of empty intermodal containers. Shippers contend, however, that major railroads are not
interested in serving smaller intermodal facilities.

e USDA requests that the Board study this situation and clarify the CCO
requirements of railroads to serve smaller intermodal facilities.

e USDA also inquires whether the Board has the authority to direct another railroad
to serve a smaller intermodal facility and under what conditions such a directive
would be issued. To what degree would the willingness of shippers to invest in a
smaller intermodal facility affect the Board’s decision?

Captive and smaller agricultural shippers have also expressed concern regarding
railcar allocation rules that could unreasonably limit the amount and timing of rail service
available to them. Smaller shippers have expressed concern regarding the fair allocation
of rail cars between small and unit-train shippers. Captive agricultural shippers have
expressed concern that railroads may serve non-captive shippers before captive shippers
during periods of increased demand for rail service because non-captive shippers have
other shipping options. Finally, shippers of minor agricultural crops have expressed
concern regarding their timely access to railcars.

e¢ USDA requests that the Board clarify the CCO requirements of railroads to
distribute railcars among similar shippers in regards to captivity and size of the
shipper.

e USDA also requests that the Board determine whether the car supply programs
used by the major U.S. railroads allow adequate participation of smaller shippers
and an appropriate allocation of railcars.

e USDA further requests that the Board clarify the CCO requirements of railroads

serving shippers of sugar beets, dry beans, and other agricultural products having
smaller volume requirements.

14


efficient means of transporting bulk grain and other agricultural products to
distant markets.

e Rail access may affect the ability of rural businesses to remain in business or new
businesses to locate in rural regions, affecting rural employment, wage levels, and
economic vitality.

e A shift from rail to truck transportation significantly increases road maintenance
costs for local and state governments due to increased road damage from large
trucks transporting agricultural and manufactured products as well as natural
resources.

¢ Railroad transportation, which is 3 times as fuel efficient as truck transportation,
becomes increasingly important during periods of high fuel costs, which reduce
the cost-effectiveness of truck competition.

Agricultural producers commit significant resources, which cannot be shifted to
another crop, once that crop is planted. The harvest of these crops usually occurs several
months after planting for grains, oilseeds, and vegetables, but the harvest of fruits, nuts,
lumber, and horticultural crops may occur years after planting. At the time of planting,
agricultural producers are not assured of a price for the crop that will cover the costs of
the inputs or even be assured of normal yields. When the crop is sold, producers usually
receive a price net of transportation. Transportation costs, especially during times of
historically typical grain prices and costs, may determine whether an agricultural
producer receives enough from a crop to remain solvent or to access the markets in which
they normally sell.

A clearer interpretation and enforcement of the CCO could help agricultural
producers and shippers obtain or improve their access to cost-effective and efficient rail
transportation in the movement of agricultural products. In today’s highly competitive

world markets, access to cost-effective and efficient transportation is needed to preserve

the competitiveness of the Nation’s agricultural producers. Improved access to rail


consideration of whether the current non-rail infrastructure would support such a change,
the anticipated costs of building infrastructure that could accommodate such a change,
and the speed at which the needed infrastructure could be built.

USDA contends that one of the key issues to consider regarding the proposed
shift of hazardous materials from rail to truck transportation is the relative safety of the
modes. Rail unquestionably provides the safest movement of these materials as the
Association of American Railroads has stated for many years. Shifting hazardous
materials from rail to trucks will require 4 trucks for every railcar, which may
compromise public safety. In addition, rather than solving the problem of transporting
these materials, it shifts the liability burden to the trucking industry, which also would be
devastated by a catastrophic accident. Thus, with the lack of safer alternative materials,
public convenience and necessity could require railroads to continue to move these
hazardous materials for basic public safety.

Anhydrous ammonia is a good example of a necessary hazardous material that
should be hauled by rail for public convenience and necessity. Anhydrous ammonia, a
product often used for agricultural purposes, is the second largest user of railroad
transportation for TIH products. However, anhydrous ammonia is a product where, in
most cases, there is no suitable substitute. Anhydrous ammonia is the base material for
all other nitrogen fertilizers and some phosphate fertilizers. Anhydrous ammonia
fertilizer is essential to the growing of food for millions of Americans and in helping
meet the nation’s energy needs.

e USDA recommends that the Board, in determining the CCO requirements for
hazardous materials such as anhydrous ammonia, consider: (1) the lack of

substitutability, (2) the relative safety of rail movement compared to truck
movement, and (3) the concept of public convenience and necessity.

10


USDA notes, however, that rail rates on agricultural traffic have risen much faster
than the rates for all commodities (including grain); and that the carload rates are higher
than those for other similar commodities. USDA recognizes that the Board has limited
authority to set rail prices, and that authority is present only when a shipper has filed a
rate appeal. The Board, however, has broad discretion regarding business practices.

e USDA asks the Board to study the issue of whether railroads are meeting the
intent of the CCO when agricultural shippers are assessed disproportionate price
increases that eliminate reasonable access to rail transportation.

e USDA requests the Board consider whether the reliance upon rail transportation
by agricultural shippers located in some geographic regions should merit special
consideration and Board action.

e USDA also asks the Board why current capacity constraints should now exempt
railroads from their CCO obligations.

USDA also notes that agricultural shippers bear a disproportionate decrease in rail
service relative to shippers of other commodities during periods when railroads are
experiencing operational fluidity difficulties, changing to new operating systems, lacking
sufficient equipment or locomotive supply, implementing mergers, or adjusting to new

retirement rules for train crew members.

e USDA asks the Board to clarify the CCO requirements to assure that agricultural
shippers receive a fair proportion of available rail service.

e Inaddition, USDA asks the Board to define railroad obligations to distribute

railcars and service among shippers of different commodities when rail capacity is
constrained.

Economically Motivated Service Reductions and Metering of Demand

USDA is concerned that many of the major railroads appear to have de-marketed

rail service to many agricultural shippers for at least 15 years—long before the current


transportation could also help agricultural producers preserve the benefits of economies
of scale-—which can only be obtained through large scale production and specialization—

through the preservation of efficient, effective, and cost-effective transportation options.

COMMENTS

In these comments USDA will highlight shipper concerns when the concerns
expressed: (1) appear to indicate a clear violation of the CCO, (2) are of major
importance to agricultural shippers, and (3) the benefits of addressing the concerns are
expected to exceed the negative effects upon railroad efficiency or operations. In
highlighting shippers’ concerns, USDA will also suggest relevant questions for the Board
to consider. USDA asks that the Board carefully consider, study, evaluate, and address —
where it can — the concerns expressed by agricultural shippers in relation to the

competing requirements listed on page 4.

Service Limitations Resulting From Capacity Constraints

Since late 2003, capacity constraints have developed as the number of railroad
route miles operated has decreased substantially, even as the volume of railroad traffic
has increased markedly. As a result, on average, each railroad route mile today carries
more than 2.6 times as much traffic volume as it did in 1980.

As capacity constraints began to reduce system operational fluidity, railroads
rapidly increased rail tariff rates to regain operational fluidity and to ration traffic to those
shippers willing to pay the most for rail service. To the extent that capacity constraints
exist and appropriate investments in additional rail capacity are made, this may be a

rational economic response on the part of the railroad industry.


USDA is also concerned that railroads may be refusing to quote tariff rates to
some off-line locations in an effort to force traffic to destinations located on their own
lines. For instance, shippers located in southern Texas report that a railroad refused to
provide service or quote a price on grain destined for Mexico because the railroad’s
portion of the haul is less than 500 miles. USDA interprets the CCO as giving a shipper
the right to a rate even when the railroad currently has no rate for that particular
movement.’ In addition, when fuel prices are at or near record highs, rail becomes
competitive with truck transportation on shorter hauls than would normally be the case.

e USDA requests that the Board clarify the CCO requirements as they apply in

cases of this type.

Cost and Safety Issues in the Transportation of Hazardous Materials

The major U.S. railroads have expressed concerns regarding their liability
exposure in the event of an accident while hauling hazardous materials, particularly
products classified as toxic inhalation hazards (TIH). The railroad industry is actively
discouraging the movement of hazardous materials and encouraging shippers to use safer
substitutes. However, USDA believes the CCO and concept of public convenience and
necessity must be fully considered in addressing cost and safety issues in the
transportation of hazardous materials by rail.

The railroad industry’s effort to encourage shippers to use safer alternative
materials is certainly an option that should be explored. However, it may not be a
suitable solution for all hazardous materials and it is not the only option that should be
under consideration. Shifting the transport of hazardous materials away from rail to
trucks should be considered only after careful study of all options, including careful

> Interstate Commerce Commission Termination Act, §11101(b).


BEFORE THE

SURFACE TRANSPORTATION BOARD

STB EX PARTE NO. 677

COMMON CARRIER OBLIGATION OF RAILROADS

COMMENTS OF THE

U.S. DEPARTMENT OF AGRICULTURE

Bruce I. Knight

Under Secretary

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

Date: April 24, 2008


the siding. Typically the shipper has no access to rail service until these siding upgrades
are completed and approved by the railroad. The new service contract often transfers all
liability risks to the shipper regardless of railroad activity or involvement.

In addition, these shippers report that it may take as long as 18 months for
railroads to approve siding specifications for new service. After these delays and the
siding is in place, the shipper is often given a take-it-or-leave-it service contract that
shifts all liability to the shipper regardless of railroad activity or involvement.

e USDA requests that the Board investigate railroad requirements for siding
upgrades in relation to the CCO requirement and reasonable business practices.

e USDA requests that the Board monitor railroad service agreements in regards to
possible unreasonable shifting of liability in relation to the CCO requirement and
reasonable business practices.

Impact of Volume Requirements or Incentives

Exports of U.S. agricultural products are projected to reduce the U.S. balance of
trade deficit by $24.5 billion during 2008. The ability to obtain cost-effective
transportation for agricultural products is important for rural economies and supports
domestic prices for agricultural products.

For several years, USDA has become increasingly concerned regarding the
closure of rural intermodal facilities in favor of larger facilities located in urban areas.
Although the location of intermodal yards in urban areas supports the import of goods
into the United States, urban locations usually increase the difficulty of exporting
agricultural products, which are produced in more remote rural locations.

Agricultural producers often incur substantial additional costs because of hauling

their produce longer distances in order to obtain intermodal service. Because agricultural

12


A possible market-based solution to the railroad liability issue could be the use of
different liability insurance pricing mechanisms in combination with a Board requirement
that railroads not profit from liability insurance costs. Under this scenario, liability
insurance companies would need to price liability for railroads and other transportation
modes either by the ton or by carload for hazardous materials. The price of the liability
insurance should be set based upon the type of hazardous material hauled and the relative
safety of the railcar used in the haul. Liability for non-hazardous materials could
continue to be priced as a lump sum if desired. Under this scenario, the liability
insurance rates for hazardous materials should be: (1) filed with the Board, (2) made
available to shippers and the public, and (3) railroads should be limited to passing
through to the shipper only an amount equal to the cost of the liability insurance. This
could have enough transparency to satisfy shippers that railroads are not making liability

insurance costs a profit center.

e USDA recommends that the Board, as it did in its fuel surcharge ruling, rule it an
unreasonable business practice for railroads to profit from liability insurance costs
incurred in the movement of hazardous materials.

Carrier Imposed Requirements for Infrastructure Investments by Shippers

Agricultural shippers have raised concerns that railroads may be using siding
upgrades as a means to push freight off the rail line. Agricultural shippers report that
railroads are mandating extensive upgrades of rail sidings that often are not economically
justifiable to the shipper. These upgrades often mandate power switches that can be
controlled by the engineer in the cab, heated switches, and heavier rail. In some cases,

the siding, after these upgrades, would be in better condition than the rail lines serving


capacity constraints—through reductions in car allocation, poor service, and excessive
tariff rate increases. Even during the early-1990s, smaller agricultural shippers located
on a major railroad complained that railroad car allocations were limited to no more cars
than the shipper used the prior year, even though a drought, late frost, or disease had
reduced demand the prior year.
e USDA asks the Board whether railcar allocation systems that reduce the
allocation of railcars to a shipper over time should be considered a violation of the

CCO and an unfair business practice.

Another USDA concern is the possibility that Class I railroads may have limited
the interchange of traffic with connecting carriers, in an effort to force traffic from
markets located on the connecting carrier to longer hauls on their own lines. To our
knowledge, the annual Waybill Samples have not been analyzed to determine whether the
proportion of traffic interchanged with connecting railroads (adjusting for mergers since
1985) has decreased. If this proportion has decreased measurably, it could indicate
devolution into a rail network contrary to the public interest rather than a freely
interchanging national rail network. USDA supports the ability of agricultural shippers
to sell in the market of their choice rather than those chosen by the railroads.

e USDA requests that the Board analyze the annual proportion of traffic the 7 major

US. railroads have interchanged to connecting railroads (using the current rail

firm configuration) since 1985.

¢ For those railroads in which the proportion has decreased, USDA requests that the

Board determine whether it was due to physical closure of the interchange

locations, disproportionate increases in rates to offline markets, decreased rates to

online markets, or some other reason.

e¢ USDA asks the Board to determine whether the CCO requirements allow
railroads to eliminate shipper access to markets located on connecting carriers.


definitions, and/or guidelines on when and how CCO applies. USDA believes that in
calling this hearing, the Board should be commended in attempting to seriously address
CCO concerns. USDA believes this is important work to undertake, but recognizes it
will not be easy. USDA recognizes that in developing clearer CCO rules, definitions,
and/or guidelines, the Board will be required to strike a delicate balance between the
competing requirements of the concepts of:

Public convenience and necessity;

Needs of agricultural and other shippers;

Interests of rail firms; and
Goals of rail deregulation, including preserving the benefits of deregulation.

RYd>

THE COMMON CARRIER OBLIGATION

Even after economic deregulation, under current law railroads are expected to
fulfill their CCO obligation as public for-hire transportation providers, but that obligation
has become less clear. In addition, even though railroads are privately owned and
operated, many shippers believe that railroads have a responsibility to the public due to
the initial governmental investment in the rail network.

In recent years, some agricultural shippers that were dependent upon rail or
intermodal transportation have lost reliable access to those services. It is critically
important for all agricultural producers—small as well as large—to be able to move their
crops to market. Access to rail and intermodal transportation is important to agricultural

shippers because:

e Rail and intermodal transportation connect agricultural shippers to distant
international and domestic markets.

e For those agricultural shippers who are distant from barge transportation,
railroads provide the only cost-effective transportation choice and the only


Proper Use of Rail Embargoes

Agricultural shippers have raised concerns about some railroads using embargoes
as a way to stop serving a line that is not as economically viable as other lines. The
embargo tends to be long term and will likely remain until abandonment proceedings are
started. USDA notes that in the case of branch lines, railroads may have an incentive to
abandon the distal portions of the line in the absence of nearby competition from another

railroad.

« USDA requests that the Board investigate and clarify the CCO requirements as
they apply to these situations.

CONCLUSION

The CCO is important to agricultural shippers, but is not straightforward and clear
to all concerned. In these comments USDA has presented shippers concerns with regard
to CCO and raised relevant concerns for the Board’s consideration. USDA asks that the
Board carefully consider, study, evaluate, and address — where it can — the concerns

expressed by agricultural shippers.

Respectfully submitted,

Bruce I. Knight

Under Secretary

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

15


Although deregulation has given railroads more freedom to make management
decisions, it has challenged the ability of regulators to enforce the CCO. For instance,
deregulation allows railroads to enter into contracts for rail service and fulfill its
reasonable commitments under contracts before responding to reasonable requests for
common carrier service.” In addition the Interstate Commerce Commission Termination
Act (ICCTA) permits the Board to exempt commodities when there is sufficient
transportation competition to protect shippers from the abuse of market power and when
the exemption would not inhibit the Board from carrying out the transportation policy of
§10101.° Another factor contributing to the challenge of enforcing the CCO is the
introduction of car allocation programs, such as auctions for the guaranteed delivery of
railcars. Finally, the unforeseen extent of major U.S. railroad consolidation may have
also increased the ability of railroads to de-market rail service to some shippers or
commodities because of the loss of rail-to-rail and geographic competition.

Frustrated with what they see as inadequate and discriminatory rail service, many
agricultural shippers have voiced concerns to the Board and USDA regarding
enforcement of the CCO and the lack of effective rail-to-rail competition. The Board
acknowledges that it has seen an increasing number of questions arising in recent years
regarding the extent of a railroad’s CCO, resulting in this proceeding.*

One of the main problems with the CCO, due in part to its history and statutory
construct, is that it is not straightforward and clear to all concerned. While easier said

than done, a desirable policy objective would be for the Board to provide clearer rules,

> Commitments, which deprive a carrier of its ability to respond to reasonable requests for common carrier
service, are not reasonable. See ICCTA §11101(a).

* See ICCTA §10502. The Board has no authority to require any specific level of rates or services for
exempt commodities. See ICCTA §10502 (e).

* Surface Transportation Board Notice of Public Hearing, STB Ex Parte No. 677, February 22, 2008.


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 Surface
Transportation Board (Board) proceedings involving rates, charges, tariffs, practices, and

services.

INTRODUCTION

The Department of Agriculture (USDA) commends the Board for holding this
hearing to allow interested parties to present their views concerning the Common Carrier
Obligation (CCO). USDA appreciates the willingness of the Board to take into
consideration the views of interested parties in its efforts to better understand, monitor
and enforce the CCO.

Since 1980, economic deregulation of the railroad industry has resulted in
extensive benefits to both shippers and railroads. Inflation adjusted rail rates per ton-mile
have decreased while the financial health of the rail industry has become much stronger.
Shippers, however, have expressed concerns that the increased market power of major
railroads—because of rail consolidation since 1980—may be a contributing factor in
major railroads giving shippers less effective rail service and being less receptive to

shipper needs.'

' See USDA and various shipper comments, Surface Transportation Board Ex Parte No. 658, The 2s"
Anniversary of the Staggers Rail Act of 1980, October 19, 2005, for a fuller discussion.


markets typically have small margins, the increased costs of accessing intermodal service
often results in the loss of domestic and international markets.

For example, when the intermodal yard in Lubbock, TX, was closed, cotton
shippers had to pick up empty containers from Dallas, haul them by truck to Lubbock and
load them, and then haul the loaded containers by truck back to Dallas. This added more
than $1,000 in transport costs.

Another example is the loss of intermodal facilities in Wisconsin. Since rail no
longer loads in Wausau and Eau Claire, WI, dairies must now truck to either Milwaukee
or Chicago at a cost of approximately $600 per truckload. In 2006, rail transportation to
the West Coast ports cost $760 compared to only $300 only 3 years earlier. Since dairies
on the West Coast can truck their product to the ports for only $200, Wisconsin dairy
exporters faced a $1,160 cost disadvantage—rather than a $100 disadvantage—versus
West Coast dairies. Service has also been suspended to other rural loading points serving
producers of other agricultural commodities in Washington State, Idaho, North Dakota,
and Minnesota.°

In some instances, local investors would like to invest in an intermodal facility but
have been unable to obtain adequate assurance from the railroad that it would be able to
supply sufficient empty containers in a timely manner and provide adequate service
hauling filled containers. The location of empty containers in urban population centers
and the fact that shipping companies owning the containers control their availability for

reloading are factors contributing to the inability of railroads to guarantee a timely supply

° Testimony of Peter Friedmann, Executive Director of the Agriculture Transportation Coalition before the
Wisconsin Department of Agriculture, Trade, and Consumer Protection, Public Service Commission at the
Rail Service hearings in Milwaukee, WI, September 26, 2006.

13


CERTIFICATE OF SERVICE

I, Bruce Blanton, certify that on this 17th day of April, 2008, I caused a copy of the
foregoing document to be served by first-class mail, postage prepaid, on all parties of

record in STB Ex Parte No. 677.

Bruce Blanton

Director

Transportation Services Division
U.S. Department of Agriculture
Washington, D.C. 20250