industry. 

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Mr. HARPER. Well, if I may. Right now, we have a workplan of $5.2 billion in front of us over the next 10 years. Yes, ma’am, I do 

think we are investing in our system, with all due respect. 

Ms. BROWN. Mr. English? 

Mr. ENGLISH. Thank you very much, Chairwoman Brown. I think 

there are a couple of issues here. One, you should not just have a 

small segment of the population in this country or a small segment 

of the shippers who pay the entire freight. If we are going to take 

this on as a national policy, everyone should be involved in paying 

for it. It is too big for one thing, and the second thing is it is not 

fair. 

The second issue, I have heard that 18 percent, and I hope you 

will challenge that a little bit and found out if that includes the 

maintenance and upkeep as well. If that is maintenance and upkeep, that is not what I think you are alluding to as far as investment in infrastructure. Thank you. 

Chairman OBERSTAR. The Chairwoman’s time has expired. 

Ms. BROWN. Yes, sir. 

Chairman OBERSTAR. Mr. LaTourette. We have seven minutes 

remaining on a vote but only a handful have voted so far. So we 

have plenty of time. 

Mr. LATOURETTE. I thank the Chairman and I will try to be 

brief. I learned from my very brief tenure as the Chairman of the 

Rail Subcommittee not to mess with Congressman English, so I 

will not be asking you any questions today, sir. 

[Laughter.] 

Mr. LATOURETTE. Mr. Spitzer, following up on where the 

gentlelady from Florida led off. One of the arguments that is made 

by the advocates of re-regulation, and you sort of I thought in your 

testimony took a whack at the railroads for buying back stock and 

I was prepared to talk to you about DuPont’s stock buy backs. But 

in answer to Ms. Brown’s question, I think she asked the right 

question. And Congressman English, I will challenge it. I do not 

think it is 18 percent. I think it is 17 percent that railroads invest 

in capital expenditures, and that comes from the Surface Transportation Board. But you did in response to Ms. Brown’s question, Mr. 

Spitzer, indicate that you do not have any problem with stock buy 

backs as long as they make investments. Do you know how much 

DuPont makes in capital expenditures based upon a function of 

revenue per year? 

Mr. SPITZER. Well, I mean, this year it will be over 5 to 6 percent, in that range. But it is a different type of industry and I am 

concerned that perhaps we are getting a little bit off of the point. 

I am not an expert in national policy or how to go ahead and deal 

with the railroad funding issue. I am here saying that as a captive 

shipper I think there are some very serious imbalances, a very uneven playing field, and unreasonable and excessive rates. And to 

add on to Mr. English, the whole idea that the captive shipper 

ought to be the place through differential pricing where you fund 

railroad capital I do not agree with. 

Mr. LATOURETTE. Let me be clear. I want to agree with Mr. 

Harper’s observation. I think that people that feel aggrieved, 

whether it is the railroads or the people that ship on the railroads, 

should have a place to go where they get treated fairly. And if that 

95

is what you are all here telling us, I could not agree with any of 

you more. And of the Surface Transportation Board, I was impressed by Chairman Nottingham. I think some of the changes 

they have made in small shipper and cost of capital are steps forward. But like anything else, you should be able to have a forum 

where you are treated fairly. So if that is what you are telling me, 

that is fine. I will tell you I cannot agree always on how you are 

getting there. 

That brings me back to you, Mr. Spitzer. One of the observations 

the railroads make, and it goes to the Chairman’s opening statement when he set up and talked about that big map of all the land 

that was given to the railroad and everything else, is that they 

have some kind of national responsibility. I agree with that too. 

But they have a common carrier responsibility and they come to 

me on a pretty regular basis and say you know what, if we do not 

have to carry your chlorine, we are not going to have the exorbitant 

insurance, we are not going to do this. And so I do not think that 

your company or any other chemical company in this country would 

say you would trade a beefed up STB and lower rates if they were 

relieved of their common carrier obligation. Right? That is part of 

this mix that we are in, which is why people need to be treated 

fairly. 

And the last question, because the vote is pending. When the 

World Bank took a look at this in 1998, and it has actually be updated, their observation at the World Bank, from a guy named Lou 

Thompson, is ‘‘Because of the market-based approach involving 

minimal government intervention, today’s U.S. freight railroads 

add up to a network that comparing the total cost to shippers and 

taxpayers give the world’s most cost-effective freight rail system. 

Unsubsidized U.S. frail rates are not only the lowest of any market 

economy, they have been falling every year since 1980 even though 

U.S. labor costs are high.’’ And I would refer you to Figure 2 in Ms. 

Hecker’s presentation from the GAO earlier today. Figure 2 shows 

that really the only sector that has seen an increase in rates since 

1985 is the guy at the end, the guy in the ag business. Everybody 

else has been seeing rates go down. 

So I think that maybe I am going to leave this hearing with the 

view that rates are going down except for the ag guy who is having 

a problem with some of his stuff. But maybe the coming together 

thing here is having an organization like the STB that when you 

leave there you feel you have been treated fairly. Mr. Spitzer, do 

you want to say something about that? 

Mr. SPITZER. If I can, Mr. Congressman. I would not want you 

to leave with let us say a misimpression. We have not had our 

rates going down over the past 20 years. Our rates have been going 

up and that does not even account for all of the other so-called accessorial charges, rail cars that add on to it. 

Mr. LATOURETTE. I do not want to beat up on you, but my view 

is fairness. My steelworkers come to me and say that DuPont has 

cornered the market on something that is called neoprene, which 

I do not even know what neoprene is, but they need it to make rubber and that your company stands in the way of bringing in neoprene from Canada, Japan, and other places. 

96

So again, I leave this hearing, Mr. Chairman, with the belief that 

re-regulation of the railroads is wrong. However, if we can develop 

a system at the Surface Transportation Board or someplace else so 

that these folks feel that their grievances are at least being fairly 

dealt with, then that is something I can get behind. I thank you 

and yield back the balance of my time. 

Chairman OBERSTAR. Thank the gentleman. We do have two 

minutes remaining. I would say that if the purpose of this legislation were to impose rates, that would be re-regulation. But as Mr. 

Mulvey said, the Staggers Act reduced, and greatly reduced, economic regulation. What we are working on here is a process by 

which we can determine fairness in rate setting. 

Mr. Baker? 

Mr. BAKER. I shall be brief and just make a statement, Mr. 

Chairman. There will be adequate time for our witnesses to respond in writing if they so choose. 

I just wish to observe that the bill that we have under consideration does address bottleneck reciprocal switching and the paper 

barriers, which have been mentioned by the various witnesses as 

important elements. If we are to assume that we may move forward with at least those essential elements, there is apparently 

one open door which the STB has provided us with the comment 

period on the capital asset pricing model. That being integral to 

rate decisions and a lot of other assessments the STB must make. 

They have held out earlier today that if you do not like the CAP 

M approach, what are the alternatives. There are some alternatives, arbitrage trading practice, for example, and there may be 

others. And Mr. Spitzer or any of the representatives at the table 

who have access to financial guidance could advise the Committee 

or, more importantly, the STB. Now their comment period closed 

September 13 but it does not foreclose or forestall what this Committee might do in moving forward. 

If there is a better way to bring about responsible pricing which 

blends the ability to make a profit with a regulated utility in this 

case, that is what we are looking for. Because from what I understand, the pricing models used to date was discounted cash flow, 

and for years past while the rest of the world moved on. They have 

said give us a better way to do this and we will consider it. Well, 

I do not want to let that opportunity pass by. We have never had 

this opportunity since Staggers passed. We may not get it for another 25 years. So among all the people who are the rail concerned 

stakeholders, this is a window for this Committee to act and for us 

to deliver to the STB a product that might make a great deal more 

market sense. With that, Mr. Chairman, I yield back. 

Chairman OBERSTAR. Thank you very much, Mr. Baker. Well 

said and thoughtfully said. 

We will excuse this panel and call the final panel for the day, 

panel III. We have three votes which could take as much as a half 

an hour. So we will resume sitting as soon as votes are concluded. 

[Recess.] 

[After 6:00 P.M.] 

Chairman OBERSTAR. The Committee on Transportation and Infrastructure will come to order and resume its sitting. 

97

We welcome our final panel, Panel III, including Mr. Jim Young, 

chairman, president, and chief executive officer of Union Pacific; 

Charlie Marshall, vice president of development, Farm Rail System; and William Rennicke, director, Oliver Wyman, Inc. The piece 

de resistance, as they say in French. 

Mr. SHUSTER. What does it mean? 

Chairman OBERSTAR. It means the main course. 

[Laughter.] 

Chairman OBERSTAR. That has many implications. Mr. Young, 

welcome. You have waited a long time today, you have been very 

patient, sat through all the previous testimony, and now is your 

turn. 

TESTIMONY OF JIM YOUNG, CHAIRMAN, PRESIDENT, CHIEF 

EXECUTIVE OFFICER, UNION PACIFIC; CHARLIE MARSHALL, 

VICE PRESIDENT OF DEVELOPMENT, FARM RAIL SYSTEM, 

INC.; AND WILLIAM RENNICKE, DIRECTOR, OLIVER WYMAN, 

INC. 

Mr. YOUNG. I feel like I have been working on the railroad today. 

Chairman Oberstar, Ranking Member Shuster, Members of the 

Committee, my name is Jim Young and as of January of this year 

I became chairman of Union Pacific Corporation. I appreciate the 

opportunity to testify today on behalf of the rail industry. I have 

attached the testimony of Wick Moorman, the CEO of NorfolkSouthern, to my written remarks. He had submitted testimony on 

behalf of the entire freight rail industry. 

Mr. Chairman, as you know, our Nation is facing an infrastructure crisis. Every mode is being stretched beyond its limits. You 

and your Committee are at the very heart of this debate and will 

play a critical role in solving this great challenge. My message 

today is a simple one. The results of your deliberations will determine how much investment is made in the private rail system and 

how much traffic gets shifted to the over-burdened highway system. Let me explain why. 

As the only transportation mode that pays for its own infrastructure, the rail industry must generate enough revenue to build new 

capacity while replacing existing infrastructure as it approaches 

the end of its useful life. Union Pacific is investing for growth. Our 

capital budget for this year is $3.2 billion, the largest amount in 

history. We are making substantial investments in growth capital 

because we believe our financial returns will continue to improve 

to justify these high levels of investment. 

If we are going to continue to prudently invest in the capacity 

that our customers want and our Nation needs, we need some assurance that we can earn revenues sufficient to justify making 

those investments. Unfortunately, the current legislative and regulatory climate threatens those returns and makes future investment in additional capacity uncertain. 

Some of our customers will tell you they are paying too much for 

rail service and their prices should be lowered. They are advocating 

proposals that would in essence cap the rates we charge and shift 

railroads to a cost-plus rate regime that ignores the market, impairs service, and penalizes efficiency. There is an interesting dichotomy between what we are hearing in Washington and what I 

98

hear when I meet with the CEOs of many of those shippers, as I 

do regularly. I can tell you that for the vast majority of the CEOs 

their primary concern is whether we are investing to handle their 

future growth. What I tell them is that as our financial returns improve they will see the benefits in the forms of better service and 

more capacity. 

We are concerned about the Surface Transportation Board’s recent proposal on the calculation of the industry’s cost of capital. 

And while we have always supported the STB finding a way to 

streamline rate cases for small shippers, we are concerned about 

the board’s new regime for bringing those rate cases. The board’s 

new rate case regime will undoubtedly lead to lower rates for some 

customers and will adversely affect our revenues. This will be compounded by the board’s new calculation of the cost of capital. The 

new calculation establishes a cost of equity level below similar calculations by economic experts in other agencies for network industries such as electric utilities. This also increases the amount of 

traffic subject to rate regulation and will force a reduction in our 

rates as calculated under the board’s rate review processes. 

We have concerns with the approaches that the board is taking 

in these two cases and will continue to participate in the process. 

At the end of the day, it is clear the regulatory landscape has shifted and that our revenues will be effected. 

As a publicly owned company, we have a fiduciary duty to our 

owners to operate the company in a profitable manner and make 

prudent decisions regarding capital investment. The shareholders 

of Union Pacific will not allow management to invest capital in 

projects that have an unreasonably low rate of return. Since the inception of the rail industry, many of the challenges we have faced 

have changed. But one constant remains the same. We can only 

build and maintain the size rail network that our customers are 

willing to pay for. The decisions you and the STB make about our 

regulatory structure will control how much investment we will be 

allowed to make. If you believe, as we do, that there is a transportation infrastructure crisis, then we should be doing everything we 

can to accelerate investment. 

Our company and this industry have demonstrated that we will 

invest when the market demands it and when the returns justify 

it. Our country’s freight railroads are finally approaching a point 

where the financial returns justify new investment. It would be 

tragic indeed if Government policy changes would step in now to 

stop the growth potential for a significant component of our country’s vital infrastructure. 

That concludes my testimony. Thank you again for giving me the 

opportunity to represent the railroad industry. I would be happy to 

take any questions. 

Chairman OBERSTAR. If there is anything else you wish to add, 

all witnesses are cautioned to keep their remarks to five minutes, 

but you are certainly welcome to extend. 

Mr. YOUNG. Thank you. I am sure I will have the opportunity 

with the questions. Thank you, sir. 

Chairman OBERSTAR. Mr. Marshall. 

Mr. MARSHALL. Thank you, Mr. Chairman. My name is Charlie 

Marshall. I am senior vice president of Farm Rail. Farm Rail is a 

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350-mile railroad in western Oklahoma. But I am here today representing the American Short Line and Regional Railroad Association, which is composed of about 500 small railroads all across the 

country. The short lines together operate about 50,000 miles of 

track, we have 23,000 employees, and we blanket the Nation. 

I would like you to think about two characteristics of small railroads. One is that we do not go from A to B. We got to A and then 

we count on the big railroads to handle the freight the rest of the 

way to B. So we are intimately tied to the fortunes of the large railroads. The second characteristic is that a large part of the freight 

we carry is merchandise, things like lumber, and paper, and waste, 

and food products, and things that can, and do, regularly travel by 

truck. Indeed, we handle some 42 percent of U.S. merchandise carloads for at least some part of the haul, according to a study that 

a fellow from MIT made earlier this year. 

Now as you look at this merchandise business that we handle, 

one of the things that worries us is that it is one of the less profitable pieces of business that the big railroads handle. And when the 

big railroads run into a capacity crunch, as they have several times 

in the past several years, what they do is favor the most profitable 

business, like any rational operator would do, and they squeeze out 

the lesser profitable business. Well, we are the less profitable business. We are the merchandise. And if that happens, when that happens, the traffic that we handle will not move by us, it will move 

by truck. 

And that is our point here today. We urge this panel to think 

very carefully before adopting measures that would take revenue 

that could supply capacity away from the large railroads and thereby as an unintended consequence divert the small railroad traffic 

onto our crowded highways. Thank you very much. 

Chairman OBERSTAR. Thank you, Mr. Marshall. Mr. Rennicke. 

Mr. RENNICKE. Thank you, Chairman Oberstar and Ranking 

Member Shuster. I am William Rennicke, the director at Oliver 

Wyman. Since I started my transportation career over 40 years ago 

as a brakeman on the bankrupt New Haven Railroad, I have been 

an active participant in both carrier operations and management 

as well as an advisor to the transportation industry, government, 

financial institutions, and users of transportation worldwide. 

In the late 1970s I was fortunate to be an active participant in 

the public and legislative process that led to the Staggers Act. I believe that Congress, shippers, the carriers, labor, and all other industry participants should be quite proud of the results of the Staggers Act and the subsequent restructuring of the U.S. rail industry. 

From the late 1960s to the mid-1970s, over half of the U.S. rail system was in bankruptcy or in financial distress. The Staggers Act 

turned the rail industry into a self-sustaining freight network and 

the U.S. regulatory and carrier model is now seen as a standard 

and benchmark for the freight systems worldwide. 

In the last 20 years, Oliver Wyman and our North American consulting competitors have actually made an industry out of exporting this success story to most foreign countries. In every country 

where we have worked, the objectives of restructuring have been 

to create a self-sustaining railway network that supports the domestic economy, facilitates international trade, and is funded as 

100

much as possible by the private sector. However, despite decades 

of efforts in other parts of the world, with the exception of the 

United States, Canada, and to some extent Mexico, no rail system 

anywhere in the world survives without direct or indirect support 

from the government and taxpayer. The billions spent by the U.S. 

Government to correct Conrail’s situation was the last significant 

investment in the U.S. railroads. 

I believe proposed provisions of H.R. 2125 raise the issue of 

whether the United States wants a freight rail system to continue 

to be funded and developed by the private sector or will there be 

a need to shift some part of the funding responsibility to tax-based 

subsidies. The principles and policies of differential pricing are generally recognized as the most effective path to railroad pricing. 

There are, however, some unavoidable realities that are embedded 

in the characteristics of any large transportation network that is 

both complex and where market-based pricing is used to maximize 

contribution and avoid the need for taxpayer support. 

First, on pricing. For any mode or sector where pricing policy 

permits differential pricing there will always be some users who 

pay more and some users who pay less. Human and economic nature being what it is, no one in the United States or any other 

economy likes to be in the differential pricing bucket that is at the 

highest or higher than others. No one celebrates paying higher 

prices. No traffic manager or shipping executive receives a bonus 

or is compensated for being the highest revenue to variable cost 

ratio. 

It is to be expected that there will be a continuous and natural 

tendency of those parties paying the higher ratios to try and modify 

the pricing structure to restrict the workings of differential pricing. 

It has been my experience over the last 25 years however that the 

differential pricing does not work when regulation cuts off one end 

of the range and tries to move as much as possible artificially to 

the lower levels. 

Service. Overall service in the U.S. freight rail system is the 

envy of the world and many U.S. network planning and business 

practices have become global benchmarks. For example, in the 

United States there are over 2 million origin-destination combinations, and in 2006, 1.31 million rail cars moved 32.1 million carloads carrying almost 2 trillion tons. Even in a situation where 

some are unhappy about being on the high end of the rate curve 

or have experienced the frustration of even one service failure, it 

is important to recognize that the U.S. freight rail system is still 

the best in the world and I believe has the opportunity to be even 

better. 

Here are several facts. 

As I think it has been pointed out a couple of times here this 

morning, by a wide measure, if you measure just the freight rates, 

the U.S. freight rates are the lowest in the world, and to some extent Canadian freight rates. No taxpayer contribution is required 

for either of the freight service infrastructure. 

The graphic I have up on the board shows the variable costs or 

the out of pocket costs the governments must pay in the countries 

that are listed on that chart for infrastructure. And as you can see, 

in some case, on the lower end of that chart, the users are paying 

101

only 10 to 15 to 20 percent of the cost of the infrastructure. There 

is no mention of capital on that because 100 percent of the capital 

cost in those countries is funded by the government. So as you 

looked at the prior chart I had where the freight rates are the lowest, not only are the freight rates the lowest in the United States, 

but when you compare them against foreign countries, that measures the freight rates that the customer is paying but then also the 

taxpayer, as I presented in this chart, is paying primarily for the 

infrastructure and some other kinds of subsidies. 

The U.S. system is the most productive in the world. The U.S. 

railroads reinvest more capital in infrastructure and equipment 

than almost any other sector in the economy. And I think the 

graphic on the left shows, whether you think it is 17 percent or 18 

percent, that is a phenomenal amount of the individual dollar revenue that comes into a railroad to be put back into the property. 

The chart on the right is even more interesting. It shows the return on equity or the returns the different industries in the United 

States earn. And while the railroads are putting the largest percentage of their revenue into investment, they basically have the 

lowest return of the large industries. 

The other important point to take from this chart, and this gets 

into the realm of maybe unintended consequences, is that every 

one of the shipper groups, with the possible exception of agriculture, who spoke to you today are in an industry that has a far 

larger or far greater return on equity than the railroads. In the financial markets, when the railroads go to attract funds, they are 

not just competing against other railroads, they compete against all 

industries. So every effort that is made, for example, to move 

freight rates is basically going to take any of those bars in chemical 

or petroleum or utilities or automotive and push it farther to the 

right and it will take that small bar on the left and push it to the 

left. So, in essence, the legislation also may have the possibility of 

being a redistribution of where returns are. Thank you. 

Chairman OBERSTAR. All right. Thank you for those very interesting and instructive charts and for your testimony. 

Mr. Marshall, you set the record for testimony today for brevity 

and to the point, and made your point most effectively. 

Mr. Young, on behalf of the industry, do you agree with or disagree with Dr. Mulvey’s observation that the Staggers Act greatly 

reduced economic regulation of the industry? 

Mr. YOUNG. I agree it reduced economic regulation of our industry. If you look at it in total, I also agree it was a tremendous success. It saved this industry. There is no question in terms of where 

we were heading in the 1980s and where we are today. 

Chairman OBERSTAR. I certainly concur. And I say that, in furtherance of my opening remarks, as a Member of the House at the 

time, rubbing worry beads about was this the right vote to make. 

It was a good vote to make. It was an era of deregulation that the 

Congress engaged in at that time. 

The railroad sector has such an evocative force with the American public. Hardly a county in my district, and there are hundreds, maybe thousands of towns across the Nation, hardly a town 

that does not have a railroad and thousands that do have a memory of the railroad era, either a caboose, or a locomotive, or a 

102

freight car, or in the iron ore mining country iron ore carrying cars. 

And time and again when the economy flounders, people will say 

well isn’t it time that we make a big investment in railroads and 

have the Government put some money in and build more rail track 

and create thousands of jobs. And I explain to them that we do not 

do it that way. But I say that because there is such a powerful appeal. There was a very effective ad that the Association of American Railroads ran in the 1970s and into the 1980s of a former astronaut whose concluding statement was, ‘‘America’s railroads, who 

needs them. We all do.’’ And we do. 

But in the deregulation language, we reduced but did not eliminate Government oversight of rail rates and service. In 1930, the 

freight rail network counted 249,000-plus miles. By 1957 that diminished to 220,000. By 1970, it was 202,000. By the Staggers Act, 

it was 176,000 miles. Today it is just slightly less than the mileage 

of the National Highway System, which is 156,000 miles, and 

140,000 miles of rail network including short line and regional railroads. Clearly, in this era of resurgence, it is not enough. We need 

more miles of track. We need more double and triple tracking, as 

many of your association members and Union Pacific have been 

doing. But in this process there are concerns, as you heard voiced 

all throughout the day, of service and of rate increases to captive 

shippers, and a very cumbersome, complex process by which the 

Surface Transportation Board, remnant of the ICC, remnant of the 

regulatory era, with very limited, focused authority can deal with. 

And so I ask the question of you that I asked of the STB panel. 

Can you envision a rate that is so high a percentage of variable 

cost that the board should use its power to declare the rate unreasonable? 

Mr. YOUNG. I cannot envision a rate that high. Although one of 

the things that we need to think about is what rate should I charge 

for chlorine moving on the railroad. And I will give you an example. In terms of the small shipper process that they have in play 

today, they are going to treat a load of lumber the same as they 

will treat a load of chlorine. And we know the risk profile on chlorine. At Union Pacific we handle 36,000 carloads of toxic inhalants 

a year. That is chlorine and anhydrous ammonia. And again the 

question there is I am not certain you could set any rate that 

would justify hauling that business. 

Chairman OBERSTAR. When setting rates, and you make a very 

good comparison of a toxic substance and one that, logs, for example, that would not be toxic. It would be damaging if it fell on people but not toxic. And rate setting there is a challenge for your industry. And the purpose of this hearing is not to inquire how you 

do that. But when you do, you do not have to have approval of the 

Surface Transportation Board, do you, to set a rate. 

Mr. YOUNG. We have to work within the regulations that we operate under. 

Chairman OBERSTAR. But the setting of a rate by a railroad does 

not require approval by the Surface Transportation Board. 

Mr. YOUNG. That is correct. Yes. 

Chairman OBERSTAR. That rate comes into question only if a 

shipper or consumer contests it; is that correct? 

Mr. YOUNG. That is correct. 

103

Chairman OBERSTAR. So if there is a process in place for challenge of rates, then should not that process be equitable both for 

the railroad and for the challenger? 

Mr. YOUNG. I think the changes that are proposed by the STB 

will help address some of the concerns you have heard from small 

shippers. 

Chairman OBERSTAR. But we have discussed today, and you have 

heard the discussion, of the filing fee just to get in the door to file 

a complaint. Do you find the filing fee system that is currently in 

place equitable? Burdensome? 

Mr. YOUNG. I think the changes that the STB made, including 

when they looked at their filing fees here—again, the discussion 

was one on the costs at the STB. I do not think they are unreasonable. We talk about small shippers. I find that DuPont has three 

rate cases at the Board. I quite honestly do not see them as small 

shippers and they certainly have the capability to cover the costs 

of that fee. 

Chairman OBERSTAR. And the timeframe for pursuing a case, 

many of these go three years, some at least four years. Do you 

think that is a reasonable period of time in which to resolve a case? 

Mr. YOUNG. No, I do not. I think whatever you can do to accelerate the resolution is fine. It would be a positive. 

Chairman OBERSTAR. Good for the railroad, good for the shipper, 

good for the consumer. And in your judgement or in your review 

of the world and economic sector in which you operate, should 

there at all be a rate reasonableness appeal process? 

Mr. YOUNG. Well, the question becomes one on what are the options for a customer. When we look at Union Pacific, I take our 

pricing very seriously. We try to understand what does it mean to 

the customer, what does it mean in terms of their competitive position, what are the alternatives. It does us no good in our industry 

to make a customer non-competitive. I need to have growth long 

term. The question becomes what is reasonable overall in terms of 

what will the market bear. And many of my customers, I heard 

today off in discussions that there is no competition. I have lost 

hundreds of millions of dollars in revenue in the last year alone to 

other railroads, to the highway truckers, to business moving 

through Mexico, business coming over Canada, container business 

moving all water around the Canal to the East Coast and to the 

rivers. There is a substantial amount of competition when you look 

at the industry today. 

Chairman OBERSTAR. My question goes to the fundamental issue 

of whether there should be in the view of the railroads, your brothers and sisters in the rail business, or should there be a process 

as exists in aviation where airlines just charge a fee and enter a 

market without any review by the Department of Transportation? 

Mr. YOUNG. I am not quite certain what your question is. 

Chairman OBERSTAR. I am asking whether you disagree with the 

fundamentals of the existing system or whether you are prepared 

to continue to live within it. 

Mr. YOUNG. Well, we will live within it. The question within the 

system at the end of day here is what type of investment, how 

much investment do we want in the railroad. If you look at the system as we are defined today, and it is not clear to me if you are 

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talking about what you are proposing in the new bill, the fundamental question will be what return will be set and how much investment we want in the business. 

Chairman OBERSTAR. Where in the introduced legislation does 

the proposed bill set rates for the railroad? 

Mr. YOUNG. Well, if you look at I believe it is——

Chairman OBERSTAR. Where does it set rates? 

Mr. YOUNG. Page 15, Section 302, it talks about improvement of 

rate reasonableness standard. 

Chairman OBERSTAR. It does not set rates. It deals with the process. 

Mr. YOUNG. What it has is a formula that is a cost-based formula 

that considers variable and fixed cost and an adequate return. 

Maybe the term rates is not the appropriate term. It is fixing the 

investment, the margin, the profitability of the business. But either 

way it may not necessarily reflect the market. 

Chairman OBERSTAR. It does not fix. It deals with the process. 

That is the difference that we have over the way your association 

reads the legislation and the way the legislation reads. In your report to your workforce, you say a Federal bureaucracy would determine who could use which tracks regardless of who owns them, and 

it would also set the rates that the owner of the track could charge. 

We are dealing with a process, not setting rates in this legislation. 

Mr. YOUNG. Mr. Chairman, the way I look at what is potentially 

out there is expanded, let us not call it re-regulation, expanded perspective or process on the rates that can be charged in a particular 

area. It will be a cost-plus formula. We have within the bill a proposal that the Government will determine areas that lack competition. That brings into account reciprocal switching, trackage rights, 

which the Government again will determine how are those rates 

set when you look at it. Let us forget we are talking about setting 

rates. What we are talking here about is setting the returns on the 

business. 

Chairman OBERSTAR. The bill does not deal with trackage rights. 

Mr. YOUNG. I think in the area where you talk about the areas 

of inadequate competition it talks about terminal trackage rights 

or some type of access in terms of the network. 

Chairman OBERSTAR. But does not set them. 

Mr. YOUNG. Well, somebody will determine the——

Chairman OBERSTAR. But there is a process in which railroads 

will have a voice, in which shippers will have a voice, and consumers will have a voice. 

Mr. YOUNG. Mr. Chairman, I think the question becomes one of 

are we confident of the process—again, ultimately the challenge 

you and your Committee have is to decide how much investment 

do we want in the rail network. And the question becomes one of 

how will we peg whatever that return is, how will we peg the margins in the business, how do you incent productivity and investment will flow. There is no question in my mind today. My first 

year as president of Union Pacific I went into my board three times 

and asked for an increase in capital. My board supported me 100 

percent. They supported me under the perspective that we were 

starting to see the financial returns in this business move up. We 

had a debate about should we do it now or should we wait. We said 

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we need to do it now under the context that we can continue to improve these returns. My concern again is simply we are introducing 

a lot of uncertainty. I am making decisions on the Sunset corridor, 

you know that corridor, it runs from L.A. to El Paso, an old Southern Pacific railroad, it should have been double tracked years ago. 

We are making a $1.5 billion bet that the future financial returns 

can support that investment. 

Chairman OBERSTAR. One factual question. In your statement of 

capital investment for the railroad and generally for your association, how much of that figure is maintenance and how much is new 

track and new locomotive and new rail car? What percentage? 

Mr. YOUNG. The 18 percent, 17-18 percent, UP is actually investing 20 percent this year but we will use those numbers, it is all 

either brand new expansion or replacement of assets. If you want 

to put maintenance in, it is 40 percent of the revenue dollar. 

Chairman OBERSTAR. Thank you. Mr. Shuster. 

Mr. SHUSTER. Thank you, Mr. Chairman. First I wanted to make 

a comment reflecting back on your decision in 1980. As we have 

moved through this process, I have got my worry beads out and I 

hope that we are going to do the right thing and do not do something that has unintended consequences. Because as I look back 

and study what has happened over the 27 years, I think it has 

been a great success. 

So I am very concerned about how we move forward and making 

sure that we do not overstep and cause great harm to an industry 

that, as Mr. Young said, is just now beginning to have the returns 

to make these bets. And they are bets, because you have uncertainty everyday in the economy; is the economy going to continue 

to grow, is it going to go into recession, what is going to happen. 

But now you also have to deal with a regulatory process that is uncertain at best and certainly can use some improvement. 

But I turn to Mr. Rennicke. If you would, I see your company 

Oliver Wyman deals with shippers, it deals with the transportation 

companies. You yourself, and we have had a discussion, you have 

dealt with shippers and rail companies. Can you talk about some 

of the shippers that you have dealt with. Is half of your business 

shippers? Is 10 percent of your business shippers? I am trying to 

establish your credentials here before the Committee. 

Mr. RENNICKE. If you look at our overall firm, transportation is 

about 10 percent and the other 90 percent basically works for auto 

companies, chemical companies, utilities, et cetera. So, in general, 

the company is oriented that way. I spend most of my time now 

working primarily for financial institutions that are looking to 

learn more about how the railroad industry works. I would say that 

is about 70 percent of my time. Probably 20 percent of the time is 

working for some shippers who are interested in is there a different 

way that we can approach, other than through litigation or regulation, our position in the industry. Most of that has been in coal and 

utilities and food products, consumer products. The other 10 percent is time where I actually work for carriers, both trucking companies and railroads. 

Mr. SHUSTER. You deal across the gamut. Are you familiar with 

Mr. Spitzer’s testimony? On page 9 there is a table dealing with 

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captive shippers, page 9 I believe it is, and how they define captive. 

Are you familiar with that? 

Mr. RENNICKE. I have looked at that a number of times because 

it has actually been on a number of websites. As best I can determine from that, how they define captive I believe is the average of 

rates above 180, and non-captive are the rates below 180. So what 

this is to some extent is a little bit of a self-fulfilling prophecy. Are 

farm products captive? That is basically an average rate, median 

or something that is above. We actually talked to the company that 

did this several years ago when they first came out to see did they 

do a survey, did they actually try to go customer to customer and 

find out if they were really captive or not captive. And as best we 

could determine from what they said, it is a pure mathematical exercise using the spread of rates that are in the——

Mr. SHUSTER. Right. In your experience, are there customers 

that only have one railroad serving them that are paying less? 

Mr. RENNICKE. Absolutely. I think the comments today, there is 

a whole series of competition that people do not think of—product, 

source competition, moving into Mexico, Mr. Young mentioned all 

water. They are starting to build 12,000 TEU ships. And part of 

the reason why the liner companies are doing that is maybe to 

avoid land movement of containers. So you may find many shippers 

who basically are paying rates that are far lower, have competitive 

options in that regard that are not rail. 

Mr. SHUSTER. Right. In your view, H.R. 2125, the bill in question 

here, do you believe that it will in the end reduce the rate to returns and the costs that can be recouped, the prices that are going 

to be charged over the railroads? 

Mr. RENNICKE. I think the biggest concern that I have, in all due 

respect with the process that you are going through in legislation, 

is that when you have an undefined process the financial community looks at that as being risk because they cannot get their arms 

around it. 

As I said, in the last couple of years we have worked extensively 

for many of these. You know, 24 months ago an equity investment 

in the railroads may not have been an interesting thing. Now pension funds, not all just hedge funds, that name was mentioned a 

lot today, but these are pension funds, teachers’ pension funds, retirement funds, as well as hedge funds and private equity firms, 

they are asking us to look at the carriers. Their first question when 

this bill came out earlier was what does all this mean. Do we have 

to start dealing now discounting for uncertainty? Because there is 

a whole bunch of undefined things here. There is trackage rights, 

there is haulage, there is the definition of what is really in the noncompetitive area versus what is in the competitive area. All of 

those things create risk and the grand daddy of them all is final 

offer arbitration, which is Monte Carlo, almost baseball arbitration. 

It is almost a roll of the dice to figure out how those kinds of decisions are made. 

So all of that creates risk and I believe will reduce their interest 

or it will increase the cost of capital because they will risk adjust 

the funds that they are lending to the railroads. 

Mr. SHUSTER. All right. I see my time is up. I am going to ask 

one question if Mr. Young if that is okay. 

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Chairman OBERSTAR. Okay. Go ahead. 

Mr. SHUSTER. Okay. Thank you. Mr. Young, I continue to hear 

people saying the railroads are buying back stock. I have some idea 

of that, but I wonder if you might be able to explain this. And you 

need to use the KISS principle here—keep it simple. Why are you 

buying back stock? And I think today somebody was saying that 

railroads are buying back stock and that is somehow a bad thing. 

I do not believe it is. But if you could explain it so I understand 

it better and we can get it on the record. 

Mr. YOUNG. Well, buying back stock is very common. In fact, in 

the S&P 500, last year 300 companies bought back stock. In fact, 

of the 23 members of the American Chemistry Council that are in 

the S&P 500, 21 bought back stock. In fact, I think the total I read 

was almost $17 billion. In fact, one of the customers represented 

up here accelerated their program. It is a very common measure 

to provide improved returns to shareholders. 

Union Pacific this year announced our share purchase program, 

the first time we have had one in many, many years, and it was 

based on this kind of logic here. The first thing we looked at is investment in the business. Where are those returns. And $3.2 billion 

was the test. What do we need to do with customers, how to think 

long term. The next thing we did is start to think about how do 

we accelerate returns for Union Pacific shareholders. And that 

comes from a combination of share repurchase. What it does, it 

takes shares out of the market, increases average earnings per 

share, stock prices go up, shareholders see a return. It is actually 

pretty simple logic that is out here. 

I will tell you, Congressman, no matter how you cut the returns 

in the railroad industry, they are still below the mean in the S&P 

500. Dividend yields, return on assets, the dividend payout ratios 

that they have, return on equity. The ACC today, when you look 

at it, the average return in equity of those companies was around 

20, 22 percent. UP this year was 11 percent. 

Mr. SHUSTER. So in essence, what I understand, when you are 

buying back stock it makes it more attractive for people to invest 

in your company, which gives you more capital to do the things you 

need to do. 

Mr. YOUNG. What it does is it boosts earnings per share. 

Mr. SHUSTER. Final question. The cost of capital, the STB has 

come up with a new way to view that. My understanding is that 

they are taking their lead from Wall Street and Wall Street calculates the cost of capital differently from the railroad industry. 

Can you give me a little bit of background on that and your view. 

Or is that not accurate and you view cost of capital the same as 

folks on Wall Street, the analysts. 

Mr. YOUNG. Well, there is not a Wall Street analyst out there 

that says I am earning my cost of capital. What they look at in the 

industry, there are a lot of different methods, discounted cash flow 

is one, the CAP M model. In theory the CAP M model and the discounted cash flow model should move the same. But there are a lot 

of assumptions that can be made in that CAP M model that can 

really cause a pretty major fluctuation in the results. Any model 

that takes the cost of equity and literally cuts it in half I have a 

concern with in terms of long term. I internally look at the cost of 

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capital for the Union Pacific long term as 10-plus percent. We have 

a long ways to go. 

Mr. SHUSTER. And so again, what Wall Street is doing, they are 

using a different formula. You mentioned they are cutting, I do not 

quite understand, they are cutting it in half? 

Mr. YOUNG. No, no. The new methodology. Again, CAP M and 

discounted cash flow should move together at some point. The variables are the assumptions that go into the equation, like the risk 

premium on equity. My point is when the STB results came out 

and you looked at the cost of equity compared to the discounted 

cash flow and CAP M, you cut the costs almost in half. That is a 

significant change that concerns me. Because ultimately what will 

happen is you are going to set the returns that you want for the 

industry. That will drive investment. The math is very straight in 

terms of as returns go up or go down, capital investment follows. 

Mr. SHUSTER. Okay. Thank you very much. 

Chairman OBERSTAR. Ms. Napolitano. 

Mrs. NAPOLITANO. Thank you, Mr. Chair. That is a little confusing because I do not understand a lot of the terminology in the 

dialogue that was just going on. But I would refer to the recent 

comments that you made to STB where you state the board’s new 

calculation of cost of capital is mistaken both technically and from 

a public policy perspective. Of course the STB announced that it intends to adopt the cost of capital calculation method closer to what 

is used in Wall Street. Why do you feel this is not fair or that the 

board should not do this? 

Mr. YOUNG. Well, again, Congresswoman, the assumptions you 

make in these methodologies, and they can be fairly complicated, 

can have a wide range of results. 

Mrs. NAPOLITANO. Based on? 

Mr. YOUNG. Based on assumptions on what the risk premium is 

for equity, what is an investor willing to accept by investing in railroad equities. My point with all of this is if you look at ultimately 

what the two methodologies show on cost of capital for the industry, there is a huge difference. If you look at what was being used 

before by the STB and the CAP M model today, it is almost 200 

to 300 basis points, that is percentage points difference. That is a 

20, 25 percent difference, and it is lower. Ultimately, if the cost of 

capital is where this industry moves or where regulation moves, it 

will control how much investment is made in the business. 

Mrs. NAPOLITANO. Anybody have a comment on that? 

Mr. MARSHALL. May I add something on that. I have a sort of 

layman’s view of revenue adequacy and cost of capital. That is if 

you see people buying railroads and then see them taking money 

out of railroads, that says that the railroads are not earning 

enough money. If you see Warren Buffet buying Burlington Northern and then Burlington Northern says next year we are going to 

build more track because we are going to earn money on the track, 

that is saying that they are earning their cost of capital and are 

revenue adequate. 

If you have some money and you are trying to decide whether to 

give it to Jim Young to put in his railroad or give it to one of the 

other industries that was up there on the chart that earns more 

on its investment, you might want to do a little further analysis, 

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but presumptively you would go with the big numbers rather than 

with Jim. And when we get our business up so that we are earning 

as much money as other people do, then you would be more likely 

to send money our way. So that is sort of the gut check that I 

would use on whether what is going on at the STB is the right 

thing to do. 

Mr. RENNICKE. Thank you. Just to echo what Mr. Marshall said. 

And I think that chart had a good deal of meaning, which is why 

I put it up there. I think the railroads are lagging the other industries right now. So in a competitive marketplace where, again with 

the dealings I had with those funds, this week they are interested 

in railroads, the last 20 or 24 months they have been interested in 

railroads. But the fact that they came in, they could also leave very 

quickly if they have a sense that basically the risk profile and the 

returns are going to get out of whack. 

They represent billions of dollars of pension money, a lot of it is 

pension money, and they have an obligation they see. They make 

their money on making money for the people who have invested in 

pensions. And if you show them a high risk situation or if there 

is a lot of uncertainty in a particular path, they are going to walk 

away from it and they are going to put it into those other industries that traditionally have had rates of return that are much 

higher. Look at petroleum on there, it was three times the rate of 

return of the railroads. So they would be much safer putting it in 

petroleum or petrochemical companies or chemical companies than 

they would in putting it in the railroads. 

Mrs. NAPOLITANO. I would beg to differ with you on a personal 

basis. 

Mr. Young, the recent GAO report found that railroads were 

transferring many costs traditionally born by the railroads onto the 

customers. Maybe that is one of the reasons why you had banner 

years. But let me tell you, I have heard from some of your customers. Can you discuss some of these costs and why UP has decided to shift them onto the customers. 

Mr. YOUNG. Well, let us take freight car ownership. That is one 

that has been talked about quite a bit today. First of all, there is 

a different rate for a customer that owns their own cars versus the 

railroad. There is a lower rate if you own your own cars. 

Mrs. NAPOLITANO. Roughly, sir, what percentage are we talking 

about? 

Mr. YOUNG. It will compensate them for the cars in terms of 

their capital investment. In fact, in many cases, some of the customers, their credit rating was higher. They could actually borrow 

at a little bit lower rate to finance those cars. But that was not the 

reason why what has happened here. If you look at the capital 

needs in the industry, and the issue is replacing assets, in terms 

of what we are faced with, the first priority where we put capital 

is in the ground—building our own highways, maintaining those 

highways; the second place is locomotives; and the third would be 

freight cars. In fact, if you get that order wrong, your railroad is 

not as efficient, it is slower, and you end up needing more cars. So 

the first place is in the infrastructure. It is a simple prioritization. 

The capital requests that we look at every year in the railroad 

far exceed what we spend. And in a priority order, we said we have 

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got to get it in the highway first, locomotive second, and in many 

cases our customers are willing to work and assume some of that 

investment risk as long as I reduce their rates. A great example 

of that risk right now. I have 20,000 freight cars sitting idle. I 

heard some discussion today about grain sitting on the ground. It 

has nothing to do with the railroads. It has everything to do with 

the markets. But that is the kind of risk that some of our customers were willing to invest in. 

Mrs. NAPOLITANO. And I got into rail cars because my concern 

is that most of them, I do not know if it has changed, are not built 

in the United States. We have lost that manufacturing capability. 

The other question that comes to mind has to do with the demarge. 

Like I said, I had two customers in my area, your customers, that 

had complained. In fact, they were in litigation if I remember correctly. Do you feel that shippers unfairly incur those demarge 

charges on rail cars that are left in the railroad yards due to delays 

or early deliveries or are just left sitting on their private property 

because the railroad cannot pick them up and then the shippers 

end up paying for that demarge. 

Mr. YOUNG. Congresswoman, I would agree with you demarge 

was the number one complaint that I had from customers if you go 

back two, three years ago. We worked hard to simplify it to take 

a lot of the complexities out. But the fact is the railroads were the 

lowest cost of warehousing for many customers for years. When you 

had excess capacity, having a freight car loaded with lumber that 

sat on a track for four days was a pretty low cost for many customers. With capacity now being very tight, the whole logistics 

chain must get more efficient. I will give you an example. If I show 

up on a Friday afternoon with one customer, they have chosen not 

to unload on the weekend, so those cars will sit until Monday. I 

have other customers that invested in turning those assets. 

Demarge is a piece of that that says I am willing at the end of the 

day to be a temporary warehouse but there is a cost for that. And 

it really should be reflected in terms of the logistics chain. 

Mrs. NAPOLITANO. Back in the 1980s when I was on local council, 

I can remember having to call the railroad because they were storing those cars behind people’s homes for many days at a time. That 

was back then and I have not heard that complaint here, so I am 

assuming that has been one of the things that you have addressed 

in dealing with some of the issues that you have faced. 

Mr. YOUNG. That is correct. 

Mrs. NAPOLITANO. The other area is, I am assuming part of your 

cost is new technology for communications in order to be able to 

move your cars more efficiently. 

Mr. YOUNG. That is correct. We invest in—really, a lot of this is 

about safety in terms of wayside detectors. You have the traditional hot box detectors that would read a wheel if you had a problem. We are looking at acoustic detectors today, very advanced in 

terms of reducing accidents. It is a technology investment but, 

quite honestly, it more than pays for itself in terms of improved 

safety. 

Mrs. NAPOLITANO. Is there new technology being utilized to be 

able to determine whether or not you have any problems, say faced 

with some kind of a terrorist attempt? 

111

Mr. YOUNG. Well, the closest we could look at would be maybe 

GPS in terms of some of the tankers. But I will tell you, when you 

operate a 33,000 mile factory out in the open, it is pretty tough in 

terms of ensuring complete security for the product moves. We 

have cameras in key locations, we are doing much more visual inspections, advanced notice in terms of cars moving. But I haul, as 

you know, a significant amount of toxic inhalants in our system 

and we are doing everything we can to keep them as secure as we 

can. 

Mrs. NAPOLITANO. Certainly. I would like to submit other questions for the record, Mr. Chair. And with that, I thank you very 

much and it is good to see you again Mr. Young. 

Mr. YOUNG. Thank you. 

Chairman OBERSTAR. The gentlewoman’s questions will be received and submitted to witnesses for a response to the Committee. 

The Chair recognizes the gentleman from Ohio, Mr. LaTourette. 

Mr. LATOURETTE. I thank the Chairman very much. And I want 

to thank you, Chairman Oberstar, for having this hearing. It has 

been a great opportunity for me to reacquaint myself with a number of the railroad issues. As the Chairman knows, because of my 

work with the Chairman on Amtrak and with the railroad industry 

in the last Congress, I have been promoted to the Coast Guard 

Subcommittee now and so I do not get the chance now to involve 

myself in these issues. But one of the things that I enjoy very much 

about the Chairman is not only is he bilingual, but he has a great 

sense of history, institutional history but also history, and he also 

asks great questions. 

Mr. Young, I want to go back to a question that the Chairman 

asked just to make sure that I am clear in your answer. When 

former Congressman English was here—and I said last year when 

he appeared before the Subcommittee that if I was running an association in Washington I would hire him because he is like a firecracker in representing his members—but he intimated that we 

should make sure we inquired of you on that 17 percent figure, I 

think Ms. Brown used 18 percent, you mentioned 20 percent, 

whether somehow, he did not say you padded it, but somehow that 

it not only included new build-outs, but it also somehow had a 

maintenance figure. And just to be clear, if you put maintenance 

together with your capital investment in infrastructure, what is 

your railroad spending? 

Mr. YOUNG. At UP, $3.2 billion this year for capital. Of that $3.2 

billion, $2.2 billion would be replacing assets that have worn out. 

The other billion would fall into the category of absolute new, going 

from single track to double track, double track to triple track, or 

locomotives. The percent that we had talked about, unfortunately, 

in a lot of cases the term is maintenance capital, but that includes 

taking a 30 year old piece of railroad or a 35 year old tie and replacing it. That is not maintenance. We have to make a decision 

to put those in. Now if you talk about another piece which is ordinary maintenance in terms of ensuring that the are bolts tight, it 

is like changing oil in your car, those numbers add up to about 40 

percent of every revenue dollar that we spend. It covers both replacing existing assets, expanding new assets, and maintenance. 

112

Mr. LATOURETTE. Okay. I thought that is what you said. And I 

want to talk a little bit about, I got into it with the DuPont fellow, 

but this common carrier obligation. I think the Chairman is right, 

that given the history of the railroad industry in this country, there 

is sort of a public responsibility. Which is why I think we still have 

this common carrier obligation on behalf of the rails. Is carrying 

toxic inhalants a money-maker for your railroad? 

Mr. YOUNG. You cannot make enough money. It is such a high 

risk. And you know the safety record in the railroad industry is 

very good. It is what is called six sigma, or greater. But the problem is one accident in the wrong location, and forget about the financial consequence, you talk about the lives that would be lost. 

You cannot charge enough. 

Mr. LATOURETTE. Let me, when we had hearings on this we 

talked about positive train control, which is where a lot of the railroads, I think BNSF calls it something else just because they are 

difficult in that regard. But have you done an evaluation as to 

what it would cost to install positive train control on your railroad? 

Mr. YOUNG. The latest numbers we are looking at, it could be 

close to $800 to $1 billion. 

Mr. LATOURETTE. And one of the purposes, it is not the only purpose, but one of the purposes is to make sure that we do not have 

disasters or accidents like Granitville and Minot, North Dakota, 

dealing with toxic inhalants. When the last panel was here, and I 

have not heard anybody dispute it, Ms. Hecker was here on behalf 

of GAO and she took a look and she has as Figure 2 what has happened to railroad rates in this country since 1985. And except for 

the lentil guy, and I suggest maybe you ought to get together with 

the lentil guy and the ag guys, everybody has gone down. Rates on 

our Nation’s railroads for motor vehicles, miscellaneous mixed shipments, and coal have all decreased. 

And so that I think brings me to the question, the crux of this 

hearing. And we had a hearing in the Coast Guard Subcommittee 

and I am very sensitive to this issue. The merchant mariners in 

this country were making the allegation that because they were 

losing a lot of cases they felt that the administrative law judge system within the Coast Guard was rigged in their favor. And to me 

the crux of this hearing, and it is not the Chairman’s intent, but 

the complaint that some shippers are making is because there are 

only seven Class I railroads in this country, that somehow those 

seven Class I railroads are taking advantage of people that have 

no rail opportunity, no rail option. And we had testimony about 

intermodal water, trucks, things like that. But I am sensitive to 

the guy that is in North Dakota someplace that cannot ship stuff 

by truck reasonably to Ohio. But that somehow your industry is 

taking advantage of those people that have no other choice. And 

really on behalf of the industry, I would invite all three of you, but 

start with Mr. Young first, is that what you are doing? 

Mr. YOUNG. Absolutely not, Congressman. I said earlier I take 

our pricing very seriously in terms of understanding what does it 

mean ultimately to the customer. Unfortunately, if you look at the 

past 20 years, the pricing that we saw, 95 percent of it went back 

to the customer in terms of productivity. As you saw the one chart 

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earlier, you have a 100 percent increase in volume with little capital investment is not sustainable going forward. 

The discussion about taking advantage of a customer, we have 

had some 100 percent price increases. I know every one of them 

that we have at that kind of level. If you look at it, I will tell you 

the example usually of what you see. You have got a long term contract, no price escalator, fuel was 70 cents a gallon. In many cases 

we try to work with our customers to help them understand that 

that is not what is out there today. Yesterday we paid $2.40 a gallon for fuel. 

So what you have is a contract that really had no pricing over 

a long time and now it comes up, it is due. At a minimum, fuel recovery in many cases can be a 40, 50, 60 percent price increase. 

And no customer, I have not had a customer thank me for a price 

increase. And for many of my customers, what they want is to 

know where I am putting investment and what we are doing for 

the service. Again, I cannot sit here and explain to you why a 100 

percent price increase makes sense. But if you step back and look 

at the reality in terms of where we have been and where we are 

going, it is very, very real. 

Mr. LATOURETTE. And before I turn to the other gentlemen on 

that question, with the Chairman’s indulgence because I am a couple minutes over. I recently saw an ad in one of the political newspapers here on Capitol Hill, Mr. Young, and the quote was that the 

railroads walked off with over $6 billion in customer fuels charge 

money. Can you tell me what your perspective is from your industry since you are representing your industry on that question. 

Mr. YOUNG. Well, thank you for asking that question, Congressman. When I read that ad, I have to tell you, I really had to contain myself. I take it personally. That was a personal attack on 

53,000 hard working men and women of Union Pacific. If I practiced that kind of creative accounting in my sector, somebody would 

go to jail. I am probably the only one in this room that was involved with fuel surcharges back to day one. Back in 2003 when 

fuels started to move away from $25 a barrel, we sat down with 

our customers and we said we have to have some mechanism to recover fuel. Our customers told us keep it simple. They actually 

liked the truck sector which had had fuel surcharges for years 

which was a percent of revenue. And again, no one wanted to pay 

higher rates. But what they wanted was assurance that when fuel 

goes back down they get a rate reduction. That is what a fuels surcharge does. 

No one at that time predicted $80 a barrel fuel when we put fuel 

surcharges in place. No question about it. What the STB did, and 

there is no perfect methodology, the STB came back in and said instead of using a percent of freight, a more accurate model would 

be a mileage basis. I will tell you that when we made that change 

I did a customer survey; half of them liked it, half of them did not. 

The key though is when fuel goes back down the customers will see 

the benefit of that immediately in terms of lower costs. 

Mr. LATOURETTE. Thank you. Mr. Chairman, with your indulgence, I did invite the other witnesses to talk about whether or not 

it is a good business model for the railroad industry to take advantage of people who have no choice. 

114

Chairman OBERSTAR. Please continue. 

Mr. LATOURETTE. Thank you. If you have an observation, great. 

If you do not have an observation, then I can be done. Mr. Marshall, do you have an observation? 

Mr. MARSHALL. That is a difficult question until you step back 

and look at the alternatives. I think, if I understand your question, 

what you are asking and what I heard here today from the shippers is I have a one railroad power plant and I pay a lot, and he 

has got a two railroad power plant and he pays less. In other 

words, competition lowers rates. And that leads one to say well, 

what we need to do is artificially create a two railroad situation at 

all points. Unfortunately, we have tried that. 

In 1975 there were seven railroads in the Northeast. Virtually 

every town of any consequence offered shippers a choice of one or 

more railroads, Altoona being a notable exception. 

Mr. LATOURETTE. That is because the Shusters represent it. 

[Laughter.] 

Mr. MARSHALL. In fact, there were five ways to get from New 

York to Chicago. All seven railroads went bankrupt. What that lesson is is that the level of competitive rates, the two railroad rate 

level does not provide enough money to keep the railroads going. 

It may pay the engineer and buy the gas for the train but it is not 

going to keep the track fixed. And so sooner or later the railroads 

will collapse, as they did. And the result was Conrail which provided one railroad service to everyone. 

In the Staggers Act, the compromise that we made, we being everyone here, being everyone who lived in the Northeast, was that 

some places could have the benefit of competitive pricing, and 

North America is the only place in the world where anybody gets 

the benefit of competitive pricing, and others would have regulated 

pricing. And the regulation, unfortunately, is complicated. It has 

gotten more complicated than any of us had imagined. But this system of differential pricing, taking advantage of competition where 

it exists but making sure that others do not pay more than the 

total cost of the railroad that serves them, is something that I 

think has served everyone very well since 1980. But it is not an 

easy issue to explain, unfortunately. 

Mr. LATOURETTE. And with the Chairman’s indulgence, Mr. 

Rennicke, do you have something to add? 

Mr. RENNICKE. I think just one comment to add, and this goes 

back to some earlier comments that were made by Mr. English. I 

think there is a sense that it is only people that are over 180 that 

are carrying the load. Differential pricing, if you go down to 100, 

the very first shipper that is just to bed of 100, let us say they pay 

1.00.01. Every one of those dollar amounts above 100, as the whole 

spectrum of rates work up, they are all making a contribution into 

the fixed cost of the railroad. That is what differential pricing is 

about. You want to capture as many of those contributions as possible. Two-thirds of the rates are less than 180. All of those customers are in various parts of the competitive spectrum but almost 

all of them are making a contribution to the process. Certainly, 

some at 181, 200, 250, 300, 350 are making a bigger contribution 

but they are not carrying the load for the whole system. You are 

maximizing the contribution across the whole spectrum of rates. So 

115

I do not think that it is good policy to just tag one group. But I 

do not think that is what is happening. 

Mr. LATOURETTE. I thank you for your answers. And I thank 

you, Chairman Oberstar, for your courtesy. 

Chairman OBERSTAR. Thank the gentleman for sharing with us 

his wisdom, his years of experience as Chair of the Rail Subcommittee and his great work on behalf of Amtrak. We all owe you 

a debt of gratitude. 

I want to come back to the question that I propounded to Mr. 

Young at the outset. Do you, does your association accept the status quo; that is, the existence of the Surface Transportation Board 

and the authorities that it has? 

Mr. YOUNG. Yes. 

Chairman OBERSTAR. Then within that context, you can accept 

some adjustments or adaptations, or at least we can discuss some. 

Mr. YOUNG. As I said earlier, I think some of the proposals that 

they made will address some of the issues that have been raised. 

Chairman OBERSTAR. Mr. Marshall, when Class I over time has 

spun off certain segments of its operations in a way that they can 

continue to operate they negotiate a deal with the surviving entity. 

That typically is a contractual agreement that prevents short line 

or regional rail from providing customers access to competitive 

service on one or more of the other competing systems. Correct? 

Mr. MARSHALL. That is often the case, Mr. Chairman. It is not 

universally the case. 

Chairman OBERSTAR. Not universally, but it is generally the 

case. Those agreements typically require a short line to deliver all 

or most of its traffic to the major carrier that originally owned that 

short line. What is inappropriate or wrong or objectionable to a 

finding by the STSB that this would be inconsistent with the public 

interest, that it would interfere with competition? 

Mr. MARSHALL. I think there would be two objections. The first 

one may be a parochial interest that I have in seeing a growing 

short line business because I think short lines serve their customers well, often better than the Class Is, and the customers benefit from that. The instant that the STB declares paper barriers, 

as they are often called, to be against public policy, there will be 

no more short lines formed. I am convinced. 

Chairman OBERSTAR. Why? 

Mr. MARSHALL. Because it will, one the one hand, cause big railroads to fear that they will lose traffic at lower rates to their competitors. Now I will come back to that in a moment. 

Chairman OBERSTAR. They do not like competition, do they. 

Mr. MARSHALL. Well, they do not like to reduce a flow of revenue 

at a time when they need. On the other hand, they might be willing to sell the short lines on terms that would compensate them 

for the loss of revenue. But that would increase the cost to the 

buyer to the point that I think there would be very few lines purchased. There have been some in the past. They have tended to be 

ones near the point of abandonment anyway. 

I think the other reason that I would be concerned, apart from 

the no new short lines fear, is that it would by giving multiple railroads access to points that previously had access to only one railroad, it would pull down the rates. I know that is what everyone 

116

who ships wants. When I go to a restaurant I want to pay less for 

the meal than I am billed. Everybody wants to pay less. But taking 

revenue flow away from Class I railroads is not good for short 

lines. 

Chairman OBERSTAR. There is another side to that coin. The 

other side of that coin is the shipper or the consumer. Now let us 

pose another situation, not necessarily hypothetical, although it 

could be hypothetical, but it is a real situation in a part of my district where the Class I discontinued service and a successor short 

line railroad is there. They are capable of providing a service. But 

they are not going to interconnect with another rail. They just 

want to use a switch. They want to cross a line. They want to use 

maybe a mile of track. And the Class I said no. If we do not carry 

it, you do not carry it either. 

Mr. MARSHALL. That sounds unfair to me. But let me tell you 

what——

Chairman OBERSTAR. It is unfair. It is unfair to the farmers, it 

is unfair to the grain elevators, it is unfair to the consumers. I 

mean from a Class I standpoint, they want to protect their turf, 

protect their rates. And I understand that. That is the competitive 

marketplace. 

Mr. MARSHALL. The short lines and the large railroads have gotten together and formed a process to negotiate just those circumstances so that service to shippers is not ended. If big railroad 

number one does not want it, big railroad number two can get a 

crack at it. And that process seems to be working. I am told there 

are over 100 cases where——

Chairman OBERSTAR. That is interesting to hear. And I do not 

take the part of those who say, well, as a short line we want to 

cross Class I track in order to provide service to a competing Class 

I railroad. The Class I owning that track has a legitimate argument against doing that. But not where the short line wants to 

serve the customer who has been literally cut off because the line 

was discontinued by the Class I and turned over to a short line. 

There is the public interest to be served here. And there has to be 

a process by which that public interest can be served. 

Mr. YOUNG. Mr. Chairman, can I provide some perspective? 

Chairman OBERSTAR. Yes, of course. 

Mr. YOUNG. Remember the advent of short lines was really a 

function that said they were not economically viable under the 

Class I railroad labor requirements, flexibility. It was either abandon or do a short line. The short lines in many cases could operate 

more efficiently. They did not have the same kind of labor conditions that were employed. The requirement in terms of the business is a function of efficiency. 

I will just give you an example. Railroads are efficient as they 

handle more volume. You drive unit costs down. You are obviously 

more efficient running a 100 car train than a 50 car train. In many 

cases what you looked at or you look at today is if you want to say 

all right, let us split the business up, let another railroad take half 

of it, what you are going to do is end up with higher costs overall. 

Because what will happen, as we make the interchange we will 

have less traffic. That drives unit costs up. It is less efficient long 

term. 

117

So I think we need to be real careful in terms of ultimately the 

discussion about allowing the short line to go ahead and send its 

business to another connecting railroad because it will disrupt efficiency in that process. Also, in many cases the Class Is have provided the short lines with no rental in terms of locomotive, no car 

hire in terms of equipment. We have kept that in our account. So 

again, to me it is going back to the fundamental driver between 

why short lines really evolved. 

Chairman OBERSTAR. I said a moment ago, in fact postulated 

that I think you have a legitimate argument in the case where a 

short line railroad would take business, use Union Pacific line in 

order to deliver that commodity to a competitor Class I railroad. 

You have got a legitimate argument about access in that case. But 

where the short line is going to serve that customer but needs to 

use a mile of track but can do so only at an outrageous sum or is 

prohibited from doing it at all, I think the public interest has to 

be served there. 

Well, there are other matters but I think we have covered these 

largely. 

Mr. SHUSTER. One question, Mr. Chairman. 

Chairman OBERSTAR. Of course. 

Mr. SHUSTER. When we are talking about competition, there is 

barges, trucks, other railroads. One of the questions I have is how 

much does this come into play as companies decide to build new 

facilities. A coal mine, coal is where the coal is so they have to 

mine it there and they have to deal with what they have to deal 

with transportation-wise. How many companies do you see today 

that are looking to locate where they can be served by two railroads or two different forms of transportation. I would guess if I 

were a railroad, I would be trying to convince customers to locate 

on the main line, I want to service you. Because that has got to 

be in the competitive mix where you are looking to keep people on 

your line and they are looking to find two railroads or other transportation modes. 

Mr. YOUNG. Congressman, in all six of my business groups—agricultural, the industrial products, chemicals—we have seen customers pick UP only to build new facilities. Twenty-three ethanol 

plants were built last year on UP only lines. Chemical industry has 

expanded and built new facilities where they had a choice to go on 

a dual serve line. They picked UP. Rock customers in Texas have 

several announcements, new mines that are single served UP. 

What they see is the value. They do see some protection in terms 

of the maximum rates. But what they see is value in the proposition. So I have seen that really across all the business groups. 

Mr. SHUSTER. That makes a pretty large statement if they are 

picking you only. 

Mr. Marshall, what have you seen in your experience? 

Mr. MARSHALL. Well, one of the things we sell is on short lines 

that do connect with more than one Class I, we try to get people 

to locate there. But I think what Mr. Young is saying is true, that 

there are plants that sometimes choose a single railroad. That is 

not probably in a majority of the cases, but it does happen. 

Mr. SHUSTER. Mr. Rennicke? 

118

Mr. RENNICKE. I think a lot of it depends on several factors. It 

depends on what the company’s perspective is in their dealing with 

the railroads. We did a big project for a very large utility to help 

them figure out where to site plants. I was absolutely amazed. 

They had a number of places where they could site at a junction 

where they could get two railroads. That particular utility said we 

want the service here, that is a main line, carrier X is investing 

in that main line, and I am more worried about whether the main 

line is up or down than whether I have two carriers there. 

So that is one group. You get other groups where first thing in 

the door they say I do not care where you look but there better be 

two railroads or locate me on a terminal company. So it is a mix. 

But there are a large number of companies including power plants 

that are willing to cut a long term agreement with the railroad and 

locate at a single service point. 

Mr. SHUSTER. Thank you very much. And I would point out to 

you, Mr. Rennicke, there is a number of places in my district that 

I can locate companies that are served by two railroads. So in the 

future if you need to talk to me, we can talk. Thanks. 

Chairman OBERSTAR. I thank the panel for participating, for 

waiting so late in the day, interrupted by votes and by extensive 

questioning of the earlier panels. I invite the Association of Railroads through you, Mr. Young, to submit your specifically written 

observations about provisions of our bill. 

Mr. YOUNG. We plan to do that, sir. 

Chairman OBERSTAR. We will welcome those comments. 

The hearing is adjourned. 

[Whereupon, at 7:18 p.m., the Committee was adjourned.]

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Æ


38170.618