CERTIFICATE OF SERVICE

I, Bruce Blanton, certify that on this 27th day of October, 2011, I caused a copy of the
foregoing document to be served by first-class mail, postage prepaid, on all parties of

record in STB Docket Number FD 35506.

AZ.

Bruce Blanton |
Director

Transportation Services Division

U.S. Department of Agriculture

Washington, D.C. 20250



Revenue Adequacy and Distorting the Rail Rate Appeal Processes

Including the acquisition/merger premium in the capital asset base would artificially lower the
return-on-investment as currently calculated by the Board, making one of the most profitable
enterprises in the country appear to be revenue inadequate. Railroads could use the appearance
of revenue inadequacy to justify further rate increases.

Allowing acquisition/merger premiums to be included in the net investment base inflates the
railroad’s Uniform Rail Costing System (URCS) variable costs, resulting in much lower
revenue-to-variable cost ratios (R/VC) than would otherwise be the case. As a result, many
shippers would be deprived of the right to appeal excessive rail rates as R/VC ratios could fall
below the regulatory threshold of 180 percent. This would likely result in higher rail rates for
grain and oilseed shippers and electric utilities serving rural areas, particularly for those most
reliant upon rail services, In addition, the reduction in R/VC ratios would distort the results of
Three-Benchmark, Simplified Stand-Alone Cost, and Stand-Alone Cost rate appeals, making
successful rate appeals much more difficult.

Premium Pass-throughs Should be Discouraged

Allowing acquisition/merger premiums to be passed through to shippers encourages similar
transactions in the future. It is possible that other investment companies watching this
proceeding will see how easy it is to pass along premiums and could be encouraged to bid
exceedingly high amounts to purchase another railroad. While in the past merger premiums may
have been justified between two railroads due to synergistic cost savings and efficiency gains
passed on to rail customers, there are likely to be little if any direct benefits to rail customers
stemming from an acquisition premium. American farmers and rural communities should not
have to pay for a merger premium each time a company decides to buy or sell a railroad.

Summary

The issue of whether the Board allows railroads to pass through the costs of an acquisition or
merger premium to rail customers is an important issue for agricultural shippers and consumers
of rural electricity. USDA believes it should not be allowed. Such premiums should also not be
allowed to affect revenue adequacy calculations or distort rate appeal processes. Finally,
because this practice is not allowed for other industries, USDA believes the Board should change
its policy to discourage this practice from being used in future acquisitions of railroads.

dward Avali
Under Secretary
Marketing and Regulatory Programs



Date:

October 28, 2011

Before the U.S, Surface Transportation Board

STB Docket No. FD 35506
Western Coal Traffic League—
Petition for Declaratory Order

Comments of the

U.S, Department of Agriculture

Edward Avalos

Under Secretary

Marketing and Regulatory Programs
U.S. Department of Agriculture
Washington, D.C. 20250



Authority and Interest

The Secretary of Agriculture is charged with the responsibility under the Agricultural
Adjustment Act of 1938 and the Agricultural Marketing Act of 1946 to represent the interests of
agricultural producers and shippers in improving transportation services and facilities by, among
other things, initiating and participating in Board proceedings involving rates, charges, tariffs,
practices, and services.

The Department of Agriculture (USDA) represents U.S. farmers, agricultural shippers, and rural
electric cooperatives; the vitality of their livelihood is our primary interest. The Board’s current
procedures allow railroad acquisition/merger premiums to be passed through to railroad
customers and is expected to result in higher rail rates for grain and oilseed shippers, particularly
for those distant from barge transportation and are thereby most reliant upon rail services. In
addition, the Board’s current procedures could unfavorably impact rail rates paid by utilities
serving rural areas, resulting in higher rates for electricity than would otherwise be the case.
Higher rail and electricity rates could increase farm production costs and reduce the economic
vitality of rural areas without a corresponding beneficial investment in rail infrastructure.

U.S. Agriculture and Rural Electric Utilities Depend on Rail Transportation

An affordable and reliable transportation network is necessary to maintain the strength and
competitiveness of American agriculture and our rural communities. Rail service is a
particularly important part of that network for U.S. agriculture, because it is virtually the only
cost-effective shipping alternative available for low-value, bulky commodities in rural areas that
are distant from water transportation and markets.

Large volumes of grain and oilseeds are produced each year in the United States. American
farmers produced more than 19.9 billion bushels of grain and oilseeds in 2009, weighing more
than 564 million tons;! railroads originated 131 million tons (23 percent) of that total.”

Because many agricultural producers are located long distances from their markets, they are
dependent on rail transportation, particularly wheat producers. Nine of the ten top
wheat-producing States are more than 150 miles from barge transportation on the Mississippi
River, which usually provides the strongest intermodal competition to railroads for the
long-distance movement of grain to export ports and therefore moderates transportation costs.
Unlike other agricultural shippers in the United States, wheat shippers in much of the Great
Plains have no cost-effective transportation alternatives to railroads. The wheat produced in
these areas moves long distances to domestic markets for processing and consumption or to
coastal ports for export. Shippers in these regions have little direct access to inland waterway
transportation and the distances involved can make truck transportation uneconomical. In
addition, corn production has expanded westward into regions having less rail-to-rail
competition.

Because coal plays such an important role in generating electricity, its costs—including delivery

' “Grains and oilseeds” includes barley, corn, oats, rice, rye, sorghum, wheat, and soybeans.
? Association of American Railroads, The Rail Transportation of Grain, Volume 7, July 2010.



costs—are reflected in the price consumers pay for electricity. The Powder River Basin of
Wyoming and Montana produces 43 percent of the Nation’s coal. This production is also far
from river transportation, and competitive access to railroads is limited, raising issues about
generating electricity at affordable prices, especially in rural areas.

USDA Comments

USDA offers the following comments on our perspective regarding the issues raised in this
proceeding.

Rail and Electricity Rates for Rural America

USDA believes that allowing rail companies to pass along acquisition premiums could
adversely affect the rail and electricity rates for rural America and farmers, and it should not be
allowed. In the case of BNSF, it is the dominant railroad handling the movement of grain,
hauling 45 percent of the carloads of grain originated in the United States during 2009 In
addition, BNSF hauls 26 percent of the coal traffic by tonnage.”

The Board’s current procedures allow railroad acquisition/merger premiums to be passed
through to railroad customers. The estimated $7.625 billion write-up of BNSF’s net investment
base, which increases BNSF’s pre-acquisition net investment base by 30 percent, is expected to
raise rail rates to agricultural producers and electric utilities serving rural areas. Shippers more
dependent on rail are expected to have larger increases while other less dependent shippers may
have little to no increase in rail rates. A large proportion of these higher rail rates would likely
be borne by small agricultural shippers and rural electrical cooperatives, located on rural lines
having less traffic density and distant from cost-effective competing modes of transportation.

Many agricultural commodities (grain and oilseeds) have a low value in proportion to their
weight. The cost of rail transportation to market constitutes a large percentage of the on-farm
price, with costs for certain movements being up to 40 percent of the delivered price. As price
takers, farmers are not in a position to pass these costs along to consumers and must absorb
increases in transportation costs. On the other hand, coal companies are often able to pass
through cost increases to their customers, such as electric utilities who in turn raise prices to
individual homes, farms, and rural communities.

USDA believes it is unfair to expect American farmers and rural communities to pay higher
rates, which reduce their real incomes, because a large acquisition premium was paid for BNSF.
For the rate increases that will likely occur from the pass through, farmers and rural communities
are not expected to receive improved service levels or benefit from actual railroad investment in
infrastructure. Paying for market driven increases in railroad input costs is legitimate, but that is
not the case with a passed through acquisition premium. Instead, farmers and rural electric
customers will be paying higher rates simply because of an arbitrary acquisition premium.
Further, such premiums are not allowed in other high capital, monopolistic industries, and
shouldn’t be allowed for rail. Rail consumers deserve the same protections afforded consumers
in other regulated industries.

31
Ibid.
* Association of American Railroads, Railroad Ten-Year Trends,2000-2009, 2010.