[Senate Hearing 109-1159]
[From the U.S. Government Publishing Office]
S. Hrg. 109-1159
ECONOMICS, SERVICE, AND CAPACITY IN THE FREIGHT RAILROAD INDUSTRY
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HEARING
before the
SUBCOMMITTEE ON SURFACE TRANSPORTATION AND MERCHANT MARINE
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JUNE 21, 2006
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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71-842 WASHINGTON : 2012
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana Chairman
TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West
KAY BAILEY HUTCHISON, Texas Virginia
OLYMPIA J. SNOWE, Maine JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada BARBARA BOXER, California
GEORGE ALLEN, Virginia BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire MARIA CANTWELL, Washington
JIM DeMINT, South Carolina FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana E. BENJAMIN NELSON, Nebraska
MARK PRYOR, Arkansas
Lisa J. Sutherland, Republican Staff Director
Christine Drager Kurth, Republican Deputy Staff Director
Kenneth R. Nahigian, Republican Chief Counsel
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Samuel E. Whitehorn, Democratic Deputy Staff Director and General
Counsel
Lila Harper Helms, Democratic Policy Director
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SUBCOMMITTEE ON SURFACE TRANSPORTATION AND MERCHANT MARINE
TRENT LOTT, Mississippi, Chairman
TED STEVENS, Alaska DANIEL K. INOUYE, Hawaii, Ranking
JOHN McCAIN, Arizona JOHN D. ROCKEFELLER IV, West
CONRAD BURNS, Montana Virginia
KAY BAILEY HUTCHISON, Texas BYRON L. DORGAN, North Dakota
OLYMPIA J. SNOWE, Maine BARBARA BOXER, California
GORDON H. SMITH, Oregon MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia FRANK R. LAUTENBERG, New Jersey
JOHN E. SUNUNU, New Hampshire E. BENJAMIN NELSON, Nebraska
DAVID VITTER, Louisiana MARK PRYOR, Arkansas
C O N T E N T S
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Page
Hearing held on June 21, 2006.................................... 1
Statement of Senator Burns....................................... 2
Prepared statement of the Alliance for Rail Competition (ARC) 3
Joint prepared statement of the National Barley Growers
Association and American Malting Barley Association........ 4
Prepared statement of the Montana Wheat & Barley Committee... 5
Statement of Senator Dorgan...................................... 42
Statement of Senator Lautenberg.................................. 45
Prepared statement........................................... 45
Statement of Senator Lott........................................ 1
Statement of Senator Pryor....................................... 51
Witnesses
Buttrey, W. Douglas, Chairman, Surface Transportation Board...... 31
Prepared statement........................................... 32
English, Hon. Glenn, CEO, National Rural Electric Cooperative
Association.................................................... 60
Prepared statement........................................... 63
Ficker, John B., President, The National Industrial
Transportation League.......................................... 75
Prepared statement........................................... 77
Hamberger, Edward R., President/CEO, Association of American
Railroads...................................................... 80
Prepared statement........................................... 82
Hecker, JayEtta Z., Director, Physical Infrastructure Issues,
U.S. Government Accountability Office.......................... 10
Prepared statement........................................... 17
McIntosh, John L., President, Chlor-Alkali Products, Olin
Corporation; on behalf of the Olin Corporation and the American
Chemistry Council (ACC)........................................ 69
Prepared statement........................................... 70
Schuler, Dale, President, National Association of Wheat Growers
(NAWG); on Behalf of NAWG, the National Barley Growers
Association (NBGA), the USA Dry Pea & Lentil Council (USDP&LC)
and Elenbaas Company........................................... 55
Prepared statement........................................... 58
Appendix
Burlington Northern Santa Fe Railway (BNSF), prepared statement.. 111
Buttrey, W. Douglas:
Letter, dated June 26, 2006, to Hon. Trent Lott.............. 109
Response to written questions submitted by Hon. Conrad Burns. 116
Capon, Ross B., Executive Director, National Association of
Railroad Passengers, prepared statement........................ 109
Portland Cement Association (PCA), prepared statement............ 111
ECONOMICS, SERVICE, AND CAPACITY IN THE FREIGHT RAILROAD INDUSTRY
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WEDNESDAY, JUNE 21, 2006
U.S. Senate,
Subcommittee on Surface Transportation and Merchant
Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:05 a.m. in
room SD-562, Dirksen Senate Office Building, Hon. Trent Lott,
Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. TRENT LOTT,
U.S. SENATOR FROM MISSISSIPPI
Senator Lott. The Committee will come to order.
Welcome. Looks like we've got a great deal of interest in
our hearing today. And we have two outstanding panels that
we're going to hear from. So, I'm pleased that we are going to
have an opportunity to get the results from a study of freight
railroad issues conducted by the Government Accountability
Office. These are preliminary results, but it is our first
opportunity to hear some details and be able to ask some
questions.
There were three major questions that we asked the GAO to
examine: What changes have occurred in freight railroad
industry since the passage of the Staggers Act, including rail
rates and competition in the industry? Two, what do these
changes suggest about different approaches to regulating
freight railroads? And, three, what are the projections of
freight traffic demand over the next 15 to 25 years, the
freight railroad industry's projected ability to meet that
demand and the potential for federal policy responses?
I strongly believe in the need for a sturdy, dynamic, and
economically viable freight rail industry. It's absolutely
essential for the future. I've said that privately and
publicly, and I'm working on some ideas to contribute
positively in that direction. I've started to ask the
questions, how many lanes and how many planes can we put on the
roads and in the air? The answer to what our needs are is
clearly in the freight railroad industry, and we need to
encourage that. We need to have a viable industry. And we need
to make sure that we don't do anything that's going to slow
down or undermine that.
On the other hand, we often hear from rail shippers that
are very frustrated about the cost of rail service. They
complain about poor service. They deserve to have a recourse
that is fair and accessible. And I've met with the Chairman of
the Surface Transportation Board, Doug Buttrey, to discuss
these problems. He has a number of initiatives underway I hope
he'll be aggressive about in that area, and, you know, that he
perhaps will have some recommendations to us in the future.
But there has to be a proper balance here. I talk to
shippers. I also talk to the railroad industry. I continue to
urge both sides to look for common sense answers. However, I've
also made it very clear, if some of the problems are not
realistically addressed, we will do whatever is necessary to
make sure it happens. For instance, if I find any evidence that
railroads are using fuel surcharge as a way to make a little
extra money, there's going to be a real problem. And I've made
that clear, privately; and I'm making it clear publicly now,
because that just cannot be what happens on fuel surcharges.
We've got enough of a problem in this country now with
ridiculous fuel costs and charges, and we can't have people
taking advantage of the opportunity to make even more money
under difficult circumstances.
So, I don't want to prejudice anything that's going to be
said in the hearing, but I wanted to get that marker down
early. And I'd be glad to yield to my good friend, the Senator
from Montana, Conrad Burns, who has been pursuing this hearing
and has been very careful in laying the necessary groundwork.
And I'm delighted to see him here.
I would be glad to hear from you, Senator Burns.
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. Thank you very much, Mr. Chairman. And thank
you for this hearing today. I appreciate that very much, as
we've been kicking this thing around for the last 2 or 3 years.
And so, I thank you for this hearing. This is the first time
that this Committee has taken a step, and what I think is a
very positive step, in just having this hearing.
I don't have much of an opening statement this morning, but
I want to--there are a couple of items that I want entered into
the record. The Alliance for Rail Competition, they have--I
want their full statement entered into the record, because we
want to get to the questions. We're kind of dealing with a
little bit of time limit here, and I don't like that.
Senator Lott. Senator Burns, let me just say that for you
and others that might come in, your entire statement will be
made a part of the record, and any additional statements that
you'd like entered at this point, we'll put them right in
behind your statement.
Senator Burns. Thank you very much. Appreciate that. And
there's a statement by the National Barley Growers Association,
and the Montana Wheat & Barley Committee, up in my state, where
we have a particular situation that I think needs remedying.
[The information previously referred to follows:]
Prepared Statement of the Alliance for Rail Competition (ARC)
Mr. Chairman and members of the Committee, this statement is
submitted for the record on behalf of the members of the Alliance for
Rail Competition.
The Alliance for Rail Competition was founded in 1997 by shippers
who believe that the shipper community must present a unified front
made up of diverse industries across the country in order to garner
support for policy reform and balanced solutions to America's freight
rail challenges. In ARC, the leaders of the largest chemical companies,
the largest carload electric utilities and largest railroad shippers of
an incredible variety of goods, have united with the largest group of
agricultural interests in the search for responsible solutions.
Of the testimony you will hear today ARC endorses in particular the
testimony of Mr. Dale Schuler, President of the National Association of
Wheat Growers. Mr. Schuler well represents the agriculture members of
ARC in his testimony today.
Freight rail shippers today would face daunting enough challenges
in their quest to compete in the global marketplace even if they did
not also find themselves captive to a ravenous monopoly. Yes, in many
parts of the country whole industrial and agriculture sectors are in
the clutches of a monopoly which has been either created or tolerated
by misguided Federal policy for decades.
Shippers do not believe that this monopoly is made up of evil
people bent on evil purposes. This situation is driven instead by pure,
cold economics which has produced a set of incentives counter to both
the interests of shippers, the long-term interests of consumers and the
country as a whole.
Let's take the issue of capacity.
Today we are told that the system is straining at the seams to move
freight. At the same time the railroads are enjoying record profits and
are all rated by Wall Street as ``buy'' items. Well, let's think about
that.
It seems that there is financial incentive for railroads to keep
capacity down therefore keeping prices high . . . and rising. It's like
the hot new toy at Christmas. Everyone knows there won't be enough to
go around, so they clamor for the available supply and bid up prices.
This is really simple economics. And we just wonder how anyone could
expect any business to expand its product . . . or service . . .
knowing that the incremental price of that service would immediately
fall.
Seeing this force at work every day, shippers have banded together
for years now and asked for help from elected policymakers in
Washington. For several years shippers have been united in support of
S. 919, the proposed Rail Competition Act, sponsored by Senators Burns,
Rockefeller and Dorgan on this Committee as well as eight additional
Senators. Shippers have rallied behind this bill not because we believe
it to be perfect, but because we believe it is a positive starting
place for finding solutions to the country's freight rail
transportation problems.
Yes, this is the country's problem.
Yet, shippers have felt that their interests and their efforts to
seek positive policy changes have been ignored by our leaders in
Washington. Why? Is it because it's too hard? Is it because there isn't
a real problem?
This is a time of turmoil in Washington and, in all candor,
shippers are discouraged when they see lavish parties provided by the
railroads at each of the major political conventions. Shippers are
discouraged when they see on internet sites that railroads are very
high on the list of providers of privately funded trips. Shippers are
discouraged when they do not find any relief at the Surface
Transportation Board for years running, yet they watch STB
commissioners fly off into the sunset joining law firms representing
and lobbying for the same railroads they formerly regulated. Shippers
are discouraged when they watch staff members of the same STB go to
work directly for the railroads and subsequently show up at STB
regulatory hearings representing Class I railroads. We suppose this is
all legal . . . all within the rules . . . but it surely is
discouraging.
Shippers believe that the intent of Congress in enacting the
Staggers Act in 1980 was good. But we also believe that a series of
unfortunate decisions made by appointed government functionaries has
usurped the intent of elected officials like those who serve on this
Committee. We are only asking our elected officials to correct these
inequities and assert their primacy as the people's representatives. We
are asking you to work with us, and the railroads, to find solutions
which will propel competitive U.S. commerce through this new century.
But it is imperative that you act.
This problem will not solve itself. The financial incentives are
working in favor of a status quo that cannot be maintained. Sooner or
later this will wind up at your doorstep. The only question is how much
it will cost to solve. This is a burgeoning crisis that grows larger
each day. So we ask you to act now, even incrementally, to avert crisis
and improve the future.
ARC members continue to look to this Congress to provide the
leadership and impetus for needed change.
It has become clear to Dow Chemical (Dow) Worldwide that domestic
competitiveness is being hindered by the lack of competitiveness in the
North American rail market. Dow Chemical, according to Brad Gray,
Director of Global Purchasing, . . . ``views the world as a single
market, rather than an aggregation of regions and blocs. In a single
world market, companies from every corner of the world are competing
with one another. The current state of the rail market, with
unreasonable fuel surcharge practices, unreliable service and limited
capacity will continue to hinder Dow's competitiveness in the world
market. Railcar transit time has increased significantly. On the U.S.
Gulf coast where Dow is the most captive chemical company, a rail
executive has indicated to Dow that improvements won't occur until 2010
or beyond. The current service problems, in Dow's opinion, have been
magnified by lack of competitive alternatives.''
A large Midwestern utility member echoes the captive rail customer
concern when it states, ``Scarcity increases the price of a commodity
and rail transportation is no exception to this. It is preposterous for
an industry to act in a monopolistic manner while the regulator, whose
job it is to protect the rail customer from monopolistic behavior
stands by and does nothing. A regulated monopoly should always face
standards of performance that are not abusive to customers in order for
that regulated entity to be allowed the ``privilege'' of being able to
receive a regulated rate of return.''
Rail shippers are the canary in the coal mine. Seeing us in
distress should send an alarm throughout the economy. The only
question, it seems, is when you will respond to the alarm. We know that
the problem is difficult, but the consequences of inaction are dire
indeed.
The members of the Alliance for Rail Competition will meet with any
parties, at any venue if it will further this debate and move in a
positive direction. But we understand that railroads will continue to
vociferously defend the ``now'' . . . even if it means eating their own
future. Our elected policymakers must intervene for the good of the
country . . . for the good of us all.
Come let us reason together.
Michael E. Grisso,
Executive Director.
______
Joint Prepared Statement of the National Barley Growers Association and
American Malting Barley Association
Mr. Chairman and members of the Committee, the National Barley
Growers Association (NBGA) and American Malting Barley Association
(AMBA) are pleased to submit this written testimony on behalf of their
barley producer and processing members concerning impacts of rail rates
and service on the U.S. barley industry.
We estimate more than half of the U.S. barley crop moves to
marketing positions by rail. The majority of our barley production
region is now captive to one railroad and we pay freight rates well
above those rates paid by other grain suppliers who have competitive
transportation options. For example, rail rates in North Dakota
(largest barley producer) and Montana (third largest producer) are
between 250 to 450 percent of the railroad's variable cost--far in
excess of the Surface Transportation Board's threshold of
unreasonableness of 180 percent. Because of these higher rates and
often unreliable service, it is very difficult for barley from our
traditional production areas to compete with other suppliers in both
domestic and foreign markets.
We pride ourselves on producing some of the highest quality barley
in the world, but if we cannot get our product to market competitively
then our quality advantages won't matter. U.S. negotiators are trying
to help us be more competitive in world markets through the WTO trade
negotiations, but again it won't matter if we get the best trade deals
if we can't ship our products competitively.
The following are specific rail issues that have directly impacted
U.S. barley competitiveness.
Ten years ago, barley comprised about 20 percent of the grain fed
to dairy cattle in the large California and western U.S. dairy shed.
However, we have lost these once large barley markets to corn because
of deliberate decisions by the two dominant western railroads to price
unit trains of Midwestern corn into these western feed markets at rail
profit levels well below the 180 percent threshold of variable cost.
Captive rates and service have prevented the movement of western
U.S. malting barley east to malt processing plants, forcing these
plants to source a portion of their needs from Canada. These processing
plants need specific varieties of malting barley that are only grown in
the western states and Canadian provinces due to agronomic factors.
Furthermore, Canadian barley currently moves to West Coast export
points at about two-thirds the cost of similar westbound movements in
the U.S.
Loss of short lines has become a significant factor in Washington
barley competitiveness.
We believe that the unrestrained monopoly power that exists in the
U.S. rail industry today has led to inferior service and excessive
freight rates, particularly in captive areas. This lack of competition
has allowed monopoly railroads to short-change both feed and malting
barley, which typically move in smaller volumes to multiple
destinations, in favor of large movements of a single grade crop (like
corn) from a single origin to a single destination.
Without a doubt, the U.S. economy relies on a healthy and
competitive rail industry. However, we believe that both shippers and
railroads will directly benefit from competition in the marketplace.
Therefore, we support provisions in Senate Bill 919 that address
current abuses of monopoly power in the rail industry and promote a
competitive balance between shippers and railroads without increasing
regulation.
Thank you for your consideration of our concerns with rail service
in the U.S. barley industry.
______
Prepared Statement of the Montana Wheat & Barley Committee
Thank you for the opportunity to present this testimony for the
record of this hearing.
The Montana Wheat & Barley Committee wishes to thank Senator Lott
for holding this important hearing and the Montana Wheat & Barley
Committee appreciates his valued leadership in seeking solutions to
these important issues affecting rail transportation and the rail
shippers all over the Nation.
We also want to especially thank Senator Conrad Burns for his
tireless leadership on efforts to solve the captive rail customer's
problems on the Nation's railroad system. His unceasing and consistent
work coupled with an unrelenting push to find solutions to the
``railroad problems'' has earned Senator Burns a great deal of respect
among the Nation's rail shipping communities in agriculture, chemicals,
utilities, glass, manufacturing and production plus the consumers that
rely on rail for commerce.
You are going to hear from rail customers (shippers) about
continuing capacity and service issues. Some will testify about the
economics of railroading. The railroads will come to you espousing the
virtues of spending more money on infrastructure and that they are
doing the best they can. The Surface Transportation Board, after
Congress passed the Staggers Rail Act in 1980, allowed and oversaw the
most massive concentration of rail power to amass in this country since
its formation in 1867. Now is the time for Congress to revisit the
Staggers Rail Act after 25 years. We have had more or less continuing
railroad capacity and service issues without interruption for almost
two decades--ever since the railroads started their march to gobble up
all of their competitors.
The rail captive areas of this country see service and capacity
issues as symptomatic of the more basic problem--over-concentration of
the railroad industry. When four of the five Class I railroads control
over 94 percent of the freight revenue generated in this country--
Congress should not only be interested, they should be alarmed.
It has never been in the public interest to allow the growth of
monopoly industrial base without some form of economic oversight.
I. Introduction
The Montana Wheat & Barley Committee (MWBC) represents the wheat
and barley producers of the state of Montana. Montana is a natural
resources state with the main economies built upon products of mines,
lumber and agriculture, as well as tourism. In order for our bulk
products of the mine, lumber and agriculture to have value, they
require bulk transportation (rail) to points outside Montana and, in
many cases, outside the U.S.
Therefore, the State's economic survival depends on having access
to good, affordable, and adequate rail transportation and attendant
facilities, with reasonable published notice of rates and rules, so
that its shippers can deliver a competitively priced product outside
the state boundaries.
Montana wheat and barley producers do not have economic
alternatives to rail transportation. They are held captive and tied to
rail with no viable alternatives to movement by rail. The Montana wheat
and barley producers are unique because they are the bearers of the
freight and cannot pass on increased transportation costs. The farmer
must absorb all freight costs. Virtually all other industries have some
capability of passing on some or all of its increased costs to their
consumers or customers. The farm producers are unique because they
operate in an environment where they do not have any control over the
price they receive for their crop and they must bear every increase, in
all costs, including transportation costs, without any possibility to
pass those higher costs on to anyone else. The farm producers who are
captive are thus truly without alternative.
II. Montana's Primary Transportation Is a Single Railroad
Montana is a base industry state. In the 1800s, its chief
industries were mining, lumber and agriculture. Today, and in the
future, Montana's chief industries will be the same three industries:
mining, lumber and agriculture, with the addition of tourism. Today,
we, in Montana, have one major railroad, the BNSF Railroad, operating
as a monopoly in the transportation of bulk commodities from the farm
to market.
Outline of Industry in Montana
1. The wheat industry in Montana is characterized by an export-
dominant rail movement.
2. The barley industry in Montana is characterized by both an
export and domestic market dominated by rail.
3. The lumber industry in Montana is characterized by both an
export and domestic market dominated by rail.
4. The coal industry in Montana is characterized by domestic
rail movement.
5. The vast majority of these commodities must be shipped out
of state.
III. Montana Is an Export State
Montana's top four industrial activities are agriculture, tourism,
mining and lumber. Montana's economy and wealth is thus highly
dependent upon the production and shipment of commodities. In order for
these commodities to have value to Montanans, they must be shipped to
points outside the state or country to market. It is this absolute
reliance upon good, affordable, and efficient transportation that
brings me to this hearing today. We hope for a better day, where
fairness in regulatory oversight and more rail competition will rule
the land. Meanwhile, we struggle every day trying to survive under
monopoly domination. Montana grain producers are being required to pay
more for this BNSF merger than their counterparts in the grain
producing industry where effective rail-to-rail competition exists.
That payment has come in the form of increased transit times, increased
rail rates and low car supplies.
Montana ranks third among the states in all wheat production. More
specifically, it ranks 3rd in spring wheat production and 2nd in durum
production. Montana also ranks 3rd in barley production, 3rd in lentils
production, 3rd in dry edible peas production, 2nd in Austrian pea
production, and 2nd in flax production. Montana originates over 37
million tons of rail traffic, which ranks it 17th in the Nation. At the
same time Montana bridged over 78,000,000 tons of rail traffic.
For the farm producer, the cost of transporting grain can represent
as much as one-third (1/3) the overall price received for the grain.
Basically the Montana farmer works for BNSF every 3rd year.
IV. Montana Rail Transportation Is Predominated by One Carrier
Montana is dominated by a single railroad, the BNSF, which controls
94 percent of the Montana rail system. This makes Montana the #1 rail-
dominated state in country. After Montana at 94 percent is Delaware at
83 percent, followed by Idaho at 80 percent, North Dakota at 66
percent, and South Dakota at 54 percent. The BNSF controls over 91
percent of the actual tonnage hauled out of Montana and 92 percent of
the rail revenue generated in the state. Since 1975, Montana has seen
over 1,900 miles of rail line abandoned (over 37 percent of the rail
miles) because there is no rail-to-rail competition. And the distances
are large--very, very large. To put this vastness in perspective, if
one were to place one corner of Montana over Washington, D.C., the
other corner would cover Chicago, IL.
Annually, the Montana producers move about 150 million+ bushel
production that is handled by rail from Montana and bear about $200+
million in freight transportation charges per year.
Our Montana concerns are founded on four points:
1. Rail transportation is vitally important to Montana's raw
commodity-based economy.
2. Montana's rail system increasingly serves simply as a bridge
for long-distance traffic.
3. Increasing numbers of short lines and abandonments have
reduced Montana shipper access to Class I rail service.
4. Dominance of one Class I railroad continues as the #1
freight issue in Montana.
V. Service and Capacity
Many have stated that Congress ``deregulated'' the railroads in the
Staggers Rail Act of 1980. Let there be no mistake--Congress DID NOT
``deregulate'' the railroads, but rather relaxed many of the economic
regulations, because Congress feared that many railroads were going
bankrupt! Today, however, the landscape has changed. Railroads aren't
going bankrupt, rather they have combined into a few, large,
monopolistic carriers controlling large areas of the economic vitality
of this country, and forcing captive shippers to pay for this
``relaxed'' regulatory environment. This ``relaxed'' regulatory
environment allows railroads to insulate themselves from
accountability.
When the Staggers Rail Act became law in 1980, Congress recognized
the need to give more pricing freedoms to the railroads to stem the
tide of rail bankruptcies occurring in the U.S. Congress also
recognized, that with the newly found pricing freedoms the railroads
would enjoy, some shippers would potentially be subject to dominant
activities by carriers with less regulatory oversight protection from
abuse. Simply put, less economic regulatory oversight would result in
less protection for those shippers who were captive and had no economic
alternative to move their goods except by rail. The result would be
that some shippers would become ``captive'' to ``market dominant''
railroads. The Staggers Rail Act also instructed the Interstate
Commerce Commission (ICC) to set up rate guideline procedures to
adjudicate the rate issues that would come before it. Congress even set
up, under Section 229, procedures whereby shippers who felt they were
captive could request adjudication of their rate levels, on a one time
basis.
The Montana Wheat & Barley Committee's experience with the ICC/STB
in litigation has been less than stellar. Shippers used to take cases
to the Surface Transportation Board expecting to get fair and balanced
treatment, but shippers haven't found any relief at the STB for a long,
long time. They have instead become so discouraged by the precedents of
the past few years that only a very few have the funds, or the
confidence, to bring a case. Faced with the effects of a railroad
monopoly that was withering away a key element of the state's economy,
Montana in 1980 filed a class-action and formal complaint (under
Section 229 of the Staggers Rail Act). We pursued the McCarty Farms
case for 17 years. In this case the ICC on December 14, 1984 found that
the BN had market dominance and that its rates were unreasonable. The
Administrative Law Judge (ALJ) further found that the rates were higher
than 300 percent of variable cost! The State of Montana spent $3.2
million, yet the STB in 1997 found that these rates were not excessive!
The Board ruled against the farm producers of Montana after changing
the regulatory standards twice.
As we stated earlier and it bears repeating, the truly rail captive
areas of this country see service and capacity issues as symptomatic of
the more basic problem--over-concentration of the railroad industry.
It has never been in the public interest to allow the growth of
monopoly industrial base without some form of economic oversight.
In 1980, when Congress passed the Staggers Act, the last major
piece of railroad legislation, we had 42 Class I railroads in the U.S.
Today, after mergers and acquisitions, we are down to about 5. This has
led to more and more businesses being served by only one railroad,
exercising virtual monopoly power to price according to its needs, not
according to market value and competition. Along with this massive
concentration there has been a serious degradation of service and
quality. And it has led to rate escalations that threatens American
productivity and jobs. Freight rail is the only industry in the country
that operates with this lack of competition . . . and exemption from
most anti-trust law.
The strength and vitality of America's freight railroads is of
vital importance to the Montana wheat and barley producers and to the
Nation and its business' ability to remain competitive in the world. We
want more railroads . . . not fewer.
But we believe that marketplace conditions would improve both
shippers and railroads alike with more competition in the railroad
industry. Indeed the current scheme of things where railroads rely on
their ability to differential price solely on the basis of captivity is
a one-legged stool approach that is doomed to fail. This country can
ill-afford the failure of this vital industry. Railroads are not a
luxury. Railroads are essential to the American marketplace and our
national security. Therefore, it is necessary that public policymakers
address this problem and work with all parties toward solutions before
a larger crisis presents itself to us all. Left on our present course,
we are sure to see a final round of mergers proposed to leave the
entire country with only two Class I railroads.
This is an issue that is vital to American competitiveness and
productivity and to the retention and creation of American jobs as well
as the health of our economy. This lack of competition is like an
invisible tax, tolerated if not sanctioned by Federal policy, that
works its way into the costs of goods and services across the country.
All because the arcane nature of the arguments have baffled and
frightened elected officials into inaction.
Oh, there are a lot of confusing arguments being made by opponents
of balance. But we in Montana are from the country and we have a simple
way of looking at it. The farm producers of Montana and the Members of
Congress have been bamboozled. The railroad cry is similar to that of
Chicken Little that the sky will fall if ANY changes are made by
Congress to their monopoly rail system. No legislator wants to take
action that might cause the failure of one of our railroads. Neither do
Montanans. No one has a greater interest in sound railroads than
shippers, not even the railroads themselves. We do not believe for a
moment that proposals to increase competition would cause harm. Indeed,
we believe quite the opposite to be true. We don't believe that this
mighty 100 year old industry cannot survive in a world where
competition is the driver of innovation and progress like every other
industry in America. In testimony before the House Transportation
Committee in 2005, Dr. Curtis Grimm of the University of Maryland
delivered compelling testimony to that effect.
VI. Congress Needs To Look At More Than Just Capacity and Service
Issues To Address The Public Interest
The Montana Wheat & Barley Committee is calling upon Members of
Congress to address this unhealthy imbalance in the freight rail
marketplace. To look at just capacity and service issues without
addressing the real problem does little to help the public interest.
Capacity and Service issues while severe are only the symptoms and
results of a problem of too much concentration in the railroad industry
and too little competition.
This Surface Transportation Subcommittee is charged with finding
solutions and has many members that have dedicated themselves to
seeking real solutions to the massive concentrations issue in American
railroading.
This Subcommittee does not have to reregulate the railroad industry
nor mandate trackage rights for one railroad over another nor cap rates
in order to develop solutions, but it must address that massive
concentration that affects over 1/3 of this Nation's rail shippers.
Congress must address a bill which would finish the job of
deregulation and take off armor that now protects freight railroads
from the real world marketplace that all of us compete in every day.
Indeed, what we in Montana now have is a federally protected
monopoly. And it has been our experience that monopolists do not
voluntarily embrace change and competition.
VII. The Problems Rail Shippers Face Are Getting Worse Every Year
We know this has been a problem for years . . . but it is getting
worse as freight rail consolidation and contraction continue. You only
have to look at the car shortage reports on grain shipments the past
three harvest seasons that made the front page of the Wall Street
Journal, or this new change back to tariff-like rates on coal with
prices increases up to 100 percent, or the incredible fact that one of
our major railroads is paying customers to ship by truck because they
can't get their act together and honor standing contracts. The
railroads are citing as ``force majeure'' reasons for their capacity
shortfalls thereby barring rail shippers from enforcing legal contract
and penalties for late delivery.
With the STB in a state of irrelevance and the railroad industry as
seemingly the only party not engaged in the search for constructive
solutions, the choices for Congress are clear. DO SOMETHING to prevent
a railroad monopoly from further harming the American farm producer,
miner, lumber worker and consumers.
The something that is available right now is for Congress to
consider and move legislation and changes in public policy. The cost of
trying is trivial compared to the astronomical cost of doing nothing
and accepting an ever worsening status quo.
The Montana Wheat & Barley Committee believes and trusts that
Congress can restore balance to this marketplace.
VIII. Congressional Action is Required
We in Montana didn't ask to become captive shippers! We in Montana
didn't want to suffer economically under the highest freight rates in
the Nation!
The ICC created this monopoly environment mess in Montana and has
ignored their responsibility in creating the economic nightmare. There
is an urgent need for Congress to come to grips with the ever-
increasing monopolistic power of the national railroads and its effects
on the agricultural economy. Today Class I railroads control the
agricultural economy.
The Surface Transportation Board is charged with protecting
``captive shippers'' under current law emanating out of the Staggers
Rail Act. The record indicates that the STB and its predecessor, the
ICC. have not protected the captive shipper from discriminatory
pricing. Indeed, the STB has gone so far afield, that they have renamed
the pricing mechanism utilized by the railroads. They call it
``differential'' pricing! It is simply a rename for ``what the traffic
will bear.'' Discriminatory pricing is both unfair to the captive
shipper and immoral. Since the merger of the BNSF and the UP/SP, we
have NOT seen increased competition in the state reflecting the
proportional rate agreements agreed to in the UP/SP merger. Indeed, we
have not been able to find one single shipper, grain or otherwise in
Montana, that have experienced a single new solicitation by the UP/SP
anywhere in Montana. The cycle times on UP and BNSF in Montana are
inching up, not what the BNSF nor the UP predicted. The captive
shippers are continuing to pay more than their fair share for these
mergers.
Any major Class I can, today, control development of any ``value-
added'' grain industry development, simply by not allowing (with
monopolistic pricing) any construction of ``in-land'' value added
processing, choosing instead, to move the raw grain to ports. Do they
have to reduce the price of moving the grain to the ports in order to
keep a ``value added'' plant from being built? No, they simply, over-
price monopolistically the value added plant. That is a true monopoly
power that is being sanctioned by the current regulatory system. It
must be changed.
IX. Solutions
The solution is very simple. Either control the monopoly pricing or
introduce competition. If the national agricultural policy is effective
in increasing exports of grain, what is to stop the railroads from
``taking'' their monopolistic share of these gains? A National
Transportation Policy should be developed that requires the STB to
consider for comparison, when reasonable rates are prescribed for
shippers for whom effective competition does not exist, similar rates
produced by rail-to-rail competition for shipment of the same or
similar commodities. Our preference at the Montana Wheat & Barley
Committee is for more competition among the monopoly railroads, but
secured with adequate protection for the truly captive shippers of this
country. After all, that is simply good, sound government policy.
Senator Burns. And I've--we've been working on this for
quite a while, so I appreciate you allowing those statements to
be made. And thank you for holding this hearing. And I think we
should get to the questions.
Senator Lott. All right. Let's have our first panel come
forward, Ms. Hecker and Mr. Buttrey. Thank you very much.
Ms. Hecker is the director of the Physical Infrastructure
Team, Government Accountability Office, Washington, D.C. And
Mr. Buttrey is Chairman, Surface Transportation Board.
And so, if we could, we'll go to you first, Ms. Hecker.
STATEMENT OF JayEtta Z. HECKER, DIRECTOR,
PHYSICAL INFRASTRUCTURE ISSUES,
U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Ms. Hecker. Thank you very much, Mr. Chairman. It's a great
honor to be here.
This is, indeed, a critical juncture for this industry and
these issues. They really represent issues that are of national
economic significance, and not only to the railroads, but to
producers, to users and the general population. And I, too,
applaud the Committee both for holding this hearing and giving
us the opportunity and the honor of having an opportunity to
really examine in-depth these really critical issues.
As you said, I'll be presenting very preliminary
observations today. I do have a small slide presentation, with
a number of charts, and I think a copy was given to each of
you. So, hopefully that will assist in my being able to cover
the enormous breadth of the issues before us.
As you outlined, there are three topics that you asked us
to address, and we will give you some preliminary observations
on all three today. The first was the changes since the
Staggers Act--industry performance, rates, and competition
issues; the second is what those changes suggest for
regulation, and what kind of alternative approaches have been
posed to deal with open competition and captivity issues; and,
finally, what some potential responses are to future freight
demand and capacity issues.
Now, the first chart I have--and I also have a visual
that's a little easier to look at--really captures the economic
performance of the industry and the changes both before the
Act--that middle point in everything is geared to 1980--and
after the Act. And, basically, these lines are productivity,
price, revenue, and volume. And it is so profoundly telling how
the--this industry stagnated under the regulatory environment.
You did not have innovation. You did not really have any growth
in volume. And mostly you didn't have productivity and
efficiencies and improvement. And that's really the hallmark of
the failure of regulation. It has a perverse effect on that
kind of innovation that's so important.
If you look at the explosion after 1980, the most important
one is really that first line, going way up top, and that's
productivity. That's the costs being cut, investments being
made, new technology, new markets. The second one is volume;
you have an enormous increase in volume. And what's good news
for the economy and consumers is--prices was the red line--
prices are going down.
A little bit more on that, though, the second chart is
overall review of industry rate changes. As you know, we've
taken a 20-year view. And this basically starts in 1985, goes
to 2004, when the most comprehensive data is still available.
And the yellow line is basically the changes in rates, using
a--an industry price package so that it standardizes and
controls for the type of commodity. So, the type can change,
and the size of movements can change. And we have developed an
index, so you get a more reliable view of changes. So, what we,
here, have is that yellow line showing industry rate changes
consistently going down.
Now, what I've broken out in the yellow and red line is
that it's quite different for different commodities. The
yellow--the blue line is--these are reversed--coal is actually
the blue--the yellow line on this one. So, that's below the
industry average. The red line is grain, and that is clearly
above the industry average. But the key thing is that the green
line is what's happening to prices overall in the economy. So,
you have either relatively steady or declining nominal prices,
while you have a 60-percent overall increase in prices in the
economy.
The next one is a map trying to give you a capture of a--an
overview of competition. This one basically uses the BEA
economic areas. And those yellow areas basically are the
number--27 BEA economic areas that are served by only one
railroad.
Now, that doesn't give you a complete view of captivity, so
we turned to another thing, and that's chart number 7. And, as
you remember, the Staggers Act defined a threshold of captivity
as paying rates 180--where there was a ratio of 180 of revenue
over variable cost. And the concern we have here is, while
there has been, actually, a reduction of traffic traveling
under a 300-percent mark, there has been a 50-percent increase
in the amount of traffic that travels over 300 percent of that
ratio. So, while captivity overall by this indicator, is
decreasing, those who are captive are paying even more
significantly higher rates than they were 20 years ago. So,
that's why those average figures are really important to get a
way to, to examine the central issue.
I see my time is up, but the bottom line, I know you want
to hear. I will----
Senator Lott. Feel free to keep going.
Ms. Hecker. Oh, thank you very much.
Senator Lott. Your statements----
Ms. Hecker. I'll still try to be----
Senator Lott.--are very important.
Ms. Hecker.--brief, because I know you want a dialogue
here.
Slide 8 is then, so what do you do about it? That balance
was in the Act. It was carefully crafted and called for. And
basically it provided two major things, in our view, for STB--
or ICC, originally. It was very broad authority, in our view,
for the agency to prevent concentration, to ensure competition.
And we have some comments about how that's been addressed. And
then, there was the--all the authority to set up an effective
relief process for those who were captive.
Now, in our view, neither of those protections in the Act
have been effectively implemented. So, the original balance, in
our view, has not really come into its own.
The first one is an area that is rarely discussed. And,
basically, in our view, as I said, the agency really has broad
authority to assess the performance of the market, not just in
response to a merger request, not just in response to a
complaint or a specific filed complaint, but really to be--one
of the original acts is promoting competition, and, in our
view, and, frankly, in response to many recommendations we've
made in the past, the STB largely says that they're
adjudicatory. And I think your own statement, Mr. Buttrey,
makes clear that there's a primary role in reviewing cases and
adjudicating or mediating disputes. The second area, everyone,
I think, largely agrees that the relief process has turned out
to be largely inaccessible. The alternatives that are under
discussion are really along these two areas, either to
streamline the relief process--and there are a number of
proposals--and to promote competition and reduce captivity.
These really are more trying to prevent the problem, rather
than--the procedural ones are trying to improve the relief
after you've presumably been made captive and not been able to
have the benefits of competition. The other one is really
getting to the root case and trying to promote competition.
Now, the concern that we have is, because there isn't this
rigorous analysis of the whole market and the failures of
competition and where there really may be an abuse of market
power, as opposed to a real response to very tight conditions
in this industry, we believe more analysis is needed of the
root problem here to be able to fully evaluate the costs and
benefits of alternative approaches. And an enormous shift
that's occurred is that we're on the cusp of most railroads
becoming revenue-adequate, which is a very good thing, but that
is a central component of the evaluation and the process and
the regulatory approach. And so, that we're at a turning point
of how that may change the regulatory approach.
The freight demand issue, on slide 9, most projections are
for significant increases. Railroads are making significant
investments. And there is a recognition that there are probably
public benefits from rail investments, beyond what rail will
invest on their own.
We've done a lot of work on these issues. I've studied
public/private partnerships in many sectors. And we have two
overriding concerns. One is that the policy response should
preserve the central role of the market in the rail sector, and
not unduly distort the benefits we have from a--an industry
driven by a competitive environment. And the other concern is
that we have a grave fiscal crisis. There is no money. And you
all know that very well. New assistance is borrowing to provide
new assistance. So, there's a very high standard to really try
to identify new assistance or support programs.
And then, we have three bullets, that it clearly has to be
in a broader intermodal context of national freight policy.
There have to be demonstrable public benefits, and at a
national level. There are local benefits, and a Federal role to
capture local benefits may not be justified. And then, in
public partnerships, the critical thing is getting an effective
allocation of costs between the public and private sector, and
between national, State, and local interests.
That concludes this preliminary report. As you've noted,
our final report will be out in September, and we hope to more
fully explore all of these issues.
But I'd be pleased to take any questions that I can address
today.
[The prepared statement of Ms. Hecker follows:]
Prepared Statement of JayEtta Z. Hecker, Director,
Physical Infrastructure Issues, U.S. Government Accountability Office
Mr. Chairman and members of the Committee:
We appreciate the opportunity to testify on our preliminary
observations on the impact of deregulation of the freight railroad
industry. As you know, over 25 years ago, Congress, with the leadership
of this Committee, transformed Federal transportation policy. After
almost 100 years of economic regulation, the railroad industry was in
serious economic trouble in the 1970s, with rising costs, losses, and
bankruptcies. In response, Congress passed the Railroad Revitalization
and Regulatory Reform Act in 1976 and the Staggers Rail Act in 1980
that substantially deregulated the railroad industry. The 1980 Act
encouraged greater reliance on competition to set rates and gave
railroads increased freedom to price their services according to market
conditions, including using differential pricing--that is, recovering a
greater proportion of their costs from rates charged to shippers with a
greater dependency on rail transportation. Furthermore, the Act
anticipated that some shippers might not have competitive alternatives,
and gave the Interstate Commerce Commission (ICC), and later the
Surface Transportation Board (STB), the authority to establish a rate
relief process so that shippers could obtain relief from unreasonably
high rates.
At the request of several Members of this Committee, we have
ongoing work providing a retrospective on the performance of the rail
industry since the Staggers Rail Act. My comments today focus on (1)
the changes that have occurred in the freight railroad industry since
the enactment of the Staggers Rail Act, including changes in rail rates
and competition in the industry, (2) what alternative approaches have
been proposed and could be considered to address remaining competition
and captivity concerns, and (3) the projections for freight traffic
demand over the next 15 to 25 years, the freight railroad industry's
projected ability to meet that demand, and potential Federal policy
responses.
To fulfill our objectives, we examined STB's Carload Waybill Sample
from 1985-2004 (the latest data available at the time of our review).
This document includes data on rail rates, tonnage, Federal regulation,
and other statistics but disguises some revenues to avoid disclosing
confidential business information to the public. We obtained a version
of the Carload Waybill Sample that did not disguise revenues. We also
interviewed, and reviewed information from representatives of each
Class I railroad in North America, \1\ shipper groups, economists, and
experts in the rail industry, and held an expert panel consisting of
individuals with expertise in the freight railroad industry and the
economics of transportation deregulation, interviewed shipper groups,
railroads, and economists, and reviewed pending legislation and
literature. We also reviewed forecasts of future freight rail demand
and capacity, including synthesizing forecasting, and transportation
planning literature, and interviewed Federal and state transportation
officials, financial market analysts, national association
representatives, and transportation experts. While we are aware that
service issues such as on time performance and the supply of railcars
by the railroads are of concern to many people here today, service
issues are not included in the preliminary observations I will present
today. Instead, we will leave comments about service to other
individuals testifying. My comments today are based on our past body of
work on the freight rail industry as well as our ongoing work, which we
are conducting in accordance with generally accepted government
auditing standards (see Appendix I for a list of our past reports on
the freight railroad industry).
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\1\ As of 2004, a Class I railroad is any railroad with an
operating revenue above $277.7 million.
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In summary:
The changes that have occurred in the railroad industry
since the enactment of the Staggers Rail Act are widely viewed
as positive, as the financial health of the industry has
improved and most rates have declined since 1985, although
concerns about competition and captivity in the industry
remain. The freight railroad industry's financial health
improved substantially as railroads cut costs through
productivity improvements, streamlined and ``right-sized''
their rail networks, implemented new technologies, and expanded
business into new markets such as the intermodal market, which
consists of containers and trailers that can be carried on
ships, trucks, or rail. Between 1985 and 2000, rates generally
declined, but have increased slightly from 2001 through 2004.
\2\ Several factors could have contributed to recent rate
increases, including continuing consolidation in the industry
and broad changes in the domestic and world economy and
emergence of a capacity constrained environment, where demand
exceeds supply. Concerns about competition and captivity in the
industry remain because traffic is concentrated in fewer
railroads and, although rates have declined for most shippers
since the enactment of the Staggers Rail Act, rates have not
declined uniformly and some shippers are paying significantly
higher rates than others. It is difficult to precisely
determine the number of shippers who are ``captive'' to one
railroad because proxy measures that provide the best
indication can overstate or understate captivity. However, our
preliminary analysis indicates that while the extent of
potential captivity may be dropping, the share of potentially
captive shippers who are paying the highest rates--those
substantially above the threshold for rate relief--has
increased. Whether this increase reflects an exercise or
possible abuse of market power or is simply a reflection of
rational economic practices by the railroads in an environment
of excess demand remains uncertain.
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\2\ While rate data are not available for 2005 and 2006, shippers,
railroads, and financial analysts we spoke with told us that rates have
generally increased during those years.
A number of alternative approaches have been suggested by
shipper groups, economists, and other experts in the rail
industry to address remaining concerns about competition and
captivity--however, any alternative approaches should be
carefully considered. While a number of approaches have been
suggested, I would, based on our preliminary work, like to
focus on two areas that are particularly integral to further
improvement. First, while STB has broad legislative authority
to investigate industry practices and has assessed competition
practices--generally in reviewing railroad merger cases--there
has been little assessment of competition nationally by any
Federal agency of the state of competition nationally and where
specific areas of inadequate competition and the inappropriate
exercise of market power might exist. Given widespread
disagreement about the adequacy of competition in the industry
and the fact that proxy measures can understate or overstate
captivity, such an assessment would allow decisionmakers to
identify areas where competition is lacking and to assess the
need for and merits of targeted approaches to address it. These
approaches include requiring reciprocal switching arrangements,
which allow one railroad to switch railcars of another
railroad, and/or terminal access agreements, which permits one
railroad to use another's terminals. Second, although the
Staggers Rail Act recognized that some shippers might not have
access to competitive alternatives and might be subject to
unreasonably high rates, there is widespread agreement that the
rate relief process does not provide expeditious handling and
resolution of complaints, is expensive, time-consuming, and
complex, and that, as a result, it is largely inaccessible to
most shippers. A number of different approaches have been
suggested by shipper organizations and others that could make
the process less expensive and more expeditious, and thus more
accessible, such as arbitration and increased use of simplified
guidelines. Each of the proposed approaches has both advantages
and drawbacks. Any alternative approaches to address
competition and captivity should be carefully considered to
ensure that the approach will achieve the important balance set
out in the Staggers Rail Act of allowing the railroads to earn
adequate revenues and invest in its infrastructure while
assuring protection for captive shippers from unreasonable
---------------------------------------------------------------------------
rates.
Significant increases in freight traffic over the next 15 to
25 years are forecasted, although many factors can affect the
accuracy of these forecasts, and the railroad industry's
ability to meet future demand is largely uncertain. Although
railroads have reported significant increased investment and
have told us that they plan to continue making infrastructure
investments, they also expressed uncertainty as to their
ability to keep pace with some of the higher projections of
future freight rail demand. Besides securing benefits for
private rail networks, investments in rail projects can produce
benefits for the public--for example, shifting truck freight
traffic to railroads can reduce highway congestion. As a
result, the Federal and state governments have been
increasingly participating in freight rail improvement
projects--for example, a number of states are involved in joint
projects with the railroads and, in 1997, the U.S. Department
of Transportation provided a $400 million loan to the Alameda
Corridor Transportation Authority for the Alameda Corridor
project to consolidate rail and other freight traveling to and
from the ports of Los Angeles and Long Beach. In addition, in
2005, Congress authorized $100 million for the Chicago CREATE
project to improve the rail network in Chicago. Congress is
likely to face additional decisions in the years ahead
regarding Federal policy toward the Nation's freight railroad
system. While our work continues, we would note, based on our
past work, that Federal involvement should only occur where
demonstrable public benefits exist, and where a mechanism is in
place to appropriately allocate the cost of financing these
benefits between the public and private sectors, and between
national, state, and local interests.
Background
Freight rail is an important component of our Nation's economy.
Approximately 42 percent of all inter-city freight in the United
States, measured in ton miles, moves on rail lines. Freight rail is
particularly important to producers and users of certain commodities.
For example, about 70 percent of automobiles manufactured domestically,
about 70 percent of coal delivered to power plants, and about 32
percent of grain moves on freight rail.
Beginning in 1887, the Interstate Commerce Commission (ICC)
regulated almost all of the rates that railroads charged shippers.
Congress passed the Railroad Revitalization and Regulatory Reform Act
in 1976 and the Staggers Rail Act in 1980, and these acts greatly
increased the reliance on competition in the railroad industry.
Specifically, these acts allowed railroads and shippers to enter into
confidential contracts which set rates and prohibited the ICC from
regulating rates where railroads had effective competition or if the
rates had been negotiated between the railroad and the shipper. The ICC
Termination Act of 1995 abolished the ICC and transferred its
regulatory functions to STB. Taken together, these acts anchor the
Federal Government's role in the freight rail industry and have
established numerous goals for regulating the industry, including the
following:
to allow, to the maximum extent possible, competition and
demand for services to establish reasonable rates for
transportation by rail.
to minimize the need for Federal regulatory control over the
rail transportation system and to require fair and expeditious
regulatory decisions when regulation is required.
to promote a safe and efficient rail transportation system
by allowing rail carriers to earn adequate revenues, as
determined by STB.
to ensure effective competition among rail carriers and with
other modes to meet the needs of the public.
to maintain reasonable rates where there is an absence of
effective competition and where rail rates provide revenues
which exceed the amount necessary to maintain the rail system
and to attract capital.
to prohibit predatory pricing and practices, to avoid undue
concentrations of market power; and:
to provide for the expeditious handling and resolution of
all proceedings.
Two important components of the current regulatory structure are
the concepts of revenue adequacy and demand-based differential pricing.
Congress established the concept of revenue adequacy as an indicator of
the financial health of the industry. STB determines the revenue
adequacy of a railroad by comparing the railroad's return on investment
with the industrywide cost of capital. If a railroad's return on
investment is greater than the industry-wide cost of capital, STB
determines that railroad to be revenue adequate. Historically, the ICC
and STB have rarely found railroads to be revenue adequate, which many
observers relate to characteristics of the industry's cost structure.
Railroads incur large fixed costs to build and operate networks that
jointly serve many different shippers. While some fixed costs can be
attributed to serving particular shippers, and some costs vary with
particular movements, other costs are not attributable to particular
shippers or movements. Nonetheless, a railroad must recover these costs
if the railroad is to continue to provide service over the long run,
and, to the extent that railroads have not been revenue adequate, this
may indicate that they are not fully recovering these costs.
Consequently, the Staggers Rail Act recognized the need for
railroads to use demand-based differential pricing in the deregulated
environment. Demand-based differential pricing in theory permits a
railroad to recover their joint and common costs across its entire
traffic base by setting higher rates for traffic with fewer
transportation alternatives than for traffic with more alternatives.
This means that a railroad might incur similar incremental costs in
providing service to two different shippers that ship similar tonnages
in similar car types traveling over similar distances, but that the
railroad may charge quite different rates. In this way, the railroad
recovers a greater portion of its joint and common costs from the
shipper that is more dependent on railroad transportation, but, to the
extent that the railroad is able to offer lower rates to the shipper
with more transportation alternatives, the other shipper makes a
contribution toward those costs.
The Staggers Rail Act further required that the railroads' need to
differentially price its services be balanced with the rights of
shippers to be free from, and to seek redress from unreasonable rates.
Railroads incur variable costs--that is the costs of moving particular
shipments--in providing service. The Staggers Rail Act stated that any
rate that was found to be above 180 percent of a railroad's variable
cost for a particular shipment was potentially an unreasonable rate and
granted the ICC, and later the STB, the authority to establish a rate
relief process. In response, the ICC established two criteria for
allowing a rail rate case. First, as stated in law, the rate had to be
above 180 percent of the revenue-to-variable-cost (R/VC) ratio. Second,
the shipper had to demonstrate that it had no other reasonable
transportation alternative. Such a shipper is referred to as a
``captive shipper.''
Railroad Industry Increasingly Healthy and Rates Down Since Enactment
of the Staggers Rail Act, but Competition and Captivity
Concerns
Remain
The changes that have occurred in the railroad industry since the
enactment of the Staggers Rail Act are widely viewed as positive. The
railroad industry's financial health improved substantially as it cut
costs, boosted productivity, and ``right-sized'' its networks. Rates
generally declined between 1985 and 2000 but increased slightly from
2001 through 2004. Concerns about competition and captivity in the
industry remain because traffic is concentrated in fewer railroads and,
although rates have declined for most shippers, some shippers are
paying significantly higher rates than others. While it is difficult to
precisely determine the number of shippers who are ``captive'' to one
railroad, our preliminary analysis indicates that while the extent of
potential captivity may be dropping, the share of potentially captive
shippers who are paying the highest rates--those substantially above
the threshold for rate relief--has increased.
Railroad Industry Financial Health Improved Substantially
There is widespread consensus that the freight rail industry has
benefited from the Staggers Rail Act. Specifically, various measures
indicate an increasingly strong freight railroad industry. Freight
railroads' improved financial health is illustrated by increases in
productivity, volume of shipments, and stock prices. Freight railroads
have also cut costs by streamlining their work force and ``right-
sizing'' their rail network, through which the railroads have reduced
track, equipment, and facilities to more closely match demand. These
measures are shown in Figure 1.
Freight railroads have also expanded their business into new
markets--such as the intermodal market--and implemented new
technologies, including larger cars, and are currently developing new
scheduling and train control systems. Some observers believe that the
competition faced by railroads from other modes of transportation has
created incentives for innovative practices, and that the ability to
enter into confidential contracts with shippers has permitted railroads
to make specific investments and to develop service arrangements
tailored to the requirements of different shippers.
Rates Declined From 1985 through 2000 and Rose Slightly from 2001
through 2004
Rail rates across the industry have generally declined since
enactment of the Staggers Rail Act. Because changes in traffic patterns
over time (for example, hauls over longer distance) can result in
increases in lower priced traffic and a decrease in average revenue per
ton mile, it can present misleading rate trends. Therefore, we
developed a rail rate index \3\ to examine trends in rail rates over
the 1985-2004 period. These indexes account for changes in traffic
patterns over time which could affect revenue statistics but do not
account for inflation. As a result, we have also included the price
index for the gross domestic product.
---------------------------------------------------------------------------
\3\ We constructed rate indexes to examine trends in rail rates
over the 1985 to 2004 period. These indexes define traffic patterns for
a given commodity in terms of census region to census region flows of
that commodity, and we calculate the average revenue per ton mile for
each of these traffic flows. The index is calculated as the weighted
average of these traffic flows in each year, expressed as a percentage
of the value for 1985, where the weights reflect the traffic patterns
in 2004. By fixing the weights as of one period of time, we attempt to
measure pure price changes rather than calculating the average revenue
per ton mile in each year. Over time, changes in traffic patterns could
result in a substitution of lower priced traffic for higher priced
traffic, or vice versa, so that a decrease in average revenue per ton
mile might partly reflect this change in traffic patterns. The rate
index for the overall industry was defined similarly, except that the
traffic pattern bundle was defined in terms broad commodity, census
region of origin, and mileage block categories. For comparison
purposes, we also present the price index for gross domestic product
over this period.
---------------------------------------------------------------------------
Although there has been a slight upturn in rates from 2001 through
2004, the industry continues to experience rates that are generally
lower than they were in 1985. During this time some costs have also
been passed on to shippers, such as having shippers provide equipment.
There was a steep decline in rates from 1985 to 1987 when rates dropped
by 10 percent. Rates continued to decline, although not as steeply,
through 1998. Rates increased in 1999, then dropped again in 2000. In
2001 and 2002 rates rose again. Rates were nearly flat in 2003 and
2004, finishing approximately 3 percent above rates in 2000, but 20
percent below 1985 rates. This is shown in Figure 2.
These data include rates through 2004. According to freight
railroad officials, shippers, and financial analysts, since 2004 rates
have continued to increase as the demand for freight rail service has
increased, rail capacity has become more limited, and as a result,
freight railroad companies have gained increased pricing power.
A number of factors may have contributed to recent rate increases.
Ongoing industry and economic changes have influenced how railroads
have set their rates. Since the Staggers Rail Act was enacted, the
railroad industry and the economic environment in which it operates
have changed considerably. Not only has the rail industry continued to
consolidate, potentially increasing market power by the largest
railroads, but after years of reducing the number of its employees and
shedding track capacity, the industry is increasingly operating in a
capacity-constrained environment where demand for their services
exceeds their capacity. In addition, the industry has more recently
increased employment and invested in increased capacity in key traffic
corridors. Additionally, changes in broader domestic and world economic
conditions have led to changes in the mix and profitability of traffic
carried by railroads.
Competition and Captivity Concerns Remain
Concerns about competition and captivity in the railroad industry
remain because traffic is concentrated in fewer railroads and even
though rates have declined for most shippers since the enactment of the
Staggers Rail Act, some shippers are paying significantly higher rates
than other shippers--a reflection of differential pricing. There is
significant disagreement on the state of competition in the rail
industry. In 1976, there were 63 Class I railroads operating in the
United States compared with 7 Class I railroads in 2004. \4\ As Figure
3 shows, 4 of these Class I railroads accounted for over 89 percent of
the industry's revenues in 2004. While some experts view this
concentration as a sign that the industry has become less competitive
over time, others believe that the railroad mergers and acquisitions
actually increased competition in the rail industry because STB placed
conditions on the mergers intended to maintain competition. These
experts also point to the hundreds of short line railroads \5\ that
have come into being since the enactment of the Staggers Rail Act, as
well as other increased competitive options for shippers from other
modes such as trucks and barges.
---------------------------------------------------------------------------
\4\ In addition to consolidation, which is the main reason for the
reduction in the number of Class I railroads, other reasons were
carrier bankruptcies and a 1992 ICC change in the threshold for
qualifying as a Class I railroad (from $5 million in annual revenue in
1976 to $250 million in 1992).
\5\ A short line railroad is an independent railroad company that
operates over a short distance.
According to our preliminary analysis, some commodities and
shippers are paying significantly higher rates than other shippers.
This can be seen in rates charged to commodities and at specific
routes. Figure 4 compares commodity rates for coal and grain prices
from 1985 through 2004 using our rail rate index. As Figure 4 shows,
all rate changes were below the rate of inflation and thus all rates
declined in real terms. However during that period, coal rates dropped
even more sharply than industrywide rates, declining 35 percent. Grain
rates initially declined from 1985 to 1987, but then diverged from
industry trends and increased, resulting in a net 9 percent nominal
increase by 2004.
It is difficult to precisely determine the number of shippers who
are ``captive'' to one railroad because proxy measures that provide the
best indication can overstate or understate captivity. One way of
determining potential captivity in our preliminary analysis was to
identify which Bureau of Economic Analysis (BEA) economic areas were
served by only one Class I railroad. \6\ In 2004, 27 of the 177 BEA
economic areas were served by only one Class I railroad. As shown in
Figure 5, these areas include parts of Montana, North Dakota, New
Mexico, Maine, and other states. We also examined specific origin and
destination pairs and found that in 2004, origin and destination routes
with access to only one Class I railroad carried 12 percent of industry
revenue. This represents a decline from 1994, when 22 percent of
industry revenue moved on routes served by one Class I railroad. This
decline suggests that more railroad traffic is traveling on routes with
access to more than one Class I railroad.
---------------------------------------------------------------------------
\6\ Economic areas are those areas defined by the Bureau of
Economic Analysis which define the relevant regional economic markets
in the U.S.
While examining BEA areas provides a proxy measure for captivity, a
number of factors may understate or overstate whether shippers are
actually captive. The first two of these factors may work to understate
the extent of captivity among shippers. First, routes originating
within economic areas served by multiple Class I railroads may still be
captive if only one Class I railroad serves their destination, meaning
the shipper can use only that one railroad for that particular route.
Second, some BEA areas are quite large, so a shipper within the area
may have access to only one railroad even though there are two or more
railroads within the broader area. Two additional limitations may work
to overstate the number of locations captive to one railroad. First,
this analysis accounts for Class I railroads only and does not account
for competitive rail options that might be offered by Class II or III
railroads such as the Guilford Rail System, which operates in northern
New England. Second, this analysis considers only competition among
rail carriers and does not examine competition between rail and other
transportation modes such as trucks and barges.
To determine potential captivity during our preliminary analysis,
we applied another proxy measure--the definition of potentially captive
traffic used in the Staggers Rail Act. The Act defines potentially
captive traffic as any that pays over 180 percent of the revenue-to-
variable cost (R/VC) ratio. As a percentage of all rail traffic, the
amount of potentially captive traffic traveling over 180 percent R/VC
and the revenue generated from that traffic have both declined since
1985.
However, our preliminary analysis indicates the share of
potentially captive shippers who are paying the highest rates--those
substantially above the threshold for rate relief--has increased. While
total tons have increased significantly (from about 1.37 billion in
1985 to about 2.14 billion in 2004), Figure 6 shows that tons traveling
between 180 and 300 percent R/VC but have remained fairly constant--an
increase from about 497 million tons in 1985 to about 527 million tons
in 2004. However tons traveling above 300 percent R/VC have more than
doubled--from about 53 million tons in 1985 to over 130 million tons in
2004.
This pattern can also be seen in the share of traffic traveling
above and below 180 percent R/VC between 1985 and 2004. As Figure 7
illustrates, the percent of all traffic traveling between 180 and 300
percent R/VC decreased from 36 percent in 1985 to 25 percent in 2004.
In contrast, the percent of all traffic traveling above 300 percent R/
VC increased from 4 percent in 1985 to 6 percent in 2004.
Our preliminary analysis indicates that this overall change in
traffic traveling over 300 percent R/VC can be seen in certain states
and commodities. For example, 39 percent of grain originating in
Montana and 20 percent of coal in West Virginia traveled over 300
percent R/VC in 2004. As shown in Figure 8, this represents a
significant increase from 1985, when 14 percent of grain in Montana and
4 percent of coal in West Virginia traveled over 300 percent R/VC.
As with BEA areas, examining R/VC levels as a proxy measure for
captivity can also understate or overstate captivity. For example, it
is possible for the R/VC ratio to increase while the rate paid by a
shipper is declining. Assume that in Year 1, a shipper is paying a rate
of $20 and the railroad's variable cost is $12. The R/VC ratio--a
division of the rate and the variable cost--would be 167 percent. If in
Year 2 the variable costs decline by $2.00 from $12 to $10, and the
railroad passes this cost savings directly on the shipper in the form
of a reduced rate, the shipper would pay $18 instead of $20. However,
as shown in Table 1, because both revenue and variable cost decline,
the R/VC ratio increases to 180 percent.
Table 1: Possible Changes in R/VC Ratios
------------------------------------------------------------------------
Revenue
Year collected Variable costs R/VC
------------------------------------------------------------------------
Year 1 $20.00 $12.00 167%
Year 2 $18.00 $10.00 180%
------------------------------------------------------------------------
Source: GAO.
Although proxy measures have inherent limitations, they can serve
as useful indicators of trends in railroad pricing, how the railroads
may be exercising their market power to set rates, and where
competition and captivity concerns remain. Whether these trends reflect
an exercise or possible abuse of market power or is simply a reflection
of rational economic practices by the railroads in an environment of
excess demand remains uncertain.
Proposed Alternative Approaches to Address Remaining Competition and
Captivity Concerns Should Be Carefully Considered
A number of alternative approaches have been suggested by shipper
groups, economists, and other experts in the rail industry to address
remaining concerns about competition and captivity--however, any
alternative approaches should be carefully considered. Two areas--an
assessment of competition and addressing problems with the rate relief
process--are particularly integral to further improvement. Any
alternative approaches to address competition and captivity should be
carefully considered to ensure that the approach achieves the important
balance set out in the Staggers Act of allowing the railroads to earn
adequate revenues and invest in its infrastructure while assuring
protection for captive shippers from unreasonable rates.
Assessment of Competition Has Been Limited
Our preliminary work shows there has been little assessment by the
Federal Government of where areas of inadequate competition might exist
or how changes in industry concentration might be resulting in the
inappropriate exercise of market power. Although the STB has broad
legislative authority to investigate industry practices, it has
generally limited its reviews of competition to merger cases. STB is
responsible for reviewing railroad merger proposals, approving those
that it finds consistent with the public interest, and ensuring that
any potential merger-related harm to competition is mitigated. STB's
mitigation efforts have focused on preserving competition, such as
granting the authority for one railroad to operate over the tracks of
another railroad (called trackage rights). As we reported in 2001, STB
found little competition-related harm during its oversight of recent
mergers. However, rail mergers can have different effects on rail
rates. For example, using an econometric approach that isolated the
specific effects of the Union Pacific/Southern Pacific merger on rail
rates for certain commodities in two geographic areas--Reno, Nevada,
and Salt Lake City, Utah--we found that the merger reduced rates for
four of six commodities, placed upward pressure on rates for one
commodity, and left rates relatively unchanged for one commodity. In
analyzing rail rates as part of merger oversight, STB examines the
merger oversight record, which generally focuses on the overall
direction and magnitude of rate changes, rather than specific
commodities or geographic areas. According to STB officials, in
general, the records have not permitted STB to reliably and precisely
isolate the effects of mergers on rates from the effects of other
factors (such as the price of diesel fuel).
STB is not unaware of concerns about competition. In addition to
reviewing competition in terms of mergers, STB has also instituted
proceedings to review rail access and competition issues. For example,
in April 1998, STB commenced a review at the request of Congress to
review access and competition issues in the rail industry. In an April
1998 decision on these issues, STB agreed to consider revising its
competitive access rules. However, in its December 1998 report to
Congress, STB declined to take further action on this issue because it
had adopted new rules allowing shippers temporary access to alternative
routing options during periods of poor service. In addition, STB
observed that the competitive access issue raises basic policy
questions that are more appropriately resolved by Congress.
Furthermore, in a December 1998 ruling on a Houston/Gulf Coast
oversight proceeding, STB recognized the possibility that opening up
access could fundamentally change the Nation's rail system, possibly
benefiting some shippers with high-volume traffic while reducing
investment elsewhere in the system and ultimately reducing or
eliminating service for small, lower-volume shippers in rural areas.
Finally, STB adopted new regulations for rail mergers in 2001. These
new regulations require the applicant to demonstrate that the merger
would enhance, not just preserve, competition.
Given the disagreement about the adequacy of competition in the
industry and the fact that proxy measures can understate or overstate
captivity, an assessment of competition and how changes in industry
concentration might be resulting in the inappropriate exercise of
market power would allow decisionmakers to identify areas where
competition is lacking and to assess the need for and merits of
targeted approaches to address it. The targeted approaches most
frequently proposed by shipper groups and others include reciprocal
switching arrangements, which allow one railroad to switch railcars of
another railroad, and terminal access agreements, which permits one
railroad to use another's terminals. We will discuss the potential
costs and benefits of these approaches further in our final report. Use
of these approaches should be carefully considered to ensure that the
approach achieves the important goals set out in the Staggers Rail Act.
For example, if these approaches expand competitive options and
decrease the number of captive shippers, which could decrease the need
for Federal regulation and the need for a rate relief process. On the
other hand these approaches could also reduce rail rates and thus
railroad revenues and affect the ability of the railroads to earn
adequate revenues and invest in its infrastructure.
Rate Relief Process Is Largely Inaccessible, but Different Approaches
Should Be Carefully Considered
The principal vehicle through which shippers seek relief from
unreasonable rates is the rate relief process. The Staggers Rail Act
recognized that some shippers may not have access to competitive
alternatives and may therefore be subject to unreasonably high rates.
For these shippers, the Act gave ICC, and later STB, the authority to
establish a rate relief process so that shippers could obtain relief
from unreasonably high rates, as well as more general powers to monitor
the railroad industry. Under the standard rate relief process, the
Board requires a shipper to demonstrate how much an optimally efficient
railroad would need to charge that shipper. Therefore, the shipper must
construct a hypothetical, perfectly efficient railroad that would
replace its current carrier.
There is widespread agreement the rate relief process is
inaccessible to most shippers and does not provide expeditious handling
and resolution of complaints. The process is expensive, time consuming
and complex, and, as a result, several shipper's organizations told us
that it is unlikely they would ever file a rate case. Since 2001, only
10 cases have been filed, and these cases took between 2.6 and 3.6
years--an average of 3.3 years per case--to complete. In addition,
while STB does not keep records of the cost of a rate case, shippers we
interviewed agreed that the process can cost approximately $3 million
per litigant. As a result, shippers told us that, for them to bring a
case, the case would need to involve several million dollars so that it
was worthwhile to spend $3 million on a case that they could possibly
lose. The process is complex because the legal procedures requires that
(1) the shipper construct a model of a hypothetical, perfectly
efficient railroad and (2) the railroad and shipper have opportunities
to present their facts and viewpoints as well to present new evidence.
Congress and STB have recognized the problems with the rate relief
process and taken actions to address them. First, Congress required STB
to develop simplified guidelines. STB developed guidelines to
streamline the process when the value of traffic at stake did not make
it feasible to incur the costs of conducting a full rate case. Under
these simplified guidelines, shippers do not have to construct a
hypothetical railroad and can instead rely on industry averages to try
to prove that their rate is unreasonable. Although these simplified
guidelines have been in place since 1997, the process set out by the
guidelines has not been used. Second, STB worked to improve the
standard rate relief process. Specifically, STB now holds oral
arguments to begin cases and, according to STB officials, these oral
arguments help to clarify disagreements without adding any time to the
process. In addition, STB has added staff to process cases.
According to shippers and railroad officials we spoke with, the
simplified guidelines are confusing regarding who is eligible to use
the process and how it would work. In addition, several shippers'
organizations told us that shippers are concerned about using the
simplified guidelines because since they have never been used, they
believe it will be challenged in court and result in lengthy
litigation. STB officials told us that they--not the shippers--would be
responsible for defending the guidelines in court. STB officials also
said that, if a shipper won a small rate case, STB could order
reparations to the shipper before the case was appealed to the courts.
During our preliminary work we identified a number of different
approaches that have been suggested by shipper organizations and others
that could make the rate relief process less expensive and more
expeditious, and therefore potentially more accessible. Each of the
proposed approaches has both advantages and drawbacks. These approaches
included the following:
Increased use of arbitration: Under arbitration, the two
parties would present their case before an arbitrator, who
would then determine the rate. This approach would replace the
shipper's requirement to create a hypothetical railroad.
Proponents of this system argue that it provides both the
railroads and the shippers with an incentive to suggest a
reasonable rate (because otherwise the arbitrator could select
the other's offer) and that the threat of arbitration can
induce the parties to resolve their own problems and limit the
need for Federal regulation. However, critics of this approach
suggest that arbitration decisions may not be based on economic
principles such as the revenue and cost structure of the
railroad and that arbitrators may not be knowledgeable about
the railroad industry.
Increased use of simplified guidelines: The simplified
guidelines use standard industry average figures for revenue
data instead of requiring the shipper to create a hypothetical
railroad. This approach would reduce the time and complexity of
the process; however, it may not provide as accurate and
precise a measure as the current process. However, as noted
above, the use of STB's simplified guidelines has not been
fully reviewed by the courts, and many railroad industry
experts believe the first use of the guidelines will result in
lengthy litigation.
Increased use of alternative cost approaches: For example,
STB could use the long-run incremental cost approach to
evaluate and decide rate cases. This process, which is used for
regulating pipelines, bases rates on the actual incremental
cost of moving a particular shipment, plus a reasonable rate of
return. This approach allows for a quick, standard method for
setting prices, but does not take into account the need for
differential pricing or the railroad's need to charge higher
rates in order to become revenue adequate. Structuring rate
regulation around actual costs can also create potential
disincentives for the regulated entity to control its costs.
Again, these alternative approaches should be carefully considered
to ensure that the approach achieves the important balance set out in
the Staggers Act. A significant factor in evaluating each of these
alternatives is the revenue adequacy of the railroads. The Staggers
Rail Act established revenue adequacy as a goal for the industry and
allowed the railroads to use differential pricing to increase their
revenues. The act further gave the ICC (and later STB) the authority to
determine the revenue adequacy of the railroads each year. While the
specific method for determining revenue adequacy has been
controversial, the overall trend in revenue adequacy may be more
important. In its last report in 2004, STB determined that one railroad
is revenue adequate and that others are approaching revenue adequacy.
While it is too early to determine that the industry as a whole is
achieving revenue adequacy, this is a significant shift in the rail
industry because for decades after enactment of the Staggers Rail Act,
the railroads were all considered revenue inadequate.
Different approaches to addressing remaining competition and
captivity concerns will likely recognize to some degree the railroads'
continued need to more consistently recover their cost of capital and
become revenue adequate. The railroads need additional revenue for
infrastructure investment to keep pace with increased demand. On the
other hand, different approaches also raise the question as to what
degree the railroads should continue to rely on obtaining significantly
higher prices from those with greater reliance on rail transportation
in a revenue adequate environment where total railroad revenues are
increasingly sufficient to meet the railroad's investment needs.
Significant Growth in Freight Rail Traffic Demand Is Forecast But
Continued Capacity Building Is Uncertain
The demand for freight and freight rail is forecast to increase
significantly in the future, although many factors can affect the
accuracy of these forecasts. Freight markets are volatile and
unpredictable and thus freight demand forecasts may prove to be off the
mark. For example, much freight demand is determined by trade that
originates outside the United States. Many of the data used to develop
these freight demand forecasts are proprietary and a result, we could
not assess the validity or reasonableness of the assumptions used to
develop the predictions. However, forecasts of freight and freight rail
demand are useful as one possible scenario of the future. As the
Congressional Budget Office (CBO) observed in a January 2006 report,
forecasts of future demand can be viewed as more illustrative than
quantitatively accurate. \7\
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\7\ Congressional Budget Office Freight Rail Transportation: Long
Term Issues January 2006.
---------------------------------------------------------------------------
Major freight railroads have reported that they expect to invest
about $8 billion in infrastructure during 2006--a 21 percent increase
over 2005--and have told us that they plan to continue making
infrastructure investments. \8\ Although railroads are sufficiently
profitable to be investing at record levels today, it is not certain
whether in the future investments will keep pace with the projected
demand. Railroads secure private benefits by investing in their
infrastructure and have many considerations in making new
infrastructure investments such as the need to obtain the highest
return on their investment, optimize the performance of their network,
and respond to other significant capital needs of rail operations. The
railroads we interviewed were generally unwilling to discuss their
future investment plans with us as this is business proprietary
information. We are therefore unable to comment on how companies are
likely to choose among their competing investment priorities for the
future.
---------------------------------------------------------------------------
\8\ According to STB, some portion of this $8 billion investment is
focused on maintenance as opposed to capacity expansion.
---------------------------------------------------------------------------
In addition to securing private benefits for railroad networks,
investments in rail projects can produce benefits for the public--some
of these public benefits are, as CBO's report pointed out, large in
comparison to anticipated private railroad benefits. For example,
shifting truck freight traffic to railroads can reduce highway
congestion and reduce or avoid public expenditures that otherwise would
be needed to build additional highway capacity or provide additional
maintenance to accommodate growth in truck traffic. These and other
public benefits can be realized at the national, state, and local
levels. For example, rail investment may generate benefits to the
national economy by lowering the costs of producing and distributing
goods. Since rail uses less fuel than trucks, energy use and emissions
may be reduced. In contrast, a rail project that eliminates or improves
a highway-rail crossing could deliver primarily local public safety
benefits by reducing accidents, time lost waiting for trains to pass,
and pollution and noise from idling trains and lessening the risk of
delays for emergency vehicles at crossings.
In pursuit of these public gains, the Federal and state governments
have been increasingly participating in freight rail improvement
projects. For example, the State of Delaware spent about $14 million to
rehabilitate a bridge in exchange for receiving a fee for each railroad
car that crosses the bridge. The Federal Government has also become
more involved in freight rail partnerships. Specifically, in 1997 the
U.S. Department of Transportation provided a $400 million loan to the
Alameda Corridor Transportation Authority for the Alameda Corridor
project, which included a number of rail and road improvements to
consolidate freight traveling to and from the ports of Los Angeles and
Long Beach. These ports are a significant gateway for freight that is
imported from Asia and distributed throughout the U.S. In addition, in
2005, Congress provided $100 million to the Chicago CREATE project to
improve the rail infrastructure and ease congestion in and around
Chicago--the busiest freight rail center in the U.S.
In the years ahead Congress is likely to face additional decisions
regarding potential Federal policy responses and the Federal role in
the Nation's freight railroad infrastructure. Based on our ongoing and
past work, I would like to make three observations. First, any
potential Federal policy response should recognize that subsidies can
potentially distort the performance of markets and that the Federal
fiscal environment is highly constrained. Second, any such response
should occur in the context of a comprehensive National Freight Policy
that reflects system performance based goals and a framework for
intergovernmental and public-private cooperation. DOT initiated this
effort by publishing a draft Framework for a National Freight Policy
this year for comment. Third, Federal involvement should only occur
where demonstrable wide-ranging public benefits and a mechanism to
appropriately allocate the cost of financing these benefits between the
public and private sectors exists and, to the extent possible, focuses
on benefits that are more national than local in scope. Although new
freight rail investment tax credits have been suggested, our past work
has pointed out that it is difficult to target this approach to desired
activities and outcomes and ensure that it generates the desired new
investments as opposed to subsidizing investment that would have been
undertaken at some point anyway. This approach can also have
problematic fiscal impacts because it either lowers tax revenues or
leads to higher overall tax rates to offset revenue losses. We will be
discussing these areas in greater detail when we issue our report.
Mr. Chairman, this concludes my prepared statement. I would be
happy to respond to any questions you or other members of the Committee
may have at this time.
Appendix I--Related GAO Products
Regulation: Changes in Freight Railroad Rates from 1997 through
2000. GAO-02-524. Washington, D.C.: June 7, 2002.
Freight Railroad Regulation: Surface Transportation Board's
Oversight Could Benefit From Evidence Better Identifying How Mergers
Affect Rates. GAO-01-689. Washington, D.C.: July 5, 2001.
Railroad Regulation: Current Issues Associated With the Rate Relief
Process. GAO/RCED-99-46. Washington, D.C.: April 29, 1999.
Railroad Regulation: Changes in Railroad Rates and Service Quality
Since 1990. GAO/RCED-99-93. Washington, D.C.: April 6, 1999.
Railroad Competitiveness: Federal Laws and Policies Affect Railroad
Competitiveness. GAO/RCED-92-16. Washington, D.C.: November 5, 1991.
Railroad Regulation: Economic and Financial Impacts of the Staggers
Rail Act of 1980. GAO/RCED-90-80. Washington, D.C.: May 16, 1990.
Railroad Regulation: Shipper Experiences and Current Issues in ICC
Regulation of Rail Rates. GAO/RCED-87-119. Washington, D.C.: September
9, 1987.
Railroad Regulation: Competitive Access and Its Effects on Selected
Railroads and Shippers. GAO/RCED-87-109. Washington, D.C.: June 18,
1987.
Railroad Revenues: Analysis of Alternative Methods To Measure
Revenue Adequacy. GAO/RCED-87-15BR. Washington, D.C.: October 2, 1986.
Shipper Rail Rates: Interstate Commerce Commission's Handling of
Complaints. GAO/RCED-86-54FS. Washington, D.C.: January 30, 1986.
Senator Lott. Let's go ahead and hear from Mr. Buttrey, and
then we'll ask questions of the both of you.
So, Mr. Doug Buttrey, Surface Transportation Board
chairman, thank you for your service, and we'll be glad to hear
from you.
STATEMENT OF W. DOUGLAS BUTTREY, CHAIRMAN,
SURFACE TRANSPORTATION BOARD
Mr. Buttrey. Good morning, Mr. Chairman, Ranking Member,
members of the Subcommittee.
My name is Douglas Buttrey. I'm Chairman of the Surface
Transportation Board. I appreciate the opportunity to appear
before this Subcommittee today to discuss the economics of the
freight railroad industry as it relates to current service and
capacity issues.
This is my first appearance before this Committee since I
became Chairman of the Surface Transportation Board on January
5. I'm glad to report that the Board has undertaken several
important new initiatives since January in an effort to be
proactive and responsive to concerns that have been raised. I
will outline these initiatives for you in a moment, but first
I'd like to comment briefly on rail capacity and service
issues.
At least some of today's issues differ from those that
prevailed when the Board last appeared before this
Subcommittee. Historically, railroads had excess capacity.
However, the U.S. economy has expanded, and the railroad
industry, like other transportation sectors, has become
capacity-constrained in some areas. The Board has a process in
place to help railroads and their customers resolve service
and/or rate disputes informally before availing themselves of
the Board's formal processes. The Board favors private-sector
solutions, but when informal processes cannot produce a
solution, the Board is available to provide an adjudicatory
forum.
Turning now to the new initiatives since January 1, I would
first like to emphasize that the Board has begun a rulemaking
to reform the large rate case process in an effort to make it
as fair, efficient, and user-friendly as possible. Preparing
the evidence that is required in a large rate case and
presenting it to the Board can be very time-consuming and
expensive for the parties. The Board's staff reviewed the
formal rate proceedings that have come before the agency over
the past few years, and, in February, the Board issued a Notice
of Proposed Rulemaking in an attempt to improve how we handle
certain difficult substantive issues that have come in large
rate cases. Comments and replies have been filed, and rebuttals
are due very shortly.
Because of the scope of these proposed rule changes, the
Board has put its pending large rate cases in abeyance. Things
are not standing still, however. Recently, the Board issued
compliance orders in two of the pending cases to obtain
additional evidence that will be needed to resolve those cases
regardless of whatever rules are ultimately adopted.
The Board is also committed to improvements in the small
rate case area. The Board's staff is continuing to develop new
ideas to improve the existing small rate case procedures where
we can. I cannot today give you a particular date on which a
rulemaking on small rate case issues will be initiated, but I
assure you that we're making every effort to come up with
better guidance in this area. I expect the proposal to be
issued later this summer.
Another matter that has been a serious concern to shippers
in recent months is railroad fuel surcharges. Recently,
unpredictability, volatility, and spikes in fuel costs are well
known. To give parties on both sides an opportunity to address
these matters, the Board held a public hearing--an all-day
public hearing--on May 11. The hearing was very well attended,
but I personally found the shippers and railroads to be worlds
apart in their testimony, even as to factual matters. The Board
is presently considering what action would be appropriate and
helpful in this area.
The Board has also scheduled a public hearing to hear views
on the issue of paper barriers. This hearing, on July 27, will
explore the pros and cons of these limitations on interchanges
that have been imposed in connection with some railroad line
sales and leases. After the hearing, the Board will consider
claims that such limitations are anticompetitive and what, if
any, action is appropriate.
The Board has also instituted a rulemaking proceeding
proposing to change the timing for class exemptions that
provide an expedited process for obtaining authority for some
rail-line acquisitions, leases, and similar transactions.
The Board proposed these changes in order to ensure that
the public is given adequate notice of a proposed transaction
before the exemption can become effective. Comments and replies
have just recently been filed.
Finally, the Board has issued an advance notice of proposed
rulemaking and sought comments on a proposed filed by the
shortline and regional railroads. They seek a new expedited
process for abandonment of rail lines owned by the smaller
railroads. Comments and replies have been filed, and the Board
will now consider what action, if any, is appropriate.
I hope it is clear from this summary that the Board is
listening and sensitive to concerns raised by stakeholders, and
has taken several important steps since January that are
intended to explore how best to address those concerns within
the bounds of our statutory authority. Reforms such as these
are, in my view, the best way to address these concerns while
maintaining a healthy freight rail network.
I'm glad to be participating on this panel today with Ms.
Hecker of GAO, who has presented certain preliminary results of
GAO's ongoing railroad study. The Board has been assisting GAO
with this study and will continue to work with GAO as it moves
forward to complete the study.
I look forward to any questions that you might have. Thank
you, Mr. Chairman.
[The prepared statement of Mr. Buttrey follows:]
Prepared Statement of W. Douglas Buttrey, Chairman,
Surface Transportation Board
Good morning Chairman Lott, Ranking Member Inouye, and members of
the Subcommittee. My name is Douglas Buttrey, and I am Chairman of the
Surface Transportation Board (Board or STB). I appreciate the
opportunity to appear before this Subcommittee today to discuss the
economics of the freight railroad industry as it relates to current
service and capacity issues.
This is my first appearance before this Subcommittee since I became
Chairman of the STB on January 5, 2006. The issues that are the subject
of this hearing are vitally important to the freight railroads, their
customers and employees, and the Nation's freight transportation system
as a whole. I commend the Subcommittee for holding this hearing to look
into these important matters.
I understand that a representative of the Government Accountability
Office (GAO) is also scheduled to testify at this hearing, to present
preliminary findings from GAO's study of recent rate changes in the
freight rail industry. The Board has been cooperating with GAO on this
study, and several meetings have been held between GAO and Board staff
on this subject, to discuss the background and exchange information.
Board staff has shared with me the contents of a preliminary draft
statement of facts from GAO's study. Board staff is currently analyzing
that preliminary draft. Once they have completed their analysis they
will share it with GAO.
First, I will provide an overview of the Board and its
responsibilities, and then I will discuss steps the Board is taking to
address the issues that are the focus of this hearing.
Overview of the STB
The STB was created over 10 years ago by legislation initiated by
this Committee. The ICC Termination Act of 1995 (ICCTA) established a
three-member Board and charged it with the fundamental missions of
resolving railroad rate and service disputes and reviewing railroad
restructuring transactions (mergers, line sales, line construction, and
line abandonments). In addition, the Board was given limited
jurisdiction over certain trucking, bus, household goods, ocean
shipping company (non-contiguous domestic trade), and pipeline matters.
It is important to note that the substantial deregulation effected in
the Staggers Rail Act of 1980 was continued under ICCTA. ICCTA empowers
the Board, through its exemption authority, to promote deregulation
through administrative action. The Board's staff is limited to no more
than 150 employees by appropriation.
Two of the Board's main functions are to provide a regulatory forum
to address rate disputes between railroads and captive shippers, and to
assist shippers with service issues. The Board has created a number of
mechanisms to help railroads and their customers resolve disputes
before availing themselves of the Board's formal processes. For
example, the Office of Compliance and Enforcement operates the Rail
Consumer Assistance Program. That program is intended to provide
assistance to rail consumers in addressing those issues that have not
been resolved through private negotiations. When informal processes
cannot produce a solution, however, the Board is available to provide
an adjudicatory forum.
Although rates throughout the rail industry have generally declined
significantly since the Staggers Act, many shippers believe the Board
has not done enough to address shipper concerns in the areas of rate
and service disputes. I understand those concerns, and I will next
relate the steps the Board is taking to address them.
Shipper Issues
1. Undercapacity
Before I discuss rate and service issues in more detail, I would
like to express my view of what it is that makes at least some of
today's problems somewhat different from the issues that prevailed when
the Board last appeared before this Subcommittee. Historically,
railroads were burdened with excess capacity, which made it difficult
for them to operate efficiently and earn a profit. In recent years,
railroads have become more efficient by rationalizing their systems. At
the same time, however, the U.S. economy has expanded, and the railroad
industry, like other transportation sectors, has become capacity-
constrained in some areas. Unlike some other sectors, however--trucking
companies, for example, which can buy new equipment or hire more
drivers--railroads cannot as readily respond to capacity constraints by
quickly building new track and other facilities. Not only are rail
construction projects expensive and time-consuming, but--as I will
discuss later--these projects often are extremely controversial and can
be the subject of court challenges on environmental issues in
particular.
For those reasons, and others that may be beyond their control,
railroads have experienced intermittent service problems throughout
their systems. To mitigate the effects of their undercapacity, they
have reportedly begun rationing service occasionally. According to some
shippers, they do this by either embargoing large classes of traffic or
by raising rates selectively. Neither of these alleged practices has
been brought formally before the Board, and whether the Board could
afford relief would depend on the circumstances of any formal complaint
that might be brought. If a particular shipper has access to truck
service--even if that service might be more expensive or less
convenient--it might be unable to meet the market dominance requirement
that is a statutory prerequisite to rate relief. And although the
statute requires railroads to provide service on ``reasonable
request,'' what is reasonable is a case-specific inquiry. Railroads
must prioritize competing requests for service, and I cannot say in
advance how the Board would rule on any particular complaint alleging
that a particular railroad's prioritization was so unreasonable as to
be unlawful.
In any event, these concerns might be mitigated if railroads were
able to expand their capacity. Such capital planning decisions depend
on a variety of factors, such as the cost of new facilities, the likely
returns on investment in new facilities, the availability of Federal
and state programs to support and/or incentivize infrastructure
capacity expansion by freight railroads, and so forth.
2. Rate Disputes
Under the statute, the Board has exclusive jurisdiction to resolve
rate disputes in those instances when a railroad has market dominance--
in other words, when the railroad is charging a rate higher than the
regulatory floor and the shipper has no effective transportation
alternative. Under the Interstate Commerce Act, the Board must balance
the often conflicting objectives of assisting railroads in attaining
revenue adequacy, on the one hand, and ensuring that the rates that
individual shippers pay are reasonable, on the other. The balance, as
we all know, is not an easy one. Rates that are too high can harm rail-
dependent businesses, while rates that are held down too low will
deprive railroads of revenues to pay for the infrastructure investments
needed to give shippers the level and quality of service that they
require. The Board has one set of procedures for handling ``large''
rate cases and another for ``small'' cases.
a. Large Rate Cases
The first step in a rate case is a two-part inquiry to determine
whether the railroad has ``market dominance'' over the transportation
to which the rate applies. The first part of the inquiry is to
determine the ``variable costs'' of providing the service. The statute
establishes a conclusive presumption that a railroad does not have
market dominance over transportation if the rate that it charges
produces revenues below 180 percent of the variable costs of providing
the service, which means that this 180 percent revenue-to-variable cost
(R/VC) percentage is the floor for regulatory scrutiny.
If the rate the railroad charges exceeds the 180 percent R/VC
threshold, the second part of a market dominance inquiry involves a
qualitative assessment in which the Board must determine whether there
are any feasible transportation alternatives that could be used for the
traffic involved. The Board considers whether there is actual or
potential direct competition--that is, competition either from other
railroads (intramodal competition) or from other modes of
transportation such as trucks, pipelines, or barges (intermodal
competition) for transporting the same traffic moving between the same
points. If there are effective competitive alternatives for the
transportation, then the Board does not have jurisdiction to regulate
the rate, even if the rate charged yields an R/VC ratio greater than
180 percent.
If the shipper can show that the railroad is market dominant, then
the Board applies its court-approved methodology for rate review known
as constrained market pricing (CMP) to assess whether the rate being
charged that shipper is in fact unreasonable. CMP provides a framework
for the Board to regulate rates while affording railroads the
opportunity to cover their costs. CMP is premised on differential
pricing, that is, pricing based on the demand for the service provided.
CMP principles recognize that, in order for railroads to earn adequate
revenues, they need the flexibility to charge different customers
different prices based on each customer's demand for rail service. But
CMP principles also impose constraints on a railroad's ability to
price. Despite the complexity of CMP, the courts have held that it is
the most desirable available approach to railroad rate review and that
the Board must use it whenever it is feasible.
The most commonly used CMP constraint is the stand-alone cost (SAC)
test. Under SAC, a railroad may not charge a shipper more than what a
hypothetical new, optimally efficient carrier would need to charge the
complaining shipper if such a carrier were to design, build, and
operate--with no legal or financial barriers to entry into or exit from
the industry--a system to serve only that shipper and whatever group of
traffic that shipper selects to be included in the traffic base. The
ultimate objective of the SAC test is to ensure that the complaining
shipper is not charged for carrier inefficiencies or for facilities or
services from which the shipper derives no benefit. As with CMP in
general, this assures the complaining shipper that it is not required
to pay for inefficiencies or to unfairly subsidize other customers of
the railroad.
I am aware that some shippers believe that the deck is stacked
against them in rate cases brought under SAC. Yet, the Board's rate
decisions historically have divided about evenly in terms of shipper
wins versus carrier wins. I have attached a table setting forth this
information as Exhibit A. Furthermore, nearly all of the Board's rate
decisions that have been challenged in court--whether challenged by
railroads or by shippers--have been affirmed.
Nevertheless, the Board is working very hard to reform the large
rate case process, in an effort to make it as fair, efficient and user-
friendly as possible, given the somewhat competing statutory
objectives. It is undeniable that deciding large rate cases is time
consuming and costly for both the parties involved and the Board. The
Board by statute has 9 months after the close of the record to decide a
large rate case, and it can take more than twice that long after the
shipper files its complaint for the parties to file all their evidence
with the Board. Preparing that evidence and presenting it to the Board
can be very time-consuming and expensive for the parties, and the Board
devotes a significant amount of staff time and resources to these cases
as well.
In recent years, the Board has developed new ways to simplify and
speed up the rate review process. It has provided for: non-binding
mediation at the beginning of the case, under the Board's auspices,
between the shipper and the railroad; expedited procedures to resolve
disputes, using Board staff, over what information the parties can be
required to give to each other during discovery; technical conferences
to resolve, before the actual evidence is filed, certain factual
disputes between the parties using the expertise of Board staff; and
public versions of all filings with the Board that can protect
confidential information but still be read and understood by all
parties and the public. These new procedures have for the most part
improved the process by helping to move large rate cases forward.
Since I became Chairman, our staff has reviewed the rate
proceedings the agency has processed over the past few years, and the
Board has issued a Notice of Proposed Rulemaking (NPR) in an attempt to
improve how we handle certain difficult substantive issues that have
come up. In particular, we are seeking comments on six proposed changes
to large rate case procedures. Those changes would focus on how the SAC
process ought to arrive at the maximum reasonable rate once it is
determined that an existing rate is too high; how the SAC process can
better reflect economies of density; how the SAC process can better
reflect carrier productivity gains when forecasting future carrier
costs; how to simplify the costing process; how to improve the
``discounted cash-flow'' analysis used to calculate the need for rate
relief; and better procedures for reopening or vacating a prior Board
decision in SAC cases.
Comments and replies have already been filed, and rebuttals are due
shortly. Because of the scope of these proposed rule changes, the Board
has put its pending large rate cases in abeyance. Things are not
standing still, however. Recently, the Board issued compliance orders
in two of the pending SAC cases, to obtain additional evidence that
will be needed to resolve those cases regardless of whatever rules are
ultimately adopted.
In sum, while major litigation of the type involved in large rate
cases is expensive and may appear to be slow, the Board has made
progress in helping to ensure that the rate cases before it can proceed
faster, cheaper and better. I will make it a priority to continue to
make more improvements in this area. I expect significant progress when
the pending rulemaking is completed.
b. Small Rate Cases
In 1996, in response to a Congressional directive, the Board
adopted simplified guidelines for assessing the reasonableness of
challenged rail rates in cases in which a full SAC presentation is too
costly. Under these guidelines, the reasonableness of a challenged rate
is determined by examining the carrier's overall revenue needs, how the
railroad prices its other captive traffic, and how railroads in general
price comparable traffic.
Shippers have expressed various concerns over how these procedures
would play out in a particular case. They say that the ambiguity of who
would qualify to use the small rate case procedures is a serious hurdle
that has kept them from bringing cases. They have expressed concerns
about how railroads might use the discovery process to unreasonably
draw out a case. And shippers (and railroads) have urged the Board to
adopt a more precise and predictable rate standard for small cases.
The agency held public hearings on this matter, and its staff met
with staff from other economic regulatory agencies to gather
information on how they handle smaller disputes. When a small rate
complaint was filed last year--the ``BP/Amoco'' case--we modified some
of our processes to make the case move more smoothly. We also provided
for agency mediation. We were pleased to see that, largely as a result
of these measures, the parties were able to settle the BP/Amoco case at
an early stage.
But I know that more needs to be done in the small rate case area,
and our staff is continuing to work hard to improve the existing
procedures where we can. I cannot give you a particular date on which
an NPR will be issued, but I assure you that we are trying to come up
with better procedures in this area. I have directed staff to work up a
recommendation and would expect a proposal to be issued later this
summer.
3. Fuel Surcharges
One matter that has concerned shippers in recent months relates to
railroad fuel surcharges. Recent unpredictability, volatility, and
spikes in fuel costs are well known. As fuel is a substantial component
of railroad costs, carriers have sought to recover their increased fuel
costs through surcharges. Many in the shipper community, however, have
expressed concern with the way in which these fuel surcharges have been
implemented. To give parties on both sides an opportunity to address
these matters, on May 11, 2006, the Board held a public hearing. The
hearing was well attended, and I found the testimony to be very
thoughtful and enlightening. The Board is presently considering what
action would be appropriate and helpful in this area.
4. Competitive New Services
Many shippers would like to obtain service from a second, competing
railroad. Sometimes rail customers may work with a second railroad to
apply for authority to construct a new rail line. The Board's
experience over the past several years has shown that new line
construction--and there have been several new line constructions over
the past few years--can bring competition while maintaining the
private-sector characteristics of our rail system. But it can also be
costly, and rail constructions, more than almost any other rail
activity, generate community concerns that can delay and complicate the
process.
The Board must take two regulatory steps before the construction of
a new rail line can occur. First, the Board's environmental staff must
conduct the necessary environmental review of the project. Second, the
Board must consider and balance environmental concerns and the
transportation-related merits of the proposed addition to the rail
network. The Board has worked hard to expedite consideration of
requests to construct rail lines whenever possible, and to approve them
when appropriate.
Three of the most controversial projects that the Board has
recently addressed are the ``DM&E,'' ``Bayport Loop,'' and ``Tongue
River'' cases. In DM&E, the Board, after an extensive environmental
review, approved the construction by the Dakota, Minnesota and Eastern
Railroad of a line into the Powder River Basin in Wyoming, which, if
constructed, will provide enhanced rail transportation options for coal
shippers, particularly in the Midwest. The United States Court of
Appeals for the Eighth Circuit found on judicial review that the Board
had done ``a highly commendable and professional job,'' but it
nonetheless remanded the matter to the agency for limited additional
consideration of four environmental issues. In a decision issued a few
months ago, the Board addressed the issues remanded by the court. The
Board's most recent decision has again been challenged in court by
environmental and local groups, and construction of the line has not
yet begun.
In Bayport Loop, the Board approved the construction of a line to
provide BNSF Railway Company access into the Bayport industrial area
near Houston, to bring competition to the service provided by Union
Pacific Railroad Company (UP) to the large concentration of chemical
companies located there. After the project was approved, it was tied up
in Texas state courts by zoning and other land use objections raised by
the city of Houston. Ultimately, the construction became unnecessary
when UP and BNSF announced that they had reached agreement to provide
these shippers with access to both railroads over the existing UP line.
In Tongue River, the Board is now considering the latest version of
a longstanding construction case designed to provide a more efficient
route for coal from the Powder River Basin to electric utilities. Two
portions of the Tongue River Railroad's project to construct and
operate a new railroad line in Montana were approved several years ago
by the Board's predecessor agency, the Interstate Commerce Commission,
and then the Board. However, the project did not go forward as
originally proposed, and the carrier presented the Board with an
amended proposal for part of the construction. The Board's
environmental staff is currently completing its final environmental
document. The agency will then determine whether it should approve the
redesigned project.
While build-ins can increase competition and provide many benefits,
we have seen that at times the construction of new rail lines can be
controversial in the communities where the construction would take
place. Indeed, both DM&E and Bayport Loop generated extensive local
opposition and spawned court challenges by various citizen and other
groups, and environmental issues have also been raised in Tongue River.
5. Service Issues
As with other industries, railroads and shippers sometimes have
disputes over service. The Board has a very active consumer assistance
program that handled a total of 121 disputes during 2005. We cannot
always resolve the issues, but we are often successful at bringing the
parties closer together and getting them to talk to each other.
The Board has rules that allow us to temporarily substitute a new
carrier for an existing carrier that is unable to provide adequate
service. We have used those rules several times in the past few years,
and we will use them again when appropriate. But I must point out that
those rules are not a viable remedy for many of the service issues we
see today, because if a line is already clogged up with too much
traffic, putting another railroad on the line will not fix the problem
and may even present problems of its own. Therefore, while our
substituted carrier rules may be very helpful in certain circumstances,
probably the best way to address service problems long-term is for new
infrastructure to be added to the rail system.
6. Preemption
As you all know, in ICCTA, Congress strengthened the statutory
preemption provision that protects railroads from most state and local
regulation. Although it may not be the subject of this hearing, I know
that preemption is an issue that has concerned many Members of Congress
in recent months. I will not go into the preemption issue in much
detail here, but I would like to emphasize a few important points.
First, concerned parties always have avenues of recourse if they
think Federal preemption is being improperly asserted. They can raise
their concerns before the Board in a proceeding that requires a
license, or through the Board's declaratory order process where no
license is required; or they can choose to go directly to a court.
Emergency relief can be, and has been, sought and obtained promptly in
each forum.
Second, Federal preemption applies only to rail activities that are
conducted by a railroad or its agent, and that are part of ``railroad
transportation'' as defined in the statute. The Board has demonstrated
its vigilance in making these fact-specific determinations in the
individual cases that have been brought before it, to ensure that only
those operations that qualify for the Federal preemption will benefit
from it.
Third, even where Federal preemption applies, Federal environmental
laws remain applicable, including those that are implemented in part by
the states such as the Clean Air Act, the Clean Water Act, and the
Solid Waste Disposal Act. In addition, states and local entities
clearly retain their reserved police powers.
7. Paper Barriers
The Board has also scheduled a public hearing to hear views on the
issue of ``paper barriers.'' This hearing, on July 27, 2006, will
explore the pros and cons of these limitations on interchange that have
been imposed in connection with some railroad line sales. After the
hearing the Board will consider what, if any, action should be taken.
8. Initiatives Concerning Abandonments and Exemptions
Lastly, I want to briefly inform the Subcommittee about some other
initiatives that the Board is pursuing that may improve the regulatory
process.
The Board instituted a rulemaking proceeding proposing to change
the timing for ``class exemptions'' that provide an expedited process
for obtaining authority for some rail lines acquisitions, leases, and
similar transactions. The Board proposed the changes to extend the
opportunity for the public to raise concerns before the Board in these
types of cases. Comments and replies have just recently been filed.
Additionally, the Board issued an Advance Notice of Proposed
Rulemaking and sought comments on a proposal filed by a group of short
line and regional railroads. They seek a new, expedited process for
abandonment of rail lines owned by Class II and Class III railroads.
Comments and replies have been filed, and the Board will now consider
what action, if any, is appropriate.
Neither of these proposals, if adopted, would dramatically change
the fabric of transportation regulation, but both proceedings have been
initiated to address areas of concern. The abandonment proceeding was
instituted after small carriers raised concerns that the current
procedures impose undue hardships on them, while the timing changes to
the exemption process were proposed to ensure that the public is given
notice of a proposed transaction before the exemption can become
effective.
Conclusion
The Board is striving to address the concerns raised by captive
shippers, and has several important initiatives underway that are
intended to do just that. Reforms such as these are, in my view, the
best way to address the concerns raised by captive shippers while
maintaining a healthy freight rail network. It is a difficult balance,
but one that can be achieved.
I appreciate the opportunity to discuss these issues today, and
look forward to any questions you might have.
Exhibit A--June 2006
STB Rail Rate Case Results
Shipper showed rate unreasonable (Board ordered reparations
for shipments moved while case pending & prescribed rate for
future shipments):
1. Arizona Pub. Serv. Co. et al. v. Atchison, T.&S.F.R.R., 2
S.T.B. 367 (1997), modified, 3 S.T.B. 70 (1998)--reparations
(approx. $23 million) & rate prescription (approx. 40 percent
reduction); rate prescription lifted in 2004 due to changed
circumstances (earlier-than-expected depletion of coal reserves
at mine).
2. West Texas Util. Co. v. Burlington N. R.R., 1 S.T.B. 638
(1996), reparations calculated, 2 S.T.B. 683 (1997), aff'd sub
nom. Burlington N.R.R. v. STB, 114 F.3d 206 (D.C. Cir. 1997)--
reparations (approx. $11.4 million) & rate prescription;
prescription revised in 2003 to correct for error.
3. FMC Wyo. Corp. et al. v. Union Pac. R.R., 4 S.T.B. 699
(2000)--reparations & rate prescription (approx. 15 percent
reduction) (minerals).
4. Wisconsin Power & Light v. UP, 5 S.T.B. 955 (2001),
modified, STB Docket No. 42051 (May 14, 2002), aff'd, Union
Pacific R.R. v. STB, No. 02-1198 (D.C. Cir. Apr. 30, 2003)--
reparations & rate prescription (approx. 11 percent reduction).
5. Texas Municipal Power Agency v. Burlington N.&S.F.Ry., STB
Docket No. 42056 (STB Mar. 24, 2003), modified (STB Sept. 27,
2004)--reparations & rate prescription (approx. 1-3 percent
reduction).
6. Public Serv. Co. of Colo. d/b/a Xcel v. BNSF, STB Docket No.
42057 (STB June 8, 2004), modified (STB Jan. 19, 2005), aff'd
sub nom. BNSF Ry. v. STB, No. 05-1030 (D.C. Cir. June 16,
2006)--reparations (approx. $14 million) & rate prescription
(approx. 16 percent reduction).
Shipper failed to show rate unreasonable:
1. McCarty Farms, Inc. et al. v. Burlington N., Inc., 2 S.T.B.
460 (1997), modified, 3 S.T.B. 102 (1998), aff'd, McCarty
Farms, Inc. v. STB, 158 F.3d 1294 (D. C. Cir. 1998) (grain).
2. PPL Montana, LLC v. Burlington N.&S.F.Ry., STB Docket No.
42054 (STB Aug. 20, 2002), reaffirmed after reviewing
supplemental evidence (STB Aug. 31, 2004), aff'd, PPL Montana,
LLC v. STB, No. 04-1369 (D.C. Cir. Feb. 17, 2006).
3. Duke Energy Corp. v. Norfolk Southern Ry., STB Docket No.
42069 (STB Nov. 6, 2003), modified (STB Oct. 20, 2004),
dismissed based upon voluntary settlement (STB July 8, 2005).
4. Carolina Power & Light Co. v. Norfolk Southern Ry., STB
Docket No. 42072 (STB Dec. 23, 2003), modified (STB Oct. 20,
2004), dismissed based upon voluntary settlement (STB July 8,
2005).
5. Duke Energy Corp. v. CSX Transp. Inc., STB Docket No. 42070
(STB Feb. 4, 2004), modified (STB Oct. 20, 2004), dismissed
based upon voluntary settlement (STB July 8, 2005).
6. Arizona Elec. Power Coop., Inc. v. Burlington N.& S.F. Ry.,
STB Docket No. 42058 (STB Mar. 15, 2005), pet. for judicial
review pending, Arizona Elec. Power Coop., Inc. v. STB, No. 05-
1136 (D.C. Cir. filed Apr. 22, 2005).
7. Otter Tail Power Co. v. BNSF Ry., STB Docket No. 42071 (STB
Jan. 27, 2006), modified (STB May 26, 2006), pets. for judicial
review pending sub nom. Otter Tail Power Co. v. STB, No. 06-
1962 et al. (8th Cir. filed Apr. 10, 2006).
Senator Lott. Thank you very much. Just a couple of
questions.
First, Ms. Hecker, your testimony indicates that the rate
relief process at STB is slow and expensive. And I don't see
how there can be any debate about that. Mr. Buttrey here has
outlined a number of initiatives that they're working on at the
Board. Do you have any reaction to those initiatives? And do
you have any suggestions of what more could be done to deal
with these obvious problems?
Ms. Hecker. I do observe that most of the areas that have
been proposed are issues that are being studied. The few that
we highlight are the simplified guidelines, looking at
alternative cost approaches, streamlining the process. So, I
think they are generally being examined. We have not really
reviewed those proposals, though, and perhaps we'll continue to
work together to be able to share what we've learned so that
that can be a component of their review.
Senator Lott. Well, I hope you would review them and have
some input into what they should consider doing.
Now, Mr. Buttrey, GAO has pointed out, and others have
pointed out, that small shippers can't use the process used by
the larger shippers to challenge a rate because of the cost and
the difficulties of the process. What is your position on
creating a process that would make it more accessible to the
smaller shippers?
Mr. Buttrey. Well, Senator, the simplified guidelines for
small rate cases came out of a request from Congress to
actually do that. And so, the Board put its hand to that task
and, frankly, thought we had done a pretty good job of that.
And so, we were pretty proud of those rules. But, as it turns
out, those rules have only been used once since going into
effect.
Senator Lott. Well, what does that mean? Does that mean
that they are not effective, or does that mean that maybe there
wasn't as much need to have that access as maybe had been
indicated?
Mr. Buttrey. It probably means that we didn't do quite as
good a job as we could have or should have perhaps in designing
them to make them more accessible. The filing fee is very low.
There are expedited procedures in place. But they have been
used only once. When that case actually came before the Board,
we required the parties to go into mediation prior to the case
being prosecuted, and that case was settled between the two
parties within about 3 days. And so, we really don't have any
example, of a case going forward. So, what we have concluded is
that we need to sit down and go over this whole process again
and come up with more simplified rules and better processes,
and make the system even simpler to use than we had earlier
done. And we are in the process of doing that right now.
Senator Lott. If a shipper wins a case before the STB, and
the losing railroad appeals the decision of the courts, who's
responsible for defending the position of the STB? Would the
shipper bear any of the cost of that appeal?
Mr. Buttrey. Senator, when the case is decided at the STB,
and a party sues, the STB becomes the defendant in that case,
and we have to defend that case on appeal.
Senator Lott. Then the shipper doesn't have to incur cost
as a result.
Mr. Buttrey. No, we do that.
Senator Lott. Right.
Mr. Buttrey. We defend our decision.
Senator Lott. I just have a feeling that there are some
entities, perhaps, that are taking advantage of this fuel
surcharge issue. And you had a hearing. Based on that hearing,
you said that there was a huge divide between, you know, what
the shippers are saying of the fuel surcharges and what the
railroad's saying. It's kind of like people trying to give you
a lecture on supply and demand; I've heard all that before. But
usually there's a pretty easy, common sense answer. Either you
are or you aren't. Now, I realize you've got to deal with
fluctuations, but there's a way to do that. The line is like
that. The lines don't go like that. [Indicating.] You know, is
this a real problem? And what are you going to do about it?
Mr. Buttrey. The word I use to describe the testimony that
I heard was a total disconnect between what the parties were
saying.
Senator Lott. Basically your job's to try to discern the
truth between the two.
Mr. Buttrey. Pardon me?
Senator Lott. Your job should be to try to discern the
truth between the two disconnects.
Mr. Buttrey. We need to separate the wheat from the chaff,
yes, sir.
Senator Lott. Yes.
Mr. Buttrey. And that's what we intend to do. The concern,
of course, as you stated in your opening statement, is that--
the claim is that the carriers may be using fuel surcharges as
a profit center. And it's up to the regulatory process to
determine whether that's, in fact, the case or not, and that's
exactly what we plan to do. It could be that the methodology
used by the shipping public and by the railroads to arrive at
these numbers is not uniform. And it could be that there may be
some need for uniformity in how these charges are calculated
over time. And so, that's one of the things we're going to be
looking at. We're going to pursue this very aggressively.
Senator Lott. I hope you will. I don't want to accuse
anybody, but, if anybody is finding a way to make money off
this, I consider that to be cheating, flat out, and would be
highly offended that that would occur. So, I hope that your
effort and my comments and those of others will influence
conduct to make sure that's not the case.
Senator Burns?
Senator Burns. Thank you very much, Mr. Chairman.
I'm really troubled, Mr. Buttrey, by, ``Well, that's what
we're going to do,'' and, ``That's what we're pursuing,'' and
we've had a year of this, and nothing has been done. I don't
know whether you're working 5 days a week down there, and give
the full 8 hours, but this is serious. And I--and I'm troubled
by that kind of testimony here today. There's no excuse why
this hasn't been handled already. There is no excuse
whatsoever, in my mind, in watching all this. And I'm going to
get very cranky about that.
A statement of future--on your--Ms. Hecker, on your display
this morning, ``Railroads reporting significant increased
investment for future is uncertain. Enhancing captive-shipper
protection can affect resources for investment.'' Would you
explain that statement to me?
Ms. Hecker. Well, the first half of it is that there has
been a substantial increase by railroads in capital investment,
reportedly over $8 billion. There are issues about where that's
going and the percent of that that's really just maintenance,
as opposed to capacity expansion. So, part of the question that
you all asked was--is, ``Capacity needs are growing. What are
the railroads doing?'' So, the first answer was, yes, they are
increasing their capital investment. How much of it is going to
capacity expansion is an open issue.
The second half of it was to recognize the nexus that
clearly exists between any changes in shipper protection. Most
of these policy reforms, whether it's reciprocal switching or
terminal access, and potentially even a simplified process that
has a more expedited settlement that may not be economic-based,
but just an arbitrator, for example, those are likely to all
increase cost to the railroads. We're not saying they're not
justified. Part of our analysis is that what we need is a more
fine-tuned assessment of the nature of the captivity, the
problem, and what the appropriate remedies are to potentially
impose increased costs on railroads, but to recognize that
those increased costs will reduce their capacity to invest for
the future.
Senator Burns. Well, I thank you for explaining that to me.
In your testimony, you noted the Staggers Act was generally
designed to create a healthy revenue-adequate railroad, as well
as to provide for competition and shipper protections. You also
note that the Staggers Act has been very positive for the
railroads. And railroad revenue adequacy is becoming more of a
reality--you've already stated that--which I think we all agree
is a good thing. But you also note that the shipper complaints
about lack of competition are on the rise. And that situation
for captive shippers is getting worse in many areas. Now, is it
fair to say, then, that the Staggers Act has not achieved the
right balance between railroads and shippers, that perhaps the
focus on revenue adequacy has overshadowed the need for
competition and for shipper protection when there is no
competition? Do you think that the Staggers Act has met its
goals?
Ms. Hecker. I think you rightly point out that there were a
mix of goals. And there's no doubt that it's met its goals in
improving the stability and revenue adequacy of the railroads,
and, in fact, their growth and dynamic importance for our
economy. I've been doing work on railroads, and traveling the
world, and the U.S. freight rail system is the envy of the
world. There is no other system that is as efficient and that
contributes to our economic growth because of its contribution
to efficiency in our logistics system.
On the other hand, I think there is some real concern about
whether the goals regarding the protection of truly captive
shippers has been achieved. It is very, very costly. It is not
an accessible system. The data is mixed. And that's our
concern, why more analysis is needed, of where the captivity
is, because there is not one bit of evidence. We see some
evidence, and some of it I shared today, that the amount of
traffic traveling under 300 percent of that ratio is
substantially increased. So, a lot more shippers are paying
relatively less than they were, and that's borne out by the
overall rate-decline data.
Our concern is with a very small portion of shippers, who
appear to be increasing--it's a small number, but it's
increasing--who are paying very substantially above what may be
their fair and justified share of railroad costs.
Senator Burns. So that you and I can discuss this in
another venue, how do you define--how would you define
``captive shipper''?
Ms. Hecker. Well, it's really--the law says the threshold
trigger is the--rate--is over the 180-percent degree, and then
it's no available options, either by rail or by other mode, so
you're just stuck. You have that one railroad, and that's your
only option. The difficulty is in really measuring that and
then also coming up with what the right response is. And then,
I think--that's why I tried to say that some of the responses
that really will promote competition and really increase
competition between railroads, and provide more viable options,
may justify as much examination as fixing the process after the
fact, really trying to focus more on achieving the goals of
Staggers that were about ensuring there was more competition.
Senator Burns. Well, I wish you'd--and my time is up, and
I'll move on, but I wish you'd just give me a simple, everyday,
man-on-the-street definition of ``captive shipper,'' so you and
I can discuss some of these problems, because we hear all this
legalese and all this other stuff that runs out, and then you
want to add numbers and graphs and all of this. That doesn't
make any difference to a farmer in Montana when he thinks he's
getting hammered, or people that are shipping coal to
powerplants around the country. Let's define what a ``captive
shipper'' is, and then we can address the problems.
Thank you very much, Mr. Chairman.
Senator Lott. Senator Dorgan?
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much.
I'm familiar with cranky Montanans, by the way.
[Laughter.]
Senator Dorgan. We're neighbors. But we're cranky, as well.
I mean, we're damn mad about what's going on with rail rates in
North Dakota.
Let me give you an example. And I don't know whether these
numbers are current, but they were accurate not very long ago.
If you were to put a carload of wheat on the tracks in Bismarck
and run it over to Minneapolis, you'd pay about $1,000, put it
on a--excuse me, you'd pay $2,400--put it on in Minneapolis,
run it to Chicago, about the same distance, you'd pay $1,000.
And North Dakota farmers wonder, ``Why do we pay twice as
much--two and a half times as much?'' What's the justification
for that?
Ms. Hecker, you indicated there's a question of whether
we've truly protected captive shippers. There's no question
about that. We truly have not protected captive shippers. I
think you were just musing a rhetorical question. And we have
not done that. And I would say, with respect to what my
colleague from Montana just said, if there's ever an Olympic
event for studying, clearly the Surface Transportation Board is
a Gold Medal winner here. They have studied and studied and--
they've been studying this since I showed up in Congress over
two decades go. We've had ten rail rate cases filed since 2001.
Before then, it was even more dismal. Ten rail rate cases since
2001, average $3 million apiece to do them, three and a third
years apiece. I mean, clearly there's a failure here. Clearly,
a failure.
And when you talk about captive shippers, it may be hard
for academics to define, but it's not hard for a shipper that's
held captive to define, I'll tell you that. I've got people in
Dickinson, North Dakota, that are trucking wheat with an 18-
wheel truck almost 200 miles east in order to put it on a
railcar to run it right back through the farmstead on the track
going to the West Coast. And they think that's stupid, that
they're required to do that because of the way the system is
set up.
But, having said all that, you know, they remixed an Elvis
Presley tune 25 years after he was dead. They remixed it and
put it out, and it hit the chart--hit number one in the charts
25 years after he died. And it was, ``A little less
conversation, a little more action, please.'' He probably
wasn't talking about the Surface Transportation Board, but that
sure applies. A little less conversation, a little more action,
please.
Now, a quick question. Ms. Hecker, you said that the
Surface Transportation Board has, quote, ``broad legislative
authority to investigate rail industry practices,'' unquote.
And yet, I believe you say they have limited their reviews to
merger cases, by and large--competition and merger cases.
Ms. Hecker. And rate cases.
Senator Dorgan. Yes. Mr. Buttrey, do you agree with that
statement? And, if so, why has the Surface Transportation Board
been so reluctant to take action on almost any of the issues
that are the thorn under the saddle of folks out there that are
held captive?
Mr. Buttrey. Well, Senator, our charge, as we understand it
under the Staggers Act, is to be an adjudicatory body and to
hear cases that are brought to us by captive shippers or in
large rate cases or service issue cases, or in small rate
cases. And we do not believe that we have the authority to go
out and set rates on our own.
Senator Dorgan. So, you disagree----
Mr. Buttrey.--A case is brought to us, evidence is adduced,
and you try these matters in the crucible of an adversary
proceeding.
Senator Dorgan. So, you disagree with Ms. Hecker that you,
``have broad legislative authority to investigate rail industry
practices''? You disagree with that?
Mr. Buttrey. We can have hearings to look into practices
that are going on in the industry, and we are doing that.
Senator Dorgan. But my--but the point I was making, and I
think the point my colleagues were making, is, cases aren't
coming to you, because the system is broken. The small shippers
don't feel like they get a fair shake. First of all, it costs
way too much, takes too much time, and, when it gets there,
they don't think they're going to get a fair result. So, if
cases aren't coming to you, and we're hiring an STB--and I--you
know, I know I've said the STB is dead from the neck up. I know
that's not true. It's just a--your evidence--your being here in
person today is evidence that's not true.
[Laughter.]
Senator Dorgan. But the fact is--but the fact is, I've said
that because I am so enormously frustrated by this--a
regulatory agency that says, ``You know what? We're going to
sit here. When somebody comes to us, then we're going to wake
up and deal with it. But, until then, we're sorry, tough
luck.'' Ms. Hecker says you have broad legislative authority to
investigate rail industry practices. My feeling is, if that's
the case, if that's her interpretation of the law, and that is
the law, then why would you not be aggressively evaluating this
issue of competition and taking action, rather than just
sitting and waiting until someone brings a case to you?
Mr. Buttrey. We have rulemaking authority. We only have
authority that's given to us by the Congress. And we are trying
to administer that, as we understand it to be. And that's the
reason we're going through the rulemaking proceedings that
we've instituted since January. Many of these regulatory
rulemakings that we're pursuing right now, which are, by the
way, on a very aggressive schedule, are to address the issues
that all of you have raised this morning.
Senator Dorgan. But, do you know what? I heard that 10
years ago, and I heard that 20 years ago. Nothing's changed.
It's like Groundhog's Day; we wake up, same day again. And I
just--I think what Senator Burns and others are saying, you
know, it's time, really, to get serious. This is not a
rhetorical question, ``Have we truly protected captive
shippers?'' The answer is, no. No, of course we haven't. And we
need to get about the business of doing that. And I'm telling
you, Ms. Hecker, the captive shippers in my state would not--
whether it's coal or wheat--would not take a look at that rail
line and say that, ``Yes, we're the beneficiaries of lower
rates.'' That is simply not the case in our area. In fact, they
feel they're paying rates that are outrageous, far above that
which is justifiable. And so does our state regulatory agency,
the Public Service Commission of North Dakota.
Mr. Chairman, I have an Indian Affairs hearing that I'm co-
chairing with Senator McCain. I have to leave, but I want to
thank you for holding this hearing.
And thank both of you for testifying. I hope you
understand, we really--at least I really want action. Those of
us that have introduced the legislation in our Committee--
Senator Burns, Rockefeller, myself, and others--we really want
to see something done here that fixes the problem, not have
another decade go by and then we have another hearing, and we
say, ``You know what? We're studying this.''
Senator Lott. Thank you, Senator Dorgan.
Senator Pryor was next to arrive, but he has agreed to
yield to Senator Lautenberg, because he has a conflict also.
Senator Lautenberg, we'd be glad to hear from you.
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg.--I thank my friend from Arkansas for
allowing me this statement. Since I was reelected, there are
not many people I am senior to in rank, so I----
[Laughter.]
Senator Lautenberg.--have to pick on Senator Pryor. And I
thank you, Mr. Chairman.
I ask unanimous consent that my full statement be included
in the record.
Senator Lott. It certainly will be included at this point.
[The prepared statement of Senator Lautenberg follows:]
Prepared Statement of Hon. Frank R. Lautenberg,
U.S. Senator from New Jersey
Good morning Mr. Chairman. Thank you for calling this hearing.
Some people think of railroads as a mode of transportation that
emerged in the 19th century, dominated the early part of the 20th
century, and then slid toward irrelevance.
But the reality is that rail service remains vital to our economy
and our way of life in the 21st century.
Freight rail lines handled 1.7 trillion ton-miles of goods in
2005--a 19 percent increase from just 2 years before. And railroads
posted record profits.
The public benefited as well. Rail remains a cost-effective way to
move goods, which means lower prices for consumers. And every container
that is hauled by rail means one less truck on our crowded highways,
less pollution in our air, and less oil consumed.
Rail has remained relevant because it is seamlessly integrated into
our transportation system. Last month the Senate adopted my resolution
to commemorate the 50th anniversary of the intermodal shipping
container, which first sailed from the U.S. from the Port of Newark.
Today, shipping containers are the backbone of our transportation
system. More than 8.7 million containers moved by rail in the United
States last year.
It is projected that by the year 2020, freight moved by rail will
increase 44 percent, while freight moved by truck is projected to
increase more than 60 percent. With highways operating at capacity in
many regions, some transportation officials are asking if it would make
sense to direct more traffic from the roads to the rails.
But railroads are operating at capacity as well, so this won't be
possible without greater investment in the rail infrastructure.
Although this infrastructure is privately owned, the railroads
continue to ask Congress for help in maintaining and improving their
tracks and yards.
If we can justify these expenditures, there is no reason why we
shouldn't also make similar investments in passenger rail
infrastructure. Senator Lott and I have a bill that will begin to
create a passenger rail system for the 21st Century, and I hope we are
able to bring it to the floor soon.
I want to mention that there is one aspect of our current freight
rail regulator system that troubles me--the failure of the Surface
Transportation Board to actively enforce environmental standards.
Congress never intended for solid waste processors to get a ``free
pass: on environmental standards by claiming to be ``railroads.''
The Surface Transportation Board should act to correct this
misinterpretation, before Congress is forced to act.
Thank you Mr. Chairman.
Senator Lautenberg. The one part that I'm, kind of, focused
on this morning--and we all are aware of the fact that rail is
continuing to pick up its obligations to carry freight and so
forth, and we're not discussing the details, but it's--we can't
fit another truck or--out there on the highways without
noticing that things are jammed up. And rail is also, in my
view, or I think in the view of many experienced people, that
there isn't enough capacity in rail to carry what is
anticipated to be a great jump in freight traffic. So, we--that
investment has got to come along. But Senator Lott and I have
also made a recommendation that we invest in passenger rail
service. It has the same beneficial result, and that is getting
cars off the highway, reducing pollution, reducing dependency
on imported oil. So, we're working hard to get that up front in
the--in our agenda.
And I--but I do want to mention one aspect of the current
freight rail regulator system that troubles me, and that is the
failure of the Surface Transportation Board to actively enforce
environmental standards. Now, Congress never intended, for
instance, for solid waste processors to get a free pass on
environmental standards by claiming to be railroads. And I
think that the Surface Transportation Board should act to
correct this misinterpretation before Congress is forced to
act.
So, Mr. Buttrey, I ask, is the Surface Transportation Board
doing anything about companies that are essentially focused on
solid-waste handling, as it is in New Jersey, who are
pretending to be railroads--and I use that comment, kind of,
cynically--in order to avoid state environmental laws? Are you
familiar with that kind of a condition?
Mr. Buttrey. Yes, Senator, I am familiar with that
situation. It's been brought to our attention, not only
informally, but formally at the Board. Just a few days ago, I
testified in the House on this very issue of entities of one
kind or another trying to hide behind the pre-emption
provisions of the Act. I assured the Transportation and
Infrastructure Committee at that time--and, by the way, I
happen to have a copy of my testimony with me today, and if
it's permissible, I could submit that for the record, if that's
OK with the chairman, and get that in the record, since you
asked a specific question about it.
[The information referred to follows:]
Testimony of W. Douglas Buttrey,
Chairman of the Surface Transportation Board
House Committee on Transportation and Infrastructure
Subcommittee on Railroads
Hearing on Impacts of Railroad-Owned Waste Facilities
10 a.m. May 23, 2006
Good morning, Mr. Chairman. My name is Douglas Buttrey, and I am
the Chairman of the Surface Transportation Board. I appreciate the
opportunity to testify before you today about Federal preemption for
rail-related facilities. I would first like to provide the Subcommittee
with an overview of the Board's role, and the role of state and local
authorities with regard to such facilities. Next, I will discuss the
state of the law on this complex issue which is still being fleshed out
by the Board and the courts in individual cases that arise. Finally,
because there has been a lot of concern lately about the potential for
misuse of Federal preemption in cases involving facilities on rail
lines, I will outline how interested parties can raise concerns before
the Board and in the courts regarding individual proposals that arise.
I will not focus today on the individual cases that have addressed
Federal preemption for rail-related facilities, but I have included as
part of my written testimony a summary of the relevant case law.
1. The Scope of the Federal Preemption
As all of you are aware, the Surface Transportation Board was
created in the ICC Termination Act of 1995 (ICCTA). The express Federal
preemption contained in the Board's governing statute at 49 U.S.C.
10501(b) gives the Board exclusive jurisdiction over ``transportation
by rail carriers.'' Congress has defined the term ``transportation''
broadly, at 49 U.S.C. 10102(9), to include all of the related
facilities and activities that are part of rail transportation. The
purpose of preemption is to prevent a patchwork of otherwise well
intentioned local regulation from interfering with the operation of the
rail network to serve interstate commerce.
Both the Board and the courts have made clear, however, that,
although the scope of the section 10501(b) preemption is broad, there
are limits. While a literal reading of section 10501(b) would suggest
that it preempts all other law, neither the Board nor the courts have
interpreted the statute in that manner. Rather, where there are
overlapping Federal statutes, they are to be harmonized, with each
statute given effect to the extent possible. This is true even for
Federal statutory schemes that are implemented in part by the states,
such as the Clean Air Act, the Clean Water Act, and the Solid Waste
Disposal Act.
When states or localities are acting on their own, certain types of
actions are categorically preempted, regardless of the context or basis
of the action. This includes any form of permitting or preclearance
requirement-such as building, zoning, and environmental and land use
permitting-which could be used to deny or defeat a railroad's ability
to conduct its rail operations or to proceed with activities that the
Board has authorized. Also, states or localities cannot regulate
matters directly regulated by the Board, such as railroad rates or
service or the construction, operation, and abandonment of rail lines.
Otherwise, whether the preemption applies depends on whether the
particular action would have the effect of preventing or unreasonably
interfering with rail transportation. Types of state and local measures
that have been found to be permissible, even in cases that qualify for
the Federal preemption, include requirements that railroads share their
plans with the community when they are undertaking an activity for
which a non-railroad entity would require a permit, or that railroads
comply with local electrical, fire, and plumbing codes.
In cases involving facilities that require a license from the Board
and an environmental review under the National Environmental Policy Act
(NEPA), the Board addresses both the transportation-related issues and
any environmental issues that are raised. The environmental review is
managed by the Board's Section of Environmental Analysis.
Even where no license is needed from the Board, there are several
avenues of recourse for interested parties, communities, or state and
local authorities concerned that the section 10501(b) preemption is
being wrongly claimed to shield activities that do not rightly qualify
for the Federal preemption. Any interested party can ask the Board to
issue a declaratory order addressing whether particular operations
constitute ``rail transportation'' conducted by a ``rail carrier.''
Alternatively, parties are free to go directly to court to have that
issue resolved. Some courts have chosen to refer that issue to the
Board; others have decided the matter themselves. It is worth noting,
however, that the Board and court cases on the boundaries of the
section 10501(b) preemption have been remarkably consistent, and that
the Board and the courts have never reached a different conclusion
regarding the availability of the preemption for particular activities
and operations.
Finally, in some cases, environmental and safety concerns have been
successfully resolved through consensual means, by the railroad and the
community working together to address their respective interests.
2. Relevant Precedent on Facilities
Given the strength and breadth of the section 10501(b) preemption,
the potential for misuse is a definite concern. Thus, both the Board
and the courts have made clear that an entity is not entitled to
Federal preemption to the extent it is engaged in activities other than
rail transportation. In some cases, solid waste and other businesses
have located close to a railroad and claimed to be a rail facility
exempted from state and local laws that would otherwise apply, but have
been found by the Board or a court not to be entitled to the Federal
preemption because the operation did not actually constitute ``rail
transportation'' by a ``rail carrier.'' In other cases, activities and
operations at facilities have been found to qualify for the Federal
preemption, as part of the transportation conducted by a rail carrier.
Cases involving solid waste transfer, storage and /or processing
facilities proposed to be located along rail lines are especially
controversial and often raise concerns that the operations could cause
environmental harm. In every case, however, interested parties,
communities, and state and local authorities concerned about a proposal
have recourse to the Board or the courts.
Rail carriers need approval to construct a new rail line under 49
U.S.C. 10901. During the Board's licensing proceedings, parties
concerned that all or part of the project is not entitled to preemption
have the opportunity to present their views to the Board for
consideration in the proceeding. In rail construction cases, the Board
also routinely conducts a detailed NEPA review, allowing all interested
parties the opportunity to raise any environmental concerns. The Board
then takes the entire environmental record into account in deciding
whether to grant the license. The Board can, and often does, impose
appropriate environmental conditions to address the environmental
concerns that are raised. Thus, the Board's existing process has proven
to be sufficient to allow the agency to address any issues related to
proposed solid waste or other facilities along the line.
If the project involves the acquisition and operation of an
existing rail line, or the acquisition of a rail carrier by another
carrier or carrier-affiliate, authority from the Board also is
required, and NEPA is applicable. Normally, however, a proposal to
change the owner or the operator of a line will not have any
significant effects on the environment. Therefore, the Board does not
always conduct a case-specific environmental analysis. But where there
is a potential for significant impacts, and that is brought to the
Board's attention, the Board may decide to undertake a full
environmental review.
Finally, some activities at facilities on or along rail lines may
qualify for the preemption in section 10501(b) but not require Board
approval and review, so that there is no occasion for the Board to
conduct an environmental review. For example, under the statute,
carriers may make improvements and add new facilities (including a
solid waste facility) to an existing line without seeking Board
approval. Even in these types of cases, however, parties concerned that
section 10501(b) is being used to shield activities that do not qualify
for the Federal preemption under section 10501(b) can ask the Board to
issue a declaratory order, or a stay, or go directly to court to
address the status of the facility.
The inquiry into whether and to what extent the preemption applies
in a particular situation is naturally a fact-bound question. There
have been only a few cases that have come before the Board involving
solid waste facilities. The Board and the courts will continue to
explore where the boundary may lie between traditional solid waste
activities and what is properly considered to be part of ``rail
transportation,'' and what kinds of state and local actions are
federally preempted, in the individual cases that arise.
Conclusion
In conclusion, it is important to reiterate that, although both the
Board and the courts have interpreted section 10501(b) preemption
broadly, there are limits on the preemption, which is harmonized with
other Federal laws. The question of what constitutes ``transportation
by rail,'' according to the statute and precedent addressing the rights
of railroads and of state and local authorities under section 10501(b),
is still being fleshed out by the Board and the courts in the
individual cases that arise. However, it is clear that not all
activities are entitled to preemption simply because the activities
take place at a facility located on rail-owned property. Of course,
cases involving preemption for railroad facilities are likely to remain
controversial. But even in cases that do not require review and
approval by the Board, parties concerned that the section 10501(b)
preemption is being misused in a case involving a facility have ways to
raise their concerns at the Board or in the courts.
I appreciate the opportunity to discuss these issues with you
today, and would be happy to answer any questions you may have.
______
Attachment
Section 10501(b) Preemption
1. Section 10501(b)
Gives Board exclusive jurisdiction over ``transportation by
rail carriers'' and expressly preempts any state law remedies
with respect to rail transportation; ICA defines
``transportation'' broadly to include all of the related
facilities and activities that are part of rail transportation
(section 10102(9))
Purpose of section 10501(b) is to prevent patchwork of local
regulation from unreasonably interfering with interstate
commerce
2. Reach of the Section 10501(b) Preemption
Statute not limited to ``economic'' regulation (City of
Auburn v. United States, 154 F.3d 1025 (9th Cir. 1998))
While most state and local laws are preempted, overlapping
Federal statutes (including environmental statutes) are to be
harmonized, with each statute given effect to the extent
possible (Tyrrell v. Norfolk Southern Ry., 248 F.3d 517 (6th
Cir. 2001) (there is no ``positive repugnancy'' between the
Interstate Commerce Act and the Federal Railway Safety Act);
Friends of the Aquifer et al., STB Finance Docket No. 33396
(STB served Aug. 15, 2001) (Congress did not intend to preempt
Federal environmental laws such as the Clean Air Act and the
Clean Water Act, even when those statutory schemes are
implemented in part by the states))
Two types of state and local actions are categorically
preempted:
(1) any form of state and local preclearance or permitting that,
by its nature, could be used to deny or defeat the
railroad's ability to conduct its operations (City of
Auburn v. United States, 154 F.3d 1025 (9th Cir. 1998)
(environmental and land use permitting categorically
preempted); Green Mountain R.R. v. State of Vermont, 404
F.3d 638 (2d Cir. 2005) (preconstruction permitting of
transload facility necessarily preempted by section
10501(b)) and
(2) state or local regulation of matters directly regulated by
the Board (CSXT Transportation, Inc.--Pet. For Decl. Order,
STB Finance Docket No. 34662 (STB served March 14, 2005),
reconsideration denied (STB served May 3, 2005), petitions
for judicial review pending, District of Columbia v. STB,
No. 05-1220 et al., (D.C. Cir. filed June 22, 2005) (any
state or local attempt to determine how a railroad's
traffic should be routed is preempted); Friberg v. Kansas
City S. Ry., 267 F.3d 439 (5th Cir. 2001) (state statute
imposing limitations on a railroad expressly preempted);
Wisconsin Cent. Ltd. v. City of Marshfield, 160 F. Supp.2d
1009 (W.D. Wis. 2000) (attempt to use a state's general
eminent domain law to condemn an actively used railroad
passing track preempted))
Otherwise, preemption analysis requires a factual assessment
of whether that action would have the effect of preventing or
unreasonably interfering with railroad transportation (Dakota,
Minn. & E.R.R. v. State of South Dakota, 236 F. Supp.2d 989 (D.
S.D. 2002), aff'd on other grounds, 362 F.3d 512 (8th Cir.
2004) (revisions to state's eminent domain law preempted where
revisions added new burdensome qualifying requirements to the
railroad's eminent domain power that would have the effect of
state ``regulation'' of railroads))
Notwithstanding section 10501(b), it is permissible to apply
state and local requirements such as building, fire, and
electrical codes to railroad facilities so long as they are not
applied in a discriminatory manner; however, need to seek
building permit is preempted (Flynn v. Burlington N. Santa Fe.
Corp., 98 F. Supp.2d 1186 (E.D. Wash. 2000); Village of
Ridgefield Park v. New York, Susquehanna & W. Ry., 750 A.2d 57
(N.J. 2000); Borough of Riverdale--Pet. for Decl. Order--The
New York Susquehanna & Western Ry., STB Finance Docket No.
33466 (STB served Sept. 10, 1999, and Feb. 27, 2001)).
Railroads are encouraged to work with localities to reach
reasonable accommodations (Township of Woodbridge v.
Consolidated Rail Corp., STB Docket No. 42053 (STB served Dec.
1, 2003) (carrier cannot invoke section 10501(b) preemption to
avoid obligations under an agreement it had entered into
voluntarily, where enforcement of the agreement would not
unreasonably interfere with interstate commerce))
3. Who Interprets Section 10501(b)?
Board in cases that require a license & environmental review
Either the Board in a declaratory order or a court (either
with or without referral to the Board) in other cases
When class exemption was invoked to lease and operate 1,600
feet of track for use in transferring construction and
demolition waste between truck and rail, the Board stayed the
proceeding to obtain additional information (Northeast
Interchange Ry., LLC-Lease & Oper. Exem.-Line in Croton-on-
Hudson, NY, STB Finance Docket No. 34734 et al., (STB served
August 5, 2005))
Board has discretion to decide whether to institute a
declaratory order proceeding and denied request that it do so
to address solid waste operations on property owned by the New
York, Susquehanna and Western Ry. in North Bergen, NJ, and
other similarly situated solid waste operations, because the
North Bergen facility is permanently closed, petitioners failed
to point to an alternative site that would warrant continuing
with the proceeding, and the railroad and the New Jersey
Department of Environmental Protection are involved in ongoing
court litigation related to the facility (National Solid Wastes
Management Association, Et Al.--Petition for Declaratory Order,
STB Finance Docket No. 34776 (STB served March 10, 2006))
4. Case Law on Facilities
Preemption applies to proposals to build or acquire
ancillary facilities that assist a railroad in providing its
existing service, even though the Board lacks licensing
authority over the projects
i. Nicholson v. ICC, 711 F.2d 364 (D.C. Cir. 1983)
ii. Borough of Riverdale--Pet. for Decl. Order--The New York
Susquehanna & Western Ry., STB Finance Docket No. 33466
(STB served Sept. 10, 1999, and Feb. 27, 2001)
iii. Flynn v. Burlington N. Santa Fe. Corp., 98 F. Supp.2d 1186
(E.D. Wash. 2000)
iv. Friends of the Aquifer et al., STB Finance Docket No. 33396
(STB served Aug. 15, 2001)
No preemption where the operation does not constitute
transportation by a rail carrier
i. High Tech Trans, LLV v. New Jersey, 382 F.3d 295 (3d Cir.
2004); High Tech Trans, LLC--Pet. For Decl. Order--Hudson
County NJ, STB Finance Docket No. 34192 (STB served Nov.
20, 2002) (both agreeing with New Jersey Dept. of Environ.
Protection that there is no preemption for truck
transportation of construction and demolition waste en
route to transloading facility, even though a railroad
ultimately uses rail cars to transport the debris)
ii. Grafton and Upton R.R. v. Town of Milford, Civ. No. 03-40291
(D. Mass. Feb. 14, 2006); Town of Milford, MA--Pet. For
Decl. Order, STB Finance Docket No. 34444 (STB served Aug.
12, 2004) (no preemption for planned steel fabrication
facilities that are not part of ``transportation'')
iii. Florida East Coast Ry. v. City of West Palm Beach, 266 F.3d
1324 (11th Cir. 2001) (no preemption for aggregate
distribution plant because the plant, although located on
railroad property, was not railroad-owned or operated and
thus was not part of rail transportation)
Activities That Do Qualify for Federal Preemption as
Transportation Conducted by a Rail Carrier
i. Green Mountain R.R. v. State of Vermont, 404 F.3d 638 (2d Cir.
2005) (preemption for cement transloading facility in
Vermont)
ii. Joint Pet. For Decl. Order--Boston & Maine Corp. v. Town of
Ayer, MA, STB Finance Docket No. 33971 (STB served May 1,
2001), aff'd, Boston & Maine Corp. v. Town of Ayer, 206
F.Supp.2d 128 (D. Mass. 2002), rev'd solely on attys fee
issue, 330 F.3d 12 (1st Cir. 2003) (preemption for
automobile loading facility in Massachusetts)
iii. Norfolk S. Ry. v. City of Austell, No. 1:97-cv-1018-RLV,
1997 WL 1113647 (N.D. Ga. 1997) (local zoning and land use
permitting regulation for railroad facility preempted)
iv. Canadian National Ry. v. City of Rockwood, No. 04-40323, 2005
WL 1349077 (E.D. Mich. 2005) (county zoning laws and
permitting and preclearance requirements preempted for a
railroad's transload facility in Michigan)
I assured the Committee at that time that if entities think
they're going to be able to escape environmental review by
trying to hide behind the pre-emption provisions of the Act,
they have a real surprise in store.
Senator Lautenberg. Good. Well, then----
Mr. Buttrey. I can assure you of that.
Senator Lautenberg. Well, I'm here--happy to hear that the
STB is examining its position--legal position, that it has the
sole jurisdiction to regulate the processing of solid-waste
action. So--and that pre-empt states--so, if you would submit--
or make that available to my staff, I'd appreciate that.
Senator Lautenberg. And, with that, I return the next
position to my friend from Arkansas and thank him for very much
for permitting me to intervene at this point.
Senator Pryor. Thank you.
Senator Lott. Senator Pryor?
STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM ARKANSAS
Senator Pryor. Thank you, Mr. Chairman.
Ms. Hecker, let me ask you, to start. As part of your
report here, you mentioned capacity problems in the future in
our rail system. Given your investigation and your time that
you've spent looking at this, do you have any thoughts on what
we can do to address the capacity problems in the future, or is
that something that you tend to stay out of?
Ms. Hecker. No, sir. It's actually a part of our review.
It's an enormous question, on its own. So, in addition to
trying to do 25 years of post-industry performance and all of
the relief options, we are addressing that issue. In my opening
remarks, what I said is, we are concerned about sweeping
proposals. We think that they won't be targeted enough. So, I
think a lot of our work in advising the Congress on a potential
role to enhance and facilitate and promote increased investment
that will generate public benefits is that they be very
carefully tailored so that they, in fact, do generate those
public benefits and don't just substitute for investments that
either the railroads or states would have made anyway.
Senator Pryor. So, the--if you take an idea like investment
tax credits, is that too sweeping, or is that----
Ms. Hecker. In my statement, I do raise concerns about
that. I do believe it has the significant potential to just
substitute for investments that railroads would have made, and
not target it to----
Senator Pryor. OK.
Ms. Hecker.--where we would generate public benefits.
Senator Pryor. Great. Well, I'd like to continue that
dialogue with you at some point.
Let me ask about your finished report. The report today is
a draft report. Is that right?
Ms. Hecker. We don't publicly release draft reports.
Senator Pryor. OK.
Ms. Hecker. These are preliminary results on a report
that's not completed. So, we have more analysis ongoing, but we
stand by everything we're saying today.
Senator Pryor. Do you anticipate that your final report
will specify ways in which the STB can improve its procedures
and maybe even include recommended legislative changes? Will
your final report do that?
Ms. Hecker. The questions that you and others have posed
certainly ask us to come up with recommendations. GAO, of
course, doesn't make them unless we feel there's enough
evidence to really support them. At this point in time, we
believe the absence of real understanding and analysis of the
captive shipper and the prices they're paying and other factors
that may be affecting those really require more evaluation
before we're comfortable settling on one solution or another.
The point is, we want to make sure a solution targets and
solves a problem so that it justifies the costs and
inefficiencies that that solution may impose.
Senator Pryor. OK. Let me ask this. In your review, and
given your experience, have you seen any evidence that
railroads are not investing in infrastructure in order to limit
capacity and, thereby, drive up rates on their customers? Have
you seen that?
Ms. Hecker. We've seen no evidence of that.
Senator Pryor. OK. Let me ask this. As I understand at
least part of your report, if I can distill it down, not to put
words in your mouth, but it seems to me there is a maxim here
that less competition may lead to higher prices. Is that fair
to say?
Ms. Hecker. That nails it.
Senator Pryor. OK. That's--if--I thought I was tracking
what you were saying earlier, and I think that's pretty much
it. And did you spend a lot of time in the shortline railroad
industry? Did you look at that, or did you primarily look at
the large rail?
Ms. Hecker. No, unfortunately, given the broad scope of
this, we have not spent a lot of time on that issue. And it may
be that the issue of their role is part of a fundamental long-
term vision of how to improve the competitive state of this
industry overall.
Senator Pryor. Yes. And we--I hear stories about the
contracts with the bigger railroads and the short lines and
getting from point A to point B, sometimes the way those
contracts are structured can move prices up, where, otherwise,
they may not. But, again, I think----
Ms. Hecker. And that's an area Mr. Buttrey says----
Senator Pryor. Yes.
Ms. Hecker.--has been open for review.
Senator Pryor. Mr. Buttrey, let me--I just have a few
seconds left--let me ask, just in general, Do you think your
agency needs more statutory authority?
Mr. Buttrey. Senator, we do not believe that's the case. We
believe that we have the statutory authority to do the job.
It's just a matter of fine-tuning our rules and our procedures
and policies so that they become more user-friendly, so they
become simpler, less time-consuming, less expensive. And we're
in the process of trying to do that right now.
Senator Pryor. That's interesting, because, you know, based
on what you said earlier, and some of the other questions,
maybe I misunderstood, but my impression was that you felt like
that there were lots of room for improvement, and that might
include more statutory authority, and even more clarity and
direction from the Congress. Is that not the case?
Mr. Buttrey. We don't believe it's the case, at the moment,
no, sir.
Senator Pryor. OK.
Thank you, Mr. Chairman.
Senator Lott. Thank you very much.
I'd like to ask some more questions. Maybe I'll have a
chance to do that privately, but we do have another panel. We
really want to hear from them. So, we----
Senator Burns. I--could I----
Senator Lott. Did you want to do a followup?
Senator Burns. I want to--I want--yes, I do.
[Laughter.]
Senator Burns. I sure do.
Senator Lott. Sorry about that.
[Laughter.]
Senator Burns. That's all right. And I appreciate the--I've
got a couple of questions for Mr. Buttrey, and it's just to
kind of clear up and lay the groundwork on what our problem is.
The scope of the STB jurisdiction--and I see right now
where we've got a couple of differing opinions. First, if a
railroad and a shipper negotiate a contract, movement of
freight, is that contract under your jurisdiction?
Mr. Buttrey. No, it's not, Senator.
Senator Burns. Does the answer change if the shipper is
captive, and, thus, can't truly negotiate at arm's length with
a single provider of that service?
Mr. Buttrey. If it's a contract between a shipper and a
railroad, whether it's captive or not, it's not subject to our
jurisdiction.
Senator Burns. It doesn't make any difference.
Mr. Buttrey. We do not have the authority to go in and undo
a contractual relationship between contracting parties.
Senator Burns. How much freight is moved under contract in
this country, percentagewise? Do you have any idea?
Mr. Buttrey. I have some staff with me. I could just see if
I could get you an answer right now, possibly, from the staff.
Senator Burns. Well----
Mr. Buttrey. We could provide that for the record.
Senator Burns. OK. Well, I'd like--respond to me and the
Committee, both.
If you don't have jurisdiction over rail-service issue,
what Federal agency or department would have that jurisdiction?
Senator Burns. Damn good question, huh?
[Laughter.]
Mr. Buttrey. It is a good question. The short answer to
that question is that if there are problems with that contract,
those matters would be litigated at the state or federal court
level, not the STB level.
Senator Burns. OK. And I am--and I hear a lot of concern
from rail customers about two rulings of the STB that are
perceived as preventing competition, in--and in direct conflict
with what Congress directed the STB to do, which was to work
toward competitive markets, and, of course, protect those
shippers. One concern is the bottleneck decision. It
essentially says that a railroad does not have to provide the
customer a rate to a point where a movement may move onto a
competing railroad. Second, both the STB, and the ICC before
it, have approved what I believe are anticompetitive contracts
known as ``paper barriers'' in track lease arrangements between
major railroads and short lines, meaning that the short lines
may only do business with the railroad leasing the track. Even
the short line might connect to another major carrier. Your
agency has the authority to take the administrative action to
promote competition, yet these decisions just do the opposite.
Can the STB act on its own initiative to change these rulings,
or must someone bring a request to the STB that it change the
rulings of these issues? Do they have to be resubmitted or
rechallenged?
Senator Burns. If they don't have to, why can't you do
something about it?
Mr. Buttrey. The bottleneck decision to which you refer
was--and you stated the facts absolutely correctly about how
that works--was a case that was affirmed by the U.S. Court of
Appeals (Cert, denied). That's the law of the land until
someone changes the law of the land. And so, we abide by that.
Senator Burns. All that was a decision by nine lawyers.
Mr. Buttrey. That was a decision by nine lawyers, yes sir.
[Laughter.]
Mr. Buttrey. The second question you asked, about possibly
anticompetitive effects as a result of line sales or leases or
possibly a merger, and the so-called paper-barriers issue is a
concern of ours as well, and that's the reason we scheduled a
hearing for July 27, to look into that issue, the prevalence of
those agreements, and the possibly anticompetitive effects of
those matters.
Senator Burns. Well, see, my legislation in my bill is
addressed to three different areas. If it were not for
antitrust exemption given to the railroads, I think this would
be a--there would be an entirely different landscape and an
entirely different approach to what you can do and what
Congress has to do.
And I'd--and I will ask you another question. Does the STB
take its duty, to provide for competition and protect shippers,
seriously, or does it simply sit back and wait for the shippers
to jump in? What does it cost--I'm a small shipper--let's say
I'm an elevator in Montana. How much does it cost me to file a
case with the STB?
Mr. Buttrey. Well, Senator, in a small rate case, the
filing fee is $150, but that does not represent the cost of
prosecuting the case, of course. The cost of prosecuting the
case is considerable.
Senator Burns. Do I bear that cost?
Mr. Buttrey. Pardon me?
Senator Burns. Do I bear that cost?
Mr. Buttrey. The plaintiff bears that cost. But if you win
that case, you get reparations back over the period of that
rate that's being challenged. You get reparations from the
railroad, directly from the railroad if you win that case,
which could be in the hundreds--maybe not hundreds of millions,
but certainly in the millions of dollars for a small shipper,
and a lot more for a large shipper.
Senator Burns. I know you're just racing along with some of
these things. It only took, what, 17 or 18 years to clear the
McCarty Farms case. And, of course, that was under a new
regime. I'd hope we could get more efficient than that. But----
And I've got a couple of other questions. In the essence of
time, Mr. Chairman--but I think there are areas that we have to
change. And I think it--whenever we define ``captive shipper,''
in other areas where there's competition, the STB, in my
notion, doesn't have any jurisdiction at all under those cases.
But where we're captive, I think you do. And I think we have to
deal with those particular areas.
And I thank the Chairman. And I've got a couple more
questions, but we'll get them to him.
The STB hasn't taken action to address the captive-shipper
issues on rates, service, and capacity, but it has routinely
protected the railroads with regard to the exclusive revenue
adequacy. What's the difference?
Mr. Buttrey. Senator, I'm not sure I understand your
question. I'm sorry.
Senator Burns. Well, you haven't taken any action, as far
as--with captive shippers, anyway--on rates, on service, or on
capacity. But you've routinely protected railroads on revenue
adequacy. I mean, we've heard this from both of you. And I want
to know what the difference is. I think this is a double-bit--I
think it's a double-bitted ax, and it cuts both ways. So, we've
got a little discussion to do about that.
Thank you, Mr. Chairman.
Senator Lott. Thank you very much to this panel. We
appreciate your time and your service.
Now let's go to the second panel. We will have before us
Mr. Dale Schuler, president, National Association of Wheat
Growers, from Carter, Montana; The Honorable Glenn English, my
former colleague from the House of Representatives, corporate
executive officer, National Rural Electric Cooperative
Association, Arlington, Virginia; Mr. John McIntosh, president
of products of Olin Corporation, from Clayton, Missouri--you
know about that, don't you, Conrad?; Mr. John Ficker, president
of The National Industrial Transportation League, from
Arlington; and Mr. Ed Hamberger, president and CEO, Association
of American Railroads, Washington, D.C.
If you all would--we'll get you set up here.
[Pause.]
Senator Lott. Gentlemen, while you're taking your seats,
we'll be glad to include in the record your complete
statements, if you'd like to sum them up. We do have a vote
beginning at 11:15. That's why I was trying to move to the
second panel. But if you could all stay within 5 minutes or
less, we can hear from all of you before we would have to leave
to go vote. I'd like to have an opportunity to ask some
questions, but we particularly want to be able to get your
testimony on record.
So, if you would, let's begin with Mr. Schuler. Please
proceed.
STATEMENT OF DALE SCHULER, PRESIDENT, NATIONAL
ASSOCIATION OF WHEAT GROWERS (NAWG); ON BEHALF OF NAWG, THE
NATIONAL BARLEY GROWERS ASSOCIATION (NBGA), THE USA DRY PEA &
LENTIL COUNCIL (USDP&LC) AND ELENBAAS COMPANY
Mr. Schuler. Thank you, Mr. Chairman. Can you hear me fine?
Senator Lott. I don't think it's on.
Mr. Schuler. OK.
Thank you, Mr. Chairman, Members of this Committee. My name
is Dale Schuler. I'm a wheat farmer from Montana, and I'm
currently serving as president of the National Association of
Wheat Growers. Today, I'm also honored to be representing NAWG
and the National Barley Growers Association, the National--or
the U.S. Dry Pea & Lentil Council, and Elenbaas Company.
One of agriculture's top priorities continues to be working
with Congress to find solutions to the problems caused by the
massive concentration of the railroad industry, and
specifically finding relief for our members who are captive
shippers. I'm very pleased to be here today to participate in
this hearing on capacity, economics, and service.
The agriculture industry believes that a viable railroad
industry is necessary for our continued success. Since the
passage of the Staggers Act in 1980, however, the degree of
captivity in many agriculture regions and industry areas has
increased dramatically, and America's farmers continue to
experience both unreliable service and higher rates.
We have had more or less continuing rail equipment
shortages since the railroads started aggressively
consolidating and merging in the early 1990's. Twenty years
ago, there were multiple transcontinental railroads servicing
the farming regions of the country. Today, however, whole
states, whole regions, and now whole industries have become
completely captive to single railroads as a result of many
railroad mergers.
In the wheat industry alone, there are substantial pockets
of captivity in Texas, Oklahoma, Arizona, Colorado, Kansas,
Nebraska, Wyoming, Idaho, South Dakota, Minnesota, North
Dakota, Washington, and Montana. These states make up a
majority of the wheat, barley, and pulse-crop growing/producing
land in this country. Also, as ethanol production continues to
increase, corn producers are seeing continuing service and
capacity problems with rail movements of dried distillage
grains and ethanol. The barley, dry pea, lentil, and chickpea
industries continue to see the railroad industry's efforts to
minimize less-than-trainload shipments. In Idaho, pulse crops
and barley markets--or marketers--continue to see greater
equipment shortages at less-than-shuttle-loading facilities,
even when their facilities are adjacent to these shuttle
loading facilities.
Farm producers know that increasing the breadth of crop
production on their farms can lead to greater efficiency and
productivity and higher income, but the Nation's railroad
industry does not have the same goal. Instead, its view of
efficient movement is moving larger and larger movements of a
single-grade crop from a single origin to a single destination.
Rail investment in grain movement has been shifted to the grain
merchandiser and farm producer, while the service level for
less-than-trainload movements continues to deteriorate.
We see value-added agriculture having to invest in rail
rolling stock to ensure adequate equipment supply, yet when
railroad service levels do not meet railroad-supplied
schedules, agriculture is being called upon to continually
increase investment in railroad rolling stock.
Because of these pockets of captivity, the cost of
transporting grain can represent as much as one-third of the
overall price a producer receives for his grain. The cost comes
directly from a producer's bottom line. Producers, unlike most
other businesses, cannot pass these costs on. Grain producers
are price-takers. The market sets the price, and we have no way
to influence that price. We're price-takers, not price-makers.
Producers bear all of the transportation costs, both to and
from the farm, and from the local country elevator to the
processor or to the export terminal.
The effect of this rail captivity is that rail rates in the
northern plains have increased 40 percent faster than the rail
cost adjustment factor, including productivity unadjusted.
Where I farm, rail rates as a percentage of the price of wheat
have risen from 16 percent in 1980 to more than 30 percent
today. Rail rates in Montana and North Dakota are between 250
and 450 percent of variable cost, far above the Surface
Transportation Board's rate of unreasonableness, which is
currently at 180 percent. These are among the highest freight
rates in the Nation, though agriculture rates in excess of 250
percent more than variable cost can be found in virtually all
of the states that have captivity issues.
Throughout the Corn Belt and pulse crop areas, rail rates
have hit all-time highs as the service continues to be sub-par.
In addition to the high cost of rates, rail service has
continued to deteriorate. Captive shippers continue to suffer
car and service disruptions. Shippers that order railcars well
in advance are still experiencing delays of 3 or 4 weeks from
the promised delivery dates. This can, and does, cause major
problems during and after harvest.
The high rates and lack of service I have just described
continue to be especially frustrating for producers in my
region who need only to look across the northern border and see
where rates for Canadian grain moving westbound, right across
the border, are only two-thirds the rates that we pay in
Montana. We grow some of the highest-quality grain in the
world, yet we're rendered residual suppliers against our
Canadian counterparts, and find ourselves at a significant
competitive disadvantage in both domestic and foreign markets
because of these shipping issues.
Agricultural producers all over the country, however, are
concerned that there is currently no regulatory body to address
our frustration and complaints. The Surface Transportation
Board does not balance these needs of shippers and railroads.
The STB has--in the opinion of those I represent here today,
have abandoned their lawfully designated role as a regulator of
the railroads. The STB continues to allow the railroads to set
rates and service practices for captive shippers, and,
therefore--for captive shippers that force them to subsidize
all other rail shippers. In 2004, car shortages on the BN
Northern--the Burlington Northern Santa Fe, by BNSF's own
numbers, were more than 70 percent of all of its past-due cars,
where in North Dakota, Minnesota, South Dakota, and Montana,
which accounts for only about a quarter of their system--the
STB, after repeated complaints from grain shippers in Montana
and North Dakota, sided with BNSF, allowing them to continue to
single out areas of their system that are most captive.
Our members believe that a healthy and competitive rail
industry is essential for our continued viability; however,
poor service, lack of available cars, increased rail rates, and
a regulatory agency that does not meet our needs of shippers
are making it difficult for our 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 100-year-old industry. We believe the
railroad industry can survive and prosper in a competitive
environment. And, indeed, we know from history that competition
breeds innovation and efficiency.
In light of the horrific situation that U.S. grain
producers are facing, with major railroads unable to meet
common-carrier obligations all over the Nation, it is time for
public policy in this area to be re-examined. Agriculture
producers believe that both railroads and shippers would be
better off with more competition in the marketplace, and many
of them, including those organizations I am representing today,
support revision--or provisions in Senate 919, which calls for
increasing competition without increasing regulation. If
enacted into law, we believe this legislation will improve rail
transportation by providing fairness and openness in
negotiation between railroads and our customers.
I'd like, again, to thank you for this opportunity to be
here before this Committee.
[The prepared statement of Mr. Schuler follows:]
Prepared Statement of Dale Schuler, President, National Association of
Wheat Growers (NAWG); on Behalf of NAWG, the National Barley
Growers Association (NBGA), the USA Dry Pea & Lentil Council (USDP&LC)
and Elenbaas Company
Mr. Chairman and members of the Committee, my name is Dale Schuler.
I am a wheat farmer from Montana and am currently serving as President
of the National Association of Wheat Growers. I am honored to be here
representing the National Association of Wheat Growers (NAWG) and
testifying on behalf of NAWG, the National Barley Growers Association
(NBGA), the USA Dry Pea & Lentil Council (USDP&LC) and Elenbaas
Company.
One of agriculture's top priorities continues to be working with
Congress to find solutions to the problems caused by the massive
concentration of the railroad industry, and specifically finding relief
for our members who are captive shippers. I am very pleased to be here
today to participate in this hearing on capacity, economics and
service.
The agriculture industry believes that a viable railroad industry
is necessary for its continued success. Since the passage of the
Staggers Rail Act of 1980, however, the degree of captivity in many
agriculture regions and industry areas has increased dramatically, and
America's farmers continue to experience both unreliable service and
higher rates. We have had, more-or-less, continuing rail equipment
shortages since the railroads started aggressively consolidating and
merging in the early 1990s.
Twenty years ago, there were multiple transcontinental railroads
servicing the farming regions of the country. Today, however, whole
states, whole regions and now whole industries have become completely
captive to single railroads as a result of many railroad mergers. In
the wheat industry alone there are substantial pockets of captivity in
Texas, Oklahoma, Arizona, Colorado, Kansas, Nebraska, Wyoming, Idaho,
South Dakota, Minnesota, North Dakota, Washington and Montana. These
states make up the majority of the wheat, barley and pulse crop
producing land in this country. As ethanol production continues to
increase, corn producers are seeing continuing service and capacity
problems with rail movements of dried distillers' grains and ethanol.
The barley, dry peas, lentils and chickpea industries continue to see
the railroad industry's efforts to minimize less than trainload
shipments. In Idaho, pulse crop and barley marketers continue to see
greater equipment shortages at less-than-shuttle loading facilities
even when they are adjacent to shuttle loading facilities.
Farm producers know that increasing the breadth of crop production
on farms can lead to greater efficiency and higher income, but this
Nation's railroad industry does not have the same goal; instead, it
views efficient movement as moving larger and larger movements of a
single grade crop from a single origin to a single destination. Rail
investment in grain movement has been shifted to the grain merchandiser
and farm producers while the service level for less-than-trainload
movements continues to deteriorate. We see value added agriculture
having to invest in rail rolling stock to ensure adequate equipment
supply, yet when railroad service levels do not meet railroad supplied
schedules, agriculture is being called upon to continually increasing
investment in railroad rolling stock.
Because of these pockets of captivity, the cost of transporting
grain can represent as much as \1/3\ of the overall price a producer
receives for his or her grain. This cost comes directly from a
producer's bottom line. Producers, unlike other businesses, cannot pass
their costs on; as price takers and not price makers, producers bear
all transportation costs both to and from the farm and from the
elevator to the processor or export terminal.
The effect of this rail captivity is that rail rates in the
Northern plains have increased 40 percent faster than the Rail Cost
Adjustment Factor including productivity unadjusted. Where I farm, rail
rates as a percentage of the price of wheat have risen from 16 percent
in 1980 to more than 30 percent today.
Rail rates in Montana and North Dakota are between 250-450 percent
of variable cost--far above the Surface Transportation Board's ``rate
of unreasonableness,'' which is currently 180 percent. These are among
the highest freight rates in the Nation though agriculture rail rates
in excess of 250 percent more than variable cost can be found in
virtually all of the states that have captivity issues. Throughout the
Corn Belt and pulse crop areas, rail rates have hit all time highs as
the service continues to be sub par.
In addition to the high cost of rates, rail service has continued
to deteriorate. Captive shippers continue to suffer car and service
disruption. Shippers that order rail cars well in advance are still
experiencing delays of three to 4 weeks after promised delivery dates.
This can and does cause major problems during and after harvest.
The high rates and lack of service I have just described continue
to be especially frustrating for producers in my region who need only
look across the Northern border to see a much more effective system.
Canadian freight rates on wheat westbound--right across the border--are
only \2/3\ of the rail rates we pay in Montana. We grow some the
highest quality wheat in world, yet we are rendered residual suppliers
against our Canadian counterparts and find ourselves at a significant
competitive disadvantage in both domestic and foreign markets because
of these shipping issues.
Agricultural producers all over the country, however, are concerned
that there is currently no regulatory body to address our frustrations
and complaints. The Surface Transportation Board does not balance the
needs of shippers and the railroads. The STB has, in the opinion of
those I represent here today, abandoned its lawfully designated role as
a regulator of railroads.
The STB continues to allow the railroads to set rates and service
practices for captive shippers that force them to subsidize all other
rail shippers. In the 2004 car shortage on the Burlington Northern
Santa Fe, by BNSF's own numbers, more than 70 percent of all its past
due cars were in North Dakota, Minnesota, South Dakota and Montana,
which accounts for less than a quarter of the BNSF system. The STB,
after repeated complaints from grain shippers in Montana and North
Dakota, sided with BNSF, allowing them to continue to single out the
areas of their system that are the most captive.
NAWG members believe that a healthy and competitive railroad
industry is essential for our continued viability, however, poor
service, a lack of available cars, increased rail rates and a
regulatory agency that does not meet the needs of shippers are making
it difficult for agriculture 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, 100-
year-old industry. We believe the railroad industry can survive and
prosper in a competitive environment and, indeed, we know from history
that competition breeds innovation and efficiency. In light of the
horrific situation U.S. grain producers are facing with major railroads
unable to meet common carrier obligations all over the nation, it is
time that public policy in this area needs to be reexamined.
Agricultural producers believe that both railroads and shippers
would be better off with more competition in the marketplace and many
of them, including those organizations I am representing today, support
provisions in S. 919 which calls for increasing competition without
increasing regulation.
If enacted into law, we believe this legislation will improve rail
transportation by providing fairness and openness in the negotiations
between railroads and their customers over rates and service. By simply
requiring railroads to provide rates to their customers between any two
points on their system, many additional rail customers will gain access
to rail transportation competition. In addition, providing for ``final
offer'' arbitration and the removal of ``paper barriers'' will restore
balance to the commercial relationship between the railroads and their
customers.
I would like to thank you again for this opportunity. I am ready to
answer any questions you may have.
Senator Lott. Thank you very much, Mr. Schuler.
Mr. English? Old House member, you know about the 5-minute
rule, or less.
[Laughter.]
Mr. English. I seem to recall the 5-minute rule, Mr.
Chairman, thank you very much. Appreciate that.
[Laughter.]
STATEMENT OF HON. GLENN ENGLISH, CEO,
NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION
Mr. English. Mr. Chairman, I'm here today, not as head of
the electric cooperatives, but as Chairman of the Consumer's
United for Rail Equity, which is a number of different
organizations that have ``joined'' or ``banded'' together;
namely, known as ``captive shippers.'' We're 20 percent of the
rail freight market.
Mr. Chairman, as you've heard from the members of the
Committee itself, they're very familiar with the fact that in
recent years we're finding that railroad service is becoming
less reliable and more expensive, particularly for those who
are known as captive shippers. Those of us in the electric
utility industry are extremely aware of this. We have seen, in
the last 2 years, our coal stockpiles deplenished to a point
that was dangerously low. Normally we like to keep a 30-day
supply of coal on hand for the utilities. Those utilities,
however, that fall in the category of being captive shippers,
many of those have found their stockpiles depleted down to a
position of less than 10 days. This has improved somewhat in
the last few months; mainly because of a mild winter and
because of the normal spring maintenance that takes place as
far as generators are concerned. I might also say, Mr.
Chairman, I think it's partly due to the fact that the Congress
is showing increasing attention with regard to this issue and
this difficulty.
As far as the problem itself, it is a problem today, but
may be a much larger problem for the future. As I think you're
aware, Mr. Chairman, the electric utility industry is going to
have to build a huge amount of new capacity in the coming
years. It has been estimated, over the next 10 to 20 years the
capacity for the electric utility industry is going to have to
increase over a third. That's a massive amount of construction.
And much of that needs to be coal-fired if, in fact, we're
going to use the resources we have here at home and to use
those resources that are best suited for the generation of
electric power. And certainly that is coal. But we're finding a
question as to whether it makes sense to build those coal-fired
generating plants if we cannot rely on America's railroads to
deliver that coal in a timely manner. If they can't do it
today, Mr. Chairman, there's a real question whether they're
going to be able to do it in the future.
The railroad industry, when we bring these issues to their
attention, when issues are asked by the Congress and by the
Federal Energy Regulatory Commission, who's also looked into
this matter last week, we find the railroads blame the
customers, ``It's your fault.'' It's the customer's fault. With
regard to the utilities, say, ``Well, we're using more natural
gas.'' However, at the same time, the rail industry points out
that they're in constant communication with the customers of
coal, and they're ensuring adequate supplies are available. And
it's hard for me to understand, if they're in constant contact,
why they wouldn't know there's increasing use of coal in this
country. And if they didn't know it from talking to the
customers, then they need to talk to Department of Energy,
which makes this information regularly available. As you can
see, here is the DOE. Energy Information Administration's use
of coal. [Chart] You can see the bottom line, Mr. Chairman, the
steady growth. And it takes it on out to the year 2030. So, if
there's any doubt in anybody's mind, here it is, provided by
the Department of Energy, for all to see.
[The information referred to follows:]
Energy Information Administration/Annual Energy Outlook 2006
Table 25. Comparison of coal forecasts, 2015, 2025, and 2030
(million short tons, except where noted)
----------------------------------------------------------------------------------------------------------------
AEO2006 Other forecasts
------------------------------------------------------------
Projection 2004 Low High
Reference economic economic PIRA EVA GII
growth growth
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
2015
-----------------------------------------------------------------------------
Production 1,125 1,272 1,251 1,318 1,250 1,234 1,149
Consumption by sector
Electric power 1,015 1,161 1,145 1,199 1,171 1,140 1,071
Coke plants 24 22 21 23 NA 29 19
Coal-to-liquids 0 22 19 27 NA NA NA
Industrial/other 65 71 69 72 88 a 65 66
Total 1,104 1,276 1,254 1,321 1,259 1,234 1,156
Net coal exports 20.7 -4.8 -4.8 -4.8 -8.0 -17.3 -7.7
Exports 48.0 22.0 22.0 22.0 NA 28.0 28.6
Imports 27.3 26.7 26.7 26.8 NA 45.3 36.3
Minemouth price
(2004 dollars per 20.07 20.39 20.04 20.67 NA 19.69 b 17.82 d
short ton)
(2004 dollars per 0.98 1.01 0.99 1.02 NA 0.99 c 0.86 d
million Btu)
Average delivered
price
to electricity
generators
(2004 dollars per 27.43 28.12 27.74 28.50 NA 29.45 b 28.17 e
short ton)
(2004 dollars per 1.36 1.40 1.39 1.42 NA 1.48 b 1.36
million Btu)
2025
-----------------------------------------------------------------------------
Production 1,125 1,530 1,394 1,710 NA 1,404 1,296
Consumption by sector
Electric power 1,015 1,354 1,248 1,486 NA 1,329 1,226
Coke plants 24 21 19 23 NA 26 16
Coal-to-liquids 0 146 115 192 NA NA NA
Industrial/other 65 71 68 73 NA 60 67
Total 1,104 1,592 1,450 1,774 NA 1,415 1,309
Net coal exports 20.7 -62.8 -57.9 -65.5 NA -29.2 -15.1
Exports 48.0 19.6 19.6 18.4 NA 30.1 23.4
Imports 27.3 82.4 77.4 84.0 NA 59.3 38.5
Minemouth price
(2004 dollars per 20.07 20.63 19.40 21.73 NA 20.15 b 16.12 d
short ton)
(2004 dollars per 0.98 1.03 0.98 1.09 NA 1.02 c 0.78 d
million Btu)
Average delivered
price
to electricity
generators
(2004 dollars per 27.43 29.02 27.48 30.87 NA 30.12 b 25.84 e
short ton)
(2004 dollars per 1.36 1.44 1.37 1.52 NA 1.53 b 1.25
million Btu)
2030
-----------------------------------------------------------------------------
Production 1,125 1,703 1,497 1,936 NA NA 1,395
Consumption by sector
Electric power 1,015 1,502 1,331 1,680 NA NA 1,330
Coke plants 24 21 19 23 NA NA 14
Coal-to-liquids 0 190 153 247 NA NA NA
Industrial/other 65 72 68 75 NA NA 67
Total 1,104 1,784 1,571 2,025 NA NA 1,411
Net coal exports 20.7 -82.7 -69.3 -89.0 NA NA -18.7
Exports 48.0 16.7 16.4 16.8 NA NA 22.3
Imports 27.3 99.4 85.7 105.8 NA NA 41.0
----------------------------------------------------------------------------------------------------------------
Table 25. Comparison of coal forecasts, 2015, 2025, and 2030--Continued
(million short tons, except where noted)
----------------------------------------------------------------------------------------------------------------
AEO2006 Other forecasts
------------------------------------------------------------
Projection 2004 Low High
Reference economic economic PIRA EVA GII
growth growth
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Minemouth price
(2004 dollars per 20.07 21.73 19.91 23.05 NA NA 15.65 d
short ton)
(2004 dollars per 0.98 1.09 1.00 1.15 NA NA 0.76 d
million Btu)
Average delivered
price
to electricity
generators
(2004 dollars per 27.43 30.58 28.28 32.79 NA NA 25.23 e
short ton)
(2004 dollars per 1.36 1.51 1.41 1.61 NA NA 1.22
million Btu)
----------------------------------------------------------------------------------------------------------------
Btu = British thermal unit. NA = Not available.
a Includes coal consumed at coke plants.
b The average coal price is a weighted average of the projected spot market price for the electric power sector
only and was converted from 2005 dollars to 2004 dollars to be consistent with AEO2006.
c Estimated by dividing the minemouth price in dollars per short ton by the average heat content of coal
delivered to the electric power sector.
d The minemouth prices are average prices for the electric power sector only and are calculated as a weighted
average from Census regionprices.
e Calculated by multiplying the delivered price of coal to the electric power sector in dollars per million Btu
by the average heat content of coal delivered to the electric power sector.
Sources: 2004 and AEO2006: AEO2006 National Energy Modeling System, runs AEO2006.D111905A (reference case),
LM2006. D113005A (low economic growth case), and HM2006.D112505B (high economic growth case). PIRA: PIRA
Energy Group (October 2005). EVA: Energy Ventures Analysis, Inc., FUELCAST: Long-Term Outlook (August 2005).
GII: Global Insight, Inc., U.S. Energy Outlook (Summer 2005).
I would suggest, Mr. Chairman, that the real reason that
we're running into these kinds of difficulties has to do with a
remark that was made by the chairman of Union Pacific, back
before the Surface Transportation Board a few years ago. He
states to the Surface Transportation Board, ``Year after year,
the railroads have been increasing their traffic volumes
without adding commensurately to their physical capacity.'' In
other words, they're following the same strategy that the
airlines have been following for some time, Mr. Chairman, and
that is to limit the capacity. With the airlines, it may be
some folks can't get a ticket, or they may get bumped off their
flight. To them, it's an inconvenience. When it happens as far
as our Nation's railroads are concerned with regard to
providing supplies for the generation of electric power, what
it's going to mean, Mr. Chairman, is that the lights are either
going to dim, or they may go out altogether. The impact that
that has on this Nation's economy obviously is very severe.
Now, we also have the interesting situation where the
railroads are coming before the Congress asking for additional
assistance. They'd like a tax credit to help them deal with
some of the capacity problems, problems that they say they want
to limit in the first place. And that, too, raises some very
serious questions for us, Mr. Chairman, particularly when we--
in light of the fact that the reported profits for this last
year, 2005 over 2004, are very significant, a 30-percent
increase in one year for the industry itself. And particular
railroads, some railroads that are serving those of us who are
captive shippers, I would point out, the Burlington Northern
Santa Fe, had, 2005 over 2004, a 93-percent increase in the
profits. CSX is reporting a 237-percent increase over the year.
And, Mr. Chairman, according to the Wall Street Journal,
they're saying the ride isn't over yet.
Now, Mr. Chairman, stranded shippers, our cost in the
recent time, we're seeing an increase of 350 to 450 percent, in
the form of profits. Now, who is paying for this increase,
these huge profits that are being made by the railroads?
Obviously it's the captive shippers. It's coming out of our
hide. But, since it is a monopoly, we obviously aren't
receiving the service for what we're paying an excess for.
In the electric utility industry, Mr. Chairman, we have
what's known as an obligation to serve. We're obligated to
serve the people of this country and provide them with electric
power. I would ask you, Mr. Chairman, don't the railroads have
an obligation to deliver for the electric utility industry and
for the rest of America and our economy?
Thank you very much.
[The prepared statement of Mr. English follows:]
Prepared Statement of Hon. Glenn English, CEO,
National Rural Electric Cooperative Association
Mr. Chairman and members of the Committee:
My name is Glenn English, and I am the Chief Executive Officer of
the National Rural Electric Cooperative Association (NRECA). I also
serve as Chairman of Consumers United for Rail Equity (CURE), a captive
rail customer advocacy group representing a broad array of vital
industries--chemical manufacturers and processors; paper, pulp and
forest products companies; agricultural commodities producers and
processors; cement and building materials suppliers; and many more.
I appreciate this opportunity to appear today to discuss railroad
issues that have rapidly risen to the top of the policy agenda for
members of NRECA, a trade association consisting of 930 cooperatives
providing electricity to more than 39 million consumers living in 47
states. As member-owned, not-for-profit organizations, the obligation
of cooperatives is to provide a reliable supply of electricity to all
consumers in our service areas at the lowest possible price. We take
our obligation to serve very seriously--the wellbeing, safety, and
economic health of our members, our communities and our Nation depends
on it. Electric cooperatives serve primarily the more sparsely
populated parts of our nation, but cover roughly 75 percent of the land
mass of the Nation.
Today I want to emphasize for the Subcommittee the very critical
issues currently facing rail freight shippers throughout the country,
especially those shippers who are ``captive'' because they are only
served by one rail carrier and have limited or no access to
competition.
Since the enactment of the Staggers Rail Act in 1980, the railroad
industry has dramatically changed. Despite their claims to the
contrary, the structure and the practices of the railroads under
current law are detrimental to the economic survival of many domestic
U.S. businesses and industries. Left unchecked, the status quo
jeopardizes our national economy and even our national security
capabilities. Consider the following:
In 1980 there were 41 Class I railroads, but today six
remain with four of them--two in the east and two in the west--
carrying about 94 percent of all rail freight.
More than 20 percent of all rail freight shipments are
``captive'' to the monopoly market power of only one rail
carrier.
The four major carriers have been allowed under current law
to artificially tighten their monopolistic stranglehold over
``captive'' shippers through practices that restrain
competition and deny shippers the ability to freely seek access
at points where competition might otherwise be available.
``Captive'' rail shippers are forced in an arbitrary ``take-
it-or-leave-it'' fashion to face enormously higher rail
transportation costs than those shippers that have access to
competition.
In areas where competition is minimal or does not exist, the
Federal regulatory watchdog established under the Staggers Act
to protect ``captive'' rail shippers--the Surface
Transportation Board (STB)--has failed to fulfill its
responsibility to ensure that rail rates and practices are fair
and equitable and in the overall national best interest.
Similar to the availability and reliability of adequate
electric power, a robust and efficient rail transportation
system is critically important to the Nation's economy and
security, and requires a common carrier obligation to
adequately serve the broader public interest.
I want to recognize the efforts of Senators Burns, Rockefeller,
Dorgan--and others who have gone on record--for their keen interest in
resolving two major issues facing the rail industry and its customers:
the need to mandate regulatory reforms in the industry; and the
shortfall in U.S. railway capacity. Any legislation moving forward must
address both problems.
We commend Senator Burns for introducing S. 919, the Railroad
Competition Act of 2005, along with Senators Rockefeller and Dorgan.
The legislation would reform many of the anti-competitive practices
that the railroads currently exert over captive shippers. S. 919 also
recognizes the need to provide some mechanism or incentive to stimulate
the capital investment needed to address the current capacity
shortfall.
The Captive Shipper/Railroad Monopoly Problem
Mr. Chairman, about 50 percent of the Nation's electricity is
generated from coal. In the electric cooperative community, about 80
percent of the electricity generated by our plants is from coal. Very
few of our generating facilities are located at coal mine sites, so
most of the coal consumed by our plants is delivered by rail.
Under most circumstances, co-ops buy the coal at the mine site and
arrange for its transportation, so the shipping agreements are between
the railroad companies and the cooperative. Generally, our co-ops
provide and maintain the ``train sets''--the unit trains that today
normally number from 120 to 130 cars. We also provide unloading
facilities and make other capital investments related to rail
transportation of coal to our plants. Most of these costs were
previously borne by the carrier and factored into rates. Today, in the
movement of coal to our plants, the railroads basically provide only
the locomotives, tracks, crews, and the diesel fuel.
Increasingly, our members must deal with substandard service and
higher costs for their coal transportation than ever before.
Consolidation of the rail industry has resulted in many of our
generators being held ``captive'' to one single railroad for coal
transportation. As a result, these electric generators are subject to
railroad monopoly power over price and service with no access to
competition. The railroads have extensive exemptions from the Nation's
antitrust laws. Under the Staggers Rail Act, the Interstate Commerce
Commission (now Surface Transportation Board) mission was to deregulate
competitive rail traffic, while also protecting against monopoly abuse
of ``single served'' or ``captive'' traffic. That protection is not
being provided.
Application of the Antitrust Laws. Railroad spokespersons have
recently represented in hearings before the House Transportation &
Infrastructure Committee and the Senate Energy & Natural Resources
Committee that the railroads are subject to ``most'' antitrust laws.
Two quick examples rebut this claim. First, section 16 of the Clayton
Act, 15 U.S.C. Sec. 26, prohibits private parties from seeking
antitrust law-based injunctions against ``any common carrier subject to
the jurisdiction of the Surface Transportation Board.'' Second, the
Supreme Court's decision in Keogh v. Chicago & Northwestern Ry., 260
U.S. 156 (1922), generally prevents shippers from obtaining treble
damages in matters involving railroad freight rates that might be found
discriminatory. Following enactment of Staggers, the Keogh decision
continues to preclude most shipper actions for treble damages against
the railroads. Square D Co. v. Niagara Frontier Tariff Bureau, Inc.,
476 U.S. 409, 422 (1986).
Given the general unavailability for private injunctive actions and
treble damages, the recent claims by the railroads that they are fully
subject to the antitrust laws is misleading at best.
Compounding the problem, the STB has interpreted Staggers in a
manner that allows railroads to deny shippers access to competing
railroads, has allowed other anticompetitive practices, and has a rate
challenge process so complex, costly and time consuming as to provide
virtually no protection to rail customers. For example, freight rates
nearly doubled this year for Dairyland Generation and Transmission Co-
op in Wisconsin. Unfortunately, given the complexity, the cost, and the
history of futile challenges before the STB, Dairyland had no realistic
option other than to accede to the ``take-it-or-leave-it'' demands of
the railroad.
Railroads Claim ``Rates'' Are Down--Shippers Find ``Costs'' Are Up
In addition to the rail capacity concerns and monopolistic rail
business practices being examined by the Subcommittee, Congress should
also be concerned about the cost of coal transportation to electric
generating facilities that must depend on a single railroad for coal
delivery. Coal transportation costs flow straight through to
electricity consumers, many of whom--farmers, chemical producers and
processors, manufacturers, providers of forest products, paper and
pulp, and many more--are already being forced to pay high rail
transport costs on the movement of their products because they are also
``captive'' to a single provider. When co-ops must rely on a single
railroad to move coal to our plants, and there is no recourse for a
fair rate review, we are in no position to negotiate a mutually
acceptable price. Rather, the railroad carrier dictates both price and
service. With the railroads largely exempt from the Nation's antitrust
laws, the only option available to customers served by a single
railroad is to petition the Surface Transportation Board for relief.
Members can refer to the following chart showing a close
approximation of the rail rates that apply to ``captive'' shippers of
products versus shippers of those products who are not held hostage to
just one Class I rail carrier.
On a Per Ton Basis, Difference Between Captive and Competitive Rates by
Commodity & Major Railroad
The following information was calculated by Escalation Consultants, Inc.
of Gaithersburg, Maryland. This ``per ton'' information is calculated
from the 2003 STB ``Revenue Shortfall Allocation Methodology'' (RSAM)
study, the latest study available from the Board.
------------------------------------------------------------------------
NS CSX BN UP
------------------------------------------------------------------------
Farm Products Captive Rate $21.37 $36.74 $45.28 $37.99
Farm Products Non-Captive Rate $11.88 $20.83 $26.09 $21.29
------------------------------------------------------------------------
Coal Captive Rate $17.56 $17.22 $16.77 $17.00
Coal Non-Captive Rate $9.76 $9.76 $9.66 $9.53
------------------------------------------------------------------------
Chemicals Captive Rate $36.98 $34.33 $42.57 $38.94
Chemicals Non-Captive Rate $20.56 $19.46 $24.52 $21.82
------------------------------------------------------------------------
Lumber or Wood Captive Rate $29.43 $36.13 $59.19 $59.49
Lumber or Wood Non-Captive Rate $16.36 $20.48 $34.10 $33.34
------------------------------------------------------------------------
Pulp, Paper Captive Rate $39.48 $40.82 $62.14 $55.40
Pulp, Paper Non-Captive Rate $21.95 $23.14 $35.80 $31.05
------------------------------------------------------------------------
The railroads have all but perfected the art of using ``global''
data and statistics to obscure the true impact of their ``rates'' and
their practices in different regions of the country and especially as
applied to ``captive'' rail customers. They will tout graphs
demonstrating how ``rates'' have steadily declined for shippers . . .
what they don't tell you is that much of the ``cost'' of rail
transportation that was previously built into the ``rate'' (the costs
of trainsets, maintenance, loading and other trackside facilities) has
been shifted over the period onto the backs of the shippers. While
``rates'' have indeed come down, the ``cost'' to shippers in many cases
has dramatically increased.
Although the railroads suggested they are subject to regulation and
that shippers have a right to file complaints, it is important to
understand the very limited extent to which railroad rates are subject
to review at the STB. Contracts are outside of the STB's jurisdiction
altogether (49 U.S.C. Sec. 10709), and the STB has exempted much other
traffic (including intermodal traffic) from its rate regulation.
For the small remaining category of traffic that is subject to
regulation, the railroads have the initial flexibility to establish any
rate they want (49 U.S.C. Sec. 10701(c)). Shippers may challenge a
rate, but bear the burden of showing that the carrier has market
dominance in both qualitative (an absence of effective competition) and
quantitative (the rate exceeds the jurisdictional threshold of 180
percent of variable costs) terms (49 U.S.C. Sec. 10707). The shipper
must also prove that the rate exceeds a reasonable maximum under
``Constrained Market Pricing,'' which largely means stand-alone cost (a
variant of replacement cost). In recent years, it has been impossible
for shippers to get meaningful relief at the STB. In addition, the
cases take a long time (at least 2 years to get the first decision on
the merits) and are very expensive ($3-5 million at a minimum).
At the end of a twenty-year contract with Laramie River Station,
BNSF more than doubled the coal-hauling rate for the plant. On October
19, 2004, a complaint was filed with the STB to review BNSF's rate
increases. Rate complaints at the STB are costly, lengthy, complex, and
rarely result in any relief for the rail customer. The cost simply to
file the LRS/Western Fuels complaint was $102,000, but that filing fee
since has been increased to $140,600. By contrast, the cost of filing a
similar case in the Federal district court is $150.
In contrast to most other regulatory systems in the nation, the
customer must prove first that it is subject to a railroad monopoly,
and then must carry the burden of proving that the rate is unreasonably
high. In a normal regulatory process, the burden of justifying a rate
falls on the monopoly that is being regulated. The rate reasonableness
standard under the STB is not the normal ``cost plus a reasonable rate
of return'' test.
The rate reasonableness standard employed by the Surface
Transportation Board requires the customer to prove that it can build
and maintain its own railroad to move its product at a price less than
the rate that is being challenged. This requires the rail customer to
employ economists to construct a highly efficient ``virtual'' railroad
that roughly follows the route and bears the same costs at the
incumbent railroad. Not surprisingly, this proof is complicated and
expensive. To date, LRS and its co-owners have spent nearly $5 million
on the prosecution of the rate case, which has been pending almost 2
years. A final judgment is not expected in this case for at least
another year.
The situation facing us today goes far beyond just the very high
prices being charged captive shippers--both directly and indirectly--by
the railroads. Currently, the Nation faces a situation wherein the
railroads are either unable or unwilling to deliver reliable supplies
of coal to our generators in a timely fashion. So, in a very real
sense, our members are paying much more and receiving far less when it
comes to rail transportation. Policies must be changed to address a
rapidly worsening situation that is harming critical industries. The
fact is that electric generation is now threatened by the railroads'
poor performance and their lack of reliability.
Current Coal Delivery Problems Adversely Impact Electricity
In a world suffering from shortages of energy supplies, our Nation
is blessed with enormous reserves of coal that can provide for
electricity and other uses for many decades in the future. Our coal
resources are sufficient to meet our energy needs for more than 250
years. Some have referred to the United States as the Saudi Arabia of
coal. In a 2001 speech, Vice President Dick Cheney pointed out that the
overall demand for electric power is expected to rise by 43 percent
over the next 20 years, and that just meeting the demand would require
between 1,300 and 1,900 new power plants. That averages to more than
one new power plant per week, every week, for the next 20 years. ``We
all speak of the new economy and its marvels,'' he said, ``sometimes
forgetting that it all runs on electric power.''
What the Vice President might not have recognized at the time of
his speech was that the railroads responsible for moving this
strategically important fuel supply were already in the process of
making America's most abundant and affordable energy supply scarce and
expensive. Electric co-ops are forced to look to South America,
Indonesia, and other foreign coal sources because the railroads cannot
make timely domestic deliveries.
The delivery system for half the Nation's electricity consists of
coal mines, rail transportation, generators, and transmission and
distribution systems. Due to rail delivery problems, many of the
electric cooperative generators have been concerned as they prepared
for this year's summer cooling season. Some generating facilities were
dangerously close to a point where continued operation could not be
sustained.
Let me focus on the coal delivery problem confronting just one very
large coal-fired electric generator in Wyoming--the Laramie River
Station (the same plant embroiled in a rate case at the STB). In the
spring of 2005, there were two derailments on tracks coming from the
Powder River Basin (PRB), reducing rail coal deliveries to 80 percent
of previous levels. Deliveries have not yet fully recovered. A BNSF
spokesman was recently quoted in CQ Weekly saying that it is just ``not
feasible'' to rebuild the LRS stockpile with current demand for coal so
high. It is unclear whether those reductions have been imposed across-
the-board, or whether the reductions and related matters, including
``parking'' of trainsets, have been imposed selectively or
accidentally, but the result is the same. It enables the railroads to
pick ``winners and losers'' among generating utilities, and to
potentially punish and retaliate against those who seek to invoke
whatever protections may be ostensibly available.
The three unit (1650 MW) Laramie River Station is located only 170
miles from the coal source and was down to a 3 to 4 day supply of coal
in January. This plant is operated by Basin Electric Power Cooperative
for 6 not-for-profit utilities. Loss of this major block of generation
could create severe reliability problems for its regional grid. Basin
provides electricity to its members in 9 states serving over 1.8
million consumers. Because of reliability concerns, Basin notified DOE
and the North American Electric Reliability Council of the stockpile
situation when coal reserves dropped below 50 percent of normal levels
and developed a generation curtailment plan to conserve coal.
Fortunately, the winter was relatively mild, coal deliveries
improved during the last few months, and Unit 1 entered a 7-week
maintenance outage, which reduced consumption of coal. Since the outage
began on April 15, Basin's stockpile has increased to almost 700,000
tons--a 30 day reserve. However, if the plant had been operating at
full load during this period, the stockpile would have gained only
100,000 tons to a total of 276,000 tons; a 10 day supply of coal. Now
that the plant is once more in full operation, Basin is concerned about
coal deliveries for the summer months.
Other co-ops have experienced similar problems and have cut
production at those coal plants that are normally the least costly to
operate. Electricity generators have resorted to burning more expensive
natural gas, purchasing higher cost electricity from the grid, or
purchasing more expensive foreign coal and higher sulfur local coal.
Arkansas Electric Cooperative estimated that its coal conservation
program, using alternate-fuel power generation, cost its customers over
$100 million because of the shortage of coal deliveries over the past
12 months to its power plants.
The shortfall in rail coal deliveries has many far-reaching
consequences. It is widely acknowledged that there will be at least a
20 million ton shortfall in PRB coal deliveries in 2006. Making up for
this shortfall will require the use of about 340-billion cubic feet of
natural gas costing about $2.6 billion more than the coal it replaces.
The additional use of natural gas instead of coal to generate
electricity has also significantly driven up the price of gas across
the country, and has increased the costs to those using natural gas as
a feedstock for manufacture of their products. Over the past year,
restriction in the supply of PRB coal has also resulted in a tripling
of the coal spot market price, increasing those prices from roughly $6
per ton to more than $20 per ton.
So, in addition to the market power and rate-setting problems not
being addressed, neither does the Surface Transportation Board assert
jurisdiction over railroad customer service issues. The STB has been
completely passive during the current coal delivery problems. For
example, when the CEO of Arkansas Electric Cooperative sent a letter on
this subject to the STB last August, not only did he never receive a
response from the STB, his letter was answered by a Vice President of
the Burlington Northern Railroad--the railroad about whom he was
complaining!
Railroad Obligation to Serve--Wall Street vs. Main Street
We believe that an overriding national public interest applies to
the railroad industry as it does with our electric utility industry. No
electric utility--whether a rural electric cooperative, a municipal
power system or an investor owned utility--is free to conduct business
in any manner it likes, including ``maximizing'' profits. city
officials overseeing municipal utilities are subject to the vote of the
people; rural electric co-op boards must earn election by their member-
owners; and investor owned utilities are subject to the oversight of
both state public service commissions and the Federal Energy Regulatory
Commission.
Railroad companies tell only one side of the story, emphasizing
freight railroad traffic ``constraints''--the ``capacity crunch''--
while alleging a need for financial incentives to lure the additional
capital necessary to modernize and expand America's rail infrastructure
and capacity.
We know the infrastructure and the capacity of our railroads need
significant expansion and improvement. Railroad constraints--coupled
with their exercise of monopoly power over captive customers--have led
to ever growing profit levels for the major rail corporations. The
railroads and Wall Street have been focused on making large profits
while Main Street Americans are focused on the ``big picture'' of
growing and expanding our overall economy--not just one sector.
Morgan Stanley Equity Research N.A. recently released a periodic
analysis of railroad financial performance. This analysis was produced
for its intended audience, the investor community. The report noted
that the major railroads are enjoying robust financial health based on
``pricing freedom'' and lack of railroad capacity. According to the
report, ``the six major North American railroads (Kansas City Southern
is not included) will see their stocks appreciate 50 percent-100
percent over the next 4 years.'' (``Air Freight and Surface
Transportation,'' Morgan Stanley Equity Research North America, January
23, 2006, James Valentine).
Since rising stock prices are an indicator of financial health that
will attract and retain capital, this analysis clearly suggests that,
according to Wall Street the railroads will be ``revenue adequate''
over the next 4 years. Furthermore, the analyst said that there is
little or no regulatory risk in the current Washington environment--an
indication that he believes the current STB, Congress and
Administration are unconcerned about the ``secular pricing'' power and
other actions of the railroads. ``Secular pricing'' is the code for the
ability of a monopoly to exercise market power in exacting cash from
those dependent on the monopoly's goods or services.
We contend that the railroad industry also has--like electric
utilities--an obligation to serve the national public interest. This
obligation may sometimes be called a ``common carrier'' obligation, but
in the end it means the duty to provide reliable transportation service
to all customers at fair and reasonable prices. Without mandating an
obligation to serve by the railroads, the economy of this Nation cannot
move forward. Adequate, dependable, and reasonably priced rail service
is almost as critical to our national and economic security interests
as electricity, and the public interest cries out for the imposition of
a formal ``obligation to serve'' mandate in order to correct the
current arrogant and abusive tendencies of the railroads.
Some tell us that the economic self-interest of the railroads will
solve the railroad service and capacity problems over time. That
certainly was the premise of the Staggers Rail Act--deregulate the
railroads and they will become healthy and provide the rail service
needed by the Nation at fair and reasonable prices. Railroad customers
have good reason to doubt that assertion.
In the absence of strong signals from the government about service
and capacity to meet the needs of ``Main Street'' America, the
railroads will take their signals only from ``Wall Street.'' Financial
analysts today rate railroad stocks high because the railroads possess
``pricing power'' based on the fact that demand for rail transportation
exceeds capacity. Moreover, Wall Street tends to grade railroad stocks
down when the railroads make heavy investments in their systems. So,
Mr. Chairman, there is significant concern among the rail customer
community that actually providing sufficient capacity and reliable
service for them will be perceived by Wall Street as adverse to the
economic interests of the rail industry.
Questions about future reliable rail service at fair prices are a
significant concern to the electricity industry as it attempts to
provide the additional coal-fired power plants the Nation will need in
the future. Can we depend on reliable rail transportation of coal in
the future at a fair and reasonable price?
Assistance to Help Ensure Rail Profits Requires an Obligation to Serve
Finally, Mr. Chairman, we understand the railroads are now seeking
legislation to provide a 25 percent investment tax credit and
``expensing'' provisions for investments in railroad infrastructure. We
might very well support such a Federal incentive, but only so long as
it includes a package of legislation that also addresses the concerns
of rail customers that are subject to railroad monopoly power, and only
so long as the tax credit and other benefits are also available to rail
customers when they make similar investments in infrastructure to
improve overall rail capacity.
Moreover, we recommend that certain conditions should be imposed on
the investments that would be eligible for the tax credits and
expensing benefits. For example, the investments that qualify should be
limited to first prioritize improving the infrastructure that currently
provides insufficient service to captive or single-served rail
customers. Eligible investments should be focused first on
infrastructure improvements that benefit the movement of domestic
products and commodities as opposed to infrastructure that benefits
imports. Finally, any infrastructure that benefits from the tax credit
should be deployed in a pro-competitive manner as suggested in S. 919,
rather than further expanding the monopoly market power of the
railroads.
The rationale for providing any level of assistance to the
railroads is because of the important role they play in our Nation's
overall economy. Electric utilities are viewed as absolutely critical
not only to the economy, but also indispensable in helping to ensure
our homeland security. Railroads obviously occupy a similar role. All
reasonable assistance should be provided to ensure the rail
transportation system is robust and efficient. However, benefits to
help ensure the profitability of the rail industry should come with a
clear ``obligation to serve'' the best interests of Main Street
America--not just Wall Street.
NRECA Supports S. 919--The Right Direction for Reform
I mentioned earlier the legislation that Senators Burns,
Rockefeller, and Dorgan have introduced that will begin to address many
of the current problems facing rail shippers--especially captive rail
shippers--as they try to deal with the railroads. S. 919 is a good
starting point for discussions among those who truly want to improve
the current rail transportation system in this country. We strongly
urge this Subcommittee to give a high priority to legislation this
year.
Conclusion
Mr. Chairman, thank you for conducting this hearing today. We
support a strong and viable rail industry that will provide reliable
service to its customers at fair and reasonable prices. The status quo
will not result in this type of rail system for the Nation. The kinds
of reforms suggested in S. 919 must be adopted as Federal policy, and
the public benefits that result from competition in the marketplace
must be applied to the rail transportation system by removing the rail
industry's exemptions from the Nation's antitrust laws.
I can assure the Subcommittee that the 39 million consumer-owners
of the NRECA electric cooperative family look forward to working with
you, and with all of the other stakeholders involved, in resolving
these critical rail transportation issues in an objective and
constructive manner.
Senator Lott. Thank you, Congressman English.
Mr. McIntosh?
STATEMENT OF JOHN L. McINTOSH, PRESIDENT, CHLOR-
ALKALI PRODUCTS, OLIN CORPORATION, ON BEHALF OF THE OLIN
CORPORATION AND THE AMERICAN CHEMISTRY COUNCIL (ACC)
Mr. McIntosh. Chairman Lott, Senator, I'm pleased to be
here today on behalf of Olin Corporation and the American
Chemistry Council.
With 5,800 U.S. employees, Olin is a leading producer of
copper alloys, ammunition, chlorine, and caustic soda. We ship
two and a half million tons of products by rail each year. ACC
represents the Nation's leading chemical manufacturers.
Today, I want to deliver three essential messages about
American competitiveness:
First, my company, my industry, other rail shippers, and
the millions of customers we serve, need reliable rail service.
Sadly, when it comes to reliability, that train has stalled.
Second, the captive rail customer--that is, the customer
with service from a single monopoly railroad, is completely at
the mercy of the carrier. Free and fair market forces no longer
ride the American rail.
And, third, the Federal oversight process centered on the
STB is not working, and, in fact, has harmed rail competition.
The system is broken, and Congress needs to fix it by
producing--by providing a clear signal to the STB, passing S.
919 and switching the rail industry back onto the antitrust
main line.
Let me make this clear. What we are talking about today is
our survival and the industry's ability to provide and create
jobs.
The chemical industry's customers require a constant flow
of high quality products produced and delivered on time at
competitive prices. Railroad reliability and service are
critical to our economic success; however, that is not what the
Nation's railroads are providing, especially to captive
shippers. And we see no light at the end of the tunnel.
For a captive customer, the efficient movement of traffic--
of its traffic, in some cases, is--in some cases, even the very
survival of its business depends upon the rates and services
provided by that single railroad. Yet by virtue of being
captive, we have no way to negotiate, beg, or buy reliability.
Railroads are experiencing capacity constraints, and tell
us that demand exceeds their ability to provide reliable
service in key chemical traffic corridors. Yet the U.S. rail
industry is financially healthy. In the 1970s, the rail
industry was on its last legs when Congress wisely passed the
Staggers Rail Act. That legislation led to the success of the
U.S. rail industry today. Staggers was intended to protect
captive shippers and promote competition. Congress wanted to
avoid the captive-shipper penalty that exists today, but the
STB has not lived up to that responsibility. Its regulatory
interpretations have skewed the Act's intent to bring free
market forces to bear on shippers and railroads. And Staggers
has left no forum, other than the STB, to address these issues.
Most ACC member facilities have no alternatives to using
rail--no alternative to using rail transportation. Sixty-three
percent of those facilities have access to only one rail
carrier, making them captive.
How did this come about? Rail competition has changed
dramatically since 1977, when there were 63 Class I railroads
in America. Today, there are just seven, and 90 percent of the
Nation's rail traffic is handled by only five. In conjunction
with other ICC/STB policies that curtail competition between
railroads, mergers have generally harmed the captive shipper.
As the inevitable result, entire states, regions, and
industries are now captive to a single railroad. You can
imagine the difficulty in negotiating a rail contract or a rail
rate for a captive facility.
This explains why captive rail rates have reached or
exceeded twice the amount of competitive rates. Captive
shippers also pay higher fuel surcharges based on those freight
rates. For captive chemical shippers, the iron horse has, in
fact, become the greedy cash cow. Regrettably, the freight rail
marketplace doesn't behave like a free market. A long line of
STB policy determinations is harming the competitiveness of the
U.S. chemical industry. Staggers did not mandate
anticompetitive policies, and the agency has acknowledged that
it has the authority to reverse its interpretations, but almost
invariably declines to exercise its discretion in favor of pro-
competition solutions.
It's time to tear down the barriers to competition, and ACC
supports Senate 919, the Rail Competition Act of 2005, a
bipartisan bill whose provisions would promote competition and
lead to reliable service. I urge you to carefully consider S.
919. And ACC recognizes and thanks Senators Burns, Dorgan, and
Rockefeller for their leadership.
Congress should also consider putting the rail industry
fully under the Nation's antitrust laws. In our free-market
economy, monopolies and the poor service and high prices they
foster belong in a museum. Unfortunately, rail impedes our
Nation's global competitiveness. We are interested in the
financial and operational health of Americans' railroads, but
captive customers are--might be forced to close U.S. plants or
forego expansion. In the future, where will new chemical jobs
be created?
For Olin and our ACC colleagues, railroad monopolies are
driving a golden spike through the heart of American
competitiveness. That's why Congress must intervene.
Thank you for the----
Senator Lott. Thank you----
Mr. McIntosh.--opportunity----
Senator Lott.--Mr. McIntosh.
[The prepared statement of Mr. McIntosh follows:]
Prepared Statement of John L. McIntosh, President, Chlor-Alkali
Products, Olin Corporation; on Behalf of the Olin Corporation and the
American Chemistry Council (ACC)
Chairman Lott, Senators, I'm pleased to be here today on behalf of
the Olin Corporation and the American Chemistry Council (ACC). Olin,
headquartered in Clayton, Missouri, is one of the world's best basic
materials companies and a leading North American producer of copper
alloys, ammunition and chlorine and caustic soda. In 2005, Olin posted
sales of approximately $2.4 billion. The company has approximately
5,800 employees working in the United States. Olin consists of three
businesses:
Olin Brass--the world's leading developer of high performance
copper alloys and the U.S. market share leader in copper and
copper alloy strip.
Winchester--North America's leading small caliber ammunition
producer with powerful global brand name recognition.
Chlor-Alkali Products--the largest producer of chlorine and
caustic soda in the eastern United States and the fourth
largest nationwide.
I am here today on behalf of Olin's Chlor-Alkali Products business,
which is the leading producer of chlorine and caustic soda in the
eastern U.S. and one of the largest in North America. Besides chlorine
and caustic soda, Olin produces Reductone' and
Hydrolin' sodium hydrosulfite and hydrochloric acid.
As one of the Nation's leading producers of chlorine, the company
produces an essential chemical that has played a key role in
dramatically reducing infant mortality rates and eliminating waterborne
diseases around the world. Our chlorine is also used in the manufacture
of swimming pool and spa sanitizers. The biggest end use for chlorine,
however, is as an ingredient in polyvinyl chloride (PVC) plastics,
including everything from vinyl siding and PVC blood bags to vinyl
plumbing pipes.
Another work-horse industrial chemical, our caustic soda is used in
household and institutional cleaning products, the pulp and paper
industry, and the fabric industry. An agent that aids the dyeing of
denim and other fabrics, Olin's Reductone' ``helps put the
blue in blue jeans.'' Our Hydrolin' sodium hydrosulfite is
principally used in treating kaolin clays, which provide filler
material for white paper and other paper products. Our hydrochloric
acid is used in the process of making aspartame which sweetens products
from diet Coke to snack foods and other consumer products.
Chlor-Alkali Products is headquartered in Cleveland, Tennessee and
includes manufacturing sites in New York, Georgia, Tennessee and
Alabama. Each of these plants offers a low cost base, highly skilled
workers and convenient delivery.
Olin and ACC appreciate the Committee's invitation to participate
in this hearing on economics, service, and capacity in the freight
railroad industry. ACC represents the companies that make the products
that make modern life possible, while working to protect the
environment, public health, and the security of our Nation. The member
companies of ACC depend on the U.S. rail industry for the safe, secure
and efficient transportation of approximately 170 million tons of
chemical products to customers each year, accounting for more than $5
billion in annual railroad industry revenues.
For a substantial proportion of the shipments from chemical
manufacturing facilities operated by ACC members, there is no
alternative to using the rail mode. For 63 percent of those facilities,
the shipper has access to only one rail carrier. Those shipments are
subject to what the Staggers Act refers to as ``market dominance,''
which is often described as being ``captive'' to a single railroad.
(Additional monopoly conditions exist when even a non-captive shipper
wishes to supply a customer location that is captive to a single
railroad.) For a captive shipper, regardless of its size or location,
the efficient movement of its traffic--in some cases even the very
survival of its businesses--depends on the rates and service provided
by that single railroad.
The chemical industry's customers require a constant flow of high-
quality products--produced on time--delivered on time--where they want
them--at competitive prices. Railroad reliability and service are
critical to our economic success. However, that is not what the
Nation's railroads are providing, especially to captive shippers.
Railroads are experiencing capacity constraints. They're telling us
that demand exceeds their ability to provide reliable service in key
chemical traffic corridors. We believe them because chemical shippers
have seen increases in transit time for our shipments. Slower train
speeds and increased dwell times for cars in terminals have led
companies to add cars to their fleets at considerable cost to hedge
against shipment delays.
It's remarkable that this situation exists in the context of a
financially healthy U.S. rail industry. In the 1970s, the rail industry
was on its last legs. Regulation had hobbled its ability to respond to
competitive forces and cover costs. Railroads lacked the capital to
properly maintain their tracks. Eight large railroads went bankrupt
during that decade. Many more faced extinction. Policymakers gave
serious thought to nationalizing the rail freight system.
But cooler heads prevailed. Instead of nationalization, which would
have involved a continuing cost of untold billions, Congress wisely
chose deregulation. It passed the Staggers Rail Act of 1980. The
legislation, in good measure, led to the success of the U.S. rail
industry today.
Yet the competitive landscape in the rail industry has changed
dramatically since 1980. As a result, shippers have paid a very high
price for U.S. rail industry gains. That's because competition--the
hoped-for result sparked by Staggers--has largely fizzled out. Under
the Interstate Commerce Commission and later its successor, the Surface
Transportation Board (STB), the regulatory agency that has authority to
address these issues has not done the job.
One reason is that consolidation in the rail industry has reduced
the number of Class I railroads (those meeting the STB definition of
having operating income exceeding $277.7 million). To be competitive,
railroads require competitors. In 1977, there were 63 Class I railroads
in America. In 1980, there were about 40. Today, because of massive
consolidation, there are just seven Class I railroads serving all of
North America. And 90 percent of the Nation's rail traffic is handled
by only five major railroads.
Although STB has not been presented with another transaction
involving two or more Class I carriers since revising its merger
guidelines in 2001, railroad mergers inevitably reduce shipper options,
regardless of the conditions that are applied by the agency.
Bottlenecks are extended when lines serving captive shippers are
acquired by connecting carriers. Efficient service from independent
``bridge'' carriers disappears. Competition for service to new
industrial sites is reduced or eliminated. In conjunction with other
ICC-STB policies that curtail competition between railroads, mergers
have generally harmed captive shippers.
As the inevitable result, whole states, regions, and industries are
now captive to a single railroad.
You can imagine the difficulty we face when it comes time to
negotiate a rail contract or a rail rate for a captive facility.
Lacking the negotiation flexibility and bargaining power that
competition provides, freight rates from the monopolistic railroads
continue to rise unchecked.
That explains why captive rail rates may reach or exceed twice the
amount of a competitive rate. In 2003, Escalation Consultants, Inc.,
which provides consulting services to the energy and rail shipper
industries, studied captive versus non-captive rail rates for several
commodity groups. For chemical companies the average non-captive rate
for each railroad was about $16 to $20 per ton. In comparison, captive
chemical rail shipments averaged $33 to $48 per ton--more than twice as
much.
Heightening ACC's concern is that there is no forum other than STB
in which to address issues involving railroads and captive shippers. In
Staggers, Congress left those issues in the jurisdiction of the
regulatory agency and did not de-regulate rail service in non-
competitive situations. But STB has not lived up to that
responsibility.
Captive shippers are at a disadvantage in a variety of ways. For
example, when basic freight rates are established, fuel surcharges are
often calculated and applied as a percentage of those rates. As a
result, captive shippers pay more in fuel surcharges because there was
no competition when the basic freight rates were established. On May
11, STB held a public hearing on railroad fuel surcharges. ACC's
analyst found that those surcharges greatly exceed actual fuel costs
due to flaws in the methodologies used in calculating the surcharges.
Railroad fuel surcharge practices are unreasonable because of five
crucial factors:
Fuel surcharges often are not based on actual fuel
consumption: Surcharges should be related to the amount of fuel
consumed to provide a specific service to a shipper. Instead,
they are based on other, often unrelated factors.
Fuel surcharges are inappropriately linked to freight rates:
Rates are based on a wide range of competitive factors, and
their differences are not relevant to the amount of fuel
consumed for a particular trip.
Higher fuel costs are often covered by other means: Railroad
fuel costs are captured through several mechanisms, such as the
Rail Cost Adjustment Factor. Adding a fuel surcharge often
means fuels costs are recovered more than once by the railroad.
Such double jeopardy is unfair.
Some shippers are overcharged because others are not subject
to fuel surcharges: Due to certain contracts or other
circumstances, some railroads can not impose a surcharge on
some customers. But it is unfair and unreasonable to ``make up
the difference'' by unduly raising the charge for customers
that do pay surcharges.
The reasonability of fuel surcharges can only be determined
if there is complete data transparency: Railroads should report
their actual fuels costs in a consistent, comprehensive and
uniform manner so that the STB, shippers and Congress can
accurately and readily determine the revenue obtained from
surcharges.
The flaws in rail fuel surcharge practices are significant.
According to the analysis prepared at the request of ACC by the
economic and management consulting firm of Snavely King Majoros
O'Connor and Lee, Inc., the manner in which fuel surcharges have been
calculated and applied by the railroads to all customer traffic has
resulted in an ``over recovery in the range of $1 billion for 2005.
This is the amount by which Class I fuel surcharge revenues collected
by U.S. railroads exceed the increased fuel costs incurred by the
railroads.''
While we believe the issue of railroad fuel surcharges requires
prompt action, STB has set no date for a decision.
The irony is that Staggers was intended to protect captive shippers
and promote competition. Congress wisely wanted to avoid the captive
shipper conditions that exist today. That Act directed ICC (now STB) to
``maintain reasonable rates where there is an absence of effective
competition.'' Again, the STB has not lived up to its responsibility,
and its regulatory interpretations have skewed the Act's intent to
bring free market forces to bear on shippers and railroads.
Regrettably, the freight rail marketplace of today doesn't behave
like a marketplace at all. Instead, it's dominated by five powerful
monopolies. It's time to tear down the barriers to competition.
Accordingly, ACC supports legislation that would reform railroad
regulation: S. 919, the Railroad Competition Act of 2005, is a
bipartisan bill whose provisions would promote competition leading to
better service at competitive prices.
S. 919 would eliminate ``bottlenecks'' that allow monopoly
carriers to take advantage of their pricing power to prevent
competition over a short, competitive portion of a route.
S. 919 would overturn STB's anti-competitive ``Midtec''
decision. Staggers allows captive shippers with facilities
located in terminal areas to seek STB's approval for
competitive access to another carrier that also serves that
same terminal area. But ICC's regulatory action in Midtec has
effectively prevented shippers from even requesting, let alone
obtaining, such relief.
S. 919 would eliminate so-called ``paper barriers'' to
competition. These are contractual agreements that require a
short-line railroad to deliver all or most of its traffic to
the major carrier that originally owned the short-line
facilities. Such agreements prevent shippers from obtaining
competitive service from other Class I carriers that connect to
the same short-line.
I urge you to carefully consider these and the other provisions of
S. 919.
We also believe Congress should consider putting the rail industry
fully under the Nation's antitrust laws. The railroads assert that such
legislation is unnecessary, given the ``extensive economic regulation''
of their industry by STB. But the same railroads claim that S. 919
would be ``re-regulation.'' They can't have it both ways.
In our free market economy, monopolies--and the poor service and
high prices they foster--belong in the museums of past history. Major
rail customers like Olin see no reason why the rail freight industry
can't thrive in a competitive American marketplace. The shelter from
competition the freight rail industry now enjoys is unfair to rail
customers and to consumers who ultimately pay the bills. It's time for
Congress to end unfair and uncompetitive market practices. It's time to
return to the original intent of the Staggers Act.
A long line of STB policy determinations is harming the
competitiveness of the U.S. chemical industry and other key sectors of
the American economy. Unless reversed, those policies will ultimately
impair the ability of the U.S rail industry to serve all of its
customers.
Congress wrote Staggers to clearly and carefully de-regulate those
rail rate and service matters that take place in circumstances where
shippers really do have competitive transportation alternatives.
Because the marketplace works for such rail customers, Congress
appropriately removed unnecessary regulatory involvement. ACC believes
that Staggers has been successful in that regard.
But Congress also wisely recognized that railroads have what the
law calls ``market dominance'' over certain shippers. In fact, were it
not for those situations, there would have been no need for a Federal
regulatory agency with exclusive jurisdiction over rail industry rates
and commercial practices, the construction and abandonment of rail
lines, railroad mergers, etc. Staggers was clearly meant to de-regulate
only those aspects of shipper-carrier commercial relationships that
take place in competitive markets. ICC was retained in 1980--and STB
exists today--to deal with the non-competitive situations.
The anti-competitive policies implemented by ICC and STB are not
included in statutory language. Staggers did not mandate such policies,
and the agency has acknowledged that it has the statutory authority to
reverse its interpretations. But STB almost invariably declines to
exercise its discretion in favor of pro-competitive solutions to
railroad issues, unless so directed by Congress.
We are at a critical point. Unless Congress acts to reverse STB's
policies, they will ultimately weaken the U.S rail industry, to the
detriment of rail-dependent domestic industries and the Nation as a
whole.
As businesses dependent on the railroad industry, we are vitally
interested in the financial health of America's railroads. We simply
cannot operate successfully in this country without a financially
viable railroad industry and a secure railroad infrastructure. Indeed,
I believe that the ability of American manufacturers and producers to
compete in today's global market is highly dependent on the rail
freight industry. Today, unfortunately, the rail freight industry
impedes--rather than enables--our Nation's global competitiveness.
American manufacturers and producers find it more and more difficult to
remain competitive against manufacturers and producers outside the
United States.
After many years of discussion with representatives of the Class I
railroads, ACC is convinced that the carriers will not budge from the
status quo in which they have complete market dominance over their
captive customers--unless Congress acts. We believe the current
business model being followed by the railroads will inevitably lead to
their financial brink, costing not only railroad shareholders, but also
taxpayers and rail-dependent American enterprise. Even the railroads
agree that the gap between their annual income needs and their annual
income is expanding, not shrinking. This is despite the fact that they
have been allowed to consolidate to achieve cost synergies. These
synergies should have allowed them to operate more efficiently and in a
fashion that permits them to recover their cost of capital. They've
also had the opportunity to transfer less profitable track to short
line railroads and they have been able to increase the burden on
captive rail customers. The result is simply that those customers with
no alternative pay the most.
Pursuing a strategy of continually loading more costs on captive
rail customers is not a business model that will result in healthy
American railroads in the long run. Captive rail customers will try to
escape and the universe of captive rail customers is likely to be
reduced over time. Some captive customers will construct rail line
``build-outs.'' Some captive customers will shift their manufacturing
activities to facilities that have transportation competition. Some
captives will shift their manufacturing to foreign countries, exporting
American jobs overseas. Some companies might be forced to close a U.S.
plant or to forego an expansion without even having an offshore
alternative. Under this business model, the rail industry will be
required to load up even more costs on the remaining captives, thus
accelerating the cycle.
When considering railroad service, it is important to recognize the
``common carrier obligation,'' under which railroads are required to
transport commodities for their customers. The Interstate Commerce
Clause of the Constitution grants power to the Congress to write the
laws that govern our Nation's commerce. Congress recognized the common
carrier obligation as the framework on which the entire national
railroad transportation system was founded [49 U.S. Code, Subsection
11101(a)]. And it remains crucial today. Railroads are chartered to
operate in the public interest because the public depends on safe and
reliable service in the delivery of a wide range of products on which
we all depend. The common carrier obligation underlines the role of
railroads as a service industry that supports so many critical sectors
of the U.S. economy.
Let me be very clear: we do not seek a return to the ``bad old
days'' of the 1970s, when several of the major railroads were in
bankruptcy and the industry lacked the capital necessary to maintain
their systems. Unfortunately, more than a quarter of a century after
passage of the Staggers Act, the rail industry apparently continues to
fall short of the revenue needed to provide a first class rail system
for the Nation.
In fact, the railroads are proposing a 25 percent investment tax
credit and first year expensing for infrastructure investments. While
some level of investment tax credit for infrastructure may be
appropriate, it must be part of a comprehensive solution to rail
reliability problems.
There must be a better way for the railroad industry to achieve
long-term financial viability while providing efficient, reliable
service at prices that will allow American business to compete
successfully in the global market. We believe that balanced, fair
legislation is needed to bring about a positive relationship between
the railroads and the captive customers.
ACC would not ask Congress to resolve issues that could be resolved
by railroads and their customers working together to benefit their own
industries. But railroad monopoly, supported by STB decisions, is the
basic impediment. This dilemma can only be resolved with the
intervention of Congress.
Thank you for allowing the American Chemistry Council to present
its views, and I would be glad to respond to any questions.
Senator Lott. Mr. Ficker?
STATEMENT OF JOHN B. FICKER, PRESIDENT,
THE NATIONAL INDUSTRIAL TRANSPORTATION LEAGUE
Mr. Ficker. Thank you, Mr. Chairman. It's a pleasure to be
here this morning and to talk about this important issue that's
not only essential to our membership, but also essential to the
economy as a whole.
The National Industrial Transportation League is America's
oldest and largest association of companies engaged in freight
transportation. Our 600-plus members are some of the largest
companies in the United States, as well as some of the smallest
enterprises, and represent over $50 billion in transportation
spending annually.
The League has actively participated with GAO during their
analysis, and we've met with their staff and provided
information to them in the study. And, actually, several of the
members of the League actually participated in the panel of
experts that the GAO convened earlier this year. We looked at
the GAO testimony this morning, before the hearing, and found
it to be right on mark, and we commend their efforts to date.
First, the GAO noted that, while the STB has broad
legislative authority to investigate industry practices, there
has been little assessment of competition nationally, including
areas of inadequate competition. The League agrees that the
study of competition and areas of inadequate competition would
be very useful to you, as policymakers, and we urge the
Committee to consider such a study.
Second, the GAO, as clearly indicated, said that the relief
process--the current rate relief process is expensive, time-
consuming, complex, and largely inaccessible to most of our
members. I have often said that if I was still working in the
shipping industry, which I spent 20 years doing, if I had ever
decided to bring a rate case before the STB, and I brought that
to the management of my company, I ought to be fired. It
doesn't work. It's not accessible. And it's not effective. The
League strongly agrees with this.
The League presented to the STB, along with 26 other
industry associations, numerous suggestions for improving the
agency's small-shipment rate complaint process. To date,
however, they have not acted on that, although Chairman
Buttrey, this morning, indicated there should be something
forthcoming later this year. And, to that, we are excited.
In addition, the League concurs that the GAO--with the GAO
assessment that there should be alternative approaches
considered to mediating disputes, and including and especially
emphasize the importance of an expedited, mandatory arbitration
process for rate relief and rail--and service disputes. The
League believes such a process would offer great potential for
resolving disputes between rail users and carriers, both to
expediting the dispute process and encouraging settlements. I
might point out also that the National Feed and Grain--Grain
and Feed Association has such a process, and it has worked
quite effectively for the last 7 or 8 years.
As we all know, the rail industry is laboring under
significant capacity constraints for the first time in over 50
years. It's caused congestions across the system. And if you
look at the AAR figures, the average train speed has decreased
by--from 23 miles an hour in 1993 to 20 miles an hour in 2003.
And meaningful service provisions in a contract are virtually
impossible to obtain today.
Some service-sensitive rail users, such as UPS, who so
stated in a recent GAO panel discussion, has shifted their
traffic back to truck, in order to meet the needs of their
customers, further exacerbating the congestion we already face
on our highways. And this capacity constraint has also
substantially increased the pricing leverage of the carriers,
which is evident in substantial rate increases across all
commodities in the demarketing of less-than-profitable traffic.
Most rail users have faced, or are facing, double-digit rate
increases along with reduced and deteriorating service. Rate
negotiations, as others have mentioned, have become a ``take it
or leave it'' proposition.
Just on Monday of this week, the Council of Supply Chain
Management Professionals released its 17th annual State of
Logistics Report. That report stated that, between 2004 and
2005, transportation costs jumped by 14.1 percent, a staggering
figure and a record, according to the Council. Rail users
understand the dynamics of a supply and-demand market
environment. They live in it every day. The concern is that
they are paying more and getting less.
The inability of the rail industry to meet the demands
caused by this is even greater concern for the future. Any
projection put out by any organization, whether it's a
Government agency, such as DOT, or the association--American
Association of State Highway and Transportation Professionals,
known as AASHTO, indicates that growth between now and 2025
could be as much as 60 to 70 percent of freight volumes in that
period of time. And according to the AASHTO Bottom Line Rail
Report, which is often quoted by my associate and friend over
here, Mr. Hamberger, rail tonnage is expected to grow by 44
percent, which is, unfortunately, significantly less than what
the growth of the economy and freight movement will be. That
needs to be addressed.
In order to meet current and future demand, the rail
industry must expand its existing capacity. The critical need
for infrastructure is clear, yet it is not the only way to
improve capacity. The application of technology, such as
positive train control, is estimated to add as much as 10 to 15
percent to the current structure. Processes for working with
shippers and carriers together will also improve that.
With the financial health of the rail industry no longer an
immediate issue, and with enhanced leverage, the railroads
have--in a capacity-constrained market--it is a time for
deteriorating service--emphasis must shift toward creating
value for the shipping public. The creation of value will occur
only if railroads and rail users, spurred by incentives in the
marketplace, work together to identify sources of productivity
gains, cost reductions, in order to provide a consistent level
of service and fully utilize existing capacity.
The League believes that the solutions to these problems
must come from the private sector and that the League has, over
the past years, initiated several efforts. The chairman
indicated, earlier, his concern over fuel surcharges. Over the
past 9 months, the National Grain and Feed Association, along
with the National Industrial Transportation League, has met
privately with each of the Class I carriers in North America to
present a fuel surcharge study, which I would be happy to make
available for the record. And in that effort, we have reached--
we are pleased to say that the BNSF and the Canadian National
and Canadian Pacific have responded positively, while the
eastern carriers have refused.
Additionally, the League, in 2005, chose to remain neutral
on Senate bill 919, and, instead, has entered into discussions
with the AAR to identify ways that rail users and carriers can
work together to find value through the productivity gains and
cost reductions that could address the concerns. The League and
the AAR have formed a number of tasks for us to examine and
address issues concerned with local rail service, capacity,
infrastructure, and office administration.
Senator Lott. Mr. Ficker, I apologize, but we are getting
under a real time constraint here. We want to----
Mr. Ficker. I--let me----
Senator Lott.--hear from Mr. Hamberger.
Mr. Ficker. If I can make one----
Senator Lott. He deserves a chance to respond to the four-
to-one odds here.
Mr. Ficker. If I can make one more comment.
Mr. Hamberger. Does that mean I get 20 minutes, Mr.
Chairman?
Senator Lott. Yes.
[Laughter.]
Mr. Ficker. If I can make one final comment, Mr. Chairman,
I appreciate it.
We want to work--continue to work with the AAR and the
railroads to resolve these problems. We've often heard from you
and Congress, ``Bring us a solution. Work together. Come--bring
the parties together.'' We intend to do that. And we'd urge the
Committee to look at the work that we're doing with the AAR and
help us and guide us in that direction so that those efforts
can provide the kind of value and direction that this country
needs.
Thank you.
[The prepared statement of Mr. Ficker follows:]
Prepared Statement of John B. Ficker, President,
The National Industrial Transportation League
The National Industrial Transportation League is pleased to have
been invited to present testimony on economic, service, and capacity
issues in the freight railroad industry. The League is the Nation's
oldest and largest association of companies interested in
transportation. Its 600-plus members range from some of the largest
companies in the Nation to much smaller enterprises. Many members of
the League ship via rail, and are vitally interested in the capacity,
service, and competitiveness of the Nation's rail industry. But League
members also substantially ship via other modes, both domestically and
internationally, and the problems of capacity must also be looked at in
this broader context, as many modes are facing capacity constraints.
The League actively participated in the General Accountability
Office (GAO) study which is in part the subject of this hearing. League
staff and the incoming League Chairman met for several hours with GAO
staff to discuss rail issues, and provided information developed by the
League to assist GAO in its study. Much of the League's discussion with
GAO centered on the problem of the rail industry's capacity
constraints. Also, the League referred GAO staff to League members for
additional information. Finally, in March 2006, the League and several
of its members appeared before a panel organized by the GAO to consider
the current state of the rail industry and to advise GAO on its study.
As requested by the Committee, the League has reviewed the draft
testimony of the GAO, which describes that Office's ongoing work on the
performance of the rail industry since the Staggers Act. The League
compliments the GAO on its work to date, and concurs with a number of
the tentative conclusions set forth in GAO's testimony. The GAO
testimony discusses two areas that are particularly integral to further
improvement for rail industry policymakers, both of which deserve
comment.
First, GAO notes that, while the STB has broad legislative
authority to investigate industry practices, there has been little
assessment of competition nationally, including areas of inadequate
competition. GAO notes that such an assessment of competition would
allow decisionmakers to identify areas where competition is lacking and
to assess the need for and merits of approaches to address it. The
League agrees that a study of competition and areas of inadequate
competition would be useful to policymakers, and urges the Committee to
consider such a study. In that connection, the League notes that, in
its experience, rail competition, in order to be effective, must be
present at both the origin and the destination of a rail movement. For
example, if an agricultural shipper at origin is served by a single
rail carrier, the fact that the export grain elevator at destination
might be served by more than one railroad does not create rail-to-rail
competition under current law, since the shipper at origin cannot
require its sole-served origin carrier to interchange with a competing
rail carrier for the movement to destination.
Second, GAO indicates that the current rate relief process is
expensive, time-consuming, complex, and largely inaccessible to most
shippers. The League strongly agrees. The League has presented to the
STB, along with 26 other industry organizations, numerous suggestions
for improving the agency's small shipment rate complaint process. To
date, however, the STB has not acted on these suggestions. In addition,
the League concurs with GAO that alternative approaches should be
investigated, including (and especially) the use of expedited,
mandatory arbitration for rail rate and service disputes. The League
believes that such an arbitration process has great potential for
effectively resolving disputes between shippers and carriers, both
through expediting the dispute process and in encouraging settlements.
The rail industry is laboring under significant capacity
constraints for the first time in over 50 years. Since 1980, demand for
rail transportation has steadily increased while rail capacity has
declined. We have reached a point where demand has exceeded the
industry's capacity to haul all of this traffic. This has caused
congestion over significant parts of the national rail system,
resulting in a substantial deterioration in service levels. The AAR's
own figures show that average train speed declined between 1993 and
2003, from about 23 miles per hour to a little over 20 miles per hour.
\1\ Monthly service statistics published by the AAR show that average
train speed for the total U.S. shows a decline from 23 miles per hour
in 2000 to less than 22 miles per hour in the twelve-month period
ending in September 2005. Meaningful service provisions in contracts
are virtually impossible to obtain. Some service-sensitive shippers
such as UPS, who so stated in the recent GAO panel discussion, have
shifted their traffic to truck, further exacerbating the congestion and
wear on the Nation's highways.
---------------------------------------------------------------------------
\1\ AAR, ``Railroad Ten-Year Trends 1993-2002,'' p. 132; and
``Railroad Ten Year Trends, 1994-2003,'' p. 132.
---------------------------------------------------------------------------
These capacity constrains have also substantially enhanced the
pricing leverage of the rail industry, which is evident in substantial
rate increases across all commodities and the de-marketing of less
profitable traffic. As stated by GAO in its testimony, four large Class
I carriers control almost 90 percent of the industry's revenue. Many
shippers are facing double digit rate increases along with reduced or
deteriorating service. Rate negotiations have become a ``take it, or
leave it'' proposition for many shippers. We believe that the effects
of these capacity constraints in the rail industry on prices is felt
across modes. Just 2 days ago, the Council of Supply Chain Management
Professionals released the 17th annual ``State of Logistics Report.''
That report stated that, between 2004 and 2005, transportation costs
jumped 14.1 percent--a staggering figure, and a ``record high,''
according to the Council. \2\
---------------------------------------------------------------------------
\2\ ``17th Annual State of Logistics Report,'' sponsored by the
Council of Supply Chain Management Professionals, June 19, 2006, p. 4.
---------------------------------------------------------------------------
The inability of the rail industry to meet current demand causes
even greater concern for the future. Any projection of future economic
growth indicates that the need for transportation will grow
dramatically in the next 15 years. For example:
The American Association of State Highway and Transportation
Officials [AASHTO Report] projects that, with moderate economic
growth, U.S. domestic and international freight tonnage will
grow by 67 percent between 2000 and 2020. \3\
---------------------------------------------------------------------------
\3\ AASHTO Report, p. 50.
According to the AASHTO Report, rail tonnage is expected to
grow by 44 percent, which is significantly less than the
---------------------------------------------------------------------------
overall growth in freight tonnage.
The Port of Los Angeles/Long Beach estimates that
containerized imports through that port will grow by 44 percent
from 2005 to 2010, by another 34 percent in 2015; and by
another 34 percent in 2020--in total more than doubling the
traffic through this key facility in just 15 hours. \4\
---------------------------------------------------------------------------
\4\ See, http://www.polb.com and http://www.portoflosangeles.org
In order to meet current and future demand, the rail industry must
expand existing capacity. This will require both the industry and the
policymakers to shift radically from a mind-set of cost control and
downsizing, to one of growth and expansion.
Rail users are vitally dependent upon a financially healthy rail
system, as there is no way for many of them to efficiently transport
their goods to market except via rail. Fortunately, the railroad
industry is thriving financially for the first time since the Staggers
Act, and well before.
The financial markets have been ``bullish'' on the rail industry
for several years. In a recent Morgan Stanley report, \5\ respected
analyst James Valentine expressed:
---------------------------------------------------------------------------
\5\ James Valentine and Michael Manelli, Morgan Stanley Equity
Research, ``All Aboard! Reiterating Bulling Vies Toward Freight
Railroads,'' Sept. 20, 2005, p. 1 (Valentine Report).
even greater conviction that the industry will consistently
earn its cost of capital over the next few years (a feat not
achieved in decades), led by secular upward pricing initiatives
---------------------------------------------------------------------------
that should continue into 2006 and beyond.
This is strong evidence that the financial strength exhibited by
railroads is not a temporary phenomenon, but a paradigm shift in rail
transportation markets brought about in large part by capacity
constraints.
Such statements also suggest that the STB's measure of revenue
adequacy significantly overstates the financial returns needed for
``real-world'' revenue adequacy. For example, despite the financial
success of the rail industry over the past several years and reflected
in the previously quoted Wall Street assessment of the industry, the
STB determined that only one Class I railroad (Norfolk Southern) was
revenue adequate in 2004, and that is expected to be the case for 2005
as well. The balance intended in the Staggers Act between allowing
competition to establish reasonable rates ``to the maximum extent
possible'' and the policy of fostering a financially healthy rail
industry, has been upset by the agency's over-reliance on a
questionable methodology of calculating revenue adequacy.
Competition is at the heart of our Nation's economic system. It
creates a sense of urgency that enables companies to thrive. It spurs
efficiency. It allocates resources in the most efficient manner.
Competition, therefore, is essential to encourage the most efficient
use of today's capacity constrained rail infrastructure and to spur
investment in additional infrastructure. Competition encourages the
most efficient use of limited capacity by ensuring that goods are moved
over the most efficient route available. Competition also ensures that
the capital for capacity expansion flows to the most economically
beneficial projects for the rail transportation system. Indeed,
increasing capacity would likely lead to increased competition, as rail
carriers sought to attract valuable traffic to their system.
With the financial health of the rail industry no longer an
immediate issue, and with the enhanced leverage of railroads in a
capacity-constrained market at a time of deteriorating service levels,
it is time for a more balanced approach. Direct government regulation
seldom has been as effective as the marketplace at increasing
efficiency. Emphasis must shift toward the creation of value to the
shipping public. The creation of value will occur if railroads and
shippers, spurred by the incentives of the market place, work together
to identify sources of productivity gains and cost reductions in order
to provide a consistent level of service that fully utilizes existing
capacity to the maximum extent possible and encourages the addition of
more capacity.
The League believes that solutions to these problems must come from
the private sector, and the League has over the past year has initiated
several efforts at private-sector solutions to various problems.
One set of discussions concerned rail fuel surcharges. This issue
has become extremely important to our members, who believe that many of
the carriers' fuel surcharge programs have significantly over-recovered
the increased cost of fuel as applied to individual movements. Over the
past 9 months, the League met, along with the National Grain and Feed
Association (NGFA), with representatives of each of the major Class I
carriers, to present the results of a Fuel Surcharge Study which the
League, NGFA and other groups sponsored, and to discuss areas where
individual carriers might consider improving their fuel surcharge
programs. Some carriers, specifically the BNSF, the Canadian National,
and the Canadian Pacific, responded positively to these discussions
with changes in their individual fuel surcharge programs. Other
carriers, especially the Eastern carriers, declined to respond.
Additionally, in 2005, the League chose to remain neutral on S.
919, and instead entered into discussions with the AAR to identify ways
that shippers and carriers can work together to find value through
productivity gains and cost reductions that could address the issues
and concerns between them. The League and the AAR have formed a number
of task forces to examine and address issues connected with local rail
service, capacity and infrastructure, and office administration. For
about a year now, these task forces have met several times to identify
issues and plan improvements. The League continues to pursue these
discussions diligently, and remains hopeful that they will yield
positive results. However, the League remains mindful that the status
quo--a trifecta of deteriorating service, double-digit rate increases,
and serious questions as to whether there are sufficient means and
incentives to meet future demand--is unacceptable.
These are matters of significant importance to rail users and it is
essential that solutions are found and that resolutions are reached
between rail users and carriers. We believe that League membership will
need to see some concrete results flowing from the League's discussions
with the AAR within a reasonable timeframe. If that does not occur, it
is likely that the League's membership would insist that the League
review its current position. We urge the Committee to insure that rail
carriers and users are moving forward in a serious, focused and
positive effort in the development of effective mutual solutions. We
would urge the Committee to provide oversight to this process. We would
be very pleased to report back to the Committee on the progress of the
League's discussions with the AAR and its carriers.
Senator Lott. Thank you very much.
Mr. Hamberger?
STATEMENT OF EDWARD R. HAMBERGER, PRESIDENT/CEO, ASSOCIATION OF
AMERICAN RAILROADS
Mr. Hamberger. Thank you, Mr. Chairman. I will try to be
brief.
On behalf of the members of the AAR, thank you for the
opportunity to discuss freight railroad capacity and others
issues here this morning.
Over the years, comprehensive, reliable, and cost-effective
freight rail service has been critical to our Nation's economic
prosperity. Looking ahead, the United States cannot prosper in
an increasingly competitive global marketplace if our freight
railroads are unable to meet our growing transportation needs.
Railroads must be able to both maintain their extensive
existing infrastructure and equipment and build the substantial
new capacity that will be required to transport a substantial
portion of the predicted 70-percent increase in freight
traffic.
Unlike many utilities, which have peak demand capacity
built into their asset base for ratemaking purposes, railroads
cannot afford to have spare capacity on hand ``just in case.''
Before they invest in new capacity, they must be confident that
traffic and revenue will remain high enough to support the
capacity in the long term.
Profits, therefore, are critical to meeting capacity
demand, as the Congressional Budget Office has observed.
According to the CBO, quote, ``As demand increases, the
railroad's ability to generate profits from which to finance
new investments will be critical. Profits are key to increasing
capacity, because they provide both the incentive and the means
to make new investments,'' end quote.
Today, I'm pleased to say that after--25 years after the
Staggers Act, freight railroads are finally beginning to show
tangible signs of financial stability might be within reach.
Rail earnings over the past year, while still below the average
and median for all companies within the United States, are
significantly higher than they have been in the past. This
welcome development means that railroads can justify and afford
the massive investments and capacity enhancements that will be
required to meet future demand. In fact, this year the industry
is investing $8.3 billion in infrastructure and investment, up
from $5.7 billion just 4 years ago.
Looking ahead, I respectfully suggest that Members of this
Committee and your colleagues in Congress do have a critical
role to play:
First, heed the findings of the CBO and allow railroads to
make the profit necessary to sustain investment in necessary
capacity. And as CBO--GAO testified here this morning, all rate
changes over the last 15 years were below the rate of
inflation, and, thus, all rates have declined, in real terms.
Reject any policy that unreasonably restricts future rail
earnings and capital cost recovery.
Second, an infrastructure tax incentive would help bridge
the gap between what the railroads can afford to invest in
infrastructure from a business standpoint and what might bring
more benefit to our society. As AASHTO has declared, shipping
more freight by rail yields public benefits of clean air,
congestion mitigation, and energy conservation, which the
public should, therefore, be willing to pay for. This is not a
subsidy.
In light of the role that we have played in the development
of the economy, Mr. Chairman, I was very disappointed in some
of the testimony I heard here earlier this morning on this
panel.
For example, in the chemical industry you will see that,
over the past 10 years, railroad rates have stayed the same.
They haven't gone up in 10 years. What has gone up overall for
chemical companies? A 30-percent increase in the producer price
index. Everything has gone up 30 percent, led by natural gas
and chemical feedstocks. And yet, the gentleman to my right has
the temerity and the gall to say that his companies are moving
overseas because of rail rates. That's not what his president
says. Jack Gerard, President of ACC, says Dow Chemical had a
facility that they were going to build in Texas. That facility
is now being moved to Oman, in the Middle East. ``Why?'' Jack
asks. Because of natural gas prices, almost solely because of
natural gas prices. Jack went on to say, ``The high price of
natural gas is driving the global chemical industry''--it's a
global chemical industry--``out of the U.S.'' The high price is
driving it out of the U.S. I'll accept his apology later.
Moving on to coal. Let's take a look at electricity rates,
up 38 percent. GAO says our rates were down 35 percent. We have
them down to 32 percent since 1981. I'll take 32 or 38 percent.
Our rates are down. Electricity rates are up. We are a
retardant on increased electricity rates, not a driver of those
rates. And notwithstanding what Mr. English says, according to
the Coalcast Stockpile data from energy ventures analysts,
dated May 2006, the rail powers stock increase, ``the inventory
crisis,'' in parenthesis, in quotation marks, is over. And the
report goes on to say that this is not because of a shutdown in
the burning. Coal burn recovered in May was 3.7 percent over
normal, and stock share--not stock prices--coal stockpiles are
still up.
Finally, with respect to agriculture, the input for
agriculture prices paid by farmers, 4 percent decline in
railroad rates--4 percent decline. The GAO says it was a 9
percent--nominal 9 percent increase since 1985. We have a 4
percent decline since--again, in nominal rates--since 1994,
while every other price paid by them to produce their farm
outputs has gone up. And I find it very interesting that, just
last week, dated June 6, 2006, the National Association of
Wheat Growers recommended--represented by my friend down at the
other end of the table--put out a white paper addressing the
crisis in wheat. And you've talked about--it talks about six or
seven different issues, government programs, wheat diseases,
the need for new biotechnology. Doesn't mention railroads,
doesn't mention transportation costs. Talks about the fact that
bread can last longer on the shelf in supermarkets, and,
therefore, demand is down. At the end, they announce that a
wheat summit has been called for the fall for members of all
parts of the wheat chain to come together to develop ideas and
policies to address this concern. And I offer our participation
in that wheat summit. We are part of your chain, Mr. McIntosh.
We want to be part of your economy. It does us no good when
chemical plants go to Oman. We don't run railroads in Oman.
Jack goes on to say that, of the 120 new chemical plants being
planned around the world, 50 are being built in China. We don't
run trains in China either, Mr. Chairman.
And I commend Mr. Ficker and the leadership that he has
exerted at NIT League, to recognize that working together we
can address issues of service. Working together. We have tried
to do that with representatives of EEI. We have done it with
the short lines. We have done it with the National Grain and
Feed Association. We are pleased and honored to do it with NIT
League. And we suggest that is the way to address any service
issues, working together.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Hamberger follows:]
Prepared Statement of Edward R. Hamberger, President/CEO,
Association of American Railroads
Introduction
On behalf of the members of the Association of American Railroads
(AAR), thank you for the opportunity to discuss freight railroad
economics, service, and capacity. AAR members account for the vast
majority of freight railroad mileage, employees, and traffic in Canada,
Mexico, and the United States.
Comprehensive, reliable, and cost-effective freight railroad
service is critical to our Nation. Today, freight railroads serve
nearly every industrial, wholesale, retail, agricultural, and mineral-
based sector of our economy. And in the words of the former World Bank
Railways Adviser, ``Because of a 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,
gives the world's most cost-effective rail freight service.''
Looking ahead, the United States cannot prosper in an increasingly
competitive global marketplace if our freight railroads are unable to
meet our growing transportation needs, and having adequate railroad
capacity is critical to meeting those needs. Railroads must be able to
both maintain their extensive existing infrastructure and equipment and
build the substantial new capacity that will be required to transport
the significant additional traffic our economy will generate.
Although I'm sure that most rail customers agree with this
sentiment, not all of them seem to recognize that if they want added
rail capacity, they must be willing to pay for it. Unlike utilities,
which have peak-demand capacity built into their asset base for
ratemaking purposes, \1\ railroads cannot afford to have spare capacity
on hand ``just in case.'' Consequently, before they invest in new
capacity, railroads must be confident that traffic and revenue will
remain high enough to support the capacity in the long term, and that
the investment will produce benefits greater than the scores of
alternative uses of the funds.
---------------------------------------------------------------------------
\1\ Some utilities, in fact, receive regulatory permission to begin
recouping the costs of new generation assets years before those assets
actually come on line.
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Profits, therefore, are crucial, as the Congressional Budget Office
(CBO) recently noted. According to the CBO, ``As demand increases, the
railroads' ability to generate profits from which to finance new
investments will be critical. Profits are key to increasing capacity
because they provide both the incentives and the means to make new
investments.'' \2\
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\2\ Congressional Budget Office, Freight Rail Transportation: Long-
Term Issues (January 2006), p. 11.
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Today, some 25 years after the Staggers Act was passed, freight
railroads are finally beginning to show tangible signs that financial
sustainability might be within reach. Rail earnings over the past year,
while still below average within the universe of all industries, have
been significantly higher than their historical norm. This welcome
development means that railroads can more easily justify and afford the
massive investments and capacity enhancements that will be required if
railroads are to continue to play their proper role in meeting our
freight transportation needs.
I respectfully suggest that Members of this Committee, your
colleagues in Congress, and other policymakers also have critical roles
to play. Indeed, a primary obligation of policymakers is to take steps
that assist--and, just as importantly, not take steps that hinder--
railroads in making the investments needed to provide the current and
future freight transportation capacity our Nation requires.
Any policy that unreasonably restricts future rail earnings and
capital cost recovery--and especially a swing in the regulatory or
legislative environment back to heavy-handed government interference in
rail operations--would take railroads away from the sustainability they
need. Such an outcome would be harmful at any time, but it would be
especially harmful today, given that as a nation we are in dire need of
more railroad investments and more railroad capacity, not less.
Capacity is a Challenge Everywhere in Transportation Today
``Every aspect of the supply chain is stretched. It's not a
question of whether [a congestion crisis] is going to happen. It's a
question of when,'' notes a West Coast port terminal operator.'' \3\
``In 23 years, I have never seen a situation where the supply chain is
at capacity. It's busting at the seams,'' an executive with a major
chemicals firm notes. \4\ ``Our highways, waterways, railroads and
aviation networks are simply not keeping up with ordinary demands,''
says the head of UPS. \5\
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\3\ Doug Tilden, CEO, Marine Terminals, quoted in The Financial
Times, March 14, 2006.
\4\ Randy Schaeffer, Manager of Rail Fleet Procurement, Air
Products and Chemicals, quoted in Traffic World, May 16, 2005.
\5\ Michael L. Eskew, Chairman and CEO, UPS, in a speech to the
World Affairs Council of Philadelphia, April 6, 2006.
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To be sure, freight is still being delivered, and there is a
tremendous amount of strength and flexibility in our Nation's
transportation systems. But as these statements make clear, all freight
modes in the United States are facing capacity challenges today.
For U.S. freight railroads, year-over-year quarterly carload
traffic has risen in nine of the past ten full quarters, and intermodal
traffic has increased in each of the past 16 full quarters, year-over-
year. As a result, U.S. railroads today are hauling more freight than
ever before. These traffic increases have resulted in capacity
constraints and service issues at certain junctions and corridors
within the rail network. In fact, excess capacity has disappeared from
many critical segments of the national rail system.
The reality that rail assets are being used more intensively is
reflected in rail traffic density figures. From 1990 to 2005, traffic
density for Class I railroads--defined as ton-miles per route-mile
owned--more than doubled. (Other measures of traffic density, such as
car-miles per mile of track, have also shown substantial increases.) Of
course, different rail corridors differ in their traffic density and
their change in density over time, and individual railroads differ in
the degree to which their capacity is constrained overall. Still, there
is no question that there is significantly less room to spare on the
U.S. rail network today than there was even a couple of years ago.
Railroads work closely with their customers on a regular basis to
determine expected traffic levels well in advance in order to help
ensure that the railroads have appropriate assets in place. Sometimes,
though--as occurred in 2005--actual demand for rail service exceeds
expectations.
When this has happened, some shippers and others have
inappropriately blamed railroads for not having enough infrastructure,
workers, or equipment in place to handle the surge in traffic. But to
contend that railroads can afford to have significant amounts of spare
capacity on hand ``just in case''--or that shippers would be willing to
pay for it, or capital providers willing to finance it--is completely
unrealistic. Like other companies, railroads try to build and staff for
the business at hand or expected to soon be at hand. ``Build it and
they will come'' has rarely been a winning strategy for freight
railroads.
Over the past couple of decades, Class I railroads have shed tens
of thousands of miles of marginal trackage. They had no choice, because
they could not afford to keep it, and it freed resources for use on
higher priority core routes. Most of the miles that were shed were
transferred to short-line operators, and most of these remain part of
our rail network. Even if railroads could have afforded to retain this
mileage--and again, they could not--most of it was in locations that
would not be useful in ameliorating today's capacity constraints.
In part, this is because long-lived rail infrastructure installed
many decades ago was often designed for types and quantities of
traffic, and origin and destination locations, that are dramatically
different than those that exist today. For example, only within the
last two decades has Powder River Basin coal taken on the enormous
importance it currently enjoys. Similarly, the explosive growth of
intermodal traffic is mainly a phenomenon of the past 20 years.
When business is unexpectedly strong, railroads are unable to
expand capacity as quickly as they might like. Locomotives, for
example, can take a year or more to be delivered following their order;
new entry-level employees take 6 months or more to become hired,
trained, and qualified; and it can take a year or more to plan and
build, say, a new siding. \6\ And, of course, before investments in
these types of capacity enhancements are made, railroads must be
confident that traffic and revenue levels will remain sufficiently high
to justify the enhancements for the long term. Again, in this regard
railroads are no different than the vast majority of their customers.
---------------------------------------------------------------------------
\6\ This may seem like a long period of time, but it compares
favorably with the decade (or more) it can take to build a typical
stretch of highway.
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Freight Transportation Demand Will Increase Sharply in the Years Ahead
No matter the mode, capacity constraints exert a substantial
economic toll. As Secretary of Transportation Norman Mineta has noted,
``Congestion and inefficiency in transportation are, in effect, hidden
taxes that burden every business and every individual, and we must find
ways to lighten that load.'' That ``load'' could become much worse over
the next 15 years if demand for freight transportation grows as quickly
as expected.
The U.S. Department of Transportation (DOT) has projected that
overall demand for freight rail service (measured in tons) will
increase 55 percent (1.3 billion tons) by 2020 from 1998 levels, equal
to 2.0 percent per year. The DOT projects a 69 percent increase (10.6
billion tons) in total freight transportation demand. \7\
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\7\ U.S. Department of Transportation, Freight Analysis Framework,
October 2002.
In a 2005 forecast, economic consultants Global Insight predicted
that rail carload and intermodal tonnage will increase by 29 percent
(650 million tons) from 2004 to 2016, or 2.1 percent per year. Global
Insight expects total freight transportation demand to rise 31 percent
by 2016. \8\
---------------------------------------------------------------------------
\8\ U.S. Freight Transportation Forecast to 2016, produced for the
American Trucking Associations.
---------------------------------------------------------------------------
If Class I ton-mile growth from 2005 through 2020 does nothing more
than match the rate of growth from 1990 through 2005, rail ton-miles in
2020 will total 2.35 trillion, up 38 percent (or 2.2 percent per year,
on average) from the 1.70 trillion in 2005.
These projections for increases in freight transportation demand
should give all of us pause. At full or near-full capacity, transport
systems become more fragile. With inadequate redundancy, there are
fewer alternative routes and facilities, breakdowns and back-ups
proliferate faster and further, and recovery from disruptions takes
longer. Ameliorating capacity constraints across modes will entail
significant costs, but in the long run the cost is likely to be far
less than if we do not adequately address the issue now.
Railroads Are Working Hard on a Variety of Fronts to Increase Capacity
For their part, U.S. freight railroads are well aware that capacity
constraints have led to service-related problems on parts of their
networks, and they are committed to solving these problems by
addressing the host of factors that influence the fluidity and
resiliency of freight rail operations.
Spending on Infrastructure and Equipment
Of the many different factors that affect how well a rail network
functions, the basic amount and quality of infrastructure and equipment
is probably the most important. That is why U.S. freight railroads have
been expending, and will continue to expend, enormous resources to
improve their asset base. As traffic grows, railroads will have to
concentrate increasingly on building new capacity to accommodate that
growth--while continuing to maintain existing capacity. But if a
railroad is not financially sustainable over the long term, it will not
be able to attract the capital necessary to maintain its existing
network in top condition, or make additional investments in the
replacement or expansion of infrastructure required by growing demand.
This point is especially relevant for railroads relative to other
modes. In contrast to the extensive government funding for truck,
barge, and airline infrastructure over the past 25 years, freight
railroads have historically received little government financial
assistance for infrastructure construction or maintenance. Instead,
freight railroads have financed infrastructure improvements (and
equipment investments, such as locomotives) almost exclusively through
their own earnings and by borrowing. \9\
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\9\ As discussed beginning on page 26, [89 of this document]
railroads favor more pronounced use of public-private partnerships for
rail infrastructure improvement projects where the fundamental purpose
of the project is to provide public benefits or meet public needs, and
support tax incentives for rail investments that enhance capacity.
---------------------------------------------------------------------------
From 1980 through 2005, Class I freight railroads alone invested
some $174 billion in capital and maintenance expenses related to
infrastructure, and another $183 billion in capital and maintenance
expenses related to equipment. (Non-Class I railroads have invested
additional billions of dollars.) \10\ Class I railroads typically
devote approximately 45 percent of their operating revenue, or $15
billion to $17 billion per year, toward these purposes, which have been
trending higher since 1990 on a per-mile basis.
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\10\ For non-Class I railroads, improving infrastructure to handle
286,000 pound cars is a major issue. The AAR urges Congress to extend
the three-year short line infrastructure tax credit, which expires in
2007.
Moreover, rail spending, which is already substantial, is expected
to rise sharply. Based on an analysis of recent railroad financial
presentations, press releases, and other sources, it appears that Class
I capital expenditures on infrastructure and equipment are set to rise
in 2006 to around $8.3 billion, up sharply from around $5.7 billion
just 4 years earlier. This huge increase demonstrates the diligence
with which railroads are responding to the capacity issue.
The following is just a sampling of the diverse types of capacity-
enhancing investments individual railroads have recently made or will
soon make:
BNSF Railway double-tracked 76 miles of main line between
Chicago and Los Angeles in 2005, and another 56 miles will be
double- or triple-tracked this year. Within a couple of years,
the entire 2,200-mile route will be double-tracked. In 2005,
BNSF also took delivery of some 400 centerbeam cars (for
hauling lumber); 3,700 high-capacity covered hoppers for
carrying grain and other commodities; 1,300 rapid-discharge
coal cars; and 650 intermodal flatcars with capacity to carry
6,500 intermodal double-stack containers. BNSF also took
delivery of 288 new locomotives in 2005 and will add more than
300 more in 2006.
In 2006, Canadian National will spend $1.2 billion to $1.3
billion on capital programs in the United States and Canada.
Included are the reconfiguration of the key Johnston Yard in
Memphis, a gateway for CN's rail operations in the Gulf of
Mexico region; siding extensions in Western Canada; and
investments in CN's Prince Rupert, British Columbia, corridor
to capitalize on the Port of Prince Rupert's potential as an
important traffic gateway between Asia and the North American
heartland.
In 2005, Canadian Pacific finished its biggest capacity
enhancement project in more than 20 years by expanding its
network from Canada's Prairie region to the Port of Vancouver.
The project increased the capacity of CP's western network by
12 percent and improved the route structure from Canada's
Pacific coast to the United States. Like other carriers, CP has
added new sidings on congested corridors; taken delivery of
dozens of new locomotives and newer, higher-capacity freight
cars; and hired and trained hundreds of new employees, many of
whom will be in the United States.
CSX recently announced plans to spend $1.3 billion to $1.4
billion per year on capital expenditures in 2006 and 2007, up
from approximately $1 billion over the previous few years. In
addition to improvements elsewhere, installation of sidings,
signals, and other infrastructure on lines between Chicago and
Florida and between New York City and Albany will expand
capacity and improve service reliability. CSX will also add
several hundred new locomotives over the next few years.
Kansas City Southern is busy integrating its Kansas City
Southern de Mexico subsidiary fully into the railroad's other
operations. KCS plans to spend some $120 million in the United
States and another $96 million in Mexico in 2006. Particular
attention will be given to the construction of new tracks and
other improvements at the railroad's Shreveport, Louisiana hub;
improvements on the ``Meridian Speedway'' between Shreveport
and Meridian, Mississippi to augment the new rails, new
sidings, and new drainage system installed in 2005; and the
expansion of rail yards, track upgrades, and new sidings on its
``Tex-Mex'' subsidiary.
Norfolk Southern (NS) will purchase more than 220 new
locomotives from late 2005 through mid-2006 to augment the
hundreds purchased over the past few years. NS is also in the
midst of its largest-ever locomotive rehabilitation program--in
2005, 491 locomotives were overhauled and 29 were rebuilt;
another 420 will be overhauled and 52 rebuilt in 2006. NS is
also beginning its ``Heartland Corridor'' project, which, among
other things, will entail raising clearances at 28 tunnels in
Virginia, West Virginia, and Kentucky to allow double-stack
intermodal service over the entire route from the Port of
Norfolk to Columbus, Ohio and Chicago.
In 2006 alone, Union Pacific will spend some $1.5 billion to
replace track and hundreds of millions more to increase
fluidity and capacity. Much of UP's current and recent spending
is coal-related, including adding a third mainline from Reno to
West Nacco on the PRB Joint Line; constructing a third run-
through mainline to speed coal trains through North Platte; and
a $35 million Marysville, Kansas bypass to expedite PRB coal
trains. Another focus of UP's capacity expansion programs for
2006 is its 760-mile Sunset Route between Los Angeles and El
Paso. Today, more than 42 percent of the Sunset Route is double
tracked, including 69 miles that were completed in 2005 at a
cost of some $100 million. UP plans to double track another 50
miles this year and most of the remainder within a few years.
Since 2004, Union Pacific has purchased 713 new locomotives and
will purchase an additional 200 in 2006.
The massive investments railroads must make in their systems are a
reflection of the extreme capital intensity of railroads. By any of a
variety of measures, railroads are at or near the top among all U.S.
industries in terms of capital intensity.
For example, from 1995 to 2004, the average U.S. manufacturer spent
3.5 percent of revenue on capital expenditures. The comparable figure
for U.S. freight railroads was 17.8 percent, or more than five times
higher. Likewise, in 2004 railroad net investment in plant and
equipment per employee was $667,000--more than eight times the average
for all U.S. manufacturing ($78,000).
The bottom line is that railroading is extraordinarily expensive,
and simply cannot be done ``on the cheap.'' And because when they make
major investments, railroads are committing capital to assets that can
have a life span of 30 years or more, adding rail capacity can be
accompanied by substantial financial risk. That's why railroads, as
noted earlier, need to be sure that the market will support additions
to capacity over the long-term. As a former NS official remarked in
comments to the Transportation Research Board, ``Any capacity enhancing
project (be it fixed plant or locomotives or cars) has to be compared
to all of the other demands on corporate capital and the returns must
be attractive. Further, all investments must be consistent with a
company's ability to raise capital. However `worthy' a capacity project
might be, it must, in the end, lead to improved financial returns.''
\11\
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\11\ James McClellan, ``Railroad Capacity Issues,'' background
paper for Research to Enhance Rail Network Performance: A Workshop,
Transportation Research Board, April 5-6, 2006.
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Aggressive Hiring
Rail capacity is a function of personnel in addition to
infrastructure, and railroads have been aggressively hiring and
training crews to expand capacity. After decades of steady decline,
rail employment has been on the increase since 2004. According to STB
data, overall Class I employment in April 2006 (the most recent month
for which data are available) was 3 percent higher than in April 2005
and 7 percent higher than in April 2004.
Infusion of Technology
Technology has always played a key role in expanding rail capacity.
Control systems have become more sophisticated; trains have become
longer and heavier; locomotives have become more powerful and more
reliable; and track structures have become more robust and thus less
prone to outages for maintenance or because of failure.
Many of the dramatic technological advancements that have increased
railroad efficiency (and safety) by helping to protect freight cars,
locomotives, track, and cargo before damage, costly repairs, traffic
holdups, and derailments occur have been developed and/or refined at
the Transportation Technology Center Inc. (TTCI) in Pueblo, Colorado, a
wholly-owned subsidiary of the AAR that is generally considered to be
the finest rail research facility in the world. Just a few of these
technological advancements include:
Wayside detectors that identify defects on passing rail
cars--including overheated bearings and wheels, dragging hoses,
deteriorating bearings, cracked axles and wheels, and
excessively high and wide loads--before structural failure or
other damage occurs. Some of the newest wayside detectors being
developed use machine vision to perform higher-accuracy
inspections through the use of digitized images, which are then
analyzed using computer algorithms.
Trackside acoustic detector systems use ``acoustic
signatures'' to evaluate the sound of internal bearings to
identify those likely to fail in the near term. These systems
supplement or replace existing systems that identify bearings
already in the process of failing by measuring the heat they
generate.
Advanced track geometry cars use sophisticated electronic
and optical instruments to inspect track conditions, including
alignment, gauge, and curvature. TTCI is developing an on-board
computer system that provides an even more sophisticated
analysis capability of track geometry, predicting the response
of freight cars to track geometry deviations. This information
will better enable railroads to determine track maintenance
needs and help improve the safety of day-to-day rail
operations.
One of the most straightforward ways to add capacity to a
rail network is to pack more freight on each train, and
railroads have been doing that ever more aggressively. In 1995,
for example, the average coal car carried on a Class I railroad
held just under 103 tons of coal. By 2005 that figure had risen
to nearly 112 tons, a 9 percent increase. But heavier loads are
far more damaging to track structures than lighter loads.
Researchers at TTCI and elsewhere are engaged in efforts
related to this heavy-axle load (HAL) service. HAL-related work
is underway on rail steels, insulated joints, bridges, welding,
maintenance practices, and more.
Freight railroads have always been at the forefront in the use of
computers and information technology, and today railroads are rapidly
expanding their use of these technologies to improve overall efficiency
and the fluidity of their operations, thereby adding capacity without
adding infrastructure.
For example, advanced computer modeling software is used in a wide
variety of rail applications, from automating rail grinding schedules
\12\ and improving customer demand forecasting to optimizing yard
operations. CN, for example, is implementing what it calls
``SmartYard,'' complex computer software that identifies and analyzes
every possible combination and outcome for sequencing cars in a large
classification yard and simultaneously updates and communicates the car
processing plan. The result is more efficient, faster yard operations.
Other railroads are engaged in similar efforts.
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\12\ Rail grinding is a maintenance procedure for removing rail
corrugations and surface defects, and for restoring the shape of rail
to improve wheel and rail interaction and extend rail life.
---------------------------------------------------------------------------
Recognizing that another way to add capacity is to move more trains
faster over the same length of track, railroads are also working with
their suppliers to design, implement, and improve innovative
computerized ``trip planning'' systems. These highly-complex systems
automatically incorporate and analyze a mix of ever-changing variables
(e.g., crew and locomotive availability, terminal congestion, the
different priority status of loads of freight, track conditions,
maintenance plans, weather, etc.) to optimize how and when cars are
assembled to form trains and when those trains depart.
Trip-planning systems are just one way that railroads are trying to
improve equipment ``cycle time''--i.e., the total time it takes for a
freight car to be loaded, hauled to destination, unloaded, returned to
the same or a different shipper, and loaded again.
The benefits of increased efficiency explain rail efforts to
``supersize,'' automate, and increase the velocity of traffic flows
where practical. For example, railroads and their grain customers
collaborate to consolidate grain loading at high-speed ``shuttle
loader'' elevators. Railroads gain by improving the efficiency of their
operations; shippers gain because the efficiencies produce railroad
cost savings that are passed through in the form of lower rates. The
efficiencies of shuttle operations can be striking. At BNSF, for
example, a typical grain car in shuttle service hauls approximately
three times more grain over the course of a year than a typical grain
car in non-shuttle service.
Expanded over a network, operational efficiency can free up
substantial capacity for other uses. At one major railroad, for
example, a one mile-per-hour increase in system-wide velocity could
mean that 250 locomotives, 5,000 freight cars, and 180 train and engine
employees would be freed up to move additional traffic.
Cooperative Alliances and Collaborations
Railroads are also entering into operational alliances with each
other which often rely on non-standard techniques to achieve desired
results. These innovative collaborations lead to improved capacity
utilization, lower costs, and better service. For example:
A recent BNSF and CN track-sharing agreement will improve
network fluidity and infrastructure capacity, principally in
Vancouver, Chicago, and between Memphis and southern Illinois.
Under the agreement, the railroads will exchange track and rail
infrastructure, and CN will grant trackage, haulage, and other
access rights to BNSF.
CSX and UP are now operating their ``Express Lane'' service
to haul fruits and vegetables by refrigerated rail car from
California and the Pacific Northwest to population centers on
the East Coast. UP and CSX also offer a similar ``Wine
Connection'' service for wine movements. These joint ventures
improve the utilization of rail assets and enhance the
efficiency of coast-to-coast transportation.
A KCS-NS joint venture will increase capacity and improve
service on the ``Meridian Speedway,'' a rail line between
Meridian, Mississippi and Shreveport, Louisiana, that is
crucial for transporting freight between the Southeast and the
Southwest. KCS will contribute a 320-mile rail line between the
cities, while NS will invest $300 million in cash,
substantially all of which will be used for capital
improvements to increase capacity over a four-year period. The
capital improvements will include signal systems, extended
sidings and stretches of double track.
UP and CN have reached a routing protocol agreement to
streamline their exchange of rail traffic at major gateways and
reduce rail congestion in the Chicago area. Under the protocol,
CN and UP are directing rail traffic flows through the most
efficient interchange locations, thereby improving transit
times and asset utilization.
NS and CP recently began a partnership under which NS runs
trains on CP trackage in New York state and then hands off the
trains to CP, which hauls them across the border for further
interchange or final delivery in Canada. The agreement allows
NS to replace the inefficient and circuitous route it
previously had to use for trans-border operations. In addition,
NS hauls CP trains between other points in New York, thereby
allowing CP to improve the efficiency of its own operations.
UP and CP recently strengthened their alliance at Eastport,
Idaho, where CP hands off grain trains to UP for delivery to
Pacific Coast ports. Working with customs authorities, the
railroads have improved the customs clearance process,
eliminating a major bottleneck that had been backing up trains
at the border. The result has been a significant decrease in
dwell time and a sharp increase in daily train count at the
interchange.
Railroad Rate Trends Since Staggers
With passage of the Staggers Rail Act of 1980, U.S. freight
railroads were generally freed to price their services in the open
marketplace, with government price regulation (which had been pervasive
prior to Staggers) remaining only where it was determined that
railroads did not face effective competition. Staggers allowed
railroads to enter into confidential rate and service contracts with
shippers and gave railroads freedom to operate over routes they found
to be most efficient. Railroads responded to their new pricing freedoms
by sharply increasing productivity and competing more effectively.
Most rail productivity gains have been passed on to shippers in the
form of lower rates. In inflation-adjusted terms, rail revenue per ton-
mile (RPTM) was relatively flat prior to Staggers, but has fallen 57
percent since then. Similarly large rate reductions have occurred over
nearly all commodity types (including coal, agricultural products, and
chemicals) and across geographical areas.
RPTM is often used as a surrogate for rail rates because it
measures both the actual payments made by rail customers and the bases
for which the rates are assessed--weight and distance. Although RPTM
can be affected by changes in length of haul, commodity mix, equipment
ownership, and other shipment characteristics, studies that have
controlled for such factors have confirmed that the decline in RPTM
reflects a real drop in rail rates.
Numerous studies confirm the sharp drop in freight rail rates. For
example:
In September 2004, the U.S. Department of Energy's Energy
Information Administration (EIA) released a report on rail
rates for coal delivered under contract from 1979 through 2001.
The report found that contract rail coal rates peaked in 1984
at $17.52 per ton, then declined by nearly 42 percent, to
$10.19 per ton, by 2001. On a revenue per ton-mile basis, the
EIA reported that rail rates declined 60 percent in real terms
from 1979-2001, compared with a decline in barge coal rates of
38 percent and an increase in truck coal rates of 73 percent
over the same period.
The September 2004 EIA report was an update to a similar
October 2000 study covering 1988 to 1997. In that study, the
EIA found that ``Although the share of coal transported by
railroads increased, the average rate per ton to ship contract
coal by rail fell steadily (a 25.8 percent decline) during the
study period . . . The general finding of declining rates was
also substantiated when the rates were calculated as a rate per
ton-mile, a rate per million Btu, or rates between specific
supply and demand regions.'' According to the EIA, on a RPTM
basis, the average contract coal rate fell 41.4 percent from
1988 to 1997, and ``the decline . . . was a response to
competitive markets.''
In a June 2002 report, the U.S. General Accounting Office
(now the Government Accountability Office) released a rail rate
analysis covering 1997 to 2000. The GAO found that ``From 1997
through 2000, rail rates generally decreased, both nationwide
and for many of the specific commodities and markets that we
examined.'' The June 2002 report was an update to a similar
April 1999 GAO report covering 1990 to 1996. In the June 2002
study, the GAO noted that ``[t]hese decreases followed the
general trend we previously reported on for the 1990-1996
period and, as before, tended to reflect cost reductions
brought about by continuing productivity gains in the railroad
industry that have allowed railroads to reduce rates in order
to be competitive.''
In December 2000, the Surface Transportation Board (STB)
released the latest in a series of periodic reports entitled
``Rail Rates Continue Multi-Year Decline.'' The STB found that
``inflation-adjusted rail rates have fallen 45.3 percent'' from
1984 to 1999. The STB continued, ``[T]he very significant rate
reductions . . . imply that shippers would have paid an
additional $31.7 billion for rail service in 1999 if revenue
per ton-mile had remained equal to its 1984 inflation-adjusted
level. . . . It is important to note that all types of rail
customers, and not just those with competitive transportation
alternatives, must have received some portion of the rate
reductions we have measured here.'' The STB also found that
``an increase in the average length of haul is not responsible
for the preponderance of the rate declines that we have
identified. We find that real railroad revenue per ton has
fallen 43.7 percent since 1984, nearly identical to the decline
of 45.3 percent obtained when using ton-miles.''
A study published in September 2000 by scholars at the
University of Maryland and The Brookings Institution noted that
``[D]eregulation was not just a boon for the rail industry.
Shippers benefited too. Based on the first decade of
deregulation, one study found that the annual benefits to
shippers from lower rates and improvements in service time and
reliability amounted to at least $12 billion (1999 dollars).
And, . . . shippers have generally continued to benefit from
lower rates.''
Competitive rail rates help rail users control the prices of their
goods.
For example, from 1981 to 2004, average railroad coal rates (as
measured by coal RPTM in nominal terms) fell 32 percent, while average
electricity prices rose 38 percent.
Over the same period, rail RPTM for chemicals rose less than 1
percent. During this same period, prices paid by chemical companies for
liquefied refinery gases, which are a major chemical industry
feedstock, rose 147 percent, while the producer price for chemicals
themselves (many chemicals are intermediates for other chemicals) rose
33 percent.
Likewise, from 1994 to 2004, the prices paid by farmers for most
farm inputs rose: up 46 percent for seed, up 34 percent for fertilizer,
and up 83 percent for fuel. During this same period, the average rail
rate for grain (as measured by grain RPTM) fell 4 percent. Clearly,
railroads have been doing their part to help keep U.S. agriculture
competitive.
Railroads Must Be Financially Healthy to Expand Capacity
Since Congress passed the Staggers Act, railroads have only slowly
made progress toward the goal of long-term financial sustainability.
Financial sustainability is essential if railroads are to have any hope
of meeting future rail capacity needs.
This slow progress is documented in the STB's annual revenue
adequacy determinations. A railroad is ``revenue adequate''--i.e., it
is earning enough to cover all costs of efficient operation, including
a competitive return on invested capital--when its rate of return on
net investment (ROI) equals or exceeds the industry's current cost of
capital (COC). This standard is widely accepted, approved by the
courts, and similar to that used by public utility regulators
throughout the country. It is also consistent with the unassailable
point that, in our economy, firms and industries must produce
sufficient earnings over the long term or capital will not flow to
them. As a prominent Wall Street rail analyst recently noted, ``Earning
the cost of invested capital is not the end goal, but the entry ticket
to the race . . . without which Wall Street will squeeze investment.''
\13\
---------------------------------------------------------------------------
\13\ Anthony Hatch, ``Six for 06: Trends To Watch in Rail,'' The
Journal of Commerce, January 2006.
During the more than 25 years in which railroad revenue adequacy
determinations have been made, railroads have significantly narrowed
the COC vs. ROI gap, but a gap still remains.
Rail customers certainly understand the importance of earning the
cost of capital over the long term. A spokesman for a major Florida
electric utility noted, ``If we can't make an attractive investment for
the shareholder, then we are going to have a very difficult time going
in the marketplace and competing for dollars.'' \14\ The CFO of a major
U.S. chemical company stated, ``We want to create spread above the cost
of capital through the cycle.'' \15\ And the CEO of a major U.S. forest
products company recently stated ``Each of our businesses continues to
assess the ability of their individual facilities and product lines to
earn the cost of capital. Those that cannot make the grade do not
belong in our portfolio.'' \16\
---------------------------------------------------------------------------
\14\ Spokesman for Florida Power & Light, quoted in The Palm Beach
Post, January 16, 2005.
\15\ Rich Lorraine, SVP and CFO, Eastman Chemical Co., at the
Morgan Stanley Basic Materials Conference, February 21, 2006.
\16\ Steve Rogel, Chairman, President & CEO, Weyerhaeuser Co., Q4
2005 Weyerhaeuser Co. Earnings Conference Call, February 3, 2006.
---------------------------------------------------------------------------
Railroads agree with this sentiment, which is echoed by firms in
every sector of the economy. Without the ability to cover total costs
and earn adequate returns, railroads--like electric utilities, chemical
companies, forest products firms, or any other firm--would be unable to
maintain (much less increase investment in) their networks and could
not sustain themselves over the long term.
Last month, the Edison Electric Institute (EEI) released a document
that defends the sometimes substantial price increases electricity
consumers are facing in many parts of the country. EEI writes:
``Clearly, electricity is an indispensable commodity that is
crucial to our daily lives and to our Nation's continued
economic growth. And the costs needed to reinforce the Nation's
electric power system are worthy long-term investments. The
bottom line is that we are living in a rising cost environment,
and electricity prices have been a great deal for many years.
Even with expected rate increases, electricity prices are
projected to remain below the rate trends of other goods and
services. In fact, the national average price for electricity
today is significantly less than what it was in 1980, adjusted
for inflation. Of course that is small comfort to customers who
will be opening costlier electric bills in the coming months.
And no one--utility, regulator, or customer--is eager to see
electricity prices increase. The unavoidable reality, however,
is that we all must address the fact that in order to ensure
that electricity remains affordable and reliable, we must help
shoulder the expense of reinforcing and upgrading our
electricity infrastructure. It is the only way to be certain
that electricity will be there when we need it, and at a price
we can afford over the long term'' \17\
---------------------------------------------------------------------------
\17\ EEI, Rising Electricity Costs: A Challenge For Consumers,
Regulators, And Utilities, May 2006.
Railroads wholeheartedly agree with this sentiment too. It is
critical to our Nation's economy and standard of living that we upgrade
and reinforce our electricity infrastructure.
We also think that EEI's statement above is just as valid, if not
more so, if the word ``electricity'' were changed to ``freight
railroading.'' Looking ahead, the United States cannot prosper in an
increasingly competitive global marketplace if our freight railroads
are unable to meet our growing transportation needs, and having
adequate railroad capacity is critical in meeting these needs. Like
utilities, railroads must be able to both maintain their extensive
existing infrastructure and equipment and build substantial new
capacity. Railroads could not do this if their earnings were
unreasonably restricted, any more than utilities could.
Even in 2005 Railroads Had Substandard Profitability
Without question, 2005 was a good year for railroads financially--
revenue and net income were both up substantially. Frankly, it's about
time the rail industry had a year like 2005, and they require them
going forward. Improved rail earnings should be viewed as a welcome
development because it means that railroads are better able to justify
and afford the massive investments in new capacity and upkeep of their
existing systems that need to be made.
That said, no one should get carried away regarding railroads'
relative profitability in 2005, because the fact is, in 2005--when
railroads were hauling record levels of traffic and had sharply higher-
than-historical profitability--rail industry earnings were still
substandard compared with other industries.
Return on equity (ROE) is commonly used as an indicator of short-
term profitability. According to Business Week data covering the S&P
500, in 2005 the average ROE for the four largest U.S. railroads was
12.3 percent--a substantial improvement over the 7.8 percent recorded
in 2004, but still well below the 16.1 percent average for all firms in
the S&P 500 for 2005. The railroad ROE was well below the median for
chemical companies in the S&P 500 (18.7 percent) and only moderately
higher than the median for electric utilities (10.8 percent) in the S&P
500.
Data from the Fortune 500 tell a similar story. In 2005, the median
ROE for the railroads in the Fortune 500 was 14.1 percent, less than
the Fortune 500 median of 14.9 percent and well below the ROE of
numerous major rail customer groups. \18\
---------------------------------------------------------------------------
\18\ The median railroad ROE for Business Week and Fortune 500
differs because different definitions were used. Business Week uses net
income excluding discontinued operations; Fortune uses net income
including discontinued operations. Business Week uses average
shareholders' equity for a year; Fortune uses end-of-year shareholders'
equity.
Fortune 500 Return on Equity: 2005
------------------------------------------------------------------------
Industry ROE (in percent)
------------------------------------------------------------------------
Household & Personal Prod. 41.5
Petroleum Refining 25.8
Mining, Crude-Oil Prod. 23.6
Pharmaceuticals 23.4
Food Consumer Products 21.8
Industrial & Farm Equip. 21.1
Computers, Office Equip. 19.7
Oil & Gas Equip., Services 18.9
Metals 18.3
Chemicals 18.1
Medical Products & Equip. 17.3
Beverages 16.4
Aerospace and Defense 16.3
Fortune 500 Median 14.9
Motor Vehicles & Parts 14.6
Railroads 14.1
Pipelines 13.5
Electronics, Electrical Equip. 12.1
Engineering, Construction 11.8
Utilities: Gas & Electric 10.4
Energy 7.4
Food Production 6.2
Packaging, Containers 4.6
Telecommunications 4.2
------------------------------------------------------------------------
Source: Fortune 500
In each of the 20 years from 1986 to 2005, the median ROE for Class
I railroads was less than the median for all Fortune 500 companies, and
in 15 of the 20 years, the median railroad ROE was in the lowest
quartile among Fortune 500 industries.
Thus, even the improved rail earnings in 2005 are generally no more
than (and in most cases less than) what non-regulated companies and
industries earn.
In any case, whatever may be the minimum level of earnings,
profitability, or solvency considered adequate to declare a railroad
``healthy'' for short-term investment purposes, the primary point to
remember is that only a return on investment in excess of the cost of
capital over a sustained period can signify that railroads are
financially healthy.
Reregulation is Not the Answer to Railroad Capacity and Service
Problems
Unfortunately, rail critics have wrongly seized upon railroads'
``record profits'' in 2005 to support their claims that railroads
should be forced to reduce their rates to certain shippers. This
viewpoint--that short-term increased railroad profitability to moderate
levels justifies a reinstatement of onerous restrictions on rail
earnings--is exceedingly shortsighted and should be rejected.
Railroads have had to battle efforts to reregulate the industry
since the Staggers Rail Act partially deregulated railroads in 1980. It
is beyond the scope of this testimony to discuss in any detail the many
ways in which reregulatory legislation (like S. 919, the ``Railroad
Competition Act of 2005'') is misguided.
It should be noted, though, that the primary objective of those who
call for rail reregulation is lower rail rates, even though, as
discussed above, railroads are not earning excessive profits. Lower
rail rates would translate directly into lower rail earnings. But
proponents of reregulation ignore the fact that rail investments in
infrastructure and equipment, like most private investment decisions in
our economy, are driven by expected returns. The hundreds of billions
of dollars invested in U.S. freight railroads since Staggers would not
have been provided if not for the investors' expectation that the
opportunity for a competitive return promised by Staggers would remain.
Under reregulation, rail managers could not commit, and rail
stockholders would not supply, investment capital needed to improve
service and expand capacity, because the railroads considering such
investments would not have a reasonable opportunity to capture the
benefits of those investments Disaster might not occur overnight, but
there would be little or no capacity expansion--something that
certainly would have a near-term and significant adverse effect.
The financial community, on whom railroads depend for access to the
capital they need to operate and expand, has consistently supported the
view that, under reregulation, an era of capital starvation and
disinvestment would return. They understand that no law or regulation
can force investors to provide resources to an industry whose returns
are lower than the investors can obtain in other markets with
comparable risk.
Proponents of reregulation cannot avoid the fundamental fact that
shippers must be willing to pay for the rail service and rail capacity
they say they need, and the market is far superior to the government in
determining who should pay.
Some in the electric power industry are among the most vocal
proponents of restrictions on rail earnings. Their advocacy of
restrictions on railroads are not consistent with their claims
regarding the need for cost-recovery and regulatory certainty in
electricity transmission--a sector of the electricity industry with
some parallels to railroading.
A representative of the Edison Electric Institute, for example,
wrote ``I cannot overemphasize the need for FERC to establish and put
into effect a durable regulatory framework that says if I prudently
invest a dollar in transmission infrastructure, that I will be able to
fully recover that dollar, along with my cost of capital, through
electricity rates. Such a framework is essential to raising the
substantial and nearly unprecedented amount of capital necessary to
construct needed, cost-effective transmission facilities.'' \19\
---------------------------------------------------------------------------
\19\ Statement on behalf of the Edison Electric Institute by Alan
J. Fohrer, CEO, Southern California Edison, to FERC, April 22, 2005.
---------------------------------------------------------------------------
Likewise, the National Rural Electric Cooperative Association has
noted that it ``believes that the best way to attract capital to
transmission at reasonable rates is to give investors greater certainty
that they will receive a return on their investment.'' \20\ The rail
industry can think of no better way to create uncertainty for their own
capital providers ``that they will receive a return on their
investment'' than proposals such as S. 919. Such legislation is bad
economics and bad public policy and should be rejected. It would mean
less rail capacity when we need more.
---------------------------------------------------------------------------
\20\ Comments of the National Rural Electric Cooperative
Association Proposed Rulemaking Promoting Transmission Investment
Through Pricing Reform,'' FERC Docket No. RM06-4-000, January 11, 2006,
p. 17.
---------------------------------------------------------------------------
Public Involvement in Freight Rail Infrastructure Investment
Freight railroads will continue to spend massive amounts to improve
and maintain their systems. But even with their improved financial
performance, funding constraints will likely prevent railroads from
meeting optimal future rail infrastructure investment needs entirely on
their own. As AASHTO noted in its Freight Rail Bottom Line Report,
``The rail industry today is stable, productive, and competitive, with
enough business and profit to operate but not to replenish its
infrastructure quickly or grow rapidly.'' \21\
---------------------------------------------------------------------------
\21\ AASHTO, Freight Rail Bottom Line Report, p. 3.
---------------------------------------------------------------------------
In its analysis, AASHTO estimated that railroads will need to carry
an additional 888 million tons of freight annually by 2020 just to
maintain their current market share. AASHTO also found that railroads
will need $175 billion to $195 billion of infrastructure investment
over this period to accommodate this traffic growth, and projected that
railroads will be able to fund the majority of this investment--$142
billion--from their own retained earnings and borrowing. Unfortunately,
according to the AASHTO analysis, the $142 billion will be enough to
enable railroads to handle only half of their expected increase in
traffic.
This funding shortfall means that many rail projects that would
otherwise expand capacity and improve the ability of our Nation's
farms, mines, and factories to move their goods to market; speed the
flow of imports and exports; relieve highway congestion; reduce
pollution; lower highway costs; save fuel; and enhance safety will be
delayed--or never made at all.
I respectfully suggest that it is in our Nation's best interest to
ensure that optimal freight railroad capacity enhancements are made.
Two ways that policymakers can help make this happen is by taking
greater advantage of public-private partnerships for freight-railroad
infrastructure projects and by introducing tax incentives for rail
infrastructure projects that enhance capacity.
Public participation in freight rail infrastructure projects is
justified because the extensive benefits that would accrue to the
general public by increasing the use of freight rail would far exceed
the costs of public participation. For example:
Highway congestion--Highway congestion costs the U.S.
economy more than $63 billion per year, but trying to eliminate
it by focusing solely on highways is not practical because
building more highways is becoming prohibitively expensive and
time-consuming. Given budget constraints, environmental
concerns, and other factors, we will be unable to simply build
our way out of highway gridlock. Freight railroads, though,
significantly reduce the costs of highway congestion and the
need to build costly new highways. A single intermodal train
takes up to 280 trucks (equivalent to more than 1,100 cars) off
our highways. Trains carrying other types of freight take up to
500 trucks (equal to around 2,000 cars) off our highways.
Fuel efficiency--Railroads are three or more times more fuel
efficient than trucks. On average, in 2004 railroads moved a
ton of freight nearly 410 miles per gallon of fuel. If just 10
percent of the intercity freight that moves by highway moved by
rail instead, fuel savings would approach one billion gallons
per year.
Pollution--The Environmental Protection Agency (EPA)
estimates that for every ton-mile of freight carried, a
locomotive emits substantially less nitrogen oxides,
particulates, and carbon dioxide than a typical truck.
Safety--Fatality rates associated with intercity trucking
are four times those associated with freight rail
transportation. Railroads also have lower employee injury rates
than other modes of transportation. Railroads and trucks carry
roughly equal ton-miles of hazardous materials, but trucks have
16 times more hazmat releases than railroads.
This point was also made by AASTHO, which that ``Relatively small
public investments in the Nation's freight railroads can be leveraged
into relatively large benefits for the Nation's highway infrastructure,
highway users, and freight shippers.'' \22\ The Congressional Budget
Office has also concluded that public investment in rail infrastructure
should be considered: ``Another way of addressing the underpayment of
infrastructure costs by railroads' competitors is to provide financial
assistance to the railroads.'' Echoing AASHTO, CBO observed that,
``[p]roviding Federal aid for a rail investment might be economically
justified if the net social benefits were large but the net private
benefits to railroads were insufficient to induce them to make such an
investment.'' \23\ The Transportation Research Board has reached a
similar conclusion, noting that ``Greater public investment to relieve
bottlenecks may improve efficiency--perhaps even in facilities that
formerly were exclusively private . . . '' \24\
---------------------------------------------------------------------------
\22\ AASHTO, Freight Rail Bottom Line Report, p. 1.
\23\ Congressional Budget Office, Freight Rail Transportation:
Long-Term Issues (January 2006), p. 22.
\24\ Transportation Research Board, Critical Issues in
Transportation (January 2006), p. 3.
---------------------------------------------------------------------------
Public-Private Partnerships
As Members of this Committee know, U.S. freight railroads are, with
few exceptions, privately owned and operated, and have traditionally
financed their infrastructure investments overwhelmingly through their
own earnings and by borrowing from outside capital providers.
Capital providers, however, insist that railroads focus their
limited investment funds on projects that promise a direct financial
benefit to the investing railroad. While these projects may well
provide substantial public benefits--such as reduced highway
congestion, cleaner air, improved safety, and enhanced mobility--from a
railroad's and capital provider's point of view, these are secondary to
the project's financial return. This kind of imposed discipline by the
financial markets is necessary and appropriate in a market economy, but
it discourages investments that would yield significant public benefits
but only limited financial benefits to the railroad.
A way to help states and localities improve rail networks that
generate public benefits is through a more pronounced use of public-
private financing partnerships for rail infrastructure improvement
projects. Partnerships are not ``subsidies'' to railroads. Rather, they
are an acknowledgement that private entities should pay for private
benefits and public entities should pay for public benefits.
Partnerships reflect the fact that cooperation between interested
entities is far more likely to result in timely, meaningful solutions
to transportation problems than a go-it-alone approach. Without a
partnership, projects that promise substantial public benefits in
addition to private benefits are likely to be delayed or never started
at all because it would be too difficult for either side to justify the
full investment needed to complete them. In contrast, if a public
entity shows it is willing to devote public dollars to a project
equivalent to the public benefits that will accrue, the private entity
is much more likely to provide the private dollars (commensurate with
private gains) necessary for the project to proceed.
Going forward, the best-known public-private partnership involving
freight railroads is the Chicago Region Environmental and
Transportation Efficiency Program, or CREATE. Conceived in June 2003,
CREATE is a $1.5 billion program involving the State of Illinois, the
city of Chicago, and the major freight and passenger railroads serving
Chicago designed to modernize and improve Chicago's highway and rail
transportation networks. Installing grade separations between tracks
and highways will speed vehicle travel and reduce congestion and delays
for motorists; updating track connections and expanding rail routes
will reduce rail transit times; and adding separate, passenger-only
tracks in key locations will remove numerous bottlenecks that have
slowed passenger and freight movements in the region for decades.
Investment Tax Incentives
Another way to bridge the funding gap between the level of
investment that will bring the most benefit to our economy and what
railroads are likely to be able to afford on their own is to implement
an investment tax credit for rail capacity enhancement projects.
Under an investment tax incentive program for rail infrastructure,
projects to expand freight rail capacity--by increasing the volume,
weight, or speed of freight that can be carried--would be eligible for
a 25 percent tax credit. Examples of qualifying capacity-expanding
investments include raising tunnel clearances to accommodate double-
stacked intermodal containers; upgrading single track lines to double
or triple tracks; adding and lengthening sidings; strengthening bridges
to carry heavier loads; and constructing intermodal terminals. In
addition, new locomotives could also qualify for the credit if they met
certain capacity-enhancement and other requirements.
Eligibility for the credit would extend to any taxpayer that makes
a qualifying expenditure, not just railroads. For example, a shipper
that built a rail spur from a distribution center to a main line would
be eligible, as would the builder of a rail intermodal terminal.
Infrastructure capital expenditures that do not qualify for tax
incentives would be expensed (the expensing option would not apply to
locomotives). This would place capital cost recovery for rail
infrastructure on the same basis as competing modes of freight
transportation (i.e., highway and waterway), which ``expense'' their
infrastructure costs.
For a railroad considering whether to fund a new infrastructure
project, the tax incentive would effectively reduce the cost of the
project and thus lower the risk that the project will not generate the
level of return needed to make it economically viable. Thus, the
incentive would be enough to help worthwhile projects get built sooner,
but would not be enough to cause economically unjustified projects to
go forward.
Conclusion
U.S. freight railroads do a remarkable job in meeting the needs of
an extremely diverse set of shippers. Railroads move tens of thousands
of railcars to and from thousands of origins and destinations every
day. The vast majority of these shipments arrive in a timely manner, in
good condition, and at rates that shippers elsewhere in the world would
love to have.
Still, it is clear that transportation capacity will have to
increase as the economy expands. The railroads are committed to meeting
these increased capacity needs primarily through private capital, but
only if the regulatory structure gives the railroads an incentive to
make the necessary investments. Policymakers can help ensure that rail
capacity is adequate to meet our future freight transportation needs by
ensuring that harmful economic reregulation is not instituted, engaging
in more public-private partnerships for rail infrastructure projects,
and instituting targeted tax incentives for projects that expand rail
capacity.
Senator Lott. Thank you, Mr. Hamberger.
We'll have a cooling-off period now.
[Laughter.]
Senator Lott. The Committee will recess, so I can go vote.
We do have two votes, back to back. But we'll be able to get
those and come right back. Senator Burns may be able to get
back before I do, and there will be an opportunity then for
some questions.
Thank you all very much.
We'll be at recess for the next 15 minutes.
[Recess.]
Senator Burns. [presiding] We'll get--go back to the fire
here--firing line. And I want to apologize. We can schedule
everything in this body but votes, you know.
And had you concluded--Mr. Hamberger, had you concluded
your----
Mr. Hamberger. I believe I more than----
Senator Burns.--statement?
Mr. Hamberger.--concluded, yes, sir.
[Laughter.]
Senator Burns. You more than concluded?
Mr. Hamberger. Thank you.
Senator Burns. And I would--I'd go into a little question-
and-answer, then. I think it--Trent is coming back. I hope he
does, anyway. And we'll get this rounded up. But I just happen
to believe that this happens to be a very, very important
issue. It is important enough that to give it just a brush-by
is just wrong. And I think there are some things that have to
be brought out on the table and talked about it. And I like
what Mr. Ficker said, that we have to work together.
I am not interested in re-regulating the railroads. I'm not
interested in that at all. I'm interested, however, in dealing
with those areas where we only have one railroad. We weren't
sent to this Congress to stand idly by and see what monopolies
do in certain areas.
Mr. Hamberger, your case of--rates have gone down, and your
efficiency has increased a little, but not the greatest. But
that is not the case in captive areas. And that's what we're
talking about here, is where the STB could not, probably, deal
with something where you have competition, but they do have the
authority to deal when there's only one railroad or you have
captive shippers. And they have not done that. And that's the
reason for this hearing. That's the reason that we have S. 919,
is to point out to America that we've got some very serious
problems in some areas. We have the same thing when we start
talking about telecommunications up here, in this same
committee, of a--which--a committee that I used to chair and
had quite a lot to do with writing the telecommunications
policy and to force out new technologies and this type thing.
Now, there are also new technologies, as far as running the
railroad. I can't run a railroad. My dad wanted me to go to
school to be an engineer, and I told him I didn't want to drive
no train.
[Laughter.]
Senator Burns. But we've got serious problems in those
areas. And I--to be right honest with you, the big railroads
have failed to come to the table. And so, we're going to forge
on with this piece of legislation, if we can. But we're going
to deal with those areas that we think we can deal with.
Now, I've got a question for this panel, and I want to hear
some discussion on it. I've seen a dramatic increase, over the
next year, of shipper concerns on rates and service. I will
tell you, we're headed for--in this fall--and get ready for
it--we are seeing more grain contracted for delivery from the
combine this year than ever before. And there's a reason for
that. Our stocks are about half what they've been. Mr. Schuler
knows about this. And we're seeing a price increase, as far as
the farm is concerned. What I want to do is get all that
increase back to the farm, as much as we can. But we're going
to run into a car shortage this fall, I think, because our crop
looks fairly good. If the big white combine doesn't go down
across our farm, I think we're going to do that.
Congress seems unwilling to take action to address these
legitimate and very serious complaints. And we've seen more of
them. Everywhere I travel across this country, I hear these
complaints. So, I know that where there's smoke, there's fire.
I'd just like for anybody, in this question--can they tell
this committee why--why now? Why is our competitiveness and job
creation over the long term in question now? Why are we seeing
these pockets of captive shippers? Why are we seeing them now?
Have we exhausted all remedies outside of legislative action?
And are there alternatives to Congressional answer--action--
that you, or we, should pursue? I think those are legitimate
questions, and I think they're the questions this committee has
to address.
Who'd like to take the first shot? Congressman English?
Mr. English. Thank you very much, Senator. I appreciate
that.
The--I think there are several reasons for it. And I can
certainly speak to the electric utility side as it affects our
members' electric cooperatives. I think a lot of this has to do
with--there were long-term contracts that were agreed to some
time ago, and those contracts are running out. And we've also
seen the situation, no question about it, as I quoted earlier,
there is an effort on the part of the railroads to get rid of
their capacity. They testified before the Surface
Transportation Board as to that's the objective, and they've
managed to do that. So, the other part of it comes down to the
question of reduced capacity. They've also reduced the number
of employees on the railroads themselves. That started in 2000.
And now we've got the old contracts running out, these new
contracts coming on. And, as far as it applies to the stranded
shippers, the people who find themselves hostage to monopolies,
they're getting--they're the ones that are catching it in the
shorts, and those are the people that you're hearing from.
And you can take a look at that chart. Let's put that chart
back up there, if we could. The one that deals with stranded
shipper costs. The point that I would make here, Senator, is
the fact that it's very obvious, when you look at these rates,
that--what are being charged captive shippers today. New
contracts that are being made. When you've got people that are
paying 350 to 450 percent of what--in the way of profits,
compared to 6 to 8 percent where there's competition, it's
pretty obvious where the money's coming from. It's coming from
those 20 percent of the shippers, and they're being taken
advantage of. And I'll be very candid with you, my folks feel
like they're being ripped off.
Now, Senator, there's one other point, too. The Surface
Transportation Board's supposed to take care of these problems.
You made that point earlier. And you're absolutely right. But
when my members--and I've got letters here from a member who
wrote the chairman of the Surface Transportation Board, and the
letter gets answered by the head of the railroad. There's a
serious question in the minds of my members as to who in the
world's running the Surface Transportation Board and who is it
that they are supposed to go to for some kind of relief from
abuse? And----
Mr. Hamberger. You know, Senator, you asked a very
thoughtful question. Maybe we should try to answer it.
Mr. English. The Surface--the----
Mr. Hamberger. And, in my opinion, you--the----
Senator Burns. Hang on, now. Let's let--we'll let Mr.
English finish, and then you can make your point, Mr.
Hamberger.
Mr. Hamberger. Thank you.
Mr. English. So, I think you have a convergence of these
kinds of issues, Senator, that's bringing about the kinds of
complaints that you're hearing about, and certainly the kinds
of concerns that I'm hearing about from our membership, if, in
fact, we're going to be building all this generation to meet
our members' needs for the future. So, I think all this is
converging at this time.
Senator Burns. Mr. Hamberger?
Mr. Hamberger. You asked a very thoughtful question,
Senator, about why is there a capacity constraint now. And I
would suggest to you that it is not just a capacity constraint
on freight railroads, it is a capacity constraint on the
highways, it is a capacity strain on the pipelines, the inland
barge and towing industry, the ports of our Nation. All are
feeling the effect of increased economic activity, increased
imports and exports. With respect to the freight rails
themselves, we have seen a spike in demand for coal, dramatic
increases. As I testified before the Senate Energy Committee--I
believe you were there last week--in 2002, 2003, and 2004,
demand for coal was less than in 2001. It's--it shot up
dramatically in 2005. It's still up now, in 2006, because
natural gas went to $16 a million-cubic-feet. It's now back
down to about $6, and it'll be interesting to see whether or
not that demand for coal is still there.
At the same time, the trucking industry experienced a 136-
percent turnover in drivers. So everybody quit once, and then a
third of them quit again--136-percent turnover, $3 a gallon for
diesel fuel. Demand for freight rail went up there, as well.
So, with the intermodal growth, the demand in coal, the
booming economy, there was a demand--not just in railroads, but
across all of the modes of transportation. That's why we're
investing $8.3 billion this year, to try to expand our capacity
to deal with that demand.
Senator Burns. Mr. Ficker?
Mr. Ficker. I could just add a couple of points. And I
would, first of all, concur with my colleague, Mr. Hamberger,
about the economy, as a whole, is--impacted transportation. Our
organization represents companies that ship via all modes of
transportation--rail, barge, ocean freight, and highway
freight, as well--and virtually in every mode, there is
capacity constraints. Whether it's driver shortages, whether
it's railroad operating crew shortages, whether it's diesel
fuel prices, whatever it is, all of these have impacted the
movement of goods in this country. And the staggering--and I
have to use the word ``staggering''--growth in imports, and the
focus that's happened, especially when you look at the ports of
L.A./Long Beach, the enormous amount of activity down there,
and growing to almost 9,000--or 9 million TEUs a year--that's
the containers a year--it's becoming difficult to take it away.
And the rail industry has struggled to meet that need.
And the pressure to meet that need comes from the
retailers, which, in turn, comes from you and I, when we want
to go to the store and buy whatever it is we want to buy.
Unfortunately, there was not the capacity built into that
infrastructure initially to make that happen. If you'd have
told me 15 years ago that we would be importing stuff from
China to the extent we are today, I'd a looked at you and
suggested that maybe you were thinking something was a little
weird.
We have experienced a dramatic economic change in
globalization that's impacted all of us. And what's happened,
the way we see it, is that the railroads have focused on that
and left some of the other carload freight, which--I represent
primarily, the carload world--and some of the freight that's
domestically--they focused on getting their act together on the
international side, and--to deal with that capacity constraint,
and probably left a little of the other information--or a
little work on the other side of the capacity to a later date.
This not means they're not going to address it, but they're
focused on getting that intermodal demand met right now.
And that's where the conflict comes. That's where the
challenge comes in. There is just not enough capacity out there
to move it. As the AASHTO report clearly points out, you're
going to have growth in the 60- to 70-percent area over the
next 20 years, and they projected that the railroads will only
grow by 44 percent.
I would assert to the Committee that the rail industry
section of the pie must grow in percentagewise, not just grow
as the pie grows. That's the critical nature of what's going on
here. The answers are not easy. They're difficult. They're
going to be--require the input of government, both at the local
and Federal level. They're going to require the input of the
users of transportation. And they're going to require the input
of the users of--the providers of rail transportation.
And I would encourage the railroads to sit down with all of
us, as we've done already, and start trying to come up with
solutions for these problems. They're not going to be easy.
It's going to take leadership across the board. And without
that sort of effort, we're going to find ourselves in a very
difficult position.
Mr. Hamberger. We concur.
Senator Burns. Mr. McIntosh?
Mr. McIntosh. Senator, I'd like to respond to your question
about remedies that have been pursued outside of congressional
action, because I think there's a telling story there.
Industry--the chemical industry has tried to create a
solution to this service reliability problem in the same way we
would attempt to resolve other commercial issues with other
suppliers, vendors, other people we deal with. Many years of
work and attempts to change the environment and the
accountability with STB have been unsuccessful, as has been
alluded to several times.
What's important to the industry--the chemical industry and
to our customers are predictability and repeatability, both in
our costs and our service level. Recognizing that we are
captive shippers, we have approached the railroads directly,
and acknowledged that we would be willing to pay higher freight
for a level of service and reliability that would be
guaranteed. We have been told no. No discussion, no interest.
There are no contracts that I have been a party to where any
kind of performance guarantee on service or reliability has
been entertained by any railroad that I do business with. And
so, consequently, having been unable to affect the environment
in any other way, and without the benefit of competition as a
captive shipper, our only recourse, at this point in time, we
believe, is to turn to Congress.
Senator Burns. Mr. Schuler?
Mr. Schuler. Thank you, Senator Burns.
In the GAO report, they've clearly stated that railroads
have, over the years, attempted to shift their industry to what
they're calling right-sizing, where they've reduced both--or
all--they reduce track, equipment, and facilities. This has
made them more efficient, this has made them more productive,
without a doubt; but yet, they fail to pass those savings on to
the shippers, especially those who are captive. And also, in
that report it is said that rail rates are increasing in areas
because of excess demand. Well, the railroads voluntarily
created that excess demand by reducing their supply of cars and
tracks and other facilities.
And also, grain rates have increased across the country, 9
percent nominally, and that's adjusted for gross domestic
product. Other industries may have declined, but grain sees--
continues to see increasing rates, especially those captive
shippers who are, more and more, paying even higher rates.
Responding to claims that we aren't inviting the railroad
to visit with us, we have sat down with the railroad, pleading
for rate relief, especially for our captive shippers. We are
holding a wheat summit this fall, in September, to address the
crisis that we see in agriculture, where our costs are
increasing above where our profits will--or our revenues will
provide us a profit. One of the invitees is Burlington Northern
Sante Fe Railroad to participate in that conference. They're
also attending our board meeting this coming October in Denver
to visit with us. So, we are having negotiations with the
railroad to try to find relief.
We've been trying to find relief for 25 years, with the
McCarty Farms versus BN case that drug on for 17 years in the
courts, with no relief for farmers. We have visited with the
railroads, we've pleaded with the railroads to provide us
better service and fairer rates, with no--to no avail. We've
talked with the Surface Transportation Board, trying to get an
effective mechanism that'll provide relief for these higher
rates. And yet, no relief. We feel, and it's my personal
opinion, that this--it's long overdue that we have some
mechanism. And if it's legislation, that's what it needs to be,
with this Senate 919 bill, to provide relief for our producers.
Thank you.
Senator Burns. Mr. English?
Mr. English. I just want to make one other comment, too,
Mr. Chairman. For many our members, stranded shippers, we're
paying more now for the freight to move the coal to the
generating plant than the coal itself costs. The difficulties
in reliability our members have run into have become so bad
that in some locations they're now importing coal from
Indonesia, as opposed to buying coal in this country, simply
because of the fact they can't rely on the railroads and some
exorbitant issues that surround the cost of that shipment. This
doesn't make any sense.
And while we talk about, ``Well, we ought to sit down and
talk together and work this stuff out,'' you know, that's what
the Surface Transportation Board's supposed to do. And if the
Surface Transportation Board isn't doing the job, it's broken.
And I would argue, if there's no one that seems to be debating
that issue, that they're seriously broken, then the Congress
ought to fix it. That's the job of the Congress, is to fix
that. And until we get that resolved, captive shippers are
going to be abused. There's just no two ways about that.
There's no logical way in which you can say that the railroads
should be able to make 350-450 percent profit off of captive
shippers and, at the same time, leave the captive shippers at
the tail end of the bus. We get the last deliveries, because
that's where the monopoly is.
We heard about the investment the railroad's going to be
making in the future. I'd like to know how much of that
investment is going to be made on the coast, as opposed to the
interior part of the United States. I'd like to know how much
of that is going to be invested to delivering goods from China,
as opposed to delivering goods internally here in the United
States. I would suggest, and strongly suspect, that that's
where the investment's going to be made. It's on the coast,
delivering imported goods, not taking care of deliveries here
in this country.
Senator Lott. [presiding] Well, I might say that,
representing a coastal state, it sounds good to me.
[Laughter.]
Senator Lott. They invest along the Mississippi Gulf Coast,
that'd be fine.
Thank you all for being here, again. Mr. Hamberger, since
you have been outnumbered by a high percentage here, would you
like to respond to anything that's----
Mr. Hamberger. Mr. Chairman----
Senator Lott.--been said about----
Mr. Hamberger.--thank you. And let me just observe that, in
the immediate parlance, I may have gotten a little hot earlier.
I may have--frustration bubbled over, and I apologize to you--
--
Senator Burns. I'm glad I wasn't here.
Mr. Hamberger.--and to the Committee, and certainly no
affront was intended either to the dignity of this Committee
nor to the respect we owe to all of our customers. And so, I
would just like to get that on the record.
There are several issues I guess I would like to respond
to. Let's start with grain. And Mr. McIntosh indicated that
grain rates have gone up. That is correct. From 1985 to 2004,
they've gone up 9 percent, in nominal terms; which means,
adjusted for inflation, they have gone down. Meanwhile, the
consumer price index, according to the GAO, has gone up 60
percent. So, we are a good deal. We recognize that we need to
keep our customers competitive in world markets.
Let me address the issue of where the investments are going
to be made. We are a private sector industry. And, in fact, the
investments must be made where the returns warrant those
investments. And, in some cases, that means that the revenue-
to-variable-cost ratio may have to be higher to warrant
investment, to make sure that there is, indeed, a network
there, that there is, indeed, service to all parts of the
country. It is our intent, and from what I can tell, the Union
Pacific and Burlington Northern Sante Fe just announced an
additional hundred-million dollars to be spent triple-tracking
the joint line coming out of Wyoming. So, the investments will
be made exactly where the traffic warrants it and where the
demand is. And that's the way it should be. We are a private
sector industry.
Senator Lott. Anything else, Conrad?
Senator Burns. Well, I'm sure going to write out your
statement, and then we're going to have a little visit about
it.
Mr. Hamberger. Yes, sir.
Senator Burns. I have no other questions, but I just want
to say that we've got a greater problem here. We may have
identified where part of that problem is today, but I think
we're in a position now where it's going to take some
legislative fix. And I've got to be talked out of that, one way
or the other. And right now, I'm not in that mode.
Mr. Hamberger. We'll be in to see you.
Senator Burns. OK. But I've just got to believe just this.
I've picked up two or three reports in the last, oh, probably 6
months that says, even though they look at their efficiency and
their proficiency in the railroads--and darn if I can find any
of them that goes above 65 percent. We know that the trains are
running slower. We know we're down from around 24 miles an hour
to around 20 miles an hour in some--in most cases. That tells
me that we've got some bed problems. And--or whatever--but,
nonetheless--and I see those coal trains roll out of Wyoming
and Montana. You say you want to triple track in Wyoming, we'd
take a little triple track in Montana, too. But you don't see
that happening where there is no competition. That's the point
we've got to make. You've got UP and Burlington running a
common bed. And we know common beds, in some circumstances,
work. But we don't see that kind of improvement in the
infrastructure where there's only one railroad.
So, I thank the witnesses today. And I thank them for their
information. I thank them for being very frank, because I think
it's going to take some very, very frank talk in order to fix
this situation for these areas that were up there in yellow.
I've got to get a color code on this guy's printer, because I
have a hard time delineating all that.
But I want to thank every one of you for coming. This has
been a very important hearing.
Thank you.
Senator Lott. Thank you very much----
Mr. Hamberger. Thank you, Mr. Chairman.
Senator Lott.--to the panel and the previous panel. We
appreciate it. We'll look forward to working with you in the
future.
The hearing is adjourned.
[Whereupon, at 12:20 p.m., the hearing was adjourned.]
A P P E N D I X
Surface Transportation Board
Washington, DC, June 26, 2006
Hon. Trent Lott,
Chairman,
Senate Subcommittee on Surface Transportation and Merchant Marine,
Commerce, Science, and Transportation Committee,
Washington, DC.
Dear Mr. Chairman:
Thank you for the opportunity to testify on June 21, 2006, before
your Subcommittee on economics, service, and capacity issues in the
freight railroad industry. This was a very important hearing and,
because of its importance, I would like to correct, for the record,
certain troubling statements made by two of the witnesses.
First. Mr. Dale Schuler, testifying on behalf of the National
Association of Wheat Growers, stated that the Board, ``after repeated
complaints from grain shippers in Montana and North Dakota, sided with
BNSF, allowing them to continue to single out the areas of their system
that are the most captive.'' While I have personally heard complaints
on my two trips to Montana, I am aware of no such complaints to the
Board, either formally or informally.
Second, the Honorable Glen English, testifying of behalf of the
National Rural Electric Cooperative Association, stated that with
regard to rates ``[i]n recent years, it has been impossible for
shippers to get meaningful relief at the STB.'' I would point to
Exhibit A of my written testimony, which illustrates that shippers over
the last 10 years have prevailed in almost half of the rate cases, and
each of these decisions has been upheld on judicial review. With
respect to issues concerning coal shipping to power plants, I would
note that the Board, which has exclusive jurisdiction over rail
transportation, has not received even one complaint from any power
company in recent months.
Sincerely,
W. Douglas Buttrey,
Chairman.
______
Prepared Statement of Ross B. Capon, Executive Director,
National Association of Railroad Passengers
Thank you for the opportunity to submit comments for the record in
your June 21 hearing on ``Economics, Service and Capacity in the
Freight Railroad Industry.'' Thank you also for holding a hearing on
such an important topic.
Beyond that, we appreciate your strong support for intercity
passenger rail, particularly as reflected in S. 1516, and S.A. 1627.
The National Association of Railroad Passengers has both a specific
and a general interest in a healthy, reliable railroad network where
average speeds are increasing, not decreasing, and where high profile
customers like UPS are adding traffic to the network, not moving it
from rails to trucks out of frustration over slow rail service.
Our specific interest, of course, is to see that railroads do a
good job of running Amtrak and commuter trains. Amtrak's current and
recent experience is not good. In addressing our Association's board of
directors on April 28, Amtrak Acting President and CEO David Hughes
said that, where Amtrak uses freight railroads, on-time performance
dropped over 50 percent from 1999 to 2005. It appears that things have
gotten still worse this year.
Capacity problems are a major factor. If an Amtrak train is delayed
on a single-track railroad while a fleet of freight trains are allowed
to run in the opposite direction, that likely is a reasonable decision
by the dispatcher, though perhaps also an indication that the railroad
should be double-tracked.
Another major factor, however, is bad dispatching, for example,
when a slow freight is dispatched just ahead of Amtrak, or when a
freight train is switching on the mainline in front of Amtrak. On June
10 at Terrell, Texas, Amtrak's northbound Texas Eagle (Train 22) was
delayed over 30 minutes while a rock train switched on the mainline.
Some of these sorts of delays appear to reflect contempt for Amtrak
higher up in railroad management. We urge the Committee to take
whatever action it can to improve Amtrak on-time performance in the
near term. The rest of this statement is devoted to longer term track
capacity issues.
The Association's general interest in rail reflects our belief that
greater reliance on freight and passenger rail would serve the national
interest. This belief is widely shared by the general public, as
reflected in a Harris poll conducted in December (before the more
recent run-up in gasoline prices). Rail is widely recognized as
maximizing energy and economic efficiency, minimizing environmental
damage, and increasing the safety of our overall transportation system.
Regarding energy, the recently-published Transportation Energy Data
Book: Edition 25 (2003 data) again shows the extent to which railroads
are more energy efficient than both domestic water carriers and trucks.
Rail averaged 344 British Thermal Units (BTUs) per ton-mile compared
with 417 for water carriers. ``Heavy single-unit and combination
trucks'' consumed 23,461 BTUs per mile, while railroads' averaged
15,016 BTUs per freight car mile.
Unfortunately, the U.S. faces a huge challenge just for rail to
maintain its existing market share. As Association of American
Railroads (AAR) President and CEO Edward Hamberger explained at page 26
of his prepared statement:
``AASHTO [in its Freight Rail Bottom Line Report released in
January, 2003] estimated that railroads will need to carry an
additional 888 million tons of freight annually by 2020 just to
maintain their current market share. AASHTO also found that
railroads will need $175 billion to $195 billion of
infrastructure investment over this period to accommodate this
traffic growth, and projected that the railroads will be able
to fund the majority of this investment--$142 billion--from
their own retained earnings and borrowing. Unfortunately,
according to the AASHTO analysis, the $142 billion will be
enough to enable railroads to handle only half of their
expected increase in traffic. This funding shortfall means that
many projects that would otherwise expand capacity and improve
the ability of our Nation's farms, mines, and factories to move
their goods to market; speed the flow of imports and exports;
relieve highway congestion; reduce pollution; lower highway
costs; save fuel; and enhance safety will be delayed--or never
made at all.''
In other words, even if we can achieve the policy shifts needed to
allow rail to maintain its market share, truck traffic would continue
to increase in absolute terms as the economy grows. [The AASHTO report
was issued by its Standing Committee on Rail Transportation, which at
the time was chaired by Joseph Boardman, the current Federal Railroad
Administrator.]
AAR favors public-private partnerships and investment tax
incentives. As an example of the former, he cites the $1.5 billion
Chicago ``CREATE'' project (Chicago Region Environmental and
Transportation Efficiency Program) ``involving the State of Illinois,
the city of Chicago, and the major freight and passenger railroads
serving Chicago.'' The difficulty CREATE has had getting adequate
funding, especially the small share Federal contribution to date,
reminds us how tough the needed ``policy shifts'' will be. If Chicago
has this much trouble, what will come of a similar, badly needed
project for New Orleans that is under development?
The AASHTO figures Hamberger cites suggest public funding needs for
freight rail are between $33 billion and $53 billion through 2020. Some
of the legitimate, capacity-enhancing investments that will depend on
public support may be not lend themselves so obviously to specific
``publics'' for the ``public-private partnership'' to work. Indeed,
there may not be enough ``CREATEs,'' that is, projects with benefits
that draw in public partners, to yield public funding anywhere near
$33-53 billion.
Thus, there needs to be consideration of how to develop a Federal
program that identifies and addresses other projects. Developing such a
program potentially involves traversing a minefield of objections--from
railroads that oppose any Federal action with the slightest impact on
the competitive positions of different railroads, and from shippers
that want Federal investment on railroads conditioned on provisions the
railroads would consider unacceptable ``re-regulation.''
The investment tax credit AAR supports presumably also would help
close the big gap AASHTO identified, by stimulating more private sector
investment than AASHTO projected. NARP's supports the investment tax
credit, but believes that there should be an emphasis on capacity that
also benefits intercity and commuter passenger trains or that improves
the efficiency of publicly supported entities. Continued tax benefits
should be tied to reliable operation of passenger trains--at least 90
percent on-time performance. The magnitude of the benefits could be
increased where the investment speeds up scheduled running times and/or
permits more frequent passenger train operation.
Obviously, we strongly support the on-time performance provisions
in S. 1516.
Finally, having cited AASHTO's freight report and its spending
recommendations, I need to highlight two items related to rail
passenger investments.
AASHTO's other January 2003 report, Intercity Passenger Rail
Transportation, said about $17 billion needs to be invested in
intercity passenger rail corridors over the next 6 years, and
$43 billion over the next two decades.
Amtrak's Fiscal 2007 Grant Request recommends, as a
``strategic investment option,'' a $50 million capital matching
program aimed at ``chokepoints'' on the freight network, and
says the program could be administered by DOT, in cooperation
with Amtrak, the freight railroads and the states.
Both of the above would benefit freight operations, just as many
passenger-inspired investments already have benefited freight--notably,
in California, capacity improvements for the Los Angeles Metrolink
(commuter rail) system and on BNSF's San Joaquin Valley line, and
restoration of double-track west of Sacramento on Union Pacific.
Thank you, Mr. Chairman, for your yeoman efforts to create a
funding mechanism that would let the Nation begin to address these
needs.
Thank you for considering our views.
______
Prepared Statement of the Burlington Northern Santa Fe Railway (BNSF)
BNSF believes that the GAO study finding with regard to grain rates
in Montana to be overstated in at least two respects:
1. The data relied upon by GAO in its study did not take into
account various discounts and other allowances from BNSF's
published grain rates that were being paid by BNSF in 2004.
There are three separate discounts paid on a regular basis on
each shuttle train movement of grain originating in Montana.
First, under its Origin Efficiency Program, BNSF pays the
shipper a discount of $100 per car provided that the shuttle
train is loaded within 15 hours. Second, under its Destination
Efficiency Program, BNSF pays the receiver of the shuttle train
$100 per car provided that the shuttle train is unloaded within
15 hours. Third, the holder of the shuttle train certificate is
paid $100 per car for each trip made pursuant to the holder's
volume commitment under the shuttle certificate. These
discounts amount to $300 per carload of grain moving in shuttle
trains originating in Montana and are paid on the vast majority
of shuttle train movements in Montana. Any accurate calculation
of the revenue/variable cost ratio must take account of these
discounts.
2. Also, since 2004 BNSF has taken significant rate reductions
to its shuttle train rates for wheat originating in Montana.
For example, at the beginning of 2005, the per car rate on
wheat moving in a shuttle train from Collins and Macon,
Montana, was $2,811 and $3,629 for movement to the Pacific
Northwest. Through a series of rate decreases during 2005 and
2006, the current per car wheat rates in shuttle trains are
$2,481 for Collins and $3,175 for Macon. These reductions
amount to about 12 percent. Similar rate reductions have taken
place from other Montana origins. The GAO study, because it
used earlier data, does not reflect these very significant rate
reductions.
The impact of the first point indicates that the GAO finding that
39 percent of grain tonnage moving in Montana at a Revenue/Variable
Cost (R/VC) ratio in excess of 300 in 2004 is substantially overstated.
The second point shows that today the amount of tons moving in Montana
producing a R/VC ratio in excess of 300 would be even smaller.
______
Prepared Statement of the Portland Cement Association (PCA)
The Portland Cement Association (PCA) appreciates the opportunity
to submit testimony to the Subcommittee regarding economics, service
and capacity issues in the freight railroad industry. The current
national rail policy and lack of capacity impedes portland cement
manufacturers from effectively and efficiently delivering an essential
commodity needed to build our Nation's vital infrastructure and
strengthen our Nation's economy. With more than 80 percent of portland
cement manufacturing plants served by (or ``captive'' to) a single
Class I railroad the current rail policy is unnecessarily contributing
to higher construction costs.
What Is Portland Cement?
The term ``portland'' cement is not a brand name--rather, it is a
generic name for the type of cement used in concrete, just as stainless
is a type of steel. Portland cement is a manufactured powder that acts
as the glue or bonding agent that forms concrete. As an essential
construction material and a basic component of our Nation's
infrastructure, portland cement is utilized in numerous markets,
including the construction of highways, streets, bridges, airports,
mass transit systems, commercial and residential buildings, dams, and
water resource systems and facilities. The low cost and universal
availability of portland cement ensures that concrete remains one of
our Nation's most essential and widely used construction materials.
Portland Cement Association
PCA is a trade association representing cement companies in the
United States and Canada. PCA's membership consists of 31 companies
operating 102 manufacturing plants in 36 states. PCA members account
for 98 percent of cement-making capacity in the United States. The
cement industry is a crucial component of one of the largest segments
of our Nation's economy--the more than one trillion dollar construction
industry. Nearly every construction project requires portland cement.
In 2005, 127 million metric tons of portland cement were consumed in
the United States; in fact, cement is the second most consumed
commodity on the planet, second only to water.
U.S. Cement Industry Demographics
The cement industry operates manufacturing plants in 36 states,
producing nearly 96 million metric tons of portland cement in 2005.
Cement manufacture is a highly capital-intensive industry. Cement
companies invest millions of dollars annually to upgrade manufacturing
equipment and phaseout more costly and less energy efficient
operations. Between 1994 and 2003 the cement industry invested $7.542
billion in new capital investment. The construction and permitting
costs of a new greenfield cement plant can easily exceed $250 million.
Only two greenfield plants have been constructed within the past 10
years.
Cement is produced from various abundant raw materials including
limestone, shale, clay and silica sand. These minerals are ground and
heated in large rotary kilns to temperatures as high as 3,400 degrees
Fahrenheit. The heat of the combustion fuses these materials into
clumps of an intermediate material called clinker. When the clinker is
discharged from the kiln, it is cooled and later ground with a small
amount of gypsum to produce the gray powder known as portland cement.
Different types of portland cement are manufactured to meet various
physical and chemical requirements.
Portland cement manufacturing facilities use an enormous amount of
energy. In fact, energy is the largest cost component in the
manufacture of portland cement. The U.S. cement industry is largely
coal fired with 81.3 percent of all plants using coal, coke, or some
combination of the two as primary kiln fuel in 2004. The domestic
cement industry is the largest industrial consumer of coal. Much of the
coal utilized to heat cement kilns on a 24/7 basis is delivered by
rail.
The cement industry is regional in nature. Most cement
manufacturing plants are located in rural areas near large limestone
deposits, the principal ingredient in producing cement. However, at the
same time plants also must be located near markets because the cost of
shipping cement quickly overtakes its value. As such, customers
traditionally purchase cement from local sources. Texas, California,
Florida and Pennsylvania, are the leading cement manufacturing states,
respectively, producing nearly 36 million tons in 2005 or 37.4 percent
of domestic cement production.
U.S. Cement Manufacturers Rely on Railroads
Considering the regional nature of the cement industry, it is
critical that there are reliable and cost-effective transportation
options available. Average cement shipments range between 250 to 300
miles. Truck transportation is not economical beyond 125 miles. As
such, the cement industry is reliant on railroads to deliver our
product beyond the economical range of trucks. Several cement plants
have access to water transportation for domestic shipments. The
railroads have sometimes argued that these cement facilities are not
captive since there are alternative modes of transportation available.
This simply is not the case. Domestic portland cement manufacturers
rely on rail transportation to move 50 percent of all shipments between
cement plants and distribution terminals, according to 2004 U.S.
Geological Survey data, the most recent independent figures available.
About 95 million tons of cement was produced domestically in the same
year. Most bulk cement shipments are from the manufacturing plants to
the more than 400 regional distribution terminals, where the cement is
then delivered by truck to local contractors and ready mixed producers.
It is vitally important to our industry that the railroads provide
reliable, efficient and cost-effective service to meet the widespread
demand for our product. As mentioned earlier, more than 80 percent of
U.S. cement manufacturing plants are captive to a single railroad. Due
to the absence of competition, these plants are charged substantially
higher rates and usually receive poor service. On the other hand, dual
rail-served facilities typically have lower rates and more reliable
service.
The railroads also transport millions of tons of inbound coal
shipments to fuel cement manufacturing plants each year. There are
examples within the industry in which cement plants that are served by
two railroads receive coal from a supplier that is captive to a single
railroad. There are also instances where both the cement plant and the
coal supplier are captive to a single railroad. These situations result
in unnecessarily high rail rates that add to the cost of cement and,
ultimately, to construction costs. PCA members have also reported
situations in which they were forced to transport coal to the cement
plant by truck, at a substantial cost, due to delivery failures by the
railroad. In these instances, the situation confronting the cement
plants were desperate: they had only a day or two of coal supply on
hand.
U.S. Cement Industry Largely ``Captive'' and Service Suffers
The Staggers Act of 1980, which removed regulations of the railroad
industry where transportation competition exists, has improved the
industry's efficiency and financial stability. However, since
deregulation, there has been a sharp decline from 63 Class I railroads
in 1976 to just four major Class I railroads today handling 90 percent
of the Nation's rail traffic. This consolidation has contributed to
diminished competition as well as ineffective and inconsistent rail
service for the cement industry and many others.
Inconsistent and unreliable service from the Class I railroads is
one of the most serious problems the portland cement industry confronts
in our efforts to bring an affordable and essential product to market.
Service encompasses many aspects of rail transportation, including
picking up rail cars (typically covered hoppers), on-time delivery of
rail cars, providing empty rail cars, handling issues, questions about
the condition of the rail cars, and settling claims for service
failures. The cars supplied by the railroads are typically old, poorly
maintained and frequently a safety concern. Our members report that as
many as 15 percent of the empty rail cars delivered to manufacturing
plants in a given week are being rejected.
In recent years, several cement companies have been forced to
purchase private rail cars since the Class I railroads have refused to
add cement rail cars to their fleets. This, in addition to the
declining and inconsistent service, has increased the need for more
rail cars to deliver the same tonnage. Meanwhile the railroads have
added tariff provisions charging for the storage (demurrage) of private
rail cars. This results in further increased costs to the cement
shipper while providing no incentive to the rail carriers to improve
their service.
Further compounding the problem is the fact that at some locations,
the railroad will only quote freight rates to the cement company if the
cement company uses their (system) rail cars. In short, no product will
move from that origin unless the railroad is collecting revenue for the
use of their rail cars. In other instances, the railroads quote rates
such that the difference in cost of a movement in a private rail car is
so great that private rail car transports are not economical. Rail car
supply is a classic Catch 22 situation that adds unnecessarily to the
cost and inefficient shipment of our product and, ultimately, to
construction costs.
While service continues to decline, cement manufacturers are
experiencing sharp rail freight rate increases. For example, some rates
increased more than 23 percent in 2005, according to some cement
companies. Indeed, transit times on empty return cars have increased by
more than 13 percent in some instances, increasing fleet storage costs.
PCA Supports Service Provisions in Legislation
The cement industry has no recourse regarding rates since cement
(officially ``hydraulic cement'') is classified as an exempt product
from rate regulation by the Surface Transportation Board (STB). Since
the STB has done little to address service issues, we believe Congress
should enact legislation expanding the STB's authority in this area.
The STB should be required to post a description of each complaint from
a customer about rail service. The legislation should also require the
Board to submit an annual report to Congress regarding rail service
complaints and describe the procedures the Board took to resolve them.
Further, either party should be allowed to submit a dispute over rail
service to the STB for ``final offer'' arbitration. These provisions
are included in bipartisan legislation (S. 919), the Railroad
Competition Act of 2005. These service provisions contained in S. 919
do not constitute ``re-regulation,'' a term coined by the railroad
industry to overstate the perceived negative impact of the legislation.
We believe strongly that the lack of rail competition is the
fundamental issue associated with these problems. PCA believes it is
important to strike a balance between regulation of the railroad
industry while also assuring rail competition. PCA believes that the
intent of Congress in the Staggers Act was only to deregulate the
railroads where competition exists. Unfortunately, the implementation
of the Act has resulted, often, in deregulation even where there is no
transportation competition--with predictable results such as those we
are reporting.
The following example further illustrates the unintended
consequences of the Staggers Act, as implemented, on a captive shipper.
PCA member Holcim (US) Inc. established HolRail, a limited
liability corporation, to construct and operate a two-mile rail line
that would provide competitive rail service to the Holcim cement
manufacturing plant in Holly Hill, South Carolina. Presently, Holly
Hill is served only by CSX Transportation, Inc. (CSX). The proposed
line would connect to a rail line owned by the Norfolk Southern
Railroad Company (NSR).
Holcim is one of the largest suppliers of portland and blended
cements and related mineral components in the United States. It ships
more than 20 million tons of cement and related materials each year, of
which 16 percent moves by railroad. Holcim has 14 manufacturing
facilities and approximately 70 distribution terminals across the
country and employs approximately 2,500 people in the United States.
The Holly Hill production facility manufactures a variety of cement
and masonry products and relies on rail transportation to receive
inbound raw materials and to ship outbound products. In August 2003,
Holcim completed a plant expansion project that increased the size of
the facility and doubled output capacity to two million tons of cement
per year. A substantial portion of Holly Hill's production is shipped
by rail to Holcim distribution terminals to serve markets that are over
100 miles from the facility. Because trucking cement over distances
greater than 100 miles is uneconomic and impractical, Holly Hill
requires reliable, economic, and efficient rail transportation to reach
optimal plant utilization.
When the Holly Hill plant operates at full capacity, the plant
annually receives 3,500 inbound rail cars with fuel and raw materials
and ships out 10,000 rail cars with cement. As the only rail carrier
with direct access to the Holly Hill plant, CSX transports all inbound
raw materials and outbound products that move by rail. CSX's service
track record is weak. Its service is unreliable and inadequate, and CSX
appears to be completely indifferent to Holcim's requirements and
requests for service improvements. For example, CSX has refused to
allow Holcim to use its private railcar fleet to transport Holly Hill's
products even when CSX cannot provide its own cars to meet the needs of
the plant! CSX recently eased its objection to this practice. The CSX
equipment is in poor condition and is routinely rejected at the Holly
Hill facility. By contrast, two other cement plants in the Holly Hill
area that are not captive to a single railroad are freely allowed to
ship product in private cars without the restrictions that CSX imposes
on Holcim.
In addition to CSX's inadequate railcar service and its
restrictions on private cars, CSX charges Holcim rates that exceed
those paid by the two nearby cement manufacturers that have competitive
rail service. By obtaining rail competition, through its ``build out''
to NSR, Holcim will place Holly Hill on equal footing with other
comparable cement facilities that have access to more than one
railroad.
CSX's consistently poor service, which has caused Holcim to lose
business opportunities in the past, simply cannot meet the needs of
Holly Hill's expanded production capacity. Holcim believes that
competition between CSX and NSR at Holly Hill will produce more
responsive, more reliable, and better rail service. Improved rail
service will support the facility's increased production and allow
Holcim to supply distant markets and to compete in new markets.
Additionally, rail-to-rail competition will lead to a reduction in
rail rates, making Holly Hill more competitive with non-captive
producers. Accordingly, HolRail, the Holcim subsidiary, has filed a
petition with the STB to construct a two-mile rail line, running south
from the Holly Hill plant to the NSR line. The petition is currently
pending before the STB.
Another example of the unintended consequences of the Staggers Act
involves a captive east coast cement company that must transport cement
300 miles by rail to its distribution terminal to meet customer demand.
The applicable rail rate is so outrageously high the cement company
concluded that importing cement from China to the east coast is less
expensive than shipping it 300 miles by rail.
Demand for Cement to Increase
United States cement consumption reached a record high during 2005,
peaking at 127 million metric tons and reflecting growth of 5.6 percent
over strong 2004 levels. The near term outlook for the cement market
remains strong. Growth in cement consumption is expected to materialize
due to continued increases in construction activity as well as
increases in the use of concrete and cement per construction dollar
spent. Despite the likelihood that the growth boom in residential
housing construction may be nearing an end, gains in nonresidential and
public construction are emerging as new sources for growth in
construction activity. Gains in these areas are expected to outweigh
modest declines in residential construction--resulting in a
continuation of growth in construction activity. Furthermore, various
influences suggest that the increases in concrete and cement usage per
dollar of construction activity will continue. The combination of
sustained strength in construction activity and cement usage per dollar
of construction activity is expected to result in new cement
consumption records in 2006 through 2007 and beyond. From 2005's record
levels, cement consumption is expected to grow 3.5 percent in 2006 and
another 2.5 percent in 2007.
Cement and concrete are literally one of the building blocks of our
Nation's economic growth. Strong cement demand reflects the need for
business to expand commerce by way of increasing its physical
properties, whether it be retail shops, warehouses or office buildings.
It also reflects the need for Federal, state and local governments to
build new schools, improve its road systems and general infrastructure.
It also reflects the need to build new housing to meet growth in
population and household formation. Furthermore, according to the
Bureau of Census, the United States population is expected to grow by
68 million persons in the next 25 years. As a result, new demand for
commercial, public and residential construction activity will increase.
According to PCA's long term forecast, cement consumption is expected
to grow from 127 million metric tons in 2005 to 200 million metric tons
in 2030.
To meet the future U.S. cement and concrete requirements, the
United States cement industry currently is engaged in its most
aggressive capacity expansion in the industry's history. Based on
announced and permitted plans, by 2010 the industry will add 18.6
million metric tons (20.6 million short tons) of clinker capacity--
representing a 19.8 percent increase over 2005 capacity levels and a
$4.1 billion commitment. The capacity expansion reflects a mix of
greenfield sites, plant modernizations, and expansions of existing
facilities. In addition, the industry is committed to the expansion of
its import facilities--amplifying the industry's commitment to expand
all sources of supply to meet the national economy's rising need for
cement and concrete. At least 63 percent of the new capacity expansion
and modernizations underway at existing facilities are captive to a
single railroad. Although three greenfield facilities are scheduled to
start production during this period, the cement industry is largely
limited to modernizing and expanding its capacity at existing
facilities because of high construction and permitting costs to build a
greenfield cement plant. Since cement industry capacity expansion must
follow projected market demographics largely based on population
growth, much of the expansion will occur in the southern and western
regions of the United States where the vast majority of the cement
facilities are captive to a single railroad. In short, the cement
industry is forced to expand capacity where it is captive to a single
railroad--despite our industry's concern about that captivity.
While the industry has proven it commitment to providing reliable
and adequate supplies of cement and concrete to meet U.S. needs, these
efforts are partially offset by existing rail constraints. The existing
lack of adequate rail capacity impedes portland cement manufacturers
from effectively and efficiently delivering its product to the
marketplace. The rail capacity shortfall relative to existing
requirements of the economy is reflected in a rapid run-up in rail
freight rates--rising by 11.7 percent in 2005 according to the Bureau
of Labor Statistics. As the economy grows and more cement capacity is
put in place, it is likely that existing rail constraints will be
exaggerated, potentially leading to a repeat of the large rate hikes
experienced in 2005. Furthermore, it is important to recognize that
other essential building materials rely heavily on the railroads to
move product to market--amplifying the adverse consequences of rail
constraints on overall economic growth.
Construction currently accounts for approximately 6.7 percent of
total economic activity. One out of every 18 jobs in the U.S. is
directly employed by the construction industry. Since 2000, growth in
construction employment has accounted for 30 percent of the United
States' total employment growth. Very little construction activity can
materialize without utilizing concrete at some stage of the
construction project. Impairment in the ability to deliver cement to
market efficiently, impairs construction activity and represents an
issue that could impede future growth in this important sector of our
Nation's overall economic activity.
Freight Railroad Infrastructure Tax Credit
The Class I railroads state that they are committed to expanding
capacity and improving service, spending an estimated $6.6 billion for
capital expenditures in 2005 and projecting to spend a record $8
billion in 2006. To further enhance capital improvement and increase
capacity, the Class I railroads are seeking a 25 percent Federal tax
credit to leverage private investment in rail infrastructure
improvements and other capital expenses. The proposal reportedly would
also make the tax credit available to certain shipper funded rail
projects.
PCA supports increasing investment in the Nation's rail
infrastructure to meet the current and future freight transportation
needs. As the Class I railroads report profit increases, now is the
time for the railroad industry to bolster investment to expand capacity
and improve service, especially for captive shippers that typically pay
much higher rates and experience poor to marginal service.
PCA would be inclined to support a tax credit if Class I railroads
are required to invest in rail capacity projects that would provide
relief to captive shippers. This requirement would have the benefit of
reducing highway congestion, creating a more efficient freight rail
system for all shippers, including particularly domestic shippers who
generally are the ones that are captive, and heavy truck traffic on our
highways and local streets, thus reducing highway maintenance cost.
Requiring that the tax credit for rail capacity enhancements be focused
on the infrastructure needed to serve captive rail customers would be
the most prudent and sound use of taxpayer dollars. The cement industry
also believes that Congress should further study the concept and
feasibility of a railroad trust fund, similar to the Highway Trust
Fund, to finance rail capacity and capital projects. Finally, we want
to see any tax benefit for the railroad industry coupled with
legislation that addresses the concerns of railroad customers that the
rail industry be more competitive.
The higher rates and unreliable service often associated with
captive cement plants often forces our industry to transport cement by
bulk tank truck to distribution terminals and customers at a much
higher cost. It is critical that cement manufacturers maintain adequate
inventories of product to meet contractor demand. Contractors utilizing
portland cement in large-scale concrete paving projects, for example,
need a constant and reliable supply of cement to meet construction time
tables and to plan for weather delays and other construction
complications. Just as contractors expect timely shipments of cement
from the cement company, it is the obligation of the railroad, we
believe, to deliver shipments of cement in a timely manner.
Conclusion
U.S. manufacturers need a vibrant and profitable rail industry to
support our Nation's economic growth. The portland cement industry is a
vital component of our Nation's construction industry, which supports
the backbone of our Nation's growing economy. It is essential that the
portland cement industry have access to a competitive rail
transportation system to ensure that our product is delivered in a
timely and efficient manner to our customers who build our Nation's
critical infrastructure fostering economic expansion. With more than 80
percent of the cement manufacturing plants and a similar ratio of the
industry's 400 distribution terminals held captive to a single
railroad, combined with the inadequate service at these facilities,
only adds to our Nation's construction costs. Demand for cement is
forecast to increase for the foreseeable future, only exacerbating this
problem.
PCA strongly urges the Subcommittee to further examine S. 919, the
Railroad Competition Act of 2005, especially provisions that would
expand STB's authority over service-related issues. This provision,
among others, would help provide some relief for captive industries,
such as the cement industry.
Thank you for the opportunity to submit testimony to the
Subcommittee on this important issue.
______
Response to Written Questions Submitted by Hon. Conrad Burns to
W. Douglas Buttrey
Question 1. I hear a lot of concern from rail customers about two
rulings of the STB that are perceived as preventing competition--in
direct conflict with what Congress directed the STB to do, which was
work toward competitive markets and protect shippers where there is no
competition. One concern is the ``bottleneck'' decision that,
essentially, says that a railroad does not have to provide a customer a
rate to a point where a movement may move onto a competing railroad.
Second, both the STB and the ICC before it have approved what I believe
are anti-competitive contracts--known as ``paper barriers''--in track
lease agreements between the major railroads and short lines meaning
that short lines may only do business with the railroad leasing the
track, even though the short line might connect to another major
carrier.
Your agency has the authority to take administrative action to
promote competition, yet these decisions do just the opposite. Can the
STB act on its on initiative to change these rulings or must someone
bring a request to the STB that it change its ruling on these issues?
If you can, then why don't you?
Answer. The STB has the authority to initiate hearings and
rulemaking proceedings to address issues like those described above. As
an illustration, we are having a hearing on July 27 to examine the role
of ``paper barriers'' in the rail industry. That hearing will explore
questions such as whether the agreements are anticompetitive, whether
they are harmful/beneficial, the extent of such agreements in the
industry and the agency's remedial powers.
The Board has not acted to modify the bottleneck decision, which
was premised on pronouncements by the Supreme Court in Great N. Ry. v.
Sullivan, 294 U.S. 548 (1935). Since the 1980 Staggers Act and the 1995
ICCTA did not disturb any portion of the Court's ruling in the 1935
decision, the Board has concluded that that decision is settled law.
Question 2. To what extent can the STB initiate investigations of
railroad practices in markets where it sees abuses of pricing power, or
severe deficiencies in service?
Answer. The STB has broad authority to issue emergency service
orders for a total of up to 270 days to address clearly emergency
situations in freight rail service. Under 49 U.S.C. 11123, our
emergency powers can be used to address serious rail service
disruptions whether they result from damage to rail tracks and
facilities, from serious congestion of the rail network, or from the
inability of a carrier to meet its transportation obligations for
whatever reason. The STB can exercise these powers on its own
initiative.
In contrast, under 49 U.S.C. 11704, we cannot investigate the
reasonableness of common carrier rates unless the shipper files a
formal complaint with the Board.
Question 3. Does the STB take its duty to provide for competition
and protect shippers seriously, or does it simply sit back and wait for
shippers to jump through all the hurdles and expense of filing an
actual rate case?
Answer. We take our duty to protect captive shippers very
seriously. In the last 6 months, we have initiated a series of
proceedings to investigate general complaints from the captive shipper
community, addressing such issues as fuel surcharges, paper barriers,
and the complexity and expense of our rate cases. But if a complainant
wants rate relief, the statute requires that it first file a complaint
with the Board. For a large rail rate dispute, a captive shipper would
seek relief under our Constrained Market Pricing guidelines, which is
an expensive process. If, however, the value of its case cannot justify
the expense of a full stand-alone cost presentation, the captive
shipper may use our simplified guidelines, and pay only a $150 filing
fee.