opportunities while preserving the lessor’s ability to recover a fair market compensation
for the lease.

Moreover, under present interchange commitment rules, the overall economy is not
producing maximum economic benefits because of each railroad’s attempt to maximize
its own returns through preventing competition. Interchange commitments which limit
market opportunities and/or raise rates above the competitive price leave shippers, the
primary businesses that depend on shippers, and the secondary businesses that are
dependent on shippers worse off. To deliver the greatest maximum benefit, competition
would have to be imposed on interchange commitments. Because the railroads would be
competing with each other for traffic lost or gained, the overall change in returns to
railroads would be negligible. Traffic lost by one railroad would be picked up by another
and vice versa. Yet, through traffic creation, as discussed above, railroads would see an
increase in traffic and revenues beyond what they receive under the current rules
governing interchange commitments. Furthermore, the overall economic benefit to the
economy would increase through traffic creation, competitive prices, and increased
market opportunities for shippers.

USDA recognizes the potential for unintended consequences resulting from an
amendment to any alleged anti-competitive provisions existing in the interchange
commitments. In extreme cases it might nullify previous lease or sale contracts,
effectively terminating a short line’s right to operate on the contested rail lines. In
addition to harming the short line, this could cause economic harm to shippers through a
deterioration of service. USDA understands that such proposals may pose problems
between the sellers or lessors and the purchasers or lessees, and ultimately upon shippers.
This is not the outcome that USDA wants. USDA believes it is within the Board’s ability
to strike the balance between railroads and shippers that preserves market incentives for
all involved and promotes the overall well-being of the economy. Based on the record
from past proceedings, USDA believes that a careful examination of existing interchange
agreements is warranted and presents a good opportunity to meaningfully address ways to
increase rail-to-rail competition for the benefit of shippers and railroads.



ofa rail line sold at a discount, the full market value of the transaction will eventually be
realized by the seller. Therefore, any line sale containing an interchange commitment
lasting into perpetuity, at some point, ceases to provide fair market compensation to the
seller and remains solely as a barrier to increased competition.

Second, excessive penalties on traffic interchanges need to be reviewed and, if warranted,
should be modified to enable reasonable interchange opportunities with third-party
carriers, Railroads state that penalties are imposed on traffic interchanges with third-
patty carriers to compensate them for the accompanying loss in income, and that without
these penalties there would be no incentive to lease a line for below its fair market value.
However, penalties that result in supra-normal payments in excess of a line’s fair market
value may be anti-competitive by constituting an effective ban on traffic interchanges
with competing third-party carriers. Consequently in cases with an agreement into
perpetuity or for many decades, a shipper’s access to markets may be arbitrarily restricted
regardless of market demand, limiting their ability to seek the best price for their
products.

It is conceivable to imagine a scenario under which market demand is stymied by
excessive penalties, which are eventually borne by the shipper. For example, suppose
there were market demand for a shipper’s product at Points A and B, Point A is willing
to pay $800 for the product while point B is willing to pay $1,000, The shipper is located
on a section of track leased by a shortline from Railroad 1. The shipper can pay $500 to
ship his product to Point A through a joint rate between Railroad 1 and the shortline. The
shipper can alternatively pay $500 for a joint rate between Railroad 2 and the shortline to
ship his product to Point B plus an additional $100 lease penalty to Railroad 1 that will be
passed along.

For illustration purposes, assume the $100 lease penalty is the fair market compensation
to Railroad 1, Under this scenario, the shipper would choose to ship to Point B, receiving
$400 after transportation costs versus $300 from Point A. However, if Railroad 1 sets the
lease penalty above fair market compensation, at $500 for example, then any interchange
movements with a third-party carrier become effectively prohibited. This interferes with
market demand for the shipper’s product by distorting the price incentives that occur in a
competitive market.

In the above example, the railroads’ argument that they should be compensated for lost
revenue is without merit when scenarios are considered under which traffic interchanged
with a third-party carrier represents traffic creation instead of just traffic diversion. In the
scenario above if, instead, Point A is willing to pay $400 for the product while Point B is
willing to pay $1,000. Railroad 1 is not losing any traffic to Railroad 2 because the
interchange with Railroad 2 creates a brand new market opportunity that did not exist
prior to the lease. If Railroad 1 charged a reasonable lease penalty, $100 for example, it
would stand to benefit from the traffic creation along with the shipper, the shortline, and
Railroad 2. Thus, the Board should be diligent in examining the incentives associated
with traffic interchanges to ensure they allow reasonable third-party interchange



Respectfully submitted,

Edward Avalos

Under Secretary

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


Before the U.S, Surface Transportation Board

STB Ex Parte No. 714
Information Required in Notices and Petitions Containing

Interchange Commitments

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

Date: December 18, 2012



CERTIFICATE OF SERVICE

I, Bruce Blanton, certify that on this 18th day of December, 2012, 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 EP 714.

Bruce Blanton

Director

Transportation Services Division
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 Surface Transportation
Board (Board) proceedings involving rates, charges, tariffs, practices, and services.

Introduction

The Department of Agriculture (USDA) recognizes that interchange commitments are a
controversial subject matter. On the one hand, they were beneficial in encouraging the
sale or lease of light density rail lines to short line railroads, saving them from
abandonment by Class I railroads. This allowed service to continue and even improve in
some areas, especially benefitting rural grain-production areas, This further promoted the
rebirth of the short line rail industry, which has been a positive development for shippers.
On the other hand, certain provisions contained in interchange commitments have
restricted shippers’ access to competing markets. This prevents shippers from receiving
the best price for their product, leading to potential economic harm.

Allowing competition to the maximum extent possible is within the Board’s statutory
responsibility under the Rail Transportation Policy! as well as in the best interest of the
broader public welfare. While the degree of financial health for the railroad industry
remains debated, the structural characteristics of the industry and their effects on the
market are greatly different now than they were 32 years ago. As such, the Board’s
rulemaking is welcomed as a necessary adjustment in rail policy to reflect the changed
state of competition in the rail industry.

Comments

USDA supports the Board’s rulemaking to revise its rules concerning interchange
commitments. USDA believes substantial evidence filed under previous proceedings
warrants these revisions and the Board’s undertaking. USDA believes the Board’s
proposed revisions should largely address shippers’ concerns of unwarranted and anti-
competitive provisions being included in new interchange commitments. USDA also
recommends that the Board go further and that any anti-competitive provisions already
embedded in existing interchange commitments also be addressed by this rulemaking.

While it is difficult to predict, it is reasonable to assume there will not likely be a large
number of new interchange commitments in the future. First, the extent of track mileage
controlled or leased by short line and regional railroads has been stable since the 1990’s
following the initial high level of sales, leases, and abandonments by the Class I railroads
beginning in 1980. This pattern suggests that a significantly larger number of
interchange commitments were put in place between 1980 and 1995, when short line and
regional track mileage increased 150 percent, compared with the 5-percent decrease that
has occurred since 1995. Second, and perhaps even more telling, is the fact that Class I

'49 U.S.C. § 10101

i



railroads have begun to show interest in reacquiring some of their former light density
lines. If this trend were to continue, there may be fewer new interchange commitments
brought before the Board as the Class I railroad trend of selling and leasing turns to
repurchasing and reacquisition. Thus, the opportunity to meaningfully address concerns
about any anti-competitive provisions that might be embedded in interchange
commitments is for the Board to review the provisions that are already in place. USDA
believes such an undertaking is especially important because so little is publically known
about the terms of the existing agreements, such as the length of agreement terms or the
existence of provisions that unreasonably limit competition.

Ideally, in addition to this rulemaking, the Board would use its authority to strike a
middle ground that is fair to both railroads and shippers concerning existing interchange
agreements.

USDA supports measures involving interchange commitments that ensure adequate rail-
to-rail competition as listed in the Rail Transportation Policy of the Staggers Rail Act and
the Interstate Commerce Commission Termination Act (ICCTA). Shippers continue to
seek ways by which the Board may fulfill its obligation “to allow, to the maximum extent
possible, competition and the demand for services to establish reasonable rates for
transportation by rail.”? As laid out by the Rail Transportation Policy, competition is in
the best interest of all parties. In an absence of competition, both shippers and railroads
operate in a sub-optimal environment. Shippers’ access to markets is limited, potentially
causing economic harm to them and their communities.

Addressing existing interchange commitments offers the Board a chance to increase rail-
to-rail competition, thereby increasing competitive options for shippers. Interchange
commitments may create barriers to increased competition in order to favor the seller or
lessor railroad. Limiting competition in order to allow the seller or lessor to recover the
fair market value of a line should not be discouraged, but the terms by which this is
accomplished should be subject to STB and shipper scrutiny, given the sensitive nature
surrounding anti-competitive provisions.

Recommendations

The Board already recognizes two forms of potential economic harm contained in
interchange agreements—those that last in perpetuity and those that effectively eliminate
the ability of the purchaser or lessee railroad from interchanging with a third-party
carrier. USDA shares the Board’s concern for these anti-competitive provisions and
believes the Board should prohibit them in both proposed and existing interchange
commitments,

USDA believes that in the sale of a line, term limits should be considered for existing
interchange commitments. Interchange commitments lasting many years, and especially
those lasting into perpetuity, may overcompensate the seller railroad. While for some
period, interchange commitments may be necessary for recovering the full market value

249 U.S.C. § 10101(1)