John T. Gray June 3, 2011 Senior Vice President - Policy & Economics
The Honorable Cynthia T. Brow n Chief, Section of Administration Office of Proceedings Surface Transportation Boar d 395 E Street, SW. Washington, DC 20423-0001
Dear Ms. Brown: This submission is the AAR forecast of the third quarter 2011 All-Inclusive Index an d Rail Cost Adjustment Factor, filed in Ex Parte No. 290 (Sub-No. 5) (2011-3) Quarterly Rai l Cost Adjustment Factor. The versions of RCAF-related indices covered in this filing are: the All-Inclusive Index (initiated in the second quarter of 1985), the Unadjusted RCAF (produced since October 1982), the Adjusted RCAF (first published in the second quarter of 1989), and the RCAF-5 (created by the STB in its Ex Parte No. 290 (Sub-No. 7) decision served October 3, 1996). The table below summarizes the third quarter 2011 results on the fourth quarte r 2007 base, and shows the percentage changes from the previous quarter

. 2011Q2 2011Q3 % Change All-Inclusive Index 115.7 118.6 2.5 Preliminary RCAF 1.157 1.186 2.5 Forecast Error Adjustment 0.019 0.020 RCAF (Unadjusted) 1.176 1.206 2.6 Productivity Adjustment Factor 2.2487 2.2566 RCAF (Adjusted) 0.523 0.534 2.1 PAF-5 2.3752 2.3823 RCAF-5 0.495 0.506 2.2

425 Third Street, SW  Suite 1000  Washington, DC 20024 Phone (202) 639-2319  Fax (202) 639-2499  jgray@aar.org

## Third Quarter 2011 All-Inclusive Inde x
Ex Parte No. 290 (Sub-No. 5) (2011-3) Quarterly Rail Cost Adjustment Facto r Surface Transportation Board

Policy and Economics Department Association of American Railroads June 3, 2011

## Table of Contents

Subject Page
Introductio n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Index Weights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 All-Inclusive Index - Third Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Forecast vs. Actual All Inclusive Index - First Quarter 2011 . . . . . . . . . . . . . . . . . 4
Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Rail Cost Adjustment Factor - Third Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . 6 Appendices A Labor B Fuel C Materials & Supplies D Equipment Rents E Depreciation F Interest G Other Expenses H Railroad and Union Abbreviations

Quarterly RCAF Association of American Railroads

## Introduction

On January 2, 1985, the Interstate Commerce Commission (ICC) [now the Surface Transportation Board (STB)] adopted the All-Inclusive Index of Railroad Costs as the basis for the Rail Cost Adjustment Factor (RCAF). The quarterly projection of railroad costs, as documented herein, emplo y the All-Inclusive Index as required by the regulations. Also presented in this submission is the RCAF , b oth Adjusted and Unadjusted, as required by the ICC in its decision in Ex Parte No. 290 (Sub-No. 4) , R ail Cost Recovery Procedures - Productivity Adjustment, served March 24, 1989. In addition, th e AAR has included (but does not endorse) the RCAF-5, which was instituted by an STB decisio n served October 3, 1996 in Ex Parte No. 290 (Sub-No. 7), P roductivity Adjustment - Implementation. This quarter's projection of railroad costs is for the third quarter 2011.

Quarterly RCAF Association of American Railroads Page 1

## Index Weights

RCAF Weights Previous Current

2008 2009 Labor 30.2 % 34.7 % Fuel 25.2 14.9 Materials & Supplies 5.1 5.1 Equipment Rents 6.3 7.1 Depreciation 10.4 13.9 Interest 2.3 3.0 Other 20.5 21.3 In the Ex Parte No. 290 (Sub-No. 2) final rules, issued in April 1981, the Interstate Commerce Commission mandated that the weig hts of each major cost compone nt be updated annually. These "external" weights are calculate d using data from Schedules 410 and 210 of the R-1 annual report filed with the Surface Transportation Board by the Class I railroads. The weights are typically updated with the fourthquarter projection.

Reweighting of the index is accomplished by calculating both the current quarter (normally the fourth) and prior (normally the third) quarter indexes with the new weights. The relative change between the two quarters is then multiplied times the prior quarter (usually the third) linked index. Use of this method ensures that the weight change, by itself, does not cause a change in the level of the All-Inclusive Index. Internal weights in the labor and equipment rents components are updated at the same time as the external weights. When these weights are changed, they are also linked using the procedure desc ri bedabovein o r der t o e liminat eth e e ff ec t o f th e c han gein we i g htin g. The 2009 (current) and 2008 (previous) weights are show n below. The previous (2008) weights were used for the fourth quarter of 2009 through the th ird quarter of 2010. Beginning with the fourth quarter of 2010, the 2009 weights are used. The year 2009 was different from recent years. Instead of increases in the expenses used for the calculati on of weights, declining demand for freight service caused the variable portion of expenses to decrease. Fuel is probably the most variable expense category, and fuel expenses dropped even more b ecause of a lower cost per gallon and improving efficiency for locomotives. Not surprisingly, Fuel's weight decreased from 25.2 percent to 14.9 percent. Labor expenses decrease d, but did not decrease as much as many of the other categories. Thus, Labor's weight increased from 30.2 percent to 34.7 percent. Depreciati on and Interest expense have little or no variability, and those expenses actually increased. Weights for those two categories increased. Changes for the remaining categories were less than one percentage point.

Quarterly RCAF Association of American Railroads Page 2

## All-Inclusive Inde x Third Quarter 2011

Forecast 2009 Previous Current Percent Weights 2011Q2 2011Q3 Change 1. Labor 34.7% 379.6 382.1 0.7 % 2. Fuel 14.9% 368.4 392.3 6.5 3. M&S 5.1% 249.0 257.8 3.5 4. Equipment Rents 7.1% 203.1 208.8 2.8 5. Depreciation 13.9% 204.6 206.1 0.7 6. Interest 3.0% 84.5 84.5 0.0 7. Other 21.3% 212.9 222.3 4.4 8. Weighted Average a. 1980 = 100 290.1 297.5 b. 1980 = 100 (linked) 284.4 291.7 1 c. 4Q07 = 100 115.7 118.6 2 2.5

1 To calculate the 1980 = 100 Linked Index:

Index80 = (Current Index / Previous Index) * the Previous Quarter Linked Index = (297.5 / 290.1) x 284.4 = 291.7

2 To calculate the 4Q07 = 100 index:

Index4Q07 = (Current Linked Index / 4Q07 Linking Factor) * 100 = 291.7 divided by 245.9 times 100 = 118.6
Indexes based on other periods: 4Q02 based index = 291.7 / 192.1 x 100 = 151. 8 4Q97 based index = 291.7 / 173.2 x 100 = 168. 4 4Q92 based index = 291.7 / 156.9 x 100 = 185. 9 4Q87 based index = 291.7 / 132.2 x 100 = 220. 7 The components and values of the current and prev ious All-Inclusive Indexes are shown below. Details of the construction of each component of the index are contained in the Appendices.

Quarterly RCAF Association of American Railroads Page 3

## Forecast vs. Actual All-Inclusive Inde x First Quarter 2011

Because of data availability, the forecast error adjustment has a two-quarter lag from each filing

. As shown below, the first quarter actual index of 112.8 is 2.0 index points above the forecas t value of 110.8. Therefore, the forecast error adjustment for third quarter 2011 is 2.0 index points. 2009 First Quarter 2011 Amt Weights Forecast Actual Difference 1. Labor 34.7% 378.3 378.3 2. Fuel 14.9% 296.5 324.6 3. M&S 5.1% 248.1 248.1 4. Equipment Rents 1 7.1% 203.9 206.2 5. Depreciation 13.9% 204.2 204.6 6. Interest 3.0% 84.5 84.5 7. Other 21.3% 208.6 212.6 8. Weighted Average a. 1980 = 100 277.9 283.2 b. 1980 = 100 (linked) 272.4 277.4 2 c. 4Q07 = 100 3 110.8 112.8 2.0 Forecast error 2.0 index points

1 2009 First Quarter 2011 W e i g h ts F orecast A ctua l C ar- Hi re 42

. 2% 186

. 3 18 5. 6 L ease R enta l s 57. 8% 208

. 6 212

. 6 W e i g h te d Average 199

. 2 201

. 2 W e i g h te d Average (li n k e d) 203

. 9 206

. 2

2 Linked actual index = (actual index / previous actual index) x previous linked actual index. 277.4 = 283.2 / 273.1 x 267.5

3 The 4Q07 based indexes are 1980 based indexes divided by the 4Q07 linking factor (245.9/100).

O t h er li n ki ng f actors are: 4Q02 = 192

. 1 ; 4Q9 7 = 1 7 3

. 2 ; 4Q92 = 1 5 6

. 9 ; an d 4Q8 7 = 132

. 2

.

Quarterly RCAF Association of American Railroads Page 4

## Productivit y

Comparison of Output, Input, & Productivity 2005 - 2009 Output Input Productivit y 1 Yea r Index Index Chan g es ( 1 ) ( 2 ) ( 3 ) 2005 1.021 0.956 1.068 2006 1.018 1.024 0.994 2007 1.000 0.996 1.004 2008 0.990 0.970 1.021 2009 0.847 0.861 0.984 Average 1.014 Corrected Previous Avg. (2004-2008) 1.012

Calculation of PAF and PAF-5
For 2005-2009, use fourth root of av g . productivit ychan g e = 1.0035 For 2004-2008, use fourth root of av g . productivit ychan g e = 1.0030 Quarter Yea r PAF PAF-5 Q1 2011 2.2409 2.3681 Q2 2011 2.2487 2.3752 Q3 2011 2.2566 2.3823 Q4 2011 2.2645 2.3894 Q1 2012 2.2724 2.3978 On February 7, 2011, the Surface Transportation Boar d (STB) served a decision in Ex Parte 290 (SubNo. 4) which added the year 2009 to the Productivity Adjustment Fact or (PAF) and removed the year 2004. This creates a geometri c average annual productivity change, for the five-year period 2005 through 2009, of 1.4 percent per year. The component s of this average annual value are shown on the following table in ratio format – therefore, 1.014 is the same as an increase of 1.4 percent. Productivity changes are calculated by multiplying eachof the five productivity changes together and taking the result to the one-fifth power. The quarter productivity adjustment factors (PAF) are calculated by increasing the previous quarter's PAF by quarterly versions of the annual rate, which are the fourth root of the geometric average annual gr owth rate. The difference between the PAF and the PAF-5 is the timing of the five-year productivity trend.

2004-2008

2005-2009 1 The values shown in Column 3 are based on full float calculations and may not exactly match numbers calculated using the rounded numbers displayed in Columns 1 and 2.

Quarterly RCAF Association of American Railroads Page 5

## Rail Cost Adjustment Facto r Third Quarter 2011

Previous Current Percent 2011Q2 2011Q3 Chan g e All-Inclusive Index 1 115.7 118.6 2.5 PreliminaryRCAF 2 1.157 1.186 2.5 Forecast Error Adjustment 3 0.019 0.020 RCAF ( Unad j usted ) 4 1.176 1.206 2.6
Productivit yAd j ustment Factor 5 2.2487 2.2566 RCAF ( Ad j usted ) 6 0.523 0.534 2.1
PAF-5 7 2.3752 2.3823 RCAF-5 8 0.495 0.506 2.2

1 See All-Inclusive Index on pa g e 3. 2 All-Inclusive Index divided b ythe All-Inclusive Index in the base period ( 100.0 )

. 3 The current fi g ure is from Forecast vs. Actual All-Inclusive Index in

this filing (page 4). The previous quarter figure is shown in a similar section of the previous quarter's filing. 4 PreliminaryRCAF plus the forecast error ad j ustment. 5 See Productivit yon pa g e 5. 6 RCAF ( Unad j usted ) divided b ythe Productivit yAd j ustment Factor ( PAF )

. 7 See Productivit yon pa g e 5. 8 RCAF ( Unad j usted ) divided b ythe PAF-5. Four RCAF values are presented in this filing. Two are not modified for productivity (Preliminary RCAF and RCAF Unadjusted), and two incorporat e a productivity calculation (RCAF Adjusted and RCAF-5). The All-Inclusive Index and all four RCAF values, plus the percent change for each, are shown below. Note that the All- Inclusive Index is on a 2007Q4=100 basis.

Quarterly RCAF Association of American Railroads Page 6

# AppendixesQuarterly Rail Cost Adjustment Factor Appendix A Page 1 of 3 

## Labo r Third Quarter 2011 The third quarter 2011 Labor Index is forecast to increase 0.7 percent. Three items caused much of the increase: cost-of-living allowance increases for three national unions; cost-of-living allowance increases for numerous independent unions; and much higher annual profit sharing payments for one railroad.
Wage Rate Index The Wage Rate Index portion of the Labor Index increased 0.8 percent from the previous quarter. Cost of living allowances and profit sharing caused the increase. Wage Increases: There are only three national labor agreements in effect that have any type of wage increase scheduled for the third quarter, and those three unions will receive a cost-of-living allowance increase of 28 cents effective July 1. Numerous independent ag reements also have a similar cost-of-livng allowance increase. One independent labor agreement has a 5 percent general wage increase scheduled for July 1. Lump Sums: The third quarter lump sum rate increased0.3 cents. This increase was caused by independent bonus payments paid by two railroads to qualifying employees of unions that signed new labor agreements between 2005 and 2010 – all of these agreements delayed the bonus payment until July 1, 2011. An additional independent bonus was paid by one railroad to selected employees of one union that signed a new labor agreemen t, and this bonus varied depending upon employee service years. Back Pay: The third quarter back pay rate increas ed 0.1 cents because of a newly-received independent labor agreement that include d back pay as part of the agreement. Other: In wages, "Other" contains the amortization of incentive compensation payments that a large railroad makes each year to its dispatchers, yardmasters, and engineers. Last year's payment has now been completely amortized and removed from the labor rate. This year's payment, which is based on profits in 2010, is much higher than the previous year, causing the hourly rate to more-than double.
Supplements Index The Supplements Index increased 0.5 percent from th e previous quarter. A lmost all of the increase was caused by a railroad's independe nt employee stock plan contributi on to employees of one of the largest unions. Health & Welfare: The Health & Welfare rate was unchange d. Changes caused by the addition of one labor agreement to the index were t oo small to have an impact on this rate.

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix A Page 2 of 3 

## Labo r Third Quarter 2011
Railroad Retirement: The Railroad Retirement rate increased 0.6 percent, as taxable income was up slightly. Unemployment Insurance: The unemployment insurance hourly rate was unchanged. Other: The "Other" category is a reflection of all other fringe benefits, and currently contain known employer contributions to empl oyee 401(k) accounts and employer c ontributions to employee stock plans that are recorded as fri nge benefits. The hourly rate increased 4.4 cents, caused by one company's annual match and another company's extra bonus match included in the startup of a new plan.

Labor Index Calculation As shown in Table A-1 on the next page, the 0.8 percent increase in the Wage Index and the 0.5 percent increase in the Supplements Index had a combined effect of a 0.7 percent increase in the Labor Index. The linked th ird quarter 2011 index is 382.1.

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix A Page 3 of 3 

## Labo r Third Quarter 2011

Table A-1 Labor Index Change 2011Q2 2011Q3 Percent A moun t Base Wa g e – Strai g ht Time & Pa yFor Time Not Worked $36.039 $36.203 0.5% $0.164 Ad j ustments: Lump Sum 0.225 0.228 1.3% 0.003 Back Pa y 0.037 0.038 2.7% 0.001 Other 0.087 0.199 128.7% 0.112 Total Wages 36.388 36.668 0.8% 0.280 Health & Welfare Benefits 8.631 8.631 0.0% 0.000 RR Retirement & Medicare 6.963 7.002 0.6% 0.039 Unemplo y ment Insurance 0.606 0.606 0.0% 0.000 Other 0.173 0.217 25.4% 0.044 Total Supplements $16.373 $16.456 0.5% 0.083 Total Labor $52.761 $53.124 Wage Index 1 311.4 313.8 0.8% Supplements Index 2 605.1 608.1 0.5% Total labor Index, 2009 Wei g hts 3 399.2 401.8 Labor Index (linked) 4 379.6 382.1 0.7%

1 1980 wage rate $11.685 2 1980 supplements rate $2.706 3 2009 weights: wages, supplements 70.1% 29.9% 4 2011Q3 linked Index = 2011Q2 linked x (2011Q3 / 2011Q2) = 379.6 x 401.8 / 399.2

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix B Page 1 of 1 

## Fuel Third Quarter 2011

Forecast Fuel Index 392.3 Chan g e from previous quarter forecast 6.5% Chan g e from previous quarter actual -3.9%

* Diesel fuel used by locomotives is made from refined crude oil, and therefore usually has some price correlation. ** Heating oil and locomotive diesel fuel are part of a group of closely related products, commonly labeled as distillates, that differ mostly by their sulfur content. Because of these similarities, these fuels are produced together and have similar pricing trends.

The forecast for fuel is based on: (1) a survey of railroad fuel purchasing officers concerning current price and volume levels, (2) expectations of railroad purchasing officers based on their own forecast models and discussions with their major suppliers, and (3) a consensus of petroleum industry experts and general business publications. Crude oil futures prices were above $100 per barrel for the month of April, but fell below $100 in May.* Inventories were above the average range during that period. In early June, disappointing news relating to the U.S. economy contributed more downward pressure on oil prices. Locomotive diesel fuel prices have trended upward (with a few "dip s") since a March 2009 "trough". April 2011 is the latest month available for locomotiv e diesel fuel prices, but data for diesel fuel, heating oil and other distillates – which have a reasonable degree of correlation with locomotive diesel fuel – are available for later peri ods**. Data provided by the U.S. Energy Information Administration show lower prices in recent weeks and inventories at the high-end of the average range.
Railroads believe locomotive diesel fuel prices for July 2011 (Q3) will be 3.9 percent lower than the second quarter's (represented by April in the FuelIndex) average price actually paid. However, because the second quarter forecast was much too low, the third quarter 2011 forecast is 6.5 percent higher than the second quarter forecast.

100 200 300 400 500 600 700 800

Jul Jan Jul Jan Jul Jan Locomotive Diesel Fuel Prices

2009 2008 Index 7/15/90 = 100

2010 2011

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix C Page 1 of 1 

## Materials & Supplies Third Quarter 2011

2011Q3 Materials & Supplies Index = 257.8 2011Q2 Materials & Supplies Index = 249.0 Difference 8.8 basis points or 3.5 % The third quarter 2011 Materials & Supplies Inde x increased 3.5 percent from its second quarter value. The increase was caused by higher prices paid for two of the three major materials categories: Metals and Miscellaneous products. The index is still below its all-time high of 258.8 set for the first quarter of 2009.

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix D Page 1 of 1 

## Equipment Rents Third Quarter 2011

2009 Percent Wei g ht 2011Q2 2011Q3 Chan g e Car Hire 42.2% 178.6 178.9 0.2 % Lease Rentals 57.8% 212.9 222.3 4.4 Wei g hted Avera g e 198.4 204.0 2.8 Wei g hted Avera g e ( Linked ) 203.1 208.8 2.8 The Equipment Rents Index consists of two co mponents – car hire and lease rentals. The methodology used to create these two components and the final Equi pment Rents Index are explained below. Car Hire The car hire component is indexed using data fro m the Car Hire Accountin g Rate Master (CHARM) file. Car hire rates for the forecast quarter are estimated based on data fo r the most recent month available. For the first quarter, December 1 of the previous year is used. For the second, third and fourth quarters; March 1, June 1, and September 1 are used, respectiv ely. Using data retrieved from the latest CHARM file, an averag e rate per car is developed. Ne xt, those average rates are grouped into car type categories to create an overall summary of car hire rates. The summary rates are then compared from quarter to quarter to determine the Car Hire Index. Lease Rentals The lease rentals portion of the E quipment Rents Index uses the Producer Price Index for Industrial Commodities less Fuel and Related Products and Power (PPI-LF). The Commission adopted this surrogate in its decision served March 13, 1987. The AARuses six years of hist orical data to derive its forecast for the PPI-LF. The forecast is used not only for lease rentals, but also for the "Other" component of the All-Inclusive Index. Appe ndix G discusses the forecast in more detail. Equipment Rents Index Calculation The table below calculates the Equipment Rents Index, which increased 2.8 percent. The third quarter Car Hire portion of the Index increased 0.2 percent, caused by small increases (since March) for privately-owned cars. A 4.4 percent increase for the PPI-LF (see Appendix G) used as a proxy for Lease Rentals, combined with the 0.2 percent in crease for Car Hire, caused the Equipment Rents Index to increase 2.8 percent.

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix E Page 1 of 2 

## Depreciation Third Quarter 2011

Forecast of Depreciation Index ( 1982=100 ) 186.3 Forecast of Depreciation Index ( 1980=100 ) 206.1 Chan g e from previous quarter forecast 0.7% Chan g e from actual first month of previous quarte r 0.6% Chan g e from same quarter of prior y ear ( actual ) 1.0% The Producer Price Index for Railroa d Equipment (PPI-RE) is used to index depreciation expense. The PPI-RE is forecast using an ARIMA (Auto-Regressive Integrated Moving Average) process where a statistical package picks the model that best fits th e historical data set (see ne xt page), and that model is then used for the forecast. The historical data set contains 6 years of monthly data (a sample size of 72), where the most recent available data point is the first month of the quarter prior to the forecast quarter. For a first quarter forecast, the most recen t month of data available would be for October of the prior year. For a second quarter forecast, January would normally be the most recent period available. April and July would be the most recent months available for third and fourth quarter forecasts, respectively. The output from the forecast model is shown on page 2 of this appendix on a 1982=100 basis. The figure forecast by the model reflects monthly PPI-RE fi gures that changed by only small amounts during 2010, but had some bigger increases in 2011.

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix E Page 2 of 2 

## Depreciation Third Quarter 2011

PPI RAILROAD EQUIPMENT Recommended model: Exponential Smoothing Forecast Model for PPIRE Holt exponential smoothing: Linear trend, No seasonality Smoothing Final C omponent We i ght Value Level 0.91182 185.22 Trend 0.01997 0.27406 Within-Sample Statistics Sample size 72 Number of parameters 2 Mean 177 Standard deviation 7.584 R-square 0.9812 Adjusted R-square 0.981 Durbin-Watson 2.015 Ljung-Box(18)=20.03 P=0.6691 Forecast error 1.046 BIC 1.094 MAPE 0.004123 RMSE 1.031 MAD 0.7289

Actual Values for the Most Recent 6 Periods: Date Actual 2010-11 184.200 2010-12 184.200 2011-01 185.000 2011-02 184.900 2011-03 185.200 2011-04 185.200
Forecasted Values Date 2.5 Lower Forecast 97.5 Upper 2011-05 183.354 185.499 187.644 2011-06 182.843 185.773 188.702
2011-07 182.503 186.047 189.591 2011-08 182.254 186.321 190.388 2011-09 182.065 186.595 191.125 QTR AVG 182.274 186.321 190.368

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix F Page 1 of 1 

## Interest Third Quarter 2011

Interest Expense (Schedule 210) Line

42 Total Fixed Charges 44 Contingent Interes t less 22 Release of Premium on Funded Deb t
Average Total Debt (Schedule 200) Line

30 Current Loans and Notes Payabl e 39 Equipment Obligations and Other Long Term Debt Due Within One Year 41 Funded Debt Unmatured - Non-Curren t 42 Equipment Obligations - Non-Curren t 43 Capitalized Lease Obligatons - Non-Curren t 44 Debt in Default - Non-Curren t 45 Accounts Payable: Affiliated Companies - Non-Curren t 46 Unamortized Debt Premium - Non-Curren t

2009 Interest Rate 6.63% 1980 Interest Rate 7.85% 2011Q3 Interest Index 84.5 2011Q2 Interest Index 84.5 Percent Change 0.0% The Interstate Commerce Commission, in its deci sion served February 28, 1989, revised the AllInclusive Index methodology to include a specific in terest component, which is to track changes in the average interest rate from year to year. The interest rate is essentially the embedded cost of debt, i.e., total interest expense divided by average total long termdebt. The interest rate is calculated for the most recent year and used until the next year's figures are available. Typically in the fourth quarter filing, the intere st rate is updated to th e new level. The source for interest expense is Schedule 210, column b, from the R-1 annual report. The lines used from current R-1 annual reports are listed below. The source for averag e total debt is Schedul e 200 from the R-1 annual report. The sums of data from columns b and c (ending and beginning balances) are combined and divided by 2 to compute an average balance. Th e line numbers are listed below. Beginning with fourth quarter 2010, the Interest Index is based on data for 2009.

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix G Page 1 of 2 

## Other Expenses

Third Quarter 2011

Forecast of Other Expense Index ( 1982=100 ) 198.3 Forecast of Other Expense Index ( 1980=100 ) 222.3 Chan g e from previous quarter forecast 4.4% Chan g e from actual first month of previous quarte r 3.1% Chan g e from same quarter of prior y ear ( actual ) 8.3% The Producer Price Index for Industrial Commodities less Fuels and Related Products and Power (PPILF) is used to index purchased services, casualties and insurance, loss and damage, taxes (other than income and payroll), general and administrative expe nses, and lease rentals. These expenses, when grouped together, are usually called "Other" expenses. Like the PPI-RE, the PPI-LF is forecast using an ARIMA process on 6 years of monthly data (a sample size of 72) with the most recent available monthly data being the first month of the quarter prior to the forecast quarter. For a first quarter forecast, the most recent month of data available would be for October of the prior year. For a second quarter fo recast, January would normally be the most recent month available. April and July would be the most recent months available for third and fourth quarter forecasts respectively. The output from the forecast model is shown on page 2 of this appendix for 1982=100. The figure forecast by the model for the th ird quarter reflects monthly PPI-LF figures that are increasing at higher rates in 2011. Preliminary indications are (see ch art) that recent forecasts may have been slightly low, which would exacerbate the increase from the prior quarter forecast.

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix G Page 2 of 2 

## Other Expenses

Third Quarter 2011

PPI INDUSTRIAL COMMODITIES LESS FUELS AND RELATED PRODUCTS AND POWER Recommended model: Exponential Smoothing Forecast Model for PPILF Multiplicative Winters: Linear trend, Multiplicative seasonality Confidence limits proportional to indexes Smoothing Final Component Weight Value Level 1.00000 192.30 Trend 0.99847 1.4992 Seasonal 0.00396 Seasonal Indexes January - March 1.00000 1.00000 1.00000 April - June 1.00000 1.00000 1.00000 July - September 1.00000 1.00000 1.00000 October - December 1.00000 1.00000 1.00000 Within-Sample Statistics Sample size 72 Number of parameters 3 Mean 174.5 Standard deviation 9.042 R-square 0.993 Adjusted R-square 0.9928 Durbin-Watson 1.952 ** Ljung-Box(18)=16.57 P=0.4472 Forecast error 0.7657 BIC 0.8194 MAPE 0.003201 RMSE 0.7495 MAD 0.5624

Actual Values for the Most Recent 6 Periods: Date Actual 2010-11 185.400 2010-12 186.300 2011-01 188.100 2011-02 189.800 2011-03 190.800 2011-04 192.300
Forecasted Values Date 2.5 Lower Forecast 97.5 Upper 2011-05 192.193 193.799 195.405 2011-06 191.710 195.298 198.887
2011-07 191.983 196.798 201.612 2011-08 192.511 198.297 204.083 2011-09 193.179 199.796 206.413 QTR AVG 192.558 198.297 204.036

Association of American RailroadsQuarterly Rail Cost Adjustment Factor Appendix H Page 1 of 1 

## Railroad and Union Abbreviation s Third Quarter 2011

Railroads BLE Bessemer & Lake Erie Railroad (Part of CN's Grand Trunk Corp.) BNSF BNSF Railway Company CC Chicago, Central & Pacific (Part of CN's Grand Trunk Corp. Sometimes noted as CC&P.) CN Canadian National Railway (Commonly known as CN, owns Grand Trunk Corporation.) CNGT AAR's abbreviation for Grand Trunk Corporation (Almost all of CN’s U.S. operations.) CP Canadian Pacific (Also noted as CPR. Owns the U.S. Class I railroad Soo Line.) CSX CSX Transportation D&H Delaware & Hudson (Canadian Pacific's U.S. operations, to be included beginning 2011Q4.) DME Dakota, Minnesota & Eastern (Canadian Pacific's U.S. operations, to be included beginning 2011Q4.) DMIR Duluth, Missabe & Iron Range Company (Part of CN's Grand Trunk Corp.) DWP Duluth, Winnipeg & Pacific Railway (Part of CN's Grand Trunk Corp.) EJE Elgin, Joliet & Eastern Railway (Part of CN's Grand Trunk Corp.) GTW Grand Trunk Western Railroad (Part of CN's Grand Trunk Corp.) IC Illinois Central Railroad (Part of CN's Grand Trunk Corp.) KCS Kansas City Southern Railway NS Norfolk Southern Combined Railroad Subsidiaries (a.k.a. Norfolk Southern Railway or NS Rail) SOO Soo Line Railroad (the largest of Canadian Pacific's U.S. operations.) UP Union Pacific Railroad WC Wisconsin Central and subsidiaries (Part of CN's Grand Trunk Corp.) Major Unions Involved with Railroads ATDA American Train Dispatchers Association BLET Brotherhood of Locomotive Engineers and Trainmen Div. of the International Brotherhood of Teamsters BMWED Brotherhood of Maintenance of Way Employees Division of the International Brotherhood of Teamsters BRS Brotherhood of Railroad Signalmen IAM International Association of Machinists and Aerospace Workers IBBM International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers & Helpers IBEW International Brotherhood of Electrical Workers NCFO National Conference of Firemen and Oilers SMW Sheet Metal Workers’ International Association TCU Transportation Communication International Union TCU-Carmen Brotherhood of Railway Carmen Division of the Transportation Communications International Union UTU United Transportation Union UTU-Yard United Transportation Union Yardmaster Department (also noted as UTU-YMD) Predecessor Unions (Some AAR databases use these old abbreviations.) BLE Brotherhood of Locomotive Engineers (predecessor to BLET) BMWE Brotherhood of Maintenance of Way Employees (predecessor to BMWED) BRC Brotherhood of Railway Carmen (predecessor to TCU-Carmen) IBFO International Brotherhood of Firemen and Oilers (predecessor to NCFO)

Association of American Railroads