[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
RAIL COMPETITION AND SERVICE
=======================================================================
(110-70)
HEARING
BEFORE THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
----------
SEPTEMBER 25, 2007
----------
Printed for the use of the
Committee on Transportation and Infrastructure
RAIL COMPETITION AND SERVICE
RAIL COMPETITION AND SERVICE
RAIL COMPETITION AND SERVICE
RAIL COMPETITION AND SERVICE
RAIL COMPETITION AND SERVICE
RAIL COMPETITION AND SERVICE
RAIL COMPETITION AND SERVICE
=======================================================================
(110-70)
HEARING
BEFORE THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 25, 2007
__________
Printed for the use of the
Committee on Transportation and Infrastructure
U.S. GOVERNMENT PRINTING OFFICE
38-170 WASHINGTON : 2008
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
JAMES L. OBERSTAR, Minnesota, Chairman
NICK J. RAHALL, II, West Virginia, JOHN L. MICA, Florida
Vice Chair DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of JOHN J. DUNCAN, Jr., Tennessee
Columbia WAYNE T. GILCHREST, Maryland
JERROLD NADLER, New York VERNON J. EHLERS, Michigan
CORRINE BROWN, Florida STEVEN C. LaTOURETTE, Ohio
BOB FILNER, California RICHARD H. BAKER, Louisiana
EDDIE BERNICE JOHNSON, Texas FRANK A. LoBIONDO, New Jersey
GENE TAYLOR, Mississippi JERRY MORAN, Kansas
ELIJAH E. CUMMINGS, Maryland GARY G. MILLER, California
ELLEN O. TAUSCHER, California ROBIN HAYES, North Carolina
LEONARD L. BOSWELL, Iowa HENRY E. BROWN, Jr., South
TIM HOLDEN, Pennsylvania Carolina
BRIAN BAIRD, Washington TIMOTHY V. JOHNSON, Illinois
RICK LARSEN, Washington TODD RUSSELL PLATTS, Pennsylvania
MICHAEL E. CAPUANO, Massachusetts SAM GRAVES, Missouri
JULIA CARSON, Indiana BILL SHUSTER, Pennsylvania
TIMOTHY H. BISHOP, New York JOHN BOOZMAN, Arkansas
MICHAEL H. MICHAUD, Maine SHELLEY MOORE CAPITO, West
BRIAN HIGGINS, New York Virginia
RUSS CARNAHAN, Missouri JIM GERLACH, Pennsylvania
JOHN T. SALAZAR, Colorado MARIO DIAZ-BALART, Florida
GRACE F. NAPOLITANO, California CHARLES W. DENT, Pennsylvania
DANIEL LIPINSKI, Illinois TED POE, Texas
DORIS O. MATSUI, California DAVID G. REICHERT, Washington
NICK LAMPSON, Texas CONNIE MACK, Florida
ZACHARY T. SPACE, Ohio JOHN R. `RANDY' KUHL, Jr., New
MAZIE K. HIRONO, Hawaii York
BRUCE L. BRALEY, Iowa LYNN A WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania CHARLES W. BOUSTANY, Jr.,
TIMOTHY J. WALZ, Minnesota Louisiana
HEATH SHULER, North Carolina JEAN SCHMIDT, Ohio
MICHAEL A. ACURI, New York CANDICE S. MILLER, Michigan
HARRY E. MITCHELL, Arizona THELMA D. DRAKE, Virginia
CHRISTOPHER P. CARNEY, Pennsylvania MARY FALLIN, Oklahoma
JOHN J. HALL, New York VERN BUCHANAN, Florida
STEVE KAGEN, Wisconsin
STEVE COHEN, Tennessee
JERRY McNERNEY, California
LAURA A. RICHARDSON, California
(ii)
CONTENTS
Page
Summary of Subject Matter........................................ v
TESTIMONY
Buttrey, W. Douglas, Vice Chairman, Surface Transportation Board. 21
Clayton, Kenneth C., Associate Administrator, Agricultural
Marketing Science, U.S. Department of Agriculture.............. 21
Diehl, Susan M., Senior Vice President, Logistics and Supply
Chain Management, Holcim, Inc.................................. 70
English, Glenn, Chief Executive Officer, National Rural Electric
Cooperative Association........................................ 70
Harper, Ronald R., Chief Executive Officer and General Manager,
Basin Electric Power Cooperative............................... 70
Hecker, Jayetta Z., Director, Physical Infrastructure Issues,
Government Accountability Office............................... 21
Hurst, Wayne, Vice President, Idaho Grain Producers Association,
on behalf of the National Association of Wheat Growers......... 70
Huval, Terry, Director, Lafayette Utilities Service.............. 70
Marshall, Charlie, Vice President of Development, Farm Rail
System, Inc.................................................... 97
Mulvey, Francis P., Board Member, Surface Transportation Board... 21
Nottingham, Charles D., Chairman, Surface Transportation Board... 21
Rennicke, William, Director, Oliver Wyman, Inc................... 97
Spitzer, Gary, Vice President and General Manager, Chemical
Solutions Enterprise, DuPont................................... 70
Young, Jim, Chairman, President, Chief Executive Officer, Union
Pacific........................................................ 97
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Baker, Hon. Richard H., of Louisiana............................. 119
Brown, Hon. Corrine, of Florida.................................. 121
Carnahan, Hon. Russ, of Missouri................................. 392
Cohen, Hon. Steve, of Tennessee.................................. 393
Cummings, Hon. Elijah E., of Maryland............................ 394
Lampson, Hon. Nick, of Texas..................................... 403
Mitchell, Hon. Harry E., of Arizona.............................. 404
Rahall, Hon. Nick J., of West Virginia........................... 406
Salazar, Hon. John T., of Colorado............................... 410
Smith, Hon. Adrian, of Nebraska.................................. 418
Walz, Hon. Timothy J., of Minnesota.............................. 419
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Buttrey, W. Douglas.............................................. 420
Clayton, Kenneth C............................................... 425
Diehl, Susan M................................................... 434
English, Glenn................................................... 443
Harper, Ron...................................................... 450
Hecher, JayEtta Z................................................ 455
Hurst, Wayne..................................................... 487
Huval, Terry..................................................... 502
Marshall, Charles N.............................................. 518
Mulvey, Francis P................................................ 529
Nottingham, Charles D............................................ 541
Rennicke, William J.............................................. 608
Spitzer, Gary W.................................................. 645
Young, James R................................................... 658
SUBMISSIONS FOR THE RECORD
Brown, Hon. Corrine, a Representative in Congress from the State
of Florida, a sample of 2,000 letters sent to Members of the
House and Senate in opposition to H.R. 2125 and S. 953......... 126
A sample of letters sent to the Committee in support of H.R. 2125 295
Kagen, Hon. Steve, a Representative in Congress from the State of
Wisconsin:
Letter to the Congressman from Badger-CURE, Wisconsin Consumers
United for Rail Equity....................................... 400
Letter to the Congressman from Wayne Toltzman, Mayor of the
City of New London, Wisconsin................................ 402
Salazar, Hon. John T., a Representative in Congress from the
State of Colorado:
Letter to the Congressman from Timothy J. Larsen, Senior
International Marketing Specialist, Colorado Department of
Agriculture, Markets Division................................ 413
Letter to the Congressman...................................... 417
Surface Transportation Board, W. Douglas Buttrey, Charles D.
Nottingham, Francis P. Mulvey, responses to questions from the
Committee...................................................... 421
Nottingham, Charles D., Chairman, Surface Transportation Board,
responses to questions from the Committee...................... 563
Young, Jim, Chairman, President, Chief Executive Officer, Union
Pacific, responses to questions from the Committee............. 684
ADDITIONS TO THE RECORD
Air Liquide, L. Richard Pedersen, Director, National Distribution
and Logistics, written statement............................... 686
Alliance for Rail Competition, American Soybean Association,
American Sugarbeet Growers Association, National Associations
of Wheat Growers, National Barley Growers Association, National
Farmers Union, United States Beet Sugar Association, USA Dry
Pea & Lentil Council, US Dry Bean Council, USA Rice Federation,
written statement.............................................. 693
Association of American Railroads, written statement............. 695
BASF Corporation, NAFTA Logistics, David McGregor, Senior Vice
President, written statement................................... 718
Minnesota Municipal Utilities Association, written statement..... 728
National Corn Growers Association, written statement............. 732
Rhodia Inc., James Harton, President, written statement.......... 741
Steel Manufacturers Association, written statement............... 744
Total PetroChemicals USA, Inc., Richard L. Charter, Senior Vice
President, written statement................................... 747
U.S. Department of Transportation, Tyler D. Duvall, Assistant
Secretary for Transportation Policy, written statement......... 751
UPM Blandin Paper, Joseph C. Maher, General Manager, written
statement...................................................... 753
Washington State Potato Commission, Chris Voigt, Executive
Director, Paul Vander Stoep, Consultant, written statement..... 755
Waterfront Coalition, Ezra Finkin, Legislative Director, written
statement...................................................... 759
Wisconsin Agri-Service Association, Inc., John Petty, Executive
Director, written statement.................................... 761
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HEARING ON RAIL COMPETITION AND SERVICE
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Tuesday, September 25, 2007
House of Representatives,
Committee on Transportation and Infrastructure,
Washington, DC.
The Committee met, pursuant to call, at 10:10 a.m., in Room
2167, Rayburn House Office Building, the Honorable James L.
Oberstar [Chairman of the Committee] presiding.
Mr. Oberstar. The Committee on Transportation and
Infrastructure will come to order, with apologies from the
Chair for not being on railroad time. Unfortunately, I had more
meetings this morning to attend to than I could fit in the
requisite time in order to start this hearing on order.
October 14 marks the anniversary of the passage of the
Staggers Rail Deregulation Act. I remember so well in the days
leading up to that vote and on the day of the vote itself being
in some indecision about whether this was a good policy for the
Country or whether it would, in the end, turn around to be
harmful to us.
I could understand we had already passed trucking
deregulation, intercity bus deregulation. We had enacted
aviation deregulation. It made an awful lot of sense that
trucks could move and enter markets and compete with each
other. Intercity buses could do the same. Airlines could
compete with one another through different airports.
But I found it difficult how you would be able to pick up a
set of rail tracks, move them around to different cities and
actually compete. We had 60 Class I railroads. The argument was
we would have an awful lot of competition if we just took the
Government out of deciding market entry and pricing. In the
end, I voted for it.
Well, today, we have seven Class I railroads. The freight
rail network in 1980 was 178,000 miles. Today, we have 140,810
route miles. Abandonments, spinoffs to short lines, all have
caused a deterioration in the miles and in the market
opportunities.
Railroad fortunes also had a dramatic turnaround. Many
railroads were on the brink of bankruptcy in those years just
prior to the Staggers Act, and that stands in stark contrast to
their financial today. In the last 10 years alone, the combined
income of the Class I railroads, seven Class I railroads, has
increased over 104 percent, $3.7 billion to $7.6 billion.
I think we have a slide on that to put up. It shows how
revenues are going up. It also shows a rather paltry investment
in capital expenditures, and that has antecedents in the
marketplace. When railroads were not doing as well, the
shareholders were insisting on withholding on capital
investments.
You can see a little tilt upward now in 2006, a pretty
substantial investment in that year, but it does not by any
means compensate for the years of low investment, somewhat
reflective of what the Federal Government has done with the
rest of our transportation infrastructure.
On paper, we have seven Class I railroads, but in reality
the railroad industry has consolidated, has evolved into two
regional duopolies, essentially east of the Mississippi, CSX
and Norfolk Southern, and one in the West, Union Pacific and
BNSF.
In that market setting, shippers with access to two rail
carriers offer counter rail rates closer to those of a captive
shipper. A shipper operating in a duopoly market is like a
captive ship. A railroad enjoys greater opportunity to assign
costs to a shipper who has little to do with the actual cost of
service.
A report in 2006 by the GAO found that railroads
increasingly are transferring costs onto shippers, costs that
are not reflected in their rates. Since 1985, rail car
ownership has shifted nearly 20 percent to shippers, so that
today shippers own a majority of rail cars in use.
GAO found that shippers are paying other costs such as
infrastructure upgrades, fuel surcharges, congestion fees.
Unfortunately, the Surface Transportation Board does not track
these charges, and that led GAO to conclude that shippers in
those markets may be paying excessive rates for rail service.
The railroads contend that the system works, and they say
that any shortfalls in the system will lead to unacceptable
reductions in their revenue and a decrease in capital
investment. They contend vigorously that despite the benefits
of the Staggers Act, they are struggling to arrive at financial
health, reflected by the Surface Transportation Board's
analysis that the industry as a whole is revenue-inadequate.
Since the Staggers Act, the rail industry as a whole has
never been found to be revenue-adequate. The Association of
Railroads reports that the Staggers Act and the years since its
enactment, the difference between the industry's return on
investment and cost of capital has not substantially narrowed.
What should follow from such a record would be significant
capital shortages and disinvestment in the rail sector.
The ICC's 1981 decision implementing the current Revenue
Adequacy Test calls ``Any firm that earns less than its cost of
capital will be unable to compete in the market for funds. Its
owners will neither wish nor be able to keep the enterprise's
capital intact. They will withdraw their capital as quickly and
as expeditiously as they can.''
However, the railroads continue to get capital from Wall
Street, from the marketplace. They earn substantial profits.
They invest billions of dollars in their systems despite the
constant shortfall of meeting the regulatory standard for
revenue adequacy.
That discrepancy between the railroad reports of revenue
shortfall and the continued availability of investment capital
is understandable if you examine the regulatory method used to
determine the railroads' revenue adequacy. There are many
methods to determine, but the model implemented in 1981 fell
out of favor with Wall Street some time ago. The marketplace
views it as overly pessimistic in the railroads' cost of
capital and their financial health.
In 1995 and again 1999, Standard and Poor's industry
surveys reported that the rail industry ``is actually fit as a
fiddle''; ``explain that the ICC's definition of cost of
capital is not particularly meaningful, given the many flaws in
the design of the financial test.''
When Wall Street measures revenue adequacy of an
investment, it uses a newer and more accurate tool to measure
revenue adequacy, the Capital Asset Pricing model. You have to
spend a little time and get close up to this and put your arms
around it and spend a little time reading late at night and
early into the morning. But it is also the system that the
Canadian counterpart to the STB uses.
According to that analysis, the railroads are financially
healthier than reported by the Surface Transportation Board. In
fact, the Board recently announced it is updating its revenue
adequacy methodology to reflect the marketplace.
Any economist will tell you that for the regulatory
purposes, it is better for the railroads' profits to remain
revenue-inadequate. This gives them a favorable regulatory
environment from the Surface Transportation Board. That then
allows them to charge higher rates to their captive customers
without coming under the threat of an adverse rate decision.
While the railroads' financial health continues to improve
and their pricing power increases, the current regulatory
environment still reflects an industry closer to its position
that existed prior to passage of the Staggers Act, and that
works to the detriment of shippers seeking rate relief.
Now when Congress passed the Staggers Act, it did not wash
its hands of oversight by the Executive Branch or the
Legislative Branch of rail operations. It created the successor
entity, the Surface Transportation Board, much more limited
authority but still allowed market pricing and market entry to
be determined by the railroads themselves in the context of the
marketplace, but it retained, the Staggers Act retained
authority in the Surf Board to protect captive shippers from
unreasonable rates. It granted broad authority to monitor the
performance of the railroad industry.
Shippers tell me, however, over many years now that the
Board is not effectively exercising their responsibility to
protect or at least give voice to the concerns of captive
shippers. The GAO report of 2006 reinforces the shippers'
claims. GAO found ``There is little effective relief for
captive shippers because the Surface Transportation Board's
standard rate relief process is largely inaccessible.''
Contesting a case now is so expensive, is so time-
consuming, so loaded with paperwork that only the egregious
cases have a chance to come to the Board's attention. Since
2001, shippers filed 11 cases with the Board. All but one of
these 11 is a coal rate dispute case. Of that 11, the Board
settled and dismissed 3, 1 was withdrawn and 1 is still
pending. Of the remaining six, the Board issued decisions in
favor of the railroads.
The Surface Board reports that these cases, on average,
took nearly three years to decide. Shippers report that they
spent upwards of $5 million contesting rate cases, only to
lose.
GAO then reports that traffic traveling at rates
substantially over the threshold have not had rate relief. That
is why Mr. Baker of Louisiana and I introduced H.R. 2125, the
Rail Competition and Service Improvement Act.
The railroads claim it to be re-regulation. That is a cute
bumper sticker phrase. It is not.
It is using the existing authority to give shippers the
opportunity of access to the Board under reasonable terms
without excessive cost to file a rate case, without excessive
time to pursue it--even if you won, you have already been out
of pocket a huge amount of money--and to use the residual
authority to give shippers a fair hearing.
The Board is not meeting its responsibilities. This
legislation will ensure that the Board does a better job of
carrying out its rate relief responsibility.
Now there is also another historical context that I think
we want to keep in mind as we begin this hearing. The railroads
received enormous grants of land in the 19th Century in the
public interest to develop rail service for the public use,
convenience and necessity. They received some 278,000 square
miles of public land. That is about 8 percent of the total land
surface of the United States.
That map shows those land grants. They were given the
surface timber rights, surface mineral rights, subsurface
mineral rights, coal, oil in some cases, gas in others that
they could use for themselves or to sell off, worth billions of
dollars.
I think it is important to keep this public interest in
mind and the claim that the public still has on the railroads
to serve the broad public interest.
Mr. Mica. Well, thank you and good morning and I would like
to welcome all of our Members and witnesses to this hearing
this morning on rail competition.
I have got a couple of comments, some that may agree with
some of the comments of the Chairman and others that disagree,
but this is indeed an important topic.
Thirty years ago, our Nation's rail system was literally
falling apart. Twenty-five percent of the system had to be
operated at reduced speeds due to dangerous track conditions
and more rail lines were bankrupt than in any time since the
Great Depression of the 1930s. In fact, the Nixon
Administration seriously considered at that time nationalizing
both freight and passenger rail service. In fact, they did
nationalize passenger service by creating a company called
Amtrak, and we all know what a success that has been.
Now today, the United States freight rails are one of the
least subsidized and best operated and actually profitable
systems in the world. Most countries still have very high
subsidies of their freight rail systems.
I know none of us would like to revert to an all government
or some type of Soviet style system and total re-regulation. I
know that is not the question before us.
Luckily, however, instead of nationalizing our freights,
Congress decided back then to attack the root of the problem
which was, in fact, excessive government regulation that
brought down our rail service. We passed the Staggers Act which
allowed the railroads to respond to the free market and rebuild
the system without big government subsidies in any of the
operations that we see today. In fact, it is almost zero
according to the information that my staff has compiled.
Our Nation's rail system is now running well, but our
regulatory system still creeps along like it is in the 1890s.
Over the last decade, STB regulations have denied small
shippers an effective forum to challenge excessive rates, and
that is one of the reasons for this hearing here today. STB
proceedings have been so complex that, in fact, it has cost
millions in legal and consulting fees just to bring a case, and
the Chair cited some of the problems that we have in trying to
get some resolution.
The STB, as we know, has recently taken some steps to
simplify their proceedings and also to reduce litigation
expenses. We have also seen a speedup of some of the processes,
but there are still difficulties for some people to access what
they consider fair rates. We do need to have some time to see
how the STB new protocols work and give them the opportunity to
succeed.
I am looking forward to learning more about the new STB
procedures that we will hear about at this hearing.
While I recognize the difficulty of some captive shippers
and some current flaws in our system and the inability to
sometimes seek the lower costs that some feel are fair, we must
be very careful in looking at what options we adopt. Also, I
think this will be a good opportunity to look at reasonable
options to improve the system that has already seen some
improvement with STB's recent action.
As you can tell, I am clearly against re-regulation of our
national railroads. Government rail regulation has proven,
without a doubt, not to work. Unfortunately, too, some
government re-regulation can reverse some of the great
successes our rail system has enjoyed. Actually, I think it can
also result in further reducing shippers' choices and also the
long term effect may be increasing rates again in the longer
period of time for everyone including those we are trying to
help.
I come from a business background. You look at investment
in any type of industry or business activity, but railroads
have one of the highest capital costs and lowest returns of
equity, and that is not my finding. We have got a little chart
here we will pass out: Capital Intensive, Low Returns. So that
does create some difficulties for them.
But if we want a strong efficient, financially viable rail
system, I believe the answers lie in working with the rail
industry to create some additional competition, that Congress
adopt a tax policy that insists that we encourage better
planning and that we also support even more private investment
in an industry that is very capital intensive.
I look forward to a full airing of the issues today, and I
thank you for bringing this important subject before the
Committee.
Mr. Oberstar. I appreciate the gentleman's comments and his
perspective and well thought out remarks, and that is why we
have hearings. We have differences of view, but they are
matters that we can resolve in the course of the hearing.
Other Members of the Committee will have opening comments,
but in respect for Senator Dorgan's schedule, I know he is
already overdue back in the other body. We welcome you back to
this house where you started your service in Congress. Thank
you for coming, making the long journey across the way from the
other body.
Thank you for coming. You are the sponsor of comparable
legislation in the Senate, and we thank you very much, Senator.
Senator Dorgan. Mr. Chairman, thank you very much. I will
be mercifully brief this morning and then depart.
As I was sitting here, I was thinking about the description
of a journalist who couldn't distinguish between a bicycle
accident and the end of civilization. I was thinking in some
ways the politics of this railroad issue are that. Some would
suggest there is just a minor flaw or two here, and other would
suggest that this is a catastrophe. It is, of course, somewhere
in between.
Let me describe to you where that somewhere is for me.
Because I assume there are people in this room, representing
the railroads, let me be quick to say that I like railroads. I
like trains, in fact. I grew up in a town of 300 people. When
you grow up in a very small town, we actually named the train
that came through our town, the Galloping Goose.
Every time the Galloping Goose would come in twice a week,
we would go down where they stopped and pick up the cream cans,
and I just thought it was wonderful to have a train coming
through our town, bringing new people. So I have a long history
with trains including the Galloping Goose.
I understand that railroads are very important to this
Country. This Country runs in a significant way on rails, and
we want a railroad industry that works.
I also believe at the same time that we are off-track in
some significant ways. This is an industry, I think, that would
be better with competition and is, in some ways, devastating to
captive shippers without competition. We have ended up now a
couple of decades past the 4R Act with the worst of all
possible worlds: near monopolies and no regulation.
I know there are people here that have an epileptic seizure
when you mention regulation. Well, the fact is you either have
competition, which is the way the marketplace is supposed to
work in a free market, or you must have some sort of sensible
regulatory authority, one or the other.
The fact is, as the Chairman indicated, we have fewer and
fewer Class I railroads. We have now four Class I railroads
that handle 90 percent of the freight rail in this Country.
Rural areas, especially, are frequently left with one carrier
who decides here is what I want to charge you. If you don't
like it, tough luck.
Well, that is defined as a lack of competition. It is
clogging the arteries of the free marketplace, and it begs for
the Congress to take a look at it and decide to do something to
deal with it.
Now I think the lack of competition not only affects and
victimizes, in many cases, rural areas. It affects the
profitability of other industries. It also affects the
pocketbooks of the consumers in this Country.
It seems to me that we have created something called the
Surface Transportation Board which was I guess the divine
interpretation of what Congress felt should succeed the
Interstate Commerce Commission. Again, without offending anyone
I hope, I think the Surface Transportation Board has been
largely an irrelevant Federal agency. It consistently does
nothing and yet seems unaffected, perhaps even satisfied, by
this paralysis.
I think it is safe to say there are a whole lot of
Americans that are not satisfied by the paralysis of an agency
that is supposed to be looking after the public interest. I
have often said the STB is dead from the neck up, but I
probably should stop saying that because there is clearly life
there but precious little effective capability to intervene on
behalf of consumers and on behalf of competition.
Let me just mention to you quickly the experience of a
resident of Dickinson, North Dakota, a farmer from Dickinson,
North Dakota. He said to me, you know, I am told by the
railroad that I must truck my grain 200 miles east to put on
the railroad in order to move it west, and they move it right
back through my farmyard and, in fact, with a terminal in the
community next to me, but I have to truck my trail 200 miles
east to get the lowest rate from this carrier.
When he said, I asked the carrier why that was the case,
the carrier said it is strategic planning. I said, I am from a
small town. I don't understand strategy or strategic, but I
understand what doesn't make any sense, and there is simply no
common sense in this.
When you talk to people, it is hard to describe to them why
all of this happens the way it happens.
I will give you one more example, and I don't know whether
these numbers are accurate. They used to be.
You put a carload of wheat on the railroad in Bismarck,
North Dakota, move it to Minneapolis, and you will pay about
$2,300. The same carload of wheat from Minneapolis to Chicago,
about the same distance, you will pay $1,000.
Why would we be more than double charged for the same
distance? Because on one segment, there is one carrier; on the
other segment, there is competition, huge difference. Where
there is no competition, the consumers are victimized in my
judgment.
Let me just mention briefly that I have passed a piece of
legislation in our Appropriations Committee that changes the
cost of challenging the railroads with respect to rates. As I
think the Chairman mentioned, it is currently now $178,000 for
a significant shipper to challenge the rates. I have passed an
amendment through the Senate Appropriations Committee, reducing
to $350. That is the cost of filing an action in Federal Court
were you able to do such action.
Finally, the fuel surcharge issue gives, I think, evidence
of substantial concentration in this industry. There is, by
most evidence, about a $6 billion overcharge for fuel on the
fuel surcharges. The regulatory authorities have said stop it,
you can't do it anymore, but the railroads are allowed to keep
the overcharge. I don't understand that, but that is where we
are.
I want a healthy railroad system. I want competition,
either competition or regulation, but I want a healthy rail
system that serves this Country, and I also want fairness to
this Country's consumers. Regrettably, at this point, we don't
have fairness to consumers.
So my hope is that we will be able to advance legislation
that you have offered here in the House of Representatives, and
in the Senate we have introduced and are moving similar
legislation. I serve on the Commerce Committee. We are going to
be holding a hearing on our legislation and hopefully moving
it.
We just passed legislation out of the Judiciary Committee,
introduced by Senator Kohl on which I was a co-sponsor, dealing
with the antitrust issues. That bill will allow the review of
railroad mergers and acquisitions to remain with the STB, but
it allows the Department of Justice to enjoin the merger in
Federal District Court if the merger as approved would violate
the Nation's antitrust laws.
So I think we are working on a number of issues that I
think are very, very important. Some very significant groups of
industries and businesses representing the shippers have formed
to say, look, all we want is we want fair opportunity. I think
they want, as well, a healthy railroad industry, but they fair
rates, and that is a reasonable thing to do.
Finally, I would just say at the end of a long period of
time, let us decide what we are going to do. We are either
going to have some competition or regulation. You can't have
near monopolies and no regulation. If we change those near
monopolies to a competitive environment, this Country would be
a whole lot better off. If not, we should have a series or
steps of regulation that affect and safeguard the consumers in
this Country.
Mr. Chairman, thank you for allowing me to come by. You
have a long hearing today, and you have a lot of Members, but I
did want to tell you that we are working on similar issues in
the Senate and wish you well in the House as you address these
important issues.
Mr. Oberstar. Thank you very much for your statement, your
comments. I look forward to meeting you in conference on this
legislation.
Your example of the farmer who trucked his grain east to
have it shipped west, I have a similar situation in the
southern end of my Congressional district, the Peterson Mill.
Because the railroad doesn't serve it any longer, because they
wouldn't meet an ever increasing threshold for quantity to be
shipped, now grain is hauled by truck.
I stood there with Jerry Peterson as the trucker handed the
farmer 86 cents. That was all that was left from his shipload
of grain trucked 100 miles with no back haul. That is not
acceptable. That is not service in the public interest.
You have given us good fodder for the future.
Does anyone have a question of Senator Dorgan?
It looks like you scared them all off.
[Laughter.]
Mr. Oberstar. Thank you.
Now we will go to Members. Mr. Rahall.
Mr. Rahall. Thank you, Mr. Chairman for recognition and for
holding today's hearing.
This particular gentleman from West Virginia has a long and
intimate relationship with the Staggers Rail Act of 1980,
primarily over the issue of captive shipper protections. The
Staggers Rail Act, of course, being named after the senior
Member of Congress from West Virginia from the House side at
that time, Harley Staggers from West Virginia, then Chairman of
the Interstate and Foreign Commerce Committee.
There are many in this room, pushing this legislation, who
were pushing similar efforts back in those days. I guess they
sent their kids to college on this issue back then, and now it
is time to send their grandkids to college. We are revisiting
this issue again.
The publication of Traffic World once described me in my
sophomore as coming ``within a coal lump's distance of
derailing the Staggers Rail Act.''
Indeed, when the legislation that was to become the
Staggers Rail Act was being considered by the House back in
1980, our former colleague, Bob Eckhardt, of Texas, and myself
teamed up with a captive shipper amendment. It was so
successful--indeed, it passed the Floor--that the bill's Floor
manager at that time, Jim Florio from what was then called the
Committee on Interstate and Foreign Commerce, pulled the bill
from further consideration.
Mr. Chairman, I recall returning to my office on that
fateful day and seeing a railroad lobbyist in the front foyer,
literally crying like a baby. I guess those were the days when
lobbyists were perhaps more in touch with their inner selves
and allowed to display emotion.
Subsequently, however--and it was not due to the tears of
the railroad lobbyist, I might add--a compromise was reached on
the captive shipper issue in the form of the Staggers-Rahall-
Lee-Loeffler Amendment which paved the way, as you will recall,
Mr. Chairman, for the House passage and ultimately the
enactment of the Staggers Rail Act.
It was no secret that post-enactment, I became extremely
dissatisfied with the way the Interstate Commerce Commission
was implementing the law. Every railroad, regardless of
profitability, was deemed revenue-inadequate. I recall a time
when Norfolk Southern was the darling of Wall Street, but the
ICC described N-S in those days as being revenue-inadequate.
The means for devising revenue to variable cost was
corrupted. Determining what was market dominance was a joke.
According to the ICC, there was always, always product and
geographic competition. For example, a coal-fired power plant
conceivably could convert to oil--yeah, right--and a power
plant in Colorado could conceivably ship coal in from West
Virginia instead of its neighboring Wyoming.
During the decade of the eighties and into the nineties, I
was the flagbearer for re-regulating the railroads, offering
bill after bill, amendment after amendment, only to be
stonewalled by the now Energy and Commerce Committee, much to
the consternation of my truly captive shippers of coal.
Let me say one thing, Mr. Chairman. By golly, if the
Republicans did one thing right when they ran this place, it
was transferring the jurisdiction over the railroads from the
Energy and Commerce Committee to this Committee under your
leadership, if they did anything right.
[Laughter.]
Mr. Rahall. As we got well into the 1990s, however,
something happened. My shippers stopped complaining.
Appalachian coal producers and those in West Virginia stopped
being the subject of railroad predatory pricing practices, and
with that reality I became a recovering re-regulator.
I will conclude with this note: Cross subsidization in the
parlance of the railroad regulatory scheme known as
differential pricing is part and parcel of maintaining a
healthy and viable railroad network which is in the national
interest.
I accepted that concept back in the 1980s and throughout my
efforts to re-regulate the railroads. I always accepted that
concept. During the course of this hearing, I hope the issues
involving the matter are clarified.
Again, Mr. Chairman, I thank you for having the hearing. I
yield back.
Mr. Oberstar. Thank you for those eye-opening remarks. We
appreciate your candor.
The gentleman from Pennsylvania, Mr. Shuster.
Mr. Shuster. I thank the Chairman.
I would wish that we go in order of seniority, so I would
defer to Mr. Baker to go first before me in the order of
seniority.
But, first, I want to just mention that Ranking Member Mica
had to depart to go to a ceremony to honor some American
soldiers that served in Iraq.
With that, if it is all right with the Chairman, go to Mr.
Baker first.
Mr. Oberstar. The gentleman from Louisiana, Mr. Baker.
Mr. Baker. I thank the Chairman and the Ranking Member for
the courtesy. I certainly want to express appreciation to the
Chairman for his keen interest in the subject and his
sponsorship of the legislation which addresses many of the
concerns which I am sure will be discussed in the course of the
hearing today.
For the purpose of balancing the record and those who have
been critical of the legislation pending, I would quickly
establish that I am not a pro-regulatory kind of guy. I am very
much a free market, believe in competition, let the best guy
with the best product sell it at whatever price he deems
appropriate and let consumers make educated choices.
I am not a proponent of re-regulation the rails. I am for
expressing the best market operation that will enable more
competitors to provide more consumer choices to those who,
under the current system, have none today.
I do believe that competition, where competition exists in
the rail industry, has in fact brought rates down, but were you
to establish two charts, one of the rates paid by captive
shippers over the last decade and hold it up next to a chart of
rates paid by those in the competitive marketplace, you would
find two very divergent trend lines.
Captive shippers are what the name says. They are captive.
They have no market choice.
Whether one be Republican or Democrat, the consequences of
being a captive shipper in a marketplace which is
internationally competitive has real world consequences. Where
you can no longer manufacture your product, put it into a rail
car and sell it in the United States, people will vote by
moving their plants elsewhere.
It was, at best, a modest inconvenience in years past, but
with fuel charges where they are today, which legitimizes the
rate underlying assessment for the rails, it is becoming a
factor in making decisional locations which are of extreme
importance to all of us who want to keep as many people
employed in this Country as is practical.
I don't know that there will be arguments made that the
current STB methodology is fair in its handling of these
difficult decisions, but regardless of whether one takes that
position or not, it is certainly justifiable to conduct a
thorough examination of how it works and the consequences of
the pricing regulatory methodologies. It is important to note
that in the current environment that the STB is now in a period
of receipt of public comment over making a significant change
in the way they determine cost of capital.
For Members who haven't spent a lot of time looking at
capital assessment formulas--I know that people were probably
doing that over the weekend, getting ready for this hearing--
this is a significant component in establishing the rate base.
The capital asset model methodology is now subject to
public comment which will close in mid-October by the STB to
move away from the discounted cash flow methodology. The manner
in which that new structure is constructed will have
considerable affect on rate-making as we go forward.
Having said that, there are many other elements of this
problem that the legislation the Chairman has offered, that are
outside simply the cost of capital, the bottleneck problem.
Yes, you have the right to move freight and to get quotes from
competitive rail carriers, but if you happen to hit a
bottleneck where there is only one provider of service through
that short distance between where you are located and where
your ultimate goal is located, you have a significant problem.
You can't even force a rate quote unless you meet certain
contractual obligations to that provider.
We do not have an open market in rail service in the United
States. It is a significant economic concern, but then there is
one other important matter. As consolidation has occurred in
the financial services sector, consolidation has occurred in
the rail industry. Despite that consolidation and the
efficiencies that has brought about, fewer miles to maintain
with fewer competitors, the rails are in fact undervalued in
the market, and that is the reason why significant hedge fund
operators have begun to target acquisition of stock in rails
because of that analyst view that these are assets that the
market has ignored and underpriced.
That has led the rails to reacquire their own stock, which
I do not have a problem with, but it has diverted their
investment practices from putting it into infrastructure and
hoping to forestay the takeover of those in the hedge fund
world who see them as undervalued assets.
All of that is to point out that smart people on Wall
Street say the rails are in extraordinarily good condition. In
fact, they are in such good financial condition, it is the kind
of industry those smart investors are wanting to get a
significant piece of.
The rail industry is sound. We need them to continue to
succeed, but there are significant sectors of our economy who
are now subject to predatory pricing. The remedy is not to re-
regulate the industry but merely to carefully evaluate the
process the STB engages in and ensuring, as a regulated
utility, that the rates they charge are in fact representative
of a competitive marketplace.
I sincerely appreciate, Mr. Chairman, the courtesies
extended and your leadership in this matter. I yield back.
Mr. Oberstar. I thank the gentleman for his very thoughtful
and well conceived statement and elaboration of the intricacies
of this legislation and of the rail marketplace.
The gentlewoman from California, Mrs. Tauscher.
Mrs. Tauscher. Thank you, Mr. Chairman.
I find myself as somebody who spent 14 years on Wall Street
as a very small child looking at the arcane valuations for this
industry and scratching my head and, at the same time,
understanding that in California, where 60 percent of the goods
that are shipped into ports of Oakland and Long Beach and L.A.
are moved out of state, how desperately we need a robust rail
network and infrastructure that is have to have, not a nice to
have.
I think that what is very clear to me is that, on the one
hand, we need to assure that private investment has some
predictability in their ability to look forward for their rates
of return and to look at regulatory scheme that isn't obsessing
so much that it prevents them from getting that rate of return
and feeling as if they can do the kinds of investments that are
going to keep their own people happy. But, at the same time,
when you have a squeeze on the credit capital and capital
formation, you find yourself without the ability to make these
investments.
So I think we need to look at lot more at public-private
partnerships, innovative financing, the kinds of things that
are a little out of the box and different from the traditional
kinds of financing that we have looked at in the past.
In the Bay Area, we tax ourselves. Almost every one of our
counties, we tax ourselves for highway infrastructure.
Many of the companies that are in the Bay Area are
companies that are high tech companies, just in time
inventories. They are not only companies that have short rail
but long rail for finished products. They need things delivered
on time, so they can put them together and then ship them out.
A lot of our products, obviously, some of our sourcing
comes from overseas too. So we need things to come out of the
ports quickly.
This is a very, very vexing, complicated issue. I think I
stand very similar to Mr. Baker in a place where I want to
solve for the issues of having competitive railroad companies
that are good investments for Americans, not only for their
investment portfolios but for good jobs so that we can have a
21st Century railroad network. At the same time, I want to help
the people that are captive shippers who find themselves unable
to be competitive because they don't have enough competition to
get better pricing to ship.
That is the sweet spot, I think, that we have to find. We
have to find some place in there. I am not for more regulation,
but I certainly am for competition, and I am certainly for
helping the people that need to ship goods to markets that are
not only my constituents but the consumers of my district too.
So I look forward to this hearing. Once again, I think that
it is always better to amplify these things and have as much as
we possibly can in front of us.
I appreciate all of the folks that are going to be
testifying in the hearing today, and I look forward to working
with everybody to find that place, that tension between too
much regulation but the ability at the same time to help the
captive shippers so that we can have the kind of robust market
that we need.
I yield back.
Mr. Oberstar. I thank the gentlewoman for her statement,
and that is the purpose of this legislation, to try to find
that proper balance.
The gentleman from Wisconsin, Mr. Petri.
Mr. Petri. Thank you very much, Mr. Chairman, for holding
this important hearing.
I also want, if I could, I don't know if I need unanimous
consent or not but to submit for the record a statement by the
Wisconsin Agri Service Association on the subject of this
hearing.
Mr. Oberstar. Without objection, so ordered.
Mr. Petri. Thank you.
I would also like to make just a point of thanking the
chairman of the Surface Transportation Board who is on the
first panel, Mr. Nottingham, for taking a day and a half of his
time to come out to Wisconsin to meet with and listen to the
representatives of a number of shipping associations in our
region and a number of concerned people affected by the things
that have happened in the transportation industry.
I would like to also associate myself with the spirit of
the remarks of our colleagues, Mrs. Tauscher and Mr. Baker.
No one is really or few are looking for a return to strict
top-down regulation of the rail industry, but everyone is
looking for an improvement in service in the rail industry so
that actually it can be used more to do higher value added
shipments and provide service to the just in time economy in
addition to bulk shipments.
Everyone is looking for fairness in pricing. Of course,
fairness is always in the eye of the beholder, and there are a
number of different ways in looking at costs and how this
should be assessed.
I appreciate Chairman Nottingham making a number of changes
in the procedures of the Surface Transportation Board so as to
enable smaller and medium size shippers to not only have
theoretical but to have practical access to the Board's
processes, so that they can have their situations looked at in
a timely and cost-effective fashion and either get some
understanding of the process or some satisfaction and sense
that they actually are being dealt with fairly.
I would urge that if there is anything that can be done to
help rail management through I don't know if it is a regulatory
process or what kind of process to improve the quality of
service and of information in the rail industry, so that people
are not confronted with the trains stopping on Friday at 5:00
and not knowing that the scheduled shipment is not going to
come. No one even being told for two or three days.
You just can't operate a modern economy without a lot of
unnecessary costs if a modern ability to communicate is not
shared by the employees and the railroad industry. This is an
area where we really could get good efficiency or improvement
in our whole situation.
Beyond that, I appreciate your looking at the investment in
the rail industry to make sure that, in fact, everyone involved
is trying to make sure we have first-rate rail industry, and I
thank you, Mr. Chairman.
Mr. Oberstar. I thank the gentleman.
Ms. Brown, the Chair of our Rail Subcommittee, the
gentlewoman from Florida.
Ms. Brown. Thank you, Mr. Chairman, and I want to thank you
for your leadership as Chair of this Committee. I think this
Committee has been one of the most productive Committees in
Congress, and I am proud to serve as Chair of the Rail.
Today's hearing is important because we always need to
consider ways to improve competition in every business sector,
and there is room for some improvement in the railroad
business. But I am concerned that many of the rail sector fixes
being discussed by shippers would be devastating to the
industry, and there are lots of shippers that support the
railroads.
In fact, I have over 2,000 letters from shippers who oppose
any new regulations for the rail industry, and I ask unanimous
consent to have them submitted to the record.
Mr. Oberstar. Without objection, so ordered.
Ms. Brown. Our Nation's railroads were in the red for a
very long time and have only recently started to make a
reasonable profit and should be given time in the black before
making major changes to their business model.
I feel that the loss or railroad earnings that is expected
with the decline in rates will have many negative consequences.
Less money being spent on capacity will slow growth and put
many more trucks on the highways, compounding safety issues and
harming the environment. We will soon have an additional 3,000
trucks a day leaving the Jacksonville port.
If we can't find a rail solution, which I am working on, it
will jeopardize our entire community. Decline in profits will
also prevent the industry from hiring more employees for good
paying jobs that we know can't be shipped overseas.
I also believe that the Surface Transportation Board which,
for a long time was not operating to full capacity and in fact
had only member, is starting to address many of the issues that
are priorities for shippers. In talking with the members and
visiting with the Board, I know that they are planning to
continue to look at ways to protect shippers from unreasonable
rates.
Mr. Chairman, at the proper time, this is the first time
they have had an opportunity to testify before the Congress.
The fact that so many of us have mentioned them, I am hoping
that we can give them additional time when it is time for them
to address the Committee.
A significant increase in capacity would also help
eliminate many of the problems facing customers and the
industry, and we all need to work together to find ways to
provide serious reasons for capacity expansion.
I look forward to hearing from today's panelists on ways
that we can improve competition in a way that is fair to both
shippers and the railroad and ensures a sound national rail
transportation system.
As I yield back my time, let me say in visiting with many
countries all over the world, our railroad freight is the envy
of many of those countries, and I want us to keep that in mind.
Thank you and I yield back the balance of my time.
Mr. Oberstar. Mr. Shuster.
Mr. Shuster. Thank you, Mr. Chairman, and thank you for
holding this hearing this morning.
I want to welcome everybody to this hearing on rail
competition. I want to point out to my colleagues, for those
that have been deeply immersed in rail issues in the past, this
is an extremely complicated issue. I would encourage and I am
glad to see many of you here, asking questions and
understanding.
You are going to hear terms that were Latin to me before I
started to talk to many of the people in the industry, things
like revenue to variable cost, differential pricing, the
revenue shortfall allocation method. When you start talking
about these things, as I said, at first they don't make sense.
Quite frankly, I have an MBA and still to me they are difficult
to comprehend and understand in this complicated system that we
have in this Country for railroad freight.
I believe in free markets. When we look at the rail
industry, I would love to have a rail industry that was based
on free markets, but because of the way it has developed over
the years, it is very difficult for us to have a completely
free market system because to build railroads, new lines in
this Country, having two and three railroads serve different
areas, it is just not possible because of the difficulty in
getting the rights to build them, getting through the
government regulatory or our legal system. For us to move to
what would be a completely free market system, as I said, just
isn't in the realm of possibility.
What we have, we have to work with, and we have to make it
work as best we can. Having competition, having government
regulation work efficiently, and hopefully we can decrease
that, but today our railroad system is the most efficient in
the world.
As the Chairwoman mentioned in her travels around the
Country, it is the envy of the world. Our shipping rates are
lower than any other developed country. Our freight railroads
require virtually zero Federal Government capital, no taxpayer
dollars. Our railroads are so efficient that we can move a ton
of freight 423 miles on a single gallon of fuel.
But it hasn't always been like this. The Chairman, as he
always does, gave us a very comprehensive history lesson of
what has happened since the Staggers Act. As I said, as always,
very comprehensive and informative, but I think we need to also
focus on what happened before the Staggers Act.
On June 21st, 1970, one of the largest companies in the
world, the Penn Central Railroad went bankrupt. At the time, it
was the largest bankruptcy in the history of the world. Penn
Central which was headquartered in my home State of
Pennsylvania had thousands of employees. They owned over 4,000
locomotives, 200,000 freight cars and 5,000 passengers car. The
Penn Central bankruptcy was, to say the least, a financial
disaster.
It also dragged down other companies: The Buckeye Pipeline
had 7,000 miles of pipeline; the Arvida Corporation which was
developing 35,000 acres in Florida; the Great Southwest
Corporation which had realty ventures across the Nation and, of
course, had numerous property holdings in New York City.
Congress and the Nixon Administration spent years, thinking
about ways to save the rail system. They drafted legislation to
come up with loan programs, but in the end it didn't go
forward.
Meanwhile, things continued to get worse. In 1972, five
Class I railroads went bankrupt. In 1976, 25 percent of our
Nation's tracks were under slow orders. In my home State,
conditions became so bad that parked rail cars literally fell
off the tracks.
In the 1960s, in Blair County, Pennsylvania, we had 2,500
folks that worked for Penn Central, later to become Conrail.
Today or after the Penn Central bankruptcy and with Conrail
being absorbed into a few other railroads, we have about 1,000
people employed there today.
The root cause of the Penn Central bankruptcy and the
decline of the entire rail industry was government regulation.
The government set the shipping rates. The railroads could not
respond to the free market and could not recover their costs.
Every day, the railroads lost more business to trucking
companies.
Finally, in 1980, Congress deregulated railroads or I
should say partially deregulated the railroads under the
Staggers Act, and since then the turnaround has been amazing.
It has been done mostly with private capital. I think that is
extremely important for us all to realize. By and large,
private capital is what turned this around, not Federal funds,
not a huge injection from our Federal Government.
Our rail system now earns a profit. It is gaining business,
and I believe it has a very bright future, but government
regulation is still a problem.
We have to admit that over the years the STB has acted like
we were still in the steam engine era. Challenging a rate has
cost shippers millions of dollars and, in fact, because it was
so expensive, they didn't challenge some of the rates. The STB
regulations effectively denied smaller shippers any relief from
excess rail rates or poor service.
Thankfully, the STB has finally taken steps to bring the
Agency into the 21st Century. The new STB small rate case
procedures will shorten and simplify the regulatory process,
and we will be watching very closely as that moves down the
road. Also proposed is a new way of calculating the cost of
capital which has promised to make rates more reasonable. We
need to give these procedures a year or so to see how they
work.
I am against re-regulating the railroads because the
private sector always can run things better than the
government, and I think we have seen that since 1980. A great
concern of mine is that re-regulation would return us to the
days of low or no profits of our railroads, and no profits mean
no private investment.
Our railroads are already one of the Nation's most capital
intensive industries. In 2006, they spent $10.6 billion on
capital projects and right of way maintenance.
The Chairman also pointed out that revenues are going up.
His statement was that it is a paltry reinvestment, but as a
number, if you look at other industries, it is probably a
smaller number. What you have to look at is the percentage. I
think the percentage is the real measure.
The rail reinvests 18 percent of every revenue dollar while
other industries such as chemical and auto manufacturers are
between 5 and 7 percent. So a significant amount of their
revenue is going back into their system.
If we move towards re-regulation, I am very concerned that
these private investments in railroads will disappear, and then
we have to ask ourselves some really big questions. If that
private money disappears, are we willing to ask the government
to replace the spending with taxpayer dollars?
If we pass re-regulation now, in five or ten years, if we
don't have the kind of private investment in our railroads, are
we going to be looking to the government for a bailout plan as
we did in the seventies?
These are huge questions, and this hearing is extremely
important to talk about these issues and understand that what
we do today is going to affect us down the road.
While I am against re-regulation, I want to make it clear
that I am not against fixing a broken STB. If the STB's new
procedures and guidelines don't work, we need to revisit this
issue and we need to work to make sure that the system, the
STB, works to the betterment of all our industries in this
Country.
I want to thank the Chair for indulging me to go over my
time. Thank you.
Mr. Oberstar. I thank the gentleman for his comments. The
history pre-Staggers Act to which I devoted just a few
sentences, the gentleman elaborated on and is quite right. The
purpose of this hearing is to explore all these issues and to
fix the Surface Board so that we don't have calls for re-
regulation.
The Chair will acknowledge the gentleman from Florida, Mr.
Mica, our Ranking Member, for a personal statement.
Mr. Mica. Thank you. First of all, I want to apologize for
leaving right after my opening statement, but I had the
opportunity. I wanted to meet a young man from my district,
also from Ms. Brown's district. He is from DeLand, Florida.
Every once in a while, you get to meet heroes, and we have
got one of them with us today. He is from our district, Ms.
Brown's and mine. His name is Jonathan Chad McCoy. He is a
Staff Sergeant.
Listen to this. He is one of 12 Outstanding Airmen of the
Year. Staff Sergeant McCoy was named the Air Force Special
Operations Command Non-Commissioned Officer of the Year,
awarded the Bronze Star Medal with valor and a second Bronze
Star Medal.
Sergeant McCoy demonstrated courage and leadership during
Operations Enduring Freedom and Iraqi Freedom. The point man in
a high risk compound assault, he fiercely fought hand to hand,
defeating an enemy guard and enabling the capture of a high
value target. Twice, he deliberately risked his life, braving
deadly small arms fire to treat and evacuate severely injured
teammates.
Part of a sniper element, Sergeant McCoy established
climbing routes over a 15 foot compound wall, allowing access
of the assault force. Commanding a 17 man joint combat search
and rescue team, he led a daring complex mission to recover the
crew of a downed helicopter submerged in an Iraqi lake.
These are just a few of his accomplishments.
Sergeant McCoy and his wife are here. I would like him to
stand and be recognized.
[Applause.]
Mr. Mica. I yield back. Thank you, Mr. Chairman.
Mr. Oberstar. I join our Ranking Member and congratulate
our guest for his great service.
The bell has rung, but we have plenty of time before the
vote. There is a motion to suspend rules.
We will go to Mr. Salazar of Colorado.
Mr. Salazar. I want to thank you, Mr. Chairman.
I ask unanimous consent to submit my full statement for the
record and a couple of letters that I have from the Colorado
Department of Agriculture.
Mr. Oberstar. Without objection, so ordered.
Mr. Salazar. I want to thank you, Mr. Chairman, once again.
I understand the issue. It is a very difficult issue. I
hear from both sides. I hear from railroad, and I hear from my
grain shippers.
The Colorado Governor, last month, issued an executive
order in order to be able to comply with the transportation
needs of Eastern Colorado where we had over 10 million bushels
of wheat on the ground.
In looking at the chart that the Chairman put up on the
board, I see the profitability doesn't seem to coincide with
the added needed infrastructure, I think, that the railroads or
the money they are putting into infrastructure.
I am very pleased to have the Surface Transportation Board
here. The Senator actually made pretty strong remarks against
the STB. I really am looking forward to hearing your comments.
I am a strong proponent of free enterprise. I know it has
been only in the last few years that the rail industry has
become profitable again, and I would really also like to see
those profits put back into the infrastructure. As the Senator
said, rural areas are especially affected by the lack of rail
capacity.
With that, Mr. Chairman, I look forward to today's hearing
and I want to thank you.
Mr. Oberstar. I thank the gentleman.
Members on the Republican side, Mr. Diaz-Balart, welcome.
Mr. Diaz-Balart. Thank you very much, Mr. Chairman. Again,
thank you for your leadership.
Really, a comment, Mr. Chairman: Obviously, the need for
further investment in our rail infrastructure has become a
front page, front burner issue in recent months particularly.
Part of this discussion is, obviously, who should make the
investment in the rail infrastructure. Should it be the private
sector as it is now or should it be the taxpayer?
The rail industry is the one industry in our Country that
does not rely on public investment--Mr. Shuster already talked
about that--but rather builds, operates and maintains its own
infrastructure, very expensive infrastructure, spending as much
as 18 percent of its revenues on capital expenditures. That is
a serious investment.
This is an industry that again, until very recently, was
not making a profit, and yet they are reinvesting up to 18
percent into infrastructure. But it is obviously clear that we
need more investment in the rail infrastructure--we talked
about that--to meet the growing needs of our economy.
So I guess this is the question: Where should we look for
that investment?
If we are going to continue to rely primarily on the
private sector, on their investment to increase our Nation's
freight rail capacity, it is obviously essential--this is not
rocket science--that we provide further incentives for
businesses to make these huge investments.
I am assuming that any bill that deals with rail would go
through the Subcommittee that I sit on, chaired by the
Honorable Congresswoman Corrine Brown from Florida, who is
extremely knowledgeable on rail issues.
Mr. Chairman, I look forward to working on this very, very
important, and I thank you for your allowing me this time.
Mr. Oberstar. Thank you for your comments, your
observations.
Before I go to Mr. Kagen, I do want to acknowledge and
introduce to the Committee, our newest Member, Laura Richardson
of California, the 37th District. She holds the seat that was
once held by our colleague on the Committee and recently
deceased, Juanita Millender-McDonald, who was a great asset to
this Committee and delightful Member of Congress, a treasured
friend.
We welcome Congresswoman Richardson who had the opportunity
at one point to work for Juanita Millender-McDonald, considers
her a mentor. She served in the California State assembly and
was appointed Assistant Speaker Pro Tem.
We welcome you to the Committee.
Now, Mr. Kagen.
Mr. Kagen. Thank you, Chairman Oberstar and Ranking Member
Mica for holding this critically important hearing today.
I would also like to thank the Members of the panels that
will be appearing here, and I look forward to hearing and
reading your testimonies. It is my sincere hope that the
witnesses will enlighten us, everyone on the Committee, about
how important it is to deliver rail services at prices everyone
can afford to pay.
I have two particular concerns that I will share with you
now. The first concern is the impact that the high rates for
delivering products by freight and the declining standards of
service are having on doing business in Wisconsin.
I am also very concerned about how the railroads are using
what appears to be their monopoly power to effectively tell
customers what will be shipped, when it will be shipped and
what rates with very little negotiation being offered.
These are not just my concerns. These are concerns of
companies that do business in Wisconsin, companies like
Georgia-Pacific, Green Bay Area Chamber of Commerce, Green Bay
Packaging, Neenah Foundry, Procter and Gamble, Sadoff Metals,
Stora Enso, the Wisconsin Farm Bureau, Wisconsin Farm Union,
Wisconsin Manufacturers and Commerce, Wisconsin Paper Council
and also the Wolf River Lumber Company which I will address
now.
In the State of Wisconsin, we received a grant in our
district in the City of New London, $350,000 to extend a rail
line to the City of New London. In my several conversations and
meetings with our mayor there, Mayor Wayne Toltzman, he
indicates that the Wolf River line is imperiled, that they only
were able to ship three carloads of their product to Chicago
because the excessive cost in the last year. That occurred
after Canadian National took ownership of the line.
Sturm Foods, which is located 12 miles west of New London
in the City of Manawa, is currently finishing a major expansion
on their facility, and they are going to add 200 very important
jobs to our region. A lack of adequate rail service would
significantly impede this progress that they are making.
Additionally, the Bemis Corporation has two plants, two
manufacturing plants in my area. New London is this home. They
have had 250 carloads of plastic resin delivered to them last
year, and the State of Wisconsin granted $200,000 to add a spur
to their plants several years ago. They are interested in
enhancing their transport of their product over the rail
service.
As such, I share the concern of Mayor Toltzman and other
manufacturers in Wisconsin, that the railroad may soon request
in the very near future that this line, this single access
line, may be abandoned due to continuing losses of revenue on
the part of the railroad company.
This would be a crippling blow to the economy of my
district and the people living in the region, not just the
agriculture industry but our manufacturing base as well. It
would displace another industry and many, many jobs.
Unfortunately, many areas of Wisconsin are held captive by a
single larger railroad that will provide limited services.
I believe in improving our railroad competition. I believe
railroads are necessarily not just for improving the health of
our local economy, the State and our Nation but also to help
combat global warming and reduce traffic by trucking.
To this end, I am very proud to be a co-sponsor of H.R.
1650, the Railroad Antitrust Enforcement Act which was
introduced by my colleague, Congresswoman Tammy Baldwin, and
H.R. 2125, the Railroad Service and Improvement Act which is
sponsored by our Chairman.
I look forward to working with my colleagues on this
Committee and across party lines to guarantee that these
measures are advanced and succeed, and I look forward to
listening and reading your testimonies.
I yield back my time. Thank you.
Mr. Oberstar. I thank the gentleman for his comments.
We have a series of four votes pending on the House Floor.
We will recess until the conclusion of those votes. I suspect
that will take the better part of an hour.
I say to the witnesses, be refreshed, be ready for a long
sitting.
[Recess.]
Mr. Oberstar. The Committee on Transportation and
Infrastructure will resume its sitting.
There are still some two Members of our first panel who are
missing, but they will arrive in due course, I am quite sure.
Mr. Nottingham, the Chair of the Surface Transportation
Board, thank you for being with us. We look forward to your
testimony. You may present it in full or summarize it as you
wish. The entire statement will be included in the record.
TESTIMONY OF CHARLES D. NOTTINGHAM, CHAIRMAN, SURFACE
TRANSPORTATION BOARD; W. DOUGLAS BUTTREY, VICE CHAIRMAN,
SURFACE TRANSPORTATION BOARD; FRANCIS P. MULVEY, BOARD MEMBER,
SURFACE TRANSPORTATION BOARD; KENNETH C. CLAYTON, ASSOCIATE
ADMINISTRATOR, AGRICULTURAL MARKETING SCIENCE, U.S. DEPARTMENT
OF AGRICULTURE; JAYETTA Z. HECKER, DIRECTOR, PHYSICAL
INFRASTRUCTURE ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Nottingham. Good afternoon, Chairman Oberstar, Ranking
Member Mica and Members of the Committee. My name is Charles
Nottingham, and I am Chairman of the Surface Transportation
Board. This is my first appearance before this Committee since
becoming Chairman of the STB in August, 2006, and I appreciate
the opportunity to appear before you today to address the
important issues of rail competition and service, the
relationship between railroads and shippers, the state of the
railroad industry and the role of the STB in resolving disputes
between railroads and their customers.
I will briefly summarize my written testimony.
Ensuring effective competition is one of the central goals
of the Nation's rail transportation policy. Yet, throughout
railroad history, there have been some rail customers who do
not enjoy the full benefits of a competitive market.
What do we mean when we refer to captive traffic that falls
under the jurisdiction of the STB's regulation of rates?
Our most recent data indicates over 71 percent of the
Nation's rail traffic moves at rates deemed by statute to have
been a product of a competitive market.
Of the remaining 29 percent, some is traffic that is
exempted from regulation because the particular commodities and
services involved, such as intermodal traffic, have competitive
transportation alternatives available, and some is traffic that
moves under private contract and is therefore outside the
Board's jurisdiction.
Less than 10 percent of the Nation's freight rail traffic
is recognized as captive and eligible for STB rate regulation.
As we focus on this important but relatively small portion of
rail traffic at the STB, we strive to assess and anticipate how
our regulatory and policy decisions might impact the broader
universe of rail customers as well as national transportation
policies such as the development of an efficient system of
interstate commerce.
As is the case in many markets, some freight rail customers
pay higher rates than others. Under the principle of
differential pricing, railroads with high sunk costs and with
fierce competition for most traffic are expected to charge
more, even substantially more from their captive traffic than
from their competitive traffic if they are to achieve enough
revenues to cover their costs and invest in necessary
facilities. Although differential pricing is practiced in many
other industries as well, it is understandable that shippers on
the captive end of this differential pricing scale would not be
satisfied with the status quo.
As policymakers examine alternatives to this longstanding
differential pricing system, several important questions merit
consideration including: If the railroads' ability to
differentially price their services based on the market forces
of supply and demand is significantly constrained, who will
make up the difference?
Who will end up paying more?
How will the railroads in this highly capital intensive
industry maintain their existing infrastructure, not to mention
attract additional private investment needed to expand their
capacity to meet projected dramatic growth and future demand
for access to the rail network?
The Board recently commissioned the economic consulting
firm, Christensen Associates, to conduct an extensive study on
the extent of competition in the railroad industry. The study
will also assess various policy issues including current and
near future capacity constraints in the industry, how
competition and regulation impact capacity investment, how
capacity constraints impact competition and how competition,
capacity constraints and other factors affect the quality of
service provided by railroads.
The study team will have the full benefit of all of the
STB's powers to inquire into and gather information from the
freight rail industry. I look forward to briefing this
Committee on the results of this study next year.
Examples of ways that the STB promotes competition can be
found in our major merger rules in cases where we impose
competition-protecting conditions such as in previous merger
cases, in other cases where the board has prevented larger
carriers from interfering with the ability of smaller carrier
to meet their obligation to provide service, in our management
of the Federal Environmental Review Process required for the
proposed construction of new rail lines and in decisions
authorizing the construction of those new rail lines.
With regard to the financial condition of the Nation's rail
system, I can report that our data reinforce what others will
report today. The rail industry has gradually recovered from
its pre-Staggers Act state of ruin, and the industry is
currently in good health.
The Board is currently awaiting final comments on an
important rulemaking that proposes to change a key measure of
the financial health of the railroads, the annual cost of
capital determination. That calculation ties into our entire
annual determination of the railroads' revenue adequacy and is
also a significant factor in rate cases and other Board
proceedings.
I believe that the Board must continue to examine all of
our procedures and to constantly explore improvements, no
matter how controversial the issue may be to stakeholders.
The Board's procedures for handling rate disputes are
particularly important, and I will now turn to that issue.
Under our statute, the Board must ensure that rates are
reasonable while, at the same time, not preclude railroads from
obtaining adequate revenues, but balancing these potentially
conflicting objectives is not an easy task. Rates that are too
high can harm rail-dependent businesses while rates that are
too low will deprive railroads of revenues sufficient to pay
for the infrastructure investments needed.
The Board has recently improved its procedures for handling
rate cases. In the fall of 2006, we made some significant
changes in how we apply the stand-alone cost test and calculate
the amount of relief in large rate cases in an effort to reduce
litigation costs, create incentives for private settlement of
disputes and shorten the time to litigate large rate cases.
Also, in the small rate case resolution process, our new
rules allow smaller cases to proceed on one of two tracks.
First, freight rail customers may seek up to $1 million in
relief, using a revised version of the three benchmark test
with more predictability built into it. Under a second
approach, customers can seek up to $5 million in relief.
Another important issue that the Board is keeping a close
eye on relates to fuel surcharges imposed by railroads. In
January of this year, we issued a decision declaring it an
industry-wide unlawful practice for carriers to use a fuel
surcharge to recover more than the increased fuel cost
attributable to the particular movement to which the surcharge
supplied.
Mr. Chairman, I will wrap up. I realize the time is
running.
This action ended an industry practice of charging fuel
surcharges as a percentage of the shipper's base rate
regardless of the actual fuel cost associated with the
transportation of the shipper's goods. The Board will
aggressively use the authority granted to us by statute to stop
unreasonable practices, thereby protecting shippers and
advancing the public interest.
It is worth noting that the Board investigated and acted on
the fuel surcharge problem on our own initiative and without
any formal complaint. This Board has not received a single
formal complaint about fuel surcharges. We will remain vigilant
on this issue and will expeditiously review any formal
complaints related to fuel surcharges or other unreasonable
practices or unreasonable rates.
Moreover, in addition to our process for adjudicating
formal disputes, we also have an effective informal dispute
resolution process which we encourage stakeholders to take
advantage of.
In sum, the STB is actively engaged in the pursuit of
enhanced competition, the implementation of accessible and
affordable dispute resolution procedures and continuous process
improvement aimed at making our Agency a more effective
economic regulator of the freight rail industry.
Our initiation of a major national study of the state of
rail competition and related policy alternatives along with our
recently improved dispute resolution procedures, our pending
rule on how the railroads' cost of capital should be measured
and the other proactive steps outlined in my full statement all
combine to demonstrate this Board's strong commitment to
providing robust regulatory oversight of the freight rail
industry.
I look forward to the opportunity today to discuss our
record of reform in more detail and to returning to this
Committee in the future to report on our progress.
Thank you.
Mr. Oberstar. Thank you, Mr. Nottingham. We look forward to
those initiatives and the report on your several reviews that
were enumerated in your testimony. You can rest assured, we
will invite you back.
Vice Chairman of the STB, Mr. Buttrey.
Mr. Buttrey. Good afternoon, Mr. Chairman. Thank you very
much for this opportunity to be here today before the
Committee. I commend you for holding the hearing.
I think to have a conversation about this issue from time
to time is probably very useful to everybody, the Congress and
the shippers and railroads and other people who are interested
in the railroad industry, including investors and potential
investors and shareholders.
I do not have a separate statement. In the interest of
time, I will dispense with any kind of formal statement. I have
associated myself with the remarks of the Chairman who is the
normal spokesman for the Agency, and I will be very happy to
answer any questions you might have.
Thank you very much.
Mr. Oberstar. Thank you. We will certainly have questions
for you.
Mr. Mulvey, welcome back to the Committee where you once
served and served with great distinction, preceded by a very
long and distinguished career with the General Accounting
Office, now the Government Accountability Office, and the
Inspector General's Office and our own Committee on
Transportation and Infrastructure.
We welcome you back here. It is good to have you on the
other side of the table now.
Mr. Mulvey. It feels a little different being on the other
side of the table, but thank you very much for having me.
Good afternoon, Chairman Oberstar, Chairwoman Brown,
Ranking Member Shuster and other Members of the Committee.
In 1995, the Surface Transportation Board was created to
balance the needs of shippers, who must rely on railroads for
reasonable rates, with the need for the railroads to earn
adequate revenues.
The overall questions we face today are: How well has the
Board met its charge to balance those interests and what is the
state of competition in the transportation of those bulk
commodities that are largely captive to the railroads?
I don't think I am understating it when I say that many
people believe the Board could do more to promote competition,
ensure reasonable rates for captive shippers and improve the
reliability and quality of railroad services.
For a long time following the Stagger's Act, the ICC and
the Board, after 1995, focused on ensuring that the railroads
recovered their financial health. It has been well documented,
the state of the industry before Staggers in the seventies and
eighties.
In October, 2005, the STB held a hearing on the state of
the railroad industry, and that testimony revealed there was
nearly unanimity that the industry had largely recovered from
the financial malaise that plagued it during the sixties and
seventies.
As Chairman Nottingham has mentioned, the Board has taken a
number of initiatives at balancing the scales between railroads
and shippers, and there are a few areas where I believe some
real progress has been made.
It was already mentioned, fuel surcharges and that the
railroads were charging the shippers fuel surcharges based upon
a percentage of their rates. This meant that the captive
shippers who already paid high rates had to pay higher fuel
surcharges as well despite the fact that their shipments did
not necessarily engender greater fuel use. The Board found this
to be an unfair practice and directed the railroads to compute
surcharges to more closely reflect actual fuel consumption.
Secondly, with regard to access to rate relief, the cost to
bring a case before the Board and using its stand-alone cost
guidelines can cost a shipper several million dollars. It is
not the filing cost. It is the cost of the lawyers and the cost
of all the consultants necessary for the shipper to undertake a
stand-alone cost procedure. Shippers, whose traffic does not
warrant the expense of bringing cases under the stand-alone
cost guidelines, believe they have no access at all to the
Board for relief.
For 20 years, the Board and its predecessor, the ICC,
studied how to make the Board's procedures available to small
shippers. Finally, the Board has now acted to address both the
cost and timeliness issues for the large rate cases as well as
finally establishing new procedures for small rate cases.
In October, 2006, the STB issued new large rate case
guidelines that were designed to reduce the cost of bringing a
case significantly and to speed up the process. Just last
month, we issued new procedures. In fact, earlier this month,
we issued for bringing small rate cases before the Board.
These rules give the shipper the option of selecting how
they want to proceed to challenge their rates but, as the
Chairman pointed out, they do set limits on recovery depending
upon which process is selected.
I am committed, Mr. Chairman, to monitoring the results of
these initiatives to make sure they work as intended and to
make changes if necessary.
Thirdly, the cost of capital, the Board has consistently
found that the Nation's railroads are revenue-inadequate
despite the fact that Wall Street has found the railroads to be
profitable. The reason for this disparity lies in the way the
Board has taken to determine the cost of capital, especially
equity capital.
The discounted cash flow approach that was used has long
lost favor with the financial community. The Board staff
reviewed the academic literature. We held hearings on this
issue, and we have come up with the decision, proposed
rulemaking rather, to adopt the capital assets pricing model.
If this change is adopted, it could reconcile the Board's
estimation of revenue adequacy of the railroads with that which
prevails on Wall Street.
However, there are still a number of areas that still
concern me, first of all, paper barriers. Paper barriers are
contract provisions that arise when a Class I railroad sells or
leases some of its light density track to a short line. Often,
the short line must agree to interchange traffic only with the
Class I carrier that leased or sold them the track.
Interchanging with any other railroad would result in severe
penalties. The restrictions generally continue on into
perpetuity.
I have found this practice to be anti-competitive and I
have dissented from the majority of the Board in several cases
where paper barriers were contained in sales or lease
agreements.
With respect to the status of competition, I believe the
GAO study on railroad competition was a very worthwhile and
well done effort. However, I do feel that it inaccurately
claimed that the extent of captivity was declining. Even if
relative captivity--which is what I think they mean--the
percentage of traffic that is captive has declined, there is no
evidence that competitive options have increased for captive
shippers.
The GAO also suggested the Board undertake a study of
competition in railroad industry, and the Board has recently,
as the Chairman pointed out, contracted with a private firm to
have such a study done.
I personally regret that those resources were not committed
to a study that was authorized in the SAFETEA-LU legislation
which would have focused on how well the Board has handled its
mission rather than the larger issue of competition in the
industry. How well has the Board acted on its mission, and that
study would have been undertaken by the Transportation Research
Board of the National Academy of Sciences.
I have a few suggestions for improving rail service and
competition. If we as a Nation are serious about shifting
traffic off our highways and onto rail, we need to devote more
resources into improving our rail infrastructure. The railroads
favor an investment tax credit for this purpose, but I
personally believe the amounts that will be needed would be far
greater than what a tax credit could realistically produce.
I believe that a railroad trust fund of the type
recommended by former Representative and T&I Committee Member,
Bill Lipinski, could generate the monies. A railroad trust fund
could generate the monies needed to upgrade and build our
Nation's rail transportation infrastructure.
Also the Board currently exercises regulatory oversight
only over about a third of the traffic. Much traffic is exempt
from our regulations because it is presumed to be competitive
with other modes of transportation. But as times change, so
does the competitive landscape. I believe we need to examine
the class exemptions periodically to determine whether those
premised on the availability of intermodal competition remain
warranted in the 21st Century.
Finally, the Board may begin an investigation of a
potential violation of the rail portions of its statute only on
complaint. If the Congress wants the Board to continue to
actively seek out and stop problems, it might be appropriate to
revise this language by striking the word ``only'' and adding
``on its own initiative.''
I thank you for the opportunity to testify today. I look
forward to answering any questions you may have.
Mr. Oberstar. Thank you very much, very crisp and
thoughtful set forth testimony. I appreciate that.
From the U.S. Department of Agriculture, Associate
Administrator in the Agricultural Marketing Service, Mr.
Kenneth C. Clayton, welcome and thank you very much for being
with us.
Mr. Clayton. Thank you, Mr. Chairman, and Members of the
Committee, thank you too for the opportunity to appear before
you today to share USDA's views regarding rail competition and
service.
As Associate Administrator of USDA's Agricultural Marketing
Service, I oversee a variety of domestic and international
marketing programs for American food and fiber including our
work on agricultural transportation issues.
There are many reasons for the productive and competitive
strength that the U.S. agricultural sector has enjoyed over the
year. Three factors, I think, stand out as particularly
important.
First, we have been blessed with an extremely productive
natural resource endowment. Second, we have an impressive
record of technological development in the production,
harvesting and processing of agricultural products. Third, we
have benefitted from a transportation system that has
facilitated the efficient and effective movement of
agricultural products from farms to destinations both at home
and abroad.
Clearly, rail is a critical component of our overall
transportation system. In fact, the agricultural industry in
the United States is highly dependent on a viable rail network,
particularly producers in more remote locations with long
distance transportation needs.
USDA shares the view of many that the deregulation of the
rail industry under the Staggers Act and related legislation
was of positive effect in preserving the industry. At the same
time, in regaining their economic standing, the railroads have
taken steps that have reduced service levels and shifted costs
to the users of their service.
Consequently, as important as rail rate measures may be for
judging the exercise of market power, changes in rail rate are
not fully reflective of either the costs associated with
movement of products from origin to destination or the impact
on the international competitive position of industries like
agriculture.
USDA has heard and continues to hear from many in the
agricultural industry regarding their concerns about rail
competition and service. For many grain producers, rail is
virtually the only cost-effective bulk shipping alternative,
and agricultural shippers continue to express concern about
decreased rail to rail competition, increased rail rates, poor
rail service, rail capacity constraints and the fair allocation
of rail capacity.
Compounding this concern, of course, is the fact that
agricultural producers have little influence over prices that
they receive for their commodities and typically must absorb
cost increases. Thus, increasing transportation costs translate
into lower producer incomes which can have important
implications for the production of food and fiber as well as
the vitality of rural and regional economies.
One of the key assumptions underlining deregulation of the
rail industry in 1980 was that there would be sufficient
competition, at least in most markets, to promote reasonable
rates and discourage the abandonment of branch rail lines vital
to agricultural producers. However, rail competition has
declined over the past quarter century due to rail
consolidation.
The implications of this decline are somewhat difficult to
assess, given incomplete and inconsistent data. To provide a
clearer perspective on the state of competition in the rail
industry, USDA notes and supports the GAO recommendation and
subsequent STB action to take onboard a study of national rail
competitiveness.
Let me conclude, Mr. Chairman, by thanking you and the
Committee for holding this hearing today. An efficient and
effective transportation system is clearly important to the
U.S. economy, particularly for our agricultural producers and
shippers.
Thank you.
Mr. Oberstar. Thank you very much. Your complete statement
will, of course, be included in the record. Your summary was
very well presented.
Mr. Clayton. Thank you.
Mr. Oberstar. Ms. JayEtta Hecker has been in front of our
Committee on many occasions and on many subjects, and we
greatly appreciate your learned analysis of the transportation
issues. Thank you for being with us again.
Ms. Hecker. Thank you, Mr. Chairman. I am very pleased to
be here to speak before you and the other Members of the
Committee.
The topic is, of course, as we heard, an extremely
important one, and we are pleased that we can speak on the
basis of two very recent and very comprehensive reports. We
were most recently asked to look at 25 year retrospective on
the impact of the Staggers Act and what kind of overall effects
there have been. So I am basing a lot of my comments on that
report as well as a more recent update looking at an additional
year of rate changes.
The three topics I will cover are, first, the major changes
in place post-Staggers with this very broad perspective;
second, I will talk about the protections, the balance that was
always envisioned for the protection of captive shippers; and
then, finally, I will briefly address the actions that the
Board has taken.
I will try to go through those very quickly because I think
you are familiar with our report, and I am sure questions will
be more useful as an exchange.
If you look at page two, I do have a slide. It is
unequivocal and all have recognized that the financial
condition of the railroads was grievous before 1980. It was
very important to our overall economy and our performance, and
in many senses Staggers had a remarkably positive impact over a
long period of time of allowing the industry to return to
financial health through a number of the measures that are
indicated there.
The next slide, and again many people recognize this. One
of the extraordinary things with the nature of the competition,
the kind of measures that the railroads took, rates went down,
went down for over 15 years, almost steadily every year, every
commodity. We developed an index to try to make that a pure
basket of goods, so it didn't deal with changes in geography or
changes in the product, but rates consistently went down and
went down even more if you look at it, as this chart does,
relative to GDP price index.
It has gone up. There is no doubt, and I am sure you have
heard this from many shippers, that rates have started to turn
up slowly in 2000 and rather significantly, the most
significant single year rise between 2004 and 2005. But in real
terms, railroad rates, the cost to move shipments by rail are
still below 1985 levels.
I might say that one of the views maybe that this
deregulation and the competition and the measures the railroads
were enabled to undertake to streamline their operations wasn't
just in their performance, but these increases in the
efficiency of the industry have actually been a macroeconomic
factor in overall economic growth.
The improvements in the performance of the logistics
sector, several Members talked about the fact that we are one
of the countries that is the cheapest in the world to move
goods, and that was part of the benefits, not just the rate
issue but the kind of efficiencies that we saw the railroads
undertake and put in place with the flexibilities they were
given.
Slide four, again as you know, while all rates went down,
they went down at different rates for different commodities,
and this slide basically showed that the least decline has been
in the grain area. The next one that started moving up more
recently is miscellaneous mixed shipments which is largely
containers. The bottom one where the rates were the lowest,
coal has ticked up. You have got a number of increases
occurring differentially in different commodities.
Now some of our analysis is you can't immediately infer
this to monopoly power or whatever. There are lots of real
factors in the industry. As many of us are well aware, capacity
constraints have really become a reality in railroads, and that
obviously turns into rate increases.
The railroads made new investments, as was discussed. They
expanded employment. They changed some of the mix to focus on
different traffic, and there was a demand growth that was
consistently occurring. So there are lot of reasons, and you
can't necessarily have a nefarious concern when you see the
rates ticking up. It is a difference in a competitive and
economic environment.
Now, in looking at the overall picture, we also wanted to
try to look behind the rates because you, Mr. Chairman, noted
there had been a transfer of a number of costs to shippers. One
of the areas we looked at, because we thought it would be
useful to understand a rarely examined factor, is this
miscellaneous revenue.
As you see from this chart, slide five, miscellaneous
revenue has skyrocketed. It has gone up 10-fold in just 5
years. Now a big factor in there is fuel surcharges, but one of
the concerns that we had that related to one of our
recommendations is this very inconsistent reporting by
railroads. This isn't good data, and so we recommended that the
Board take some action to improve the consistency of data and
the transparency of this information.
On slide six, I quickly go into some of the information on
captive shippers. You yourself have noted that while slide six
uses this proxy for an indicator of captivity and uses the
statutory definition which just opens access to rate relief.
With this global factor, the share, whether it is in tonnage in
revenue of potentially captive shippers, has gone down.
But then to try to probe a little further, we looked in a
more isolated subset at traffic which was traveling at
substantially above the statutory threshold, and that was a
ratio of 300 percent of revenue to variable cost. We found that
has been rather significantly increasing.
And, we looked at it on a geographic basis. You see
differences in where those very high revenue to variable cost
ratios occur, and it is in States like Montana, New Mexico,
North Dakota and West Virginia.
The key question that we had was, I think as several people
said, we really did not believe that effective relief had been
provided for shippers. In the 25 year history, in the balancing
that was envisioned and while there was always the concern
about the revenue adequacy, there really was very little
effective relief provided.
It is true that the Board very recently has started to take
some actions. You have heard those, and I don't need to recount
them. I will say that some of them, particularly this change in
the calculation of revenue adequacy, could be very substantial.
Really, it is too soon to tell what kind of impact some of
these changes would have.
What we did do in our report was recognize that in our view
there were a number of alternatives that have been proposed and
that I know you and others are aware of that could promote
competition. That is the really the interest in these
alternatives. They are not giving up on the marketplace
working. They are trying to efficiently intervene to promote
competition.
Although each of these have been argued as opportunities to
do that, each has real costs and benefits. We did not feel we
had the information to recommend any particular action by the
Board. That combined with our concern with the absence of
relief and the continued presence of some captive shippers led
us to recommend that the Board more comprehensively, using its
full authority, evaluate this situation.
The conclusions then on slide 10, the Staggers Act has had
far-ranging benefits not only to railroads but to our economy
and to consumers and to many shippers. We did conclude that
widespread changes in the relationship between the railroads
and their customers are not needed.
We did observe and do believe that there are pockets of
potentially captive shippers that remain and that more
examination is needed to determine whether some of those rates
were really justified by market conditions or reflected in
abuse of market power. As I said, that led to our
recommendation for a more comprehensive study by the Board and
some specific improvements in data as well.
That concludes my statement, and I apologize for going
over.
Mr. Oberstar. Oh, no, not at all. It is an excellent
statement. We expect that thorough review from the GAO. Thank
you very much.
Chairman Nottingham, you referred in your statement that
earlier this month the Board issued new guidelines for small
and medium size rate disputes. Shippers are saying, well, the
new guidelines, they welcome some action. There hasn't been
much over many years on this issue.
But they do not reflect any of their recommendations. What
recommendations were made that you think were useful and what
recommendations were not?
Mr. Nottingham. Thank you, Mr. Chairman, and I will say
that issue stands out.
That rulemaking where we endeavored to, with a lot of
effort and time put into this by the career staff at the STB
and hearings and a period of years of observing a system that
really did not work, endeavored to put together a set of new
procedures so that the Board can be more accessible to smaller
and medium size rate cases, and that is what the recent
rulemaking was all about.
I will say that a number of shipper groups have already
asked and we have given them some more time to decide whether
they want to begin the process of appealing that decision. I
believe some of the railroads have already filed some legal
paperwork indicating intent to appeal. Somehow we have managed
to attract concerns on all sides of the issue.
But we think we have, by setting up two new channels to
bring smaller cases, putting the shipper in the driver's seat--
the shipper can choose which one to take advantage of--and
allowing a shipper to receive up to $5 million in damages under
what we call the mid-level review or up to $1 million under the
most simplified, we have greatly improved a situation that
really wasn't working.
We had no cases resolved under the preexisting special
procedures for simplified rates, and that was over a period of
many years. Clearly, that is not because there are no shippers
who believe they have cases. It was because of some problems
with the dispute resolution process that existed.
It will be interesting to see as time goes by whether
shippers take advantage of this opportunity, how it works. We
do have one significant shipper. I believe it is the DuPont
Company that has already filed several complaints, and I know
they are before you later today. I will let them speak for
themselves.
Time and experience will tell whether we are on the right
track, but I do believe we have made a big improvement.
Mr. Oberstar. It is an ongoing process is what you are
saying.
Mr. Nottingham. Yes, sir. Until we see a case play out,
that is when we really know whether it works.
Mr. Oberstar. You made reference to hedge funds and other
large investors that are in your words, showing extraordinary
interest in railroads. I met with the AAR Board earlier this
year. That issue was brought up. Two major railroads, two of
the Class Is have suddenly found themselves the target of
investment.
I would have concerns about hedge funds investing
significant amounts at least up to the ability to have control
over the railroad from the experience that I have had with a
paper company in my Congressional district, the one that
acquired Boise Cascade.
Then what this hedge funds do with some regularity is spin
off assets, cut down workforce, trim the company, increase its
apparent profitability and then sell it off at that higher
value. But, in this case, they sold off the woodlands that have
been for 100 years in company ownership.
If you are in the pulp and paper business, your asset is
wood. It is trees. You sell your asset off, then you deprive
the company of the ability to counterbalance forces in the
marketplace. Those hedge fund guys didn't care a hoot about
that.
Now I can envision hedge fund operators coming in.
Everybody welcomes increased capital investment, but when that
capital investment comes in and strips the asset, its
viability, then you have a serious situation. In this case, the
serious situation is the future ability of the railroad to
serve the public.
Have you at the Board given thought to reviewing the
potential effects of hedge fund investments in the railroads?
Mr. Nottingham. We have, Mr. Chairman. It is an issue and
an area we are looking at closely, and it represents really an
example, probably one of the most glaring examples of how fast
changing this industry and this marketplace really is.
We are living through incredibly dynamic times where after
many years of disinterest by large segments of the financial
community in the rail sector as an attractive place to invest
money, we are seeing huge amounts of resources pouring into the
railroads from large investors.
Some of them go by the general name, hedge fund. Some of
them don't. Some of them are prominent individuals like Warren
Buffett who have earned a lot of respect generally over the
years for being a wise investor, and others are people like
Bill Gates, and people who just seem to have significant
capital and they want to invest it.
We want to be sure, though, that anyone who does get
involved in the railroad business, and we will ensure that
anyone who does get involved in the business of railroading,
has the public interest at heart and is not interested in just
cashing out tomorrow and leaving shippers stranded.
Mr. Oberstar. I think that is a very good perspective, but
the question that I would like the Board to be asking is: Do
these investors bring an increase in capital to the railroad
for investment in its capital needs or are they just playing
around with the shares, taking hold and getting a controlling
interest in the railroad to further their own pocket, not to
advance the cause of the railroad itself? That is what I would
like the Board to be asking.
Mr. Mulvey, your statement, I think, makes a profound
observation. The Staggers Act greatly reduced economic
regulation of the industry. It didn't take away economic
regulation.
Mr. Mulvey. It did not. It greatly reduced by allowing,
especially allowing the railroads to enter into contracts with
shippers. Historically, before Staggers, all railroad rates
were the tariff. With contracts, the deal was the rich could be
more competitive. They could make agreements, et cetera, and
the railroads could become more competitive.
But you know you always have to be careful what you wish
for because some of those contracts the railroads entered into
back in the days when they were still financially in distress,
were very, very lucrative for the shippers. They went on 10,
15, 20 years and, over time, these contracts became a real
burden on the railroads.
Now, of course, as these contracts are coming due, the
railroads turning that around and raising rates 50, 60, 100
percent in order to make up for the years when these contracts
were bad.
Staggers also allowed the railroads to abandon lines much
more easily. It sped up the abandonment process. So they were
able to reduce their costs, reduce the size of their
infrastructure, continue to cut back on the labor force until
they are a fraction of what they were 30 years ago.
There is good with that--they are more efficient--but there
is bad with that because today we have a railroad system that
is not well positioned to meet the demands in the future.
Mr. Oberstar. Thank you.
The conclusion we could draw from that is attempts for the
Board to exercise its inherent authority, more authority or
encourage the Board to vigorously use its authority is not re-
regulation. Regulation remains but at a diminished level,
right?
Mr. Mulvey. Yes, and there is a new question as to what the
Board's authority is. We have a general counsel. They have
views of what our authority is. We don't want to overstep the
authority that Congress has given us, but there have been some
cases where we have been questioned as to whether or not we had
the authority to do what we did.
Fuel surcharges, for example. A lot of people believe the
Board did the right thing in fuel surcharges, that the
railroads action was unreasonable, but some of the railroads'
claim that the Board had overstepped its authority in the fuel
surcharges. We didn't have authority to do what we did.
I recommend that the Board be able to initiate
investigations on its own. Right now, we don't have the
authority to initiate investigations on our own. We have to
wait until a complaint is filed. That, again, would strengthen
us.
Mr. Oberstar. I definitely think that is an initiative we
should take and should be an outcome of this legislation.
Mr. Nottingham, do you disagree with subsequent witnesses
who will come before the Committee, who have already many times
said, filing fees are excessive, cost of proceedings are
excessive, time consumed in proceeding on a rate case is
excessive?
Do you disagree with that?
Mr. Nottingham. I sympathize with those concerns because
looking back at the record over the years, in some cases over a
hundred years, in some cases more recently, what I have had to
do as a new chairman, 13 months into my appointment here, I
will say I have been distressed to see that it has gotten to
this point.
But I am pleased to say that my colleagues, well before I
came onto the board, initiated a number of very sweeping,
important reforms that I was pleased to join with, and almost
all of our major actions have been unanimous and bipartisan in
those reform areas. We are changing fast for a regulatory
agency, and I just ask the Committee's forgiveness to judge us
on what this Board, these three members and the staff, actually
accomplish and have accomplished.
Mr. Oberstar. You are moving in the right direction. I
appreciate that.
I would say that on those issues, even railroads that
disagree with other provisions of my legislation will say those
filing fees are too high, the barriers are unreasonable, the
time consumed is unreasonable. That ought to be adjusted.
I have one question that I want to ask, and then we will go
on with other Members.
Is there or could there be a rate that is so high a percent
of variable cost that it would be appropriate for the Surface
Transportation Board to use its powers to declare the rate
unreasonable?
Mr. Nottingham. Mr. Chairman, I assume you would like me to
take a first stab at that. Yes, sir, we get that question a
lot. It seems pretty straightforward that if a rate got to a
certain level percentage-wise that common sense would say the
Board would de facto deem it to be unreasonable.
I will say, though, we don't do that, and I have to be
careful how I speak here because we do expect this kind of
issues to come before us in an active litigation context.
How high is too high is the question we often get. What is
the big magic number? Should it be 300 percent, 189, 450, 600?
Really, it is important that we look at the facts and
circumstances of each case and apply the modeling and the tests
that have withstood Federal Court approval to make sure there
is not a width of randomness or arbitrariness in the way we do
that because these are multimillion dollar disputes and we
prefer not to see them dragged out in appeals unnecessarily.
Mr. Oberstar. Thank you.
Mr. Mulvey, do you have a comment on that?
Mr. Mulvey. I would agree that we have a process, and any
particular number would be somewhat arbitrary. So we do have a
process, and we do look at the stand-alone costs. If the rate
is higher than that which would be necessary for the railroad
to continue operations and reinvest in itself for its
investment, then that rate is too high and we will roll the
rate back.
In some of the cases that came before us, some of the large
rate cases, it is true that I don't think we have ever given a
shipper a complete win, but we have rolled back the rate
somewhat in some of these cases. But I am not sure there is a
magic number.
Mr. Oberstar. Ms. Hecker, have you had GAO consider that
issue?
Ms. Hecker. No, we haven't explicitly, but I have to say in
our discussion of the problem with the revenue to variable cost
ratio, we point out and discuss explicitly in the report that
the nature of a ratio can have perverse effects. You can have a
rate decrease where the entire decrease is passed on to
individual shippers, but the ratio will change and the revenue
to variable cost ratio will go up.
So it is very dangerous to not have it be case specific.
If I may, I wanted to add a point, though, about authority
which I think is a very important one and clearly a legislative
issue. In our report, we basically observed and we put a lot of
our lawyers on this issue, that we though the Board's authority
did reach to its ability to inquire into and report on railroad
practices and to study and to monitor and take action to
promote and enhance competition.
One of the statutory objectives of Staggers and the
formation of the STB is about ensuring effective competition.
While some of the measures that are being explored are the
subject of prior rulemakings where they decided one thing,
there is the potential where circumstances have changed where
we think the Board has the authority.
In early discussions of our recommendation, there were some
issues about whether the Board could even undertake the study
that we were recommending. At the end of the day, they finally
agreed that they could do that.
We would be happy to have our lawyers talk with you at the
same time with the STB lawyers. We think there is a lot of
authority there, and it has been a question of the balance that
we really haven't seen in the past.
Mr. Oberstar. Thank you. That would be very useful. We
could do that.
Ranking Member Shuster.
Mr. Shuster. Thank you.
Chairman Nottingham talked a lot about the new procedures
and processes he just put in place to handle rate cases. It is
my understanding you attempted the Board attempted to do that
in the 1990s and it failed.
What is in these new procedures that is going to assure us
that they will succeed and can you talk about a few of the
changes you have made to those procedures that you think are
going to come out with positive world changes where we will see
success as we move forward?
Mr. Nottingham. Yes, sir, I would be happy to. Under our
recently adopted rulemaking in the area of creating a
simplified process for small and medium size rate case dispute
resolution, what is of, I think, most interest to me and should
be of high interest to shippers is that for a $150 filing fee,
which is a pretty routine filing fee you see in a lot of
courts, you can bring a $1 million complaint. You can choose to
do that or you can choose to pay a higher fee and bring a $5
million complaint.
Under the three benchmark approach, which is the smaller $1
million and less approach, we basically set up almost a small
claims court type model, that you don't have to bring in four
law firms and five consulting firms and spend millions of
dollars arguing over 99 different assumptions.
We make a lot of the assumptions for you. It is laid out in
the rule. You just bring your case, and within eight months you
are guaranteed an answer.
Now that is assuming that the parties don't prevail upon
the STB to extend which we hope that we don't see requests for
extension, but that is the reality that you may want to ask
future panels about today because you will hear a lot about the
lengthiness of procedures. Very often, it is borne out by the
repeated requests for extensions by both shippers and
railroads.
Mr. Shuster. What is the time frame?
Mr. Nottingham. So it is eight months gets you a decision
under that. Under the slightly more complicated $5 million
simplified stand-alone cost procedure, you get an answer in 17
months, which for complex civil litigation with $5 million on
the table is a great improvement. We are going to do our best
to stick to that.
Today is probably a good opportunity with the audience we
have through the internet and here for me to say that we will
be looking at extensions very tightly and we will not, if I
have anything to do with it, just be granting them as quickly
as we may have in past years.
Mr. Shuster. As the Chairman said, I am sure we will be
calling you back because we will be watching, watching closely.
I think it is extremely important that we do streamline it and
get it down to where small shippers can get in there and get
relief if it is necessary.
The fuel surcharge situation, I have seen some
advertisements on the Hill. You commented it on it briefly, and
I think Dr. Mulvey, you had commented on it. Can you explain
that again to me?
Did shippers come in and file cases or not? I am not quite
sure I understood that.
Mr. Nottingham. A lot of this transpired before I was on
the job, but I am told by our staff, who searched the records
very carefully, that we have to this date never received, this
Board in the last period of years when this issue has been
playing out, a formal complaint from any shipper about a
specific case of fuel surcharge, misconduct or abuse or
unreasonableness.
Now the Board, under its own authority--and I would be
happy to let my colleagues address this because they should get
the credit for this--actually heard about this issue because we
are constantly meeting with shippers and stakeholders and
others, that this was a problem. Under our own authority, we
actually initiated a sweeping industry-wide investigation and
hearings and put an end to the practice.
It was an outrageous practice, personally, if I might say,
where railroads were actually asking shippers to pay something
called a fuel surcharge that had no relation necessarily to the
use of fuel by those shippers. How it lasted and played out as
long as it did is a mystery to me, but I am pleased to be part
of the group that actually put an end to it. If we ever do see
a formal case brought to us, we will take a good look at it.
Mr. Shuster. Dr. Mulvey.
Mr. Mulvey. The advertisement that you saw in Roll Call, I
guess the other day, didn't refer to the STB's finding that the
fuel surcharge was an unreasonable practice which we did find.
It complained that we didn't make it retroactive, that the
shippers had already paid all these fuel surcharges and they
did a calculation which said that the railroads made $6.4
billion above and beyond what was justified with these fuel
surcharges.
Now you will be hearing from the railroads later, and they
very much dispute the calculation. Clearly, to the extent that
these fuel surcharges were unreasonable, while they were in
place they were unjust, but we decided to go forward with the
fuel surcharges rather than try to rebate those that were
already paid. But that is what the complaint in that ad was.
Mr. Shuster. Dr. Mulvey, I wonder if you could shed some
light on the 180 percent of revenue to variable cost rates. We
keep hearing that talked about, and it is my understanding it
wasn't developed very scientifically as many things on Capitol
Hill aren't developed very scientifically. So can you talk a
little bit about that?
I think a lot of people and I don't know about other
Members of the Committee's understanding of it, but I think it
is important as to where did the 180 percent, what does it
mean, is it a scientific number.
Mr. Mulvey. Well, the actual number itself, 180 percent of
variable cost, it is my understanding that it was decided on by
one of the staff people on the Hill many years ago late at
night.
Mr. Shuster. You are pointing to John.
Mr. Mulvey. It wasn't John, but it was a staff person
apparently, but there was a lot of evidence it had to be
somewhere near that number.
Revenue had to be greater than variable cost obviously
because it has to cover fixed costs. The presumption is how
large are those fixed costs and how much more then the fixed
costs must revenues be to make sure they are covering all the
out of pocket or variable costs as well as making a return on
investment and having enough money to replace capital.
The actual number, people talked about different numbers,
and then finally it was set at 180 percent. It is not based on
any kind of scientific knowledge that I know, but basically it
is somebody's best guess.
Mr. Shuster. Mr. Chairman, I wonder if I may ask one more
question. My time has expired.
Mr. Oberstar. Sure.
Mr. Shuster. Ms. Hecker, you had mentioned that there has
been no effective relief to the shippers. At the same time, you
said the rates are actually below what they are 1985 rates.
When I hear that, I think, well, rates have been reasonable. So
is there relief necessary?
At the same time, my understanding is there have been very
few, especially small shippers, relatively few cases. Can you
explain that to me?
No relief has occurred. Is that because there have been no
cases brought because it is too expensive or is there no relief
because the rates have been relatively low?
Ms. Hecker. I think if you are able to stay for the next
panel, I am sure people will tell you far more eloquently than
I can the specific concerns.
Mr. Shuster. I intend to.
Ms. Hecker. Basically, as I mentioned, while we report
aggregate data, that when you go deeper into it, there are
these pockets where there appear to be captive shippers, and it
is indicative. It is illustrative. The kind of work that we
were able to do, given our data that we had access to, but
there appear to be some captive shippers who are paying
substantially more, so even though overall on an aggregate
basis, rates might be going down
Don't forget there are these costs transferred. I am sure
you will hear more about that too.
So you have to look at a complete picture. There are these
pockets where there could be shippers who are totally captive
and while there is the rationale for differential pricing,
there is the process that is supposed to be there to protect
from unreasonable or excessive prices. Basically, as you have
heard, nothing has ever gotten through the process.
Mr. Shuster. That is obviously a big, big concern of ours
here.
You mentioned out West, I believe it was, 300 percent of
revenue to variable cost. Does that include large fixed or
large capital investments?
I know out west they have double and triple tracked out
there to try to move coal.
Ms. Hecker. I don't believe it is just the western areas. I
remember that West Virginia was one of the States, and there
are pockets. Those were just States that there were some
pockets of it. So it is not just one area.
Again, that was just an illustrative piece of data, and
that is why we are pleased that the Board is commissioning a
far more comprehensive and rigorous study.
Mr. Shuster. Thank you.
Thank you, Mr. Chairman.
Mr. Oberstar. The Chair of the Rail Subcommittee, Ms.
Brown.
Ms. Brown. Thank you, Mr. Chairman.
I guess what still stands out most in my mind is that the
rail industry is operating in the black and that is exactly
what we want. I have been reading these 2,000 letters that I
received, and it is surprising that it is comprehensive where I
have gotten them from, particularly the number of letters I
have gotten from people in agriculture, grain, coal.
One of the statements is that this bill is a one size fits
all type of remedy that will not achieve the desired goal. What
is the desired goal?
I guess I want to go to the Board and ask, in the instance
that you have enacted some additional relief for the shippers,
can you expand on that? Does that address most of the pricing
that the small shippers have expressed their concern?
Mr. Nottingham. Madam Chairman, if I could, first of all,
your reference to the thousands of letters that you reference,
it is a good reminder. I know here at the Board, we, of course,
spend most of our time working with folks who are not happy
with the current system of regulation, and that is
understandable. People who are not satisfied are the first ones
to come to Washington and petition for change, and that is the
way it should be.
Our system of rail transportation, though, is so big and
enormous and so important to our economy. It is always
important to not forget that there are thousands, hundred of
thousands of other shippers busy moving product by rail in a
system that overwhelmingly works well and is a model in the
world for an effective freight rail system.
Yes, we have got challenges and problems. Yes, this Agency,
STB, has its work cut out for us, and we embarked on an
extensive series of reforms. That gets to your question.
I believe that our new simplified procedures for resolving
small and medium size rate disputes will give shippers a
significant new avenue to come to the Board and actually bring
cases and get results.
I believe that our pending--and we are waiting for comments
to get finalized this week--rule on the cost of capital
decision, and we are keeping an open mind, of course, as the
Administrative Procedures Act requires until we see all the
comments and responses. We will come in during October and by
the end of this year we hope to have something to say in final
form on that.
These actions and others will make a real difference for
shippers. Now I am not going to sit here and say that when you
have this hearing in six months or a year or one month, that
you are going to have a room full of 100 percent happy
witnesses. Looking at the history, going back to the 1800s of
this Agency and our predecessor, that would probably be
unreasonable for me to say that to you.
Ms. Brown. I would like to hear from the other board
members. Also, it is still going to take about eight months. Is
there anything that you can do to cut that time down?
The cost is a factor, but how long it takes these things to
be resolved is another factor.
Mr. Nottingham. I know. We are sympathetic. Eight months is
a long time. We put the challenge to our staff and tested them
over and over again. Give us the fastest process that,
remember, allows for discovery.
This is still complex civil litigation with discovery back
and forth, and the parties tell us that they do need some time
to make their case, and to bring it. The railroads do get the
procedural opportunity, obviously, to provide information and
make their case. And so, that literally was the shortest
feasible time period.
We wish it could have been a lot less, but that was the
quickest amount of time we felt we could have a reasonable
process that would survive, frankly, survive the kind of
appeals that we expect are coming. Anytime you try to change
something in Washington, in a number of ways, we are getting
challenged every step of the way in the courts of appeals from
all sides.
It is kind of interesting. Somehow, you are making all
sides unhappy. You are either doing something right perhaps or
maybe not, but we think we are on the right track.
Ms. Brown. Dr. Mulvey.
Mr. Mulvey. Yes, I agree that we do get a lot of complaints
though not only about rates. On rates, we do hear from the
captive shippers. But other shippers, who aren't captive or
have alternatives but rely heavily on rail, also complain about
cost of availability, how long should things take, delays, et
cetera.
We don't have formal procedures for all of these. We do
have informal procedures. We have a grain car council that we
meet with a couple of times a year to make sure that the grain
cars are going to be available to meet shipper needs, so they
have an understanding of what the crops are going to look like
and what the needs are going to be, where they are going to be.
We have a group called the Rail Shipper Transportation
Advisory Council or RSTAC that discusses some of the upcoming
shipper needs and how shippers are viewing the quality of
service, and they meet quarterly.
We just established a new Committee called the Rail Energy
Transportation Advisory Committee which will focus very much on
the availability of rail cars and equipment to meet the energy
transportation needs, not only coal but also biofuels and other
materials.
We try to work with the railroads and the shippers to
resolve some of those complaints and some of those issues in an
informal manner.
Ms. Brown. Did you want to respond to that, Ms. Hecker?
Ms. Hecker. No, I have nothing to add.
Ms. Brown. My last question, the Board is currently dealing
with some competition barriers. What additional issues with
competition does the Board plan to do to address these
additional issues?
Mr. Nottingham. Thank you, Madam Chairman.
We do continue to see competition problems and challenges
across the Country. It is one of the reasons we commissioned
this million dollar study, and we expect our consultants out of
Madison, Wisconsin to go out and spend quality time with many
stakeholders, GAO, others, shippers and railroads to really
help us come up with some more recommendations in those areas.
I don't have the complete menu of solutions in my mind yet,
but we have our work cut out for us.
Of course, in our work as we see mergers, which in recent
years have mostly been coming out of the short line sector, we
do make sure that shippers are protected.
We have a big merger heading our way. The paperwork hasn't
been filed yet, but it has been in the press involving the
Canadian Pacific and the Dakota, Minnesota and Eastern
railroads. That could have some important consequences for
competition, particularly the possibility of getting a third
major railroad into the Powder River Basin.
Our Agency has already done much of the environmental work
which has taken years to develop, and we survived huge lawsuits
from communities and individuals who don't want to see
additional railroad track put through their towns.
And so, that brings me back full circle to what we really
need to see here which is some serious construction of new
railroad track across our Country. We are so far past the day
when our top problem is too much track in too many communities
that needs to be abandoned. I look forward to the day when we
don't have any abandonments in our docket, and we have got
nothing but applications for new line construction.
That is what we need both in your port community of
Jacksonville which you were kind enough to show me the real
opportunity you had there to get some of that traffic off of
the trucks and the highways and really develop the rail system.
Unlike some other systems out there, there is really room for
the rail system to grow in many important places.
Ms. Brown. Thank you.
Mr. Chairman, are we going to have another round?
Mr. Oberstar. Oh, yes, we will.
Ms. Brown. All right, thank you.
Mr. Oberstar. Mr. LaTourette.
Mr. LaTourette. Thank you very much, Mr. Chairman, and
thank you all for you testimony.
When Ms. Hecker was speaking, I wrote down a couple of
things, and one was I wrote down at one point she said small
pockets of captive shippers and another time, pockets of
captive shippers. That leads me, I think, to my first line of
inquiry with you, Chairman Nottingham.
She also indicated it is difficult to get around what is a
captive shipper and what isn't a captive shipper.
But from your perspective, you know there is a number of
pieces of legislation floating around here, one by the
Chairman, that attempt to address the issue of captive
shippers. When you, as the Board, look at rail shipments as a
whole, what percentage of those shipments do you consider to be
captive?
Mr. Nottingham. When you actually look at everything that
is moving under contract that is outside of our review,
everything that is moving under an exemption because it is
intermodal, for example, and has the benefit of competitive
options, and you peel it all away as I outlined in my
statement, Mr. LaTourette, we are really talking about less
than 10 percent of all the Nation's rail traffic that is viewed
by us from a technical perspective as captive.
Now are there others who feel captive sometimes? Probably
yes. Are all those captive on every day of the week all year
long, feeling completely mistreated? Probably not.
That is where it might be a pocket to some but, of course,
if you are that captive and it is your family farm or your
family business, you are not in a pocket. You are in a huge
hole, and it is understandable why those folks feel the way
they do.
Mr. LaTourette. Then that gets to my next question. When
you used the word, intermodal, some members of this coalition
that are behind Mr. Oberstar's bill, the C.U.R.E. Coalition, I
think they are called. I know I speak at my peril because Mr.
Baker is to my left as I ask this question.
There was a box company from my district. I said, well, if
you are complaining about the rates that the railroads are
charging, why don't you put it on a truck?
They said, well, because the truck is more expensive.
My question to you is do you consider someone who defines
himself in that circumstance, that has an intermodal option to
meet the definition of a captive shipper?
Mr. Nottingham. Well, one of the important considerations
we look at, of course, is does the shipper have a meaningful
alternative. I am not an expert on the box industry, but
typically if it is just boxes and they are not made out of
heavy steel or something, trucking probably could be an option.
We look at each market, though, in each specific case to
make that determination, to see whether a shipper really does
have a meaningful option.
If you are a coal mine, though, in the Powder River Basin
of Wyoming or Montana, trucking is just not a reasonable option
to move your coal a thousand miles. So we have seen most of the
big cases in recent years have been right there in the Powder
River Basin and dealing with coal and utilities unhappy with
the rates they are paying. You will hear much more about that
this afternoon. I know from having seen some of the statements.
Mr. LaTourette. Okay, thank you.
Commissioner Mulvey, my question to you is that in light of
the fact that the STB has come up with recent decisions on the
cost of capital and the small shipper rate relief that has been
discussed by Chairman Nottingham in response to other
questions, would you say that most of the issues, at least that
I get into my office, the complaints by the shipper groups,
have been addressed by the actions that the Board has already
taken?
Mr. Mulvey. I guess in a word, no. We hope that will be the
case. I mean it was meant to do that. My suspicion, of course,
is that while these will go partway in meeting some of their
needs, I think there will be still be complaints about the
Board processes.
Some of the shippers feel that, for example, our relief
numbers, $1 million under the three benchmark approach, $5
million under simplified guidelines, are too low. That is a
five year figure. It is only $200,000 a year under the first
and a million a year for the second. So I think there will
still be complaints. It goes part of the way, but I would be
very, very surprised to see our phones stop ringing.
With regard to one thing the Chairman said, I want to make
it clear about captive traffic. Some of the traffic that is
captive is under contract, and we do not regulate that. It may
still be captive, but it doesn't come into our purview until
the contract expires and it comes down to a common carrier
rate.
Then there is also traffic that is captive to railroads,
that is to railroads by traffic, but it is not really feasible
for that traffic to move by barge or by truck.
Mr. LaTourette. Okay, thank you for that clarification.
Ms. Hecker, to you, towards the end of your testimony, you
indicated that the STB has taken some actions, and I assume
that you are talking about the two improvements that I just
asked Mr. Mulvey about. You also indicated that it may be too
soon to pass judgment on how those changes affect the issues
that are under study by your organization and also the issue
that is before this Committee today.
How long do you think we would need to wait to determine
whether or not those changes are actually working and if Mr.
Mulvey's answer in a word, no, might be in a word, yes, after
it has had some time to work?
Ms. Hecker. Well, let me preface by saying that we haven't
even had the opportunity, given our work was completed a number
of months ago, to systematically review the major actions. So I
answer with only a broadest brush of what the measures are and
therefore what kind of time frame might be necessary to assess
them.
The main one that we had recommended was the study, and
that is not done for a year. Surely, I think, there could be
very meaningful results. I was encouraged that the study group
would have the same authority and access that the Board had.
That was one of the concerns we had in the study being
contracted out.
So that time frame is one that I think the Congress would
be in a position to have very high expectations from the Board
to not only forward you a copy of the study but to comment
themselves what their strategy is, what they read in it, what
they see, whether there is consensus or whether there is a mix
of views about proceeding. I think that is a very important
window.
These measures, I think there are still some legal disputes
on the way. Obviously, one often has to wait to see whether
even new processes are upheld. So I think it is certainly at
least a year to look at the potential impact of new procedures.
The one not yet done, as I mentioned I think could be the
most important of all, and that is changing the way revenue
adequacy is defined.
Mr. LaTourette. I thank you.
Mr. Chairman, I am still smarting over the theft of my
chief of staff by the Surface Transportation Board, but I tried
to be tried to be polite to them notwithstanding.
Mr. Oberstar. Cross-fertilization is important, though, in
this town.
[Laughter.]
Mr. Oberstar. Mr. DeFazio, since the gentleman was called
to other duties during the opening remarks, if the gentleman
wishes to make an opening statement.
Mr. DeFazio. Well, thank you, Mr. Chairman. At this point,
I would just proceed to questions if I could. I appreciate the
offer. I had to run to the Homeland Security Committee for
their minor portion of the Coast Guard Reauthorization. They
are building on our good work over here.
I just want to further pursue this definition of captive. I
am a bit puzzled to tell the truth.
Rail is much more fuel efficient generally than truck. I
don't know how it compares. I mean basically if we are looking
at lumber, it is two and a half truckloads on one rail car. I
think it is about three times as fuel efficient, as I
understand, over a longer distance. I have a lot of lumber
producers in my district.
So the question is if they have access to trucking but
trucking, because of the laws of physics, is going to be much
more expensive than the rail, we still consider because someone
could theoretically put it on a truck, they are not captive. Is
that the way it works?
Mr. Mulvey. Well, theoretically, almost anything can be
carried by truck.
Mr. DeFazio. Right.
Mr. Mulvey. If you go to the Powder River Basin, for
example, you will see that when the coal comes out of the
ground, the first thing it goes on is a truck with eight foot
wheels. Theoretically, they could go on the highways. The
highways wouldn't last very long, but theoretically that could
happen.
But the reality is there are some commodities for which
truck or other modes of transportation just aren't feasible.
Coal, for example, virtually has to travel by rail.
The cost, we have a process called exemptions, class
commodity exemptions. We decided that a number of commodities
are modally competitive and therefore we do not regulate them.
Now, we made those decisions back in the eighties and the
nineties. One of the things I had in my statement was that we
need to look at those commodity exemptions. Over time,
circumstances change and with rising fuel rates, with the
shortage of truck drivers, et cetera, it may very well be true
that some things that we have said historically are modally
competitive may not be.
I think we need to review those exemptions periodically to
decide whether or not things are captive or whether or not they
are modally competitive.
Mr. DeFazio. Right, but if there is a contractual
obligation because it spun off a short line, there is no way to
void that contractual obligation and/or can you regulate in
that area if you determined that they are captive but they are
only captive by virtue of a short line which is under contract
to deliver to one Class I?
Can you do anything in that case?
Mr. Mulvey. If they are under a contract to a short line
which is under a contract to a Class I, once they are into
contracts, we cannot do anything until the contracts expire. We
did talk about the short line being under contract, the paper
barrier issue. Again, too, it is one of those things.
Mr. DeFazio. Some of those are perpetual.
Mr. Mulvey. Some of those are preventable. As I said, I
have been very critical of paper barriers. I have dissented on
several cases when paper barriers have been involved. Right
now, they are accepted and, no, we can't do anything about that
then.
Mr. Nottingham. Mr. DeFazio, the so-called paper barrier or
interline agreement issue is very much with us from a
regulatory perspective. We hope to have something to say
publicly soon. Hearings were held last summer in 2006, and it
is a very important issue. We are going to have something to
say about that.
Mr. DeFazio. Does that apply only to future agreements or
is there any way? I mean there is contract law and all that. I
don't know whether there is any way to deal with existing
agreements.
Mr. Nottingham. As much as I would like to have a full
discussion on this today, I really have to be careful or my
lawyers will worry.
Mr. DeFazio. You are in the rulemaking process.
Mr. Nottingham. We are in the rulemaking process, but let
me say something to answer your question.
Hypothetically, a shipper who only has a rail option and
that rail option is tied up, for lack of a better word or
phase, in an agreement with a Class I, that could,
hypothetically, be a captive scenario, so depending on the
facts and everything. We could see a case like that in the
future.
Mr. DeFazio. When will we see a rule? When do you think
there will be a rule on the paper barrier issue?
Mr. Nottingham. I think within a month. I always need a
second vote. I am always careful to point that out. It is a
three person board as you see here. We should have something
out very soon.
Mr. DeFazio. Okay. I am trying to drill down to what is
real and what is theoretical.
We want to become more fuel efficient as a Nation and, in
many cases, being more fuel efficient is also going to be more
cost efficient because of the cost of fuel. In many cases for a
lot of heavier products, that means movement by rail, but if
there are other impediments to better utilizing the rail system
which relate to contractual agreements between Class IIs and
Class Is or other things.
I mean the reality is in my district. I have a lot of
people who are on a contracted short line. Burlington Northern
comes to the north of Eugene, but they can't get to Burlington
Northern. So they can only go to UP because they are not
allowed to get to BN unless they want to truck to north of
Eugene which becomes pretty inefficient with the unloading.
That is one side.
The other side we have to consider is how do you provide
for an industry that is stable and can generate the revenues it
needs to make investment. But, in a deregulated environment, of
course, we aren't guaranteed that the profits that might come
from captive shippers or access charges are going to
necessarily flow to investment because you can't direct them to
make investments, right? That is beyond the role of the STB at
this point and time.
Mr. Nottingham. Correct.
Mr. DeFazio. In the old days, of course, it was a whole
different system.
I guess the question, in listening to Mrs. Tauscher and
some of the other remarks here, is how we can be creative and
balance these interests, both helping the shippers and assuring
the Country that we are going to best utilize this resource
which is more fuel efficient, which is the interest of our
businesses and our national economy.
Yes, I guess that probably gets beyond your rulemaking, but
I would be interested in any ideas you have along those lines
outside of your normal day to day activities.
Mr. Nottingham. We would be happy, sir, to come brief you
as soon as we get this rule out. That should be a little better
time procedurally. We can have a good, full, open discussion
about it and explain to you what is in there.
Mr. DeFazio. Sure.
Mr. Mulvey. We also talked about the investment tax credit
that the railroads are looking for, and I also mentioned former
Congressman Lipinski's suggestion for a railroad trust fund,
whereby you would fund it similarly to the way the highways and
airplanes and roadways trust funds are financed and use those
monies to invest in the infrastructure to expand the capacity
to meet the projected growth needs.
There are a lot of difficulties in how you would actually
do it, but nonetheless there needs to be more money put in the
infrastructure than the railroads can afford to do out of
retained earnings.
Mr. DeFazio. Right, that would get to the unique
partnerships that Mrs. Tauscher was referring to.
My State is doing that with something called ConnectOregon
where they are partnering with a freight railroad to build more
sidings, to mitigate congestion in the hope of avoiding more
trucks on the highway and other costs that flow through to the
rest of society and also hopefully to more efficiently move the
passenger trains through that same congested area.
Partnerships like that, I think, could be very valuable. I
am open to ideas along those lines. So thank you.
Thank you, Mr. Chairman, for the time.
Mr. Oberstar. I thank the gentleman.
That is an interesting observation that the gentleman from
Oregon made. The State is engaged in building sidings and other
capital facilities for railroads. Is that a subsidy to
railroads?
Is that a kind of government intervention that the
railroads would not welcome?
Mr. DeFazio. Well, I think these days, there is a new
generation of management that is more interested in creative
partnerships like that with the State of Oregon or at least in
our part of the Country they are interested in it.
Mr. Oberstar. Let us hope that is the case. I thank the
gentleman.
The gentleman from Louisiana, Mr. Baker.
Mr. Baker. Thank you, Mr. Chairman.
Ms. Hecker, I was recently provided a copy of an executive
summary by the American Chemistry Council of a study engaged by
them with Snavely King, which looked at fuel surcharges over
the period of 2003 through the first quarter of 2007. The
simplified conclusion of this lengthy report was that over the
period, it appears that there was about $6.4 billion in rail
overcharges coming from fuel assessments.
Have you had opportunity to become familiar with it as far
as the GAO look at the fuel surcharge issue previously?
Ms. Hecker. No, I have not looked at that. I think you
heard quite explicitly, though, from the board members about
their concern about this, their action, and I think Dr. Mulvey
made clear that one of the issues here whether there is a
retroactivity in some of the actions of the Board.
I think there is a recognition that there was a very
inequitable application of the way the surcharges were levied
and that it was to the serious detriment of the more captive
shippers because it was percent-based on the revenue.
Mr. Baker. I just really wanted to establish as to whether
the GAO had opportunity to examine it.
If not, Mr. Chairman, at the appropriate time, I am sure
you have this data, but I would provide you with this
information and perhaps request could be made of the GAO to
examine this issue because I think it goes toward the overall
governance question about how matters of this import should be
addressed. I will discuss that with the Chairman at the
appropriate time.
Mr. Oberstar. I would suggest the gentleman submit the data
to GAO, and we will direct them to respond to the Committee.
Mr. Baker. I thank the Chairman for that assistance.
Mr. Nottingham, there is some question as to how frequently
the STB has found significantly in a shipper's favor. For the
record, I note that there has been representations made that
the findings are relatively balanced.
In looking at the record from my perspective, in 2001, in
the case of Wisconsin Power and Light, the STB is generally
viewed in that instance as having made a measurable decision in
favor of the shippers. Since the 2001 decision to date, is
there another decision of similar scope and consequence to
Wisconsin Power that you could make us aware of?
Mr. Nottingham. Congressman Baker, most of the attention we
see in this area--we have had some comments and I know you will
hear much more from later panels--does focus on this one type
of major, major case. These are multimillion dollar, sometimes
tens of millions. Sometimes the amount in dispute can be
upwards of over $100 million, and you think about the
possibility of the Board being asked to put a 10 or 20 year
rate prescription in place.
In my look at the record, having come to the Board just 13
months ago, there seems to have been a period of years in the
nineties where there were a number of shipper wins, so to
speak, followed by a period of years more recently, since 2001,
where there have been some shipper defeats.
I was told before I came to the Board, don't fall victim to
the appeal of trying to decide one case one way and another the
next just so you can say that there is sort of some kind of 50-
50 ratio. We have to look at these cases, obviously, in a very
exhaustive manner. They are fact-specific.
I will say, though, while those cases get a lot of
notoriety because they are big and because law firms and
consultants convince their clients to part with millions of
dollars to pursue the cases in a way, frankly, we never require
or ask anybody to spend millions, but the process has somehow
developed out there to become that which is a problem that we
continue to work on.
Remember, we have about 1,300 cases and proceedings and
actions we do in an average year. I would say hundreds of those
are to the benefit, if not most, of shippers. You may never
hear about them because they might be small from a national
perspective.
But if you are a shipper in Defiance, Ohio, and you
petition the Board, which is a case we decided against a major
Class I this past year about a Class I cutting off a short
line's access, hurting shippers potentially. We forced that
Class I to put that connection back in place at a significant
cost and immediately. That is just one example. I could give
you a list of 1,300 cases.
But, yes, in the very large, hard-fought major cases, we
have seen a string of railroad wins in recent years.
Mr. Baker. That brings to the forefront the question of
conditions to file with regard to fees that are necessary. Can
you give the Board's apparent thinking with regard to the
relatively high rates for filing as contrasted with, say, an
action in district court where it may be protracted litigation?
There may be a series of expert witnesses, but generally
the court does not require filing fees that prepay all future
anticipated administrative costs.
I know you are working toward an imposition of a new system
which has only been recently deployed for small filers, but I
am really asking the question from the big filers' side. What
rate relief could be given there on facilitating access to the
Board in a more financially painless way?
Mr. Nottingham. Thank you for that question because we do
see a lot of misinformation out in the popular media about
fees.
Let me be the first to say, we take no pleasure in imposing
fees. Personally, I wish we didn't have to charge a fee to
anybody. It is aggravating, and it just creates, frankly, some
ill will that we prefer not to engender.
We do this because there is a statute that requires Federal
agencies that are charged with resolving private sector
disputes, such as our Agency, the Independent Agencies Act,
that requires that we seek to recover our costs. Because these
cases require enormous STB time and money, we have had a policy
consistent with statute to charge fees.
Sometimes they are as low as a dollar a page for some small
proceedings, $35 fees and now in the small cases for up to a
million dollars, it is $150. Then it goes as high as merger
fees for railroads merging which are very high. In major cases
that you probably have heard most about from your chemical
industry constituents and others, it is a high fee.
I would say we have written to the Congress on this issue,
that if we get some type of statutory relief or some type of
appropriations relief that relieves us from that obligation, we
would be happy to get out of the fee business, but until it
happens, we feel like it is our obligation to follow the law.
Mr. Baker. Well, the bill now pending would reduce that fee
to the common district court filing rate which you would not
necessarily find an objectionable modification.
Mr. Nottingham. Sir, with one key proviso because I know
your constituents and our stakeholders want prompt action by
the STB and have complained about how long it has taken. Be
sure we have the resources coming through the appropriations
process to counterbalance that because if we can't hire up the
staff to pursue and resolve those cases, you will just be
creating another problem.
Mr. Baker. You raise an extremely good point. I am
concerned about the current three year period to get a decision
out typically, which I think is an unreasonable regulatory
constraint on an applicant. Whether the fees are high or not,
the time to get a yes or no, you at least ought to be able to
get a friendly no in a few months.
Mr. Oberstar. Would the gentleman yield?
Mr. Baker. I would be happy to yield.
Mr. Oberstar. Just supplementing the question, a very, very
appropriate question and a very thoughtful comparison with U.S.
District Court filing fees, what relationship is there between
these fees and documented real costs to the Board of processing
a case? I have never seen anything on that.
Mr. Nottingham. We would be happy to follow up in writing
on that, sir, because it is a question we have fielded before.
We did a very extensive and exhaustive hour by hour
workload assessment study. We have updated it recently, and I
checked it out because I was astounded when I first heard about
these fees, to be honest. It is unusual. I can tell you there
is solid data and documentation to back it up. The fees are
directly proportionate to the amount of time required by these
cases.
Remember, these are taxpayer hours, your Federal employees
at work, and it is to resolve a private sector dispute often
between Fortune 100 or 500 companies who do have a lot of
resources. It is a policy question. Who should bear the cost of
those cases, the taxpayer completely or litigants through the
fee?
We will implement whatever the law tells us to do. Right
now, it tells us to collect a fee.
Mr. Baker. I thank the gentleman.
I would merely point out that the application of the fee is
not objectionable as long as it is related to services
rendered, but it is the up-front collection before we have gone
through the process. Even some staged fee assessment would be
helpful to people. At least they know what they are getting
into.
It is like sitting down with a lawyer to get advice. You
want to know when his clock starts, and you want to know what
it costs per hour. You may have a 10 minute conversation or it
might be 10 days, but at least you know going into it where you
are.
In this case, somehow the Board is predicting the overall
resolution cost at the time of filing, which seems a bit out of
step with the likely consequences of all the complications that
the Board is engaged in, in making these judgments.
A bigger question, what is your view, Mr. Chairman, of the
STB's jurisdictional reach in relation to all operating rails?
Is every rail in the Country subject to your review?
Do you see yourself only as a responsive entity where
differing parties come before you?
How do you define the jurisdictional scope of the STB?
Mr. Nottingham. If I could just real quickly say and commit
that I will look at the staged fee suggestion. Frankly, it is
the first time I have heard that proposal. I think it makes
good sense. We do waivers of fees for local governments and
public entities and other extraordinary cases, and staged fee
collection is something we can take a look at.
Mr. Baker. You can do it in relation to credit risk. If it
is Fortune 500, you have got a pretty shot you are going to
find. They are not going to want to make you mad.
Mr. Nottingham. Obviously, we don't spend all of our hours
in the first week. So it makes good sense. Thank you.
On your actual question,--I appreciate your patience--I
believe the Board has broad scope to look at especially
practices, as Ms. Hecker mentioned, looking into the records
and gathering information from the freight rail sector in its
entirety to look at practices in a very sweeping way.
We have broad, broad powers. Of course, we have a hugely
important power which is to review mergers, and that is where
we actually have the ability to put in conditions that really
can provide meaningful reforms in the area of access or shared
right of way and other arrangements that we have seen play out
in different merger approvals.
In our more discrete area of rate disputes, there, the
Congress has limited our jurisdiction, and so we are mindful of
those limits. But I am not one to say that the Board can't
address or take on the big issues of the day because there is
some technicality that says we can't.
Generally speaking, I am the kind of leader and manager
that wants to take on the challenges, fix the problems and sort
of don't ask permission. If we have got a responsibility
consistent with the spirit of the law and statute, we will move
forward.
Mr. Baker. A reason for asking that is to make sure I
understood the implications in your September 5th STB release
talking about simplification of rail rate dispute mechanisms.
In the fact sheet that accompanies that release, there is a
statement that this new mechanism--I am paraphrasing that from
the earlier page--provides access to rate reasonableness
process for all sizes of rail rate disputes, in particular to
the estimated 73 percent of challengeable rail traffic for
which the large rate case process would be financially
impractical.
That struck me that if your jurisdiction is national in
scope and the finding in this release is that 73 percent of
rail traffic which would not be able to normally utilize the
large rate resolution process, I am trying to create an
understanding with the Board.
There is a reason why people feel frustrated and call
themselves captive for whatever reason. If they are physically
captive and there is only one rail in and out or if they are
financially captive and don't have the resources to come to you
with an application for relief because there is price gouging
involved, they are still trapped.
I think this speaks to the urgency of why, at least I know
I am and I believe Chairman Oberstar is proposing the
legislation that is being remedied, it is more than casual
discomfort. There is a business consequence.
I have four plant managers who were in an internationally
competitive market and when assets are depreciated in the
current site because of the cost of rail traffic in for raw
material and finished product out, which is the lifeline of the
industry, they are considering, strongly, relocating outside
the United States. Now there are other contributing factors, of
course, but the rail issue is at the top of the list.
We need to have some way of expanding the scope of
reasonableness in examining these rate applications. Certainly,
we have to get past the stand-alone construction idea where you
are going to build your own rail system and prove to the STB
that that is more economical than what your current provider is
giving you.
Some of those machinations that we require people to go
through don't yield logical results because they are not
capturing the current state of economic factors, and I think
that is the frustration, but that 73 percent figure really
jumps.
I know I am out of time. I have one last thing. Well,
actually, I have much more, but I have got one thing I really
need to get to.
In the bill before us today, H.R. 2125, it makes some
really simplistic changes. It doesn't re-regulate anybody. It
doesn't diminish the STB's review right or process. It doesn't
even tell you that you need to go to a different capital asset
model. It doesn't do any of that.
What is it in the bill, in your opinion, that creates any
problem for the administration of STB business?
Mr. Nottingham. Thank you for the question. If I could
quickly just address the 73 percent issue, if that is okay,
because I felt personally that was important that we put that
in our press release.
Mr. Baker. I was surprised.
Mr. Nottingham. People would often tell me, often Members,
when I was a staff rep in this body, and some of my happiest
professional memories are from working in this body. People
tell me all the time: Try to simplify what the STB is doing.
Make it understandable and make it work.
That is what I have been focused on the last 13 months. We
looked at this issue of how to come up with a simpler and
streamlined and cheaper procedure to resolve rail rate
disputes. Nothing stood out more to me than the fact that the
major rate case dispute process had gotten so expensive, three
to four or more million dollars per side, railroad and shipper.
When you look at the average shipments around the Country,
the amounts that were being disputed in a case, basically 73
percent of all the shipments out there in the Country are lower
than that three or four million dollar threshold, meaning why
would they ever bring a case if they couldn't get at least some
money back out of it. And so, that underscores to me the
importance of this new forum that we have created, two options
and a shipper gets to choose and one only costs $150 and you
get an answer in eight months.
Now, H.R. 2125, we have not as a Board, as far as I know,
been asked for any formal views on that. We are not on record.
I won't speak for my colleagues. I know we probably have
different views on it.
I will say just personally as one board member, I do have
some concerns with some of the provisions in the bill. At a
time of great change, when we are moving forward with several
critical regulatory initiatives, not the least of which is our
pending cost of capital measurement, to see the Congress moving
forward, sort of changing the rules. Now, we will earnestly and
in good faith implement any set of rules the congress puts in
place, and so we respect that completely.
But you asked the question. I need to say, and it is really
in the area of access to private property and how we ask the
railroads or tell the railroads that they have to allow
competitors access to private property.
Mr. Baker. Well, I will follow this opportunity up with
correspondence to ask in the manner that is best appropriate,
whether the Board chooses to do it as a Board. Whether you as
an individual choose to give us your personal observations, I
would just like to have the view of the experts about the
mechanisms in the bill that will create in your view any
operational problem on either side of the fence.
What we are trying to accomplish is an appellate process to
give people options and to facilitate lower cost access to
regulatory relief. Nothing in the bill, and I have thought
about this for some time, would affect the capital asset model
nor any decision the Board might make about the cost of
capital. So I would hope that we can follow this up with
correspondence quickly and that we could get some indication
from you as to how we could work together on the remedy.
Thank you very much, sir. I yield back.
Mr. Oberstar. I thank you, Mr. Baker, for a very thoughtful
line of questioning. I would observe that if the Congress and
the Board are working on the same issues toward the same
objective, then legislation should not preclude Board action.
Mr. Larsen, you have been very patient.
Mr. Larsen. Thank you, Mr. Chairman.
Ms. Hecker, first off, between all the questions that have
been asked and the issues currently before the Board that we
can't talk about, I have run out of a lot of questions to ask,
but I do have some that haven't been asked yet.
For Ms. Hecker, you had a statement in your report
regarding a divergence, so I would like you to explain it for
me. How do you explain the divergence of a decrease of
potentially captive traffic while traffic traveling at rates
above the threshold for rate relief have increased?
It seems to me that those are divergent statements. How can
those two exist? Can you explain to me?
Ms. Hecker. Well, first of all, I want to go back to Dr.
Mulvey's criticism that the information, the data on the amount
of traffic traveling over 180 is an illustrative piece of data,
but it is a factual piece of data. It is the amount of traffic
paying a certain rate in that ratio.
A subset of that is actually paying more. It is that
simple. The universe is actually going, but there is a smaller
group that is paying more. So you have captivity potentially
going down, but for the ones who are captive they potentially
may be paying far more, significant rates over that ratio.
Mr. Larsen. A smaller subset is paying more while there is
an overall number going down?
Ms. Hecker. Potentially.
Mr. Larsen. Potentially?
Ms. Hecker. It is an illustrative piece of data. It is a
rough proxy for captivity.
Mr. Larsen. Mr. Mulvey, does that then get at your
statement to say no evidence that competitive options have
increased for these so-called captive shippers?
Mr. Mulvey. I think what JayEtta is referring to is
relative captivity. In other words, the relative amount of
traffic that is captive as to the expansion in traffic for the
railroads is recent years has largely been intermodal traffic.
That is where the real growth has occurred. That is not
captive. So, therefore, captivity as a percent of total traffic
would be going down.
But it would be difficult to infer from that that the
number of captive shippers, the absolute number of captive
shippers has gone down. That probably isn't the case because
that would have required more firms entering the industry or
existing firms going into those other markets, and we haven't
really seen that happening.
So the number of captive shippers has probably stayed the
same, but the relative importance of them compared to the
overall market has gone down. In that sense, we don't disagree.
I was concerned more about how it could be taken and how it was
represented, that maybe things are getting better for captive
shippers when I don't think that is the case.
Mr. Larsen. I appreciate that. It is important for at least
me to understand that as we discuss this concept of captive
shippers.
I will also just note that every time I read captive in
GAO's report, there are quotes around it. So I am assuming that
the term, captive, is term of art. It is not really a
legislative or regulatory term, is that correct?
Mr. Mulvey. That is correct.
Mr. Larsen. Mr. Mulvey, you make an argument for a general
power to investigation. Now are there other models and other
independent administrative or legal boards in the Federal
Government that you can point to that would be a model of
language for a general power to investigate?
Mr. Mulvey. I am not a lawyer, so I would not want to posit
an answer to that. I can come back to you with some examples,
but I am sure there are other agencies that do have
investigative powers.
We had them, but they were taken. The ICC had them, but in
1995, in the ICC Termination Act, we lost those powers. Now if
you look, for example, in our fuel surcharge action, we pretty
much behaved as if we had that because it was on our own
initiative.
Mr. Larsen. Right.
Mr. Mulvey. But we could have been challenged on that, and
we were not, but it could have been challenged. We think the
Congress should clarify what our investigatory powers are.
Mr. Larsen. Mr. Nottingham, when does the STB project
completion of this independent analysis that we have been
discussing?
Mr. Nottingham. In one year. We launched it a couple weeks
ago, and they have been given a year. I believe the actual
might be 13 months to be specific. I wanted to give them time
to get around the Country, to get their hands around this
issue.
It is a daunting enough issue that GAO, with all its skill
and staff and having done an excellent job with their report
for many, many months, even today says they couldn't actually
get their arms completely around it, and they actually came
forward with the idea to us, the recommendation to do this
study.
It does take time, but we look forward to seeing the
results.
Mr. Larsen. Let me get my last question.
Ms. Hecker, with this study, have you examined the
parameters of the study and is the methodology adequate and you
believe it will get to some of these answers about an analysis
of competitive markets that GAO requires to take a look at?
Ms. Hecker. We have not been given an opportunity to review
it, and I have no information other than the press release
announcing it, what the scope of the study is and the
representations made by the Chairman today that the group would
have the same authority and access to data, which was our
concern when we made the recommendation.
Mr. Larsen. Is that of concern or importance to you to be
able to look at the parameters of the study as they move
forward?
Ms. Hecker. Well, I would imagine it is kind of moot if the
contract has been let. It would be what scope it is. I would
imagine that we may be asked after the fact to review.
Mr. Larsen. It might be moot if you say it is. It may not
be moot if we say it isn't.
Ms. Hecker. I have no information to speak to the scope of
the work.
Mr. Larsen. Do you want to see the scope of the work?
Ms. Hecker. If you would like us to review it, we would be
happy to review it.
Mr. Nottingham. Mr. Larsen, if I could just interject, we
have tasked our consultant team as one of their first orders of
priority to spend some quality time with GAO. They obviously
haven't called Ms. Hecker yet--they will be--and your staff, so
that the consultant team can fully understand the report and
vice versa to give an opportunity to brief GAO on anything GAO
would like to know about the report.
Any recommendations or advice we get formally or informally
from GAO, we will take a good look at. My general attitude is
if the GAO gives some good thought to something, makes a
recommendation, we are going to go ahead and implement it.
Mr. Larsen. We want to be very encouraging in that.
Thank you, Mr. Chairman.
Mr. Oberstar. Thank you.
Mr. Moran, thank you for your patience.
Mr. Moran. Mr. Chairman, thank you very much.
Generally, I know we are talking about captive supply here
at this hearing, and clearly Kansas is not immune from those
concerns with coal and grain shipments and chemical shipments,
but let me ask about a broader topic.
It seems to me that rail capacity in this Country is less
than it needs to be. My impression is that is a given, although
I assume the markets ultimately determine what that capacity
will be. But the demand for services exceeds the ability of the
railroads to meet that demand.
Is there any measure that says that we are moving in the
right direction or that demand for services and capacity will
intersect in the near future? I guess this would be for the
Chairman.
Mr. Nottingham. Thank you, Congressman Moran.
We held a major hearing on this issue in April, looking at
traffic forecasts nationwide, short term and long term, the
state of capacity. We actually asked a very diverse group of
stakeholders. The hearing went, I think, 14 hours just as an
example of the level of interest in this issue. It probably
could have gone on longer. Just people got worn out finally.
What we heard from railroad CEOs, and you will have one of
them before you shortly, and also leading shipper groups was
complete--this is amazing actually--agreement on at least one
issue, which is that we are not on pace as a Country to meet
our rail infrastructure needs especially in the mid and the
longer term, out 10 and 20 years.
While the railroads are spending, and you will hear more
about this today from the railroad themselves, we are spending
more than we ever have before. You have got to really dig into
those numbers because the need is so much bigger than before.
It is not just enough, in my personal view, to say great, we
are on track because more is being spent than last year.
We have really got to look at these choke points in the
system, the Chicagos, the Houstons, the Port of L.A., Long
Beach and others, not to mention in agricultural country, to
hold the railroads accountable for what they are really
delivering in the way of meaningful infrastructure and
investments.
But I would say that is the number one top rail policy
challenge before us as a Country_how will we step up and
actually build enough track in this Country to keep our economy
moving because we pretty well know, I know from having labored
in the highway sector for eight plus years at the State and
Federal level, the highway system and the best planners there
are assuming that the rail system will continue to carry its
share of the load. If that assumption starts to not hold valid,
we have just an incredible problem in this Country.
Mr. Moran. Mr. Clayton, one way that Congress attempted to
address infrastructure needs in the rail industry is on the
short line side. This Congress, three years ago, passed a tax
credit for short lines and/or their shippers to utilize in
improving the road bed, the rail line, bridges and try to move
the short lines up to the capacity to carry 286,000 pound cars.
Any evidence at USDA that we are better meeting the needs
in regard to agriculture, utilizing short lines, capacity
increasing? Are things improving or continued problems into the
future?
Mr. Clayton. Thank you, Mr. Moran.
I think the evidence is positive in terms of progress that
has been made with short lines filling in, and certainly that
plays a role.
I think also the evidence is fairly clear that overall
capacity in our transportation network is really being
strained. It doesn't apparently take much, a good hurricane,
for example, where the barge lines have to shut down and we
look to the rail system to pick up the slack and it is not able
to do so. That, to me at least, suggests that we are running on
kind of a razor's edge here in terms of margin of error and in
terms of the state of capacity that is out there.
So, certainly, to your question, the short line piece is
important. There has been progress there, but I think one still
needs to look at the larger issue of capacity particularly as
it interacts between the modes of transportation.
Mr. Moran. That short line tax credit is set to expire in
the near future, and there is legislation that I would
encourage my colleagues to act on that would renew that tax
credit. It is my impression it has made at least some
difference in our ability to invest.
Mr. Mulvey, you are shaking your head. I am looking for an
ally. I am happy to hear you saying something positive.
Mr. Mulvey. When I was working for Mr. Oberstar, I worked
very hard on that bill, and I am very proud of the success we
achieved with it. The short line railroads, for the most part,
have taken advantage of it, and the legislation does need to be
reauthorized this year.
Mr. Moran. The reason I think this is so important is in
part what Mr. Baker said. We often decry the fact that we are
losing jobs to other countries, that we are outsourcing
employment. Factories, plants and facilities are moving abroad,
and our infrastructure is a significant component in the
business decision that will be made as to whether or not a
business remains in the United States.
Let me go down one other line of questioning before my time
is totally gone.
I do care a lot about biofuels, and the rail infrastructure
is critical to that industry. In addition to hearing concerns
about a captive shipper, I often hear concerns and complaints
about the quality of service.
So my question is two-prong. What role does the Surface
Transportation Board have? Mr. Mulvey mentioned this perhaps
more than just in passing but the role that you have in
addressing lack of rail cars, the timeliness, the shipment.
I know that in Kansas we produce a lot of flour, wheat
flour, and the timeliness of those shipments and bottleneck is
often described to me as the cars sat outside of Los Angeles
waiting for their turn to be unloaded at the ports. So what
role does the Surface Transportation Board play in trying to
improve the quality and timeliness of the service?
Secondly, in regard to the biofuels issue, explain to me
the role that this phrase, common carrier, has in requiring or
determining that service must be provided to a new ethanol
plant, for example.
Mr. Mulvey. Well, the common carrier obligation for a
railroad goes to any commodities that are regulated. If a
commodity is not regulated as it stands right now, the railroad
does not have a common carrier obligation. Ethanol would be
regulated by us and therefore a common carrier obligation would
apply. Anybody who offered cars for shipment, the railroad
would have to serve them.
Now in terms of the quality of the service, that is
basically between the railroad and the shipper. If the service
quality declined, the Board could open an investigation.
The Board also has its group offices. We have group which
focuses on railroad and shipper issues. They would call the
railroad up and try to work with the railroad in order to get
the problem resolved.
The railroads will tell you later on that it is in their
interest and they want to be cooperative with shippers. We try
to facilitate that cooperation through our Office of Compliance
and Enforcement.
Mr. Nottingham. I would just like to add, Congressman
Moran, that this is the work that we focus on probably more
than anything else, the day to day, week to week service
complaints that we field. We have an office of Consumer
Assistance. Calls come also directly into commissioners'
offices. We send people out around the Country on occasion, and
each of us gets around and looks at service situations.
We have a number of tools available to us. I will just give
you a couple of examples. One, you touched on the common
carrier obligation. That is the touchstone in freight
transportation as to really what the shipper can expect and
should expect, which is reasonable service upon reasonable
request.
Now there are some general words in there, and people can
have pretty serious arguments about what those words all mean
in a specific case. But we take those cases very seriously, so
seriously, in fact, that in an agricultural-oriented situation
down in Texas recently, we actually ordered a railroad that was
not providing adequate service to get out of the rail business
and we forced them to sell their business. It is now with us.
Two interested railroads are considering buying that railroad
now.
That is an example of how far we are willing to go as a
board. We are literally in the process of putting a non-
performing railroad out of the rail business, and we are
replacing it with someone who is willing to serve the shippers.
But we have other means at our disposal too, and these
issues get particularly complex and interesting when you look
at materials and commodities that the railroads, on occasion,
would prefer not to have to carry like hazardous materials and
materials that sometimes trigger large insurance premiums for
the railroads.
Mr. Moran. Thank you for responding to my questions.
Thank you, Mr. Chairman.
Mr. Oberstar. Thank you for your very thoughtful line of
questioning.
The gentleman from Tennessee, Mr. Cohen.
Mr. Cohen. Thank you, Mr. Chairman.
I have tried to understand a bit about this issue just
reading some of the statements, including getting ahead of
myself and reading Mr. Spitzer's statement, and I kind of get
the picture of this being the railroads on one hand and the
shippers on the other.
But all politics are local. In my situation, local is
Tennessee 9. Tennessee 9, though, is America's distribution
center which makes it national. Our distinguished Vice Chairman
has knowledge of Tennessee 9, and I would like to ask the
Honorable Mr. Buttrey what his advice would be for me and the
Country on how these different bills. Particularly, 2125 would
affect Tennessee 9 and therefore the entire Country.
Mr. Buttrey. Thank you, Congressman, and thank you, Mr.
Chairman. It is an honor to be here and to answer or try to
answer the Congressman's question, my good friend from
Tennessee.
I think I would start by saying that etched in concrete on
a building not too far from here, there are the words--and I am
paraphrasing here--that the right of the citizens to petition
their government for redress of their grievances shall not be
abridged. One of my strong points at the Board has been to make
sure that people have access to the regulatory process.
I think we have gone a long way during my short tenure at
the Board, which will come to an end before too long because
appointees don't stay around forever and that is probably good.
We have tried very hard to create a regulatory process that is
accessible to everyone and to keep the fee levels, Congressman
Baker, down to levels that aren't egregious while trying to
understand the prescriptions that are placed on us by the GAO
in determining what our fees shall be.
We will be getting back to you, Mr. Chairman, on that as we
said earlier.
Your district in Tennessee is a huge crossroads for the
railroads of this Country, and you don't have to live there to
know that. I mean people who are in this business, people who
are shippers know that if the weather is bad in Memphis for
some reason, which it usually isn't by the way. It is usually
great. That is why another company is located there that I have
some knowledge of.
The infrastructure that is there is very important to the
way the commerce in this Country works, and Chicago and other
places are the same way. Long Beach, California and others are
out there.
I think a lot of the complaints that I have heard even
before coming to the Board and certainly after arriving at the
Board. I think what we have tried to do in the recent past
anyway, certainly since the three of us have been members of
the board, has been to work very hard and to keep that phrase
on that building very uppermost in our minds and to work very
hard to try to come up with improved access, along with the
expert advice of our staff which is very expert and I take my
hat off to them.
They are very hardworking, talented, knowledgeable
professionals, if you will. I think we would all agree. We may
disagree on other things, but I think we certainly agree on
that.
Taking their advice and counsel and doing our very best job
in coming up with new rules and procedures that will facilitate
reasonable access to this regulatory process.
As Senator Dorgan said this morning, I think his statement
was eloquent. As he said this morning, earlier today, where
there is a lack of competition, there must be regulation.
In the situation that we have today with the railroads the
way they are structured in this Country, which is a product of
many, many years of development and metamorphosis, if you will,
evolution--choose your word--we have come to a point now where
competition is not as great as it once was, and so we have to
have a system of regulation that works. We are trying very hard
to do that.
The bill has some ideas about that. I think we have gone a
long way in the very recent past to implement a lot of the
things that the Congress is concerned about and that shippers
are concerned about.
Are we going to make everybody happy? No, we are not. We
are not. The way this economy of ours continues to develop and
to evolve and to restructure itself and re-engineer itself,
there are going to be pockets out there where the system is not
going to serve those pockets as well as we would all like for
it to happen.
There are going to be organizations, companies, small and
large, that are going to suffer some severe disruptions, if you
will, from time to time in the way they operate their business.
Someone earlier today said is a truck a better way to carry
cardboard? I don't know. I am not in the cardboard business. I
have never been in the cardboard business, but I suspect that
people who are in that business keep a pretty close eye on how
they operate their system and how they structure their supply
chain.
Today's supply chain is very rapid, very fast, very time-
sensitive. If one mode of transportation doesn't meet my
objective in terms of time sensitivity, I am going to find one
that does or I am going to move my business or I am going to do
whatever I need to do so that my supply chain is not disrupted.
The Board, on the other hand, has a responsibility to try
to look into those situations. When someone comes to us with a
complaint, to look into those situations to see if there is not
some regulatory response to what is going on. Sometimes there
is and sometimes there isn't.
All I can say is, as I said in the recent past, we have
tried to develop rules and procedures that makes the regulatory
process accessible to them so that shippers, not only in
Memphis but all around the entire Country and all around the
entire globe as a matter of fact because our trade is so global
now, get the service that they need.
That is a long way around to try to answer your question,
but those are just some thoughts that I had, and I hope in some
way they may be responsive.
Mr. Cohen. It is a long way to Capleville.
Mr. Buttrey. Yes. Nobody knows where that is but us.
Mr. Cohen. It is where all the rails are.
Chairman Nottingham, Mr. Spitzer says in his testimony that
evidence suggests the STB process is skewed in the railroads'
favor. He also quotes a report from a coal and energy price
report that says that people realize they can't win with the
current STB, so they have to take it back Congress.
Do you think Mr. Spitzer's comments are accurate?
Mr. Nottingham. Well, I prefer not to argue with individual
witnesses today. He will have his opportunity to speak.
I would just like to say that it does occur to me that too
often, whether it is in some of these advertisements we see
floating around the town, in the press or in some of the
advocacy pieces that come across our desks, this Committee see
plenty of them, it occurs to me that a lot of stakeholders
wrote their talking points a couple years ago probably and
haven't actually spent quality time looking at the actual work
and performance of this three person Board in the last 13
months and the number of sweeping reforms and changes we have
initiated.
I can understand why they don't want to do that because if
they actually look at our reforms and our proposals and give
them the credit, I think with all due respect, that they are
due, it does call into question some of the talking points that
you have heard already earlier today and you will hear again
about the history of the Board and what some past Board did or
didn't do.
It is frustrating for those of us who are actually in the
arena day to day, wrestling with real cases and real disputes
and moving forward real reforms over the objections, in many
cases, of the railroads who are dragging us into the courts as
we speak, trying to appeal many of these, and on occasion some
shipper groups who have concerns.
I just encourage everybody to take a fresh look at what is
actually going on. I know this Committee will. Because I think
there is a real story to be told about meaningful reform and an
Agency that is committed to improving the way we do the
people's business.
Mr. Cohen. Thank you.
Thank you, Mr. Chairman.
Mr. Oberstar. We certainly will watch very closely what the
Board is doing and follow it. I must say that the Board is
moving in ways that it has not done since its inception.
The gentlewoman from California, Mrs. Napolitano.
Mrs. Napolitano. Thank you, Mr. Chair, and thank you for
holding this very important hearing on railroads.
My district has a lot of small business, a lot of
manufacturing, small manufacturing. The companies there in my
district rely on moving their goods for fair rates and adequate
service. In the past, I have had businesses complain about the
issue of demurrage. I haven't heard that recently for a number
of reasons. I guess because I will pick up a phone and I will
call a railroad, very simple.
But given the fact that in my district, the whole Alameda
Corridor East traverses and the increase in traffic and the
already burdened rail traffic going through my district kind of
sets back some of the small businesses' needs to move their
goods. So how do we do that?
Another question I would pose to the three gentlemen from
the Board is how do I tell my businesses, here is a number, if
you have an issue that you feel is hurting your business to use
to call?
I don't know that they know. I didn't know. Some of those
things that are important to my district, to the continuing
economy in my district, that it is not going to be overshadowed
by the increase in traffic of imported goods to the rest of the
United States is a big concern. That is one question.
Mr. Nottingham. Thank you. I will take a stab. I know my
colleagues probably have plenty to say on this and more
experience than I do working on these issues.
Demurrage, you mentioned, is still a very active area of
concern. We hear concerns all the time about demurrage charges
or charges for storing, basically, cars on property. An
effective and efficient rail system depends on empty cars
getting put back into commerce quickly, and we see it on both
sides. Sometimes we hear from shippers, saying, hey, I unloaded
a car three days ago. I want to get rid of it, and now I get a
demurrage fee sent to me.
We actively work these out. We do have a phone number. We
will make sure we get that to you right away. Board
commissioner offices handle calls regularly. We actually have a
very active consumer assistance program.
You are right, Congresswoman Napolitano, describing your
district. You are really in that kind of proverbial ground zero
of international commerce. You know that, and you don't need me
to tell you that. I know, having been out in that area, the
challenges that that evokes for neighbors, residents,
businesses. You have got the whole world, in some ways, coming
through in freight cars and intermodal containers.
It is so important that we keep that system moving, and at
the same time, that we don't treat any community as just a
crossroads, but that the community knows it can have access to
the system of interstate commerce as well and get that service
provided.
So if you ever get concerns from shippers or complaints
about any of those issues, please put them in touch with us.
Call any of us. Call my office. We will get on it right away.
Mrs. Napolitano. Thank you.
Anybody else?
Mr. Mulvey. This has become a problem, especially with
railroad capacity and getting more and more constrained. The
railroads have been changing their rules on demurrage and
tightening the rules on demurrage as well as raising charges.
Sometimes you have bunching problems where the shipper
needs five cars a day and all of a sudden gets no cars for four
days and then 25 cars show up at one. He can't handle them all
or they come at times when they can't be unloaded because the
shipper has problems with his workers and when they can work.
This is an ongoing problem.
As the Chairman said, we do have a number which shippers
can call. We will get that number to you. We often are able to
work with the railroads and work out these problems, but they
are ongoing.
Mrs. Napolitano. Anybody else?
Mr. Chair, we recently did a Congressional delegation visit
to three countries on high speed rail, London and Paris and
Spain. One of the interesting things, and I heard the Chairman
address this in his comments, was that all those high speed
rail groups specifically spoke to the fact that they own the
property. The government owns the property. So for them, mass
transit is a priority for people to move.
The United States leads in being able to move product, but
we fall desperately short in moving people. And so, how do we
come to a balanced approach?
Not to say back to the railroads, we are going to take our
land back and utilize it for the benefit of the people who pay
the taxes but rather be able to say how do we address without
being heavy-handed and ensuring that we look at not losing the
economy that is created by the transportation of goods.
Mr. Nottingham. I am glad to hear about your trip. I had a
chance in my past job at the Federal Highway Administration to
manage several offices, one which was the International
Programs Office, and I had a chance to occasionally get
overseas and see what other countries are doing in the area of
both highways and transit and rail, including China and riding
the Maglev Train with Secretary Peters and exploring how those
projects and systems get paid for and what the tradeoffs are.
In our Country, you are right, we have put a premium on
using our rail system to move freight, and we have a world-
class model that nobody outperforms in productivity and
efficiency of moving freight rail, large amounts of tonnage
across large distances. So we can take a lot of pride in that
as a Country.
As we talked earlier today, it is threatened by capacity
constraints and some under-investment that needs to be
addressed over the years, but it sets up a real challenge in
how we then try to transpose onto that system, as many people
often suggest, a world-class passenger rail and a high speed
passenger rail system onto the freight system as opposed to
building up a separate system or a side by side system.
I do think that it is not just a question of our current
freight system not serving people. The freight, of course, is
going to people. It is going to the shelves of the stores we
all shop at, and it is employing people, creating jobs. More
importantly, from a transportation perspective, it is getting
trucks off the highways.
So if we aren't extremely careful how we encourage the
expansion of passenger rail, which I am personally a strong
believer in and live two blocks from an Amtrak station in
Fredericksburg, Virginia. I would love nothing more than to see
higher speed, better passenger rail.
We have to be very careful that we don't just drop a big
unfunded band-aid or a burden onto the railroads with the
result that they can't manage their freight business. That
traffic then goes back onto the highways, and then we actually
have a worse problem. We have a less efficient railroad system,
we still have a marginal passenger rail system, and we have an
even worse highway system.
The issues and the stakes are extraordinarily complex and
high, but it needs to be addressed.
Mrs. Napolitano. Any suggestions?
Mr. Nottingham. The Board, I just would say we don't hold
ourselves out as experts in passenger rail and transit. Each of
us brings experience. I will let my colleagues speak to that.
I just would say it gets back to my major point earlier
about the need to build more infrastructure. We are not going
to be able to have a world-class passenger rail system if we
don't build some new track because if we just ask the freight
railroads to make it happen, we are going to see all kinds of
unintended consequences that will hurt everybody: highway
users, consumers, freight railroads, railroad passengers.
We have got to set up some programs and procedures and
polices that actually result in getting some new track built.
Mr. Mulvey. As something of an expert on passenger rail, I
did my Ph.D. thesis on Amtrak when it was first getting
started. So I had been in this business for a while when I
worked with Mr. Oberstar on the high speed rail bills, et
cetera.
But I think it is fairly clear that if you are going to
have high speed rail systems like you have in France and
Germany and Italy, you are going to have to have dedicated
right of way. It can be in the same right of way as freights,
but it has to be on dedicated track.
It is going to take an enormous investment. Many of the
proposals to expand higher speed services in the Country bring
the speeds up from 40,50 miles an hour to 70, 80 miles an hour.
That is an improvement, but it doesn't give you the kind of
service that you are seeing over in Europe. To get that, you
need an enormous amount of investment in rail transportation
infrastructure.
I would hope that you could make investments in rights of
way that would benefit both the freight and the passenger
services simultaneously so that the freight railroads see the
high speed passenger stuff as something that benefits them as
well. By doing that, you can get the freight railroads and the
passenger railroads to work together and make that investment.
But to try to put high speed passenger trains on today's
freight railroads would only bring the problems that Chairman
Nottingham talked about, and you would have no winners.
Mrs. Napolitano. Thank you.
Mr. Chair, I have a whole bunch of other questions, but I
would like to submit them in writing if I may.
Mr. Oberstar. Thank you. We all have a lot more questions
than we have time with which to engage the Board.
Mrs. Capito?
Mrs. Capito defers at the moment.
I just want to pick up on Dr. Mulvey's observation about
passenger rail. While this is not a hearing on that subject,
that is always an issue before this Committee and one to which
we will devote time at later hearings in the Rail Subcommittee.
It was the railroads, which in the 19th Century in a period
of roughly 20 years, we see nearly 8 percent of the land
surface of the United States. It held onto that land. It kept
that right of way instead of selling it off. For whatever money
they made or wherever that money went, we have those rail
corridor rights of way.
Mr. Mulvey. A lot of it was sold off and a lot of it was
developed. A lot of the monies that went to made the railroad
captains of industry, or the robber barons as they were called,
rich but did not necessarily help the railroads. As you said, a
lot of those rights of way are gone now.
Mr. Oberstar. Mr. Clayton, we have hardly laid a glove on
your today.
Mr. Clayton. That is okay.
[Laughter.]
Mr. Oberstar. You made some very pertinent observations in
your testimony. The average freight revenue per carload for
major trains has increased 39 percent while the average freight
revenue for all commodities increased only 24 percent. Now if
we had excluded grain from that number, it would been even
less, right?
Rates on corn, sorghum, soybeans, wheat have gone up 41,
38, 53, 31 percent, respectively, you say. Grain shippers bear
a greater responsibility for car supply and other functions
that railroads formerly provided. Senator Dorgan made an
observation of those.
Is it appropriate for a company like, say, Cargill to have
to be the owner of 19,600 rail cars and store them on its
property?
Mr. Clayton. I am not sure exactly how I want to answer
that question. I do think, Mr. Chairman.
Mr. Oberstar. Well, our job is to make you uncomfortable.
Mr. Clayton. You will get me there. I am sure.
I will make a couple of observations, though, if I could.
One, I think there may be good business reasons why a grain
company, in fact, might want to invest in cars.
Mr. Oberstar. None of them willing, though.
Mr. Clayton. Well, there may good business decisions along
with that.
The more important point, I think, that I tried to raise
earlier on in the hearing is that from agriculture's point of
view, what is important is the total cost of moving the
commodity. In part, rail rates play a role in that, but to the
extent that certain functions have been rolled off to others to
incur the costs, those don't get reflected in rail rates. Those
are additional costs.
Ultimately, in terms of the competitive position of
agriculture in this Country, it is the total cost of moving a
product that matters.
I would just hope as we look at some of these issues that,
while I can appreciate the interest, the need to focus first
specifically on a given mode of transportation as you are
doing, from the standpoint of the transportation user
community, it is the total cost of moving a product that
ultimately matters and the components matter as well, but one
needs to be holistic, I think, in looking at that kind of a
question.
Mr. Oberstar. Yes, that is true.
But you go on to say rail emphasis on unit trains causes
shippers to make more significant capital investments in
sidings, grain inventory, storage capacity, and loading
facilities--shippers to make those investments--and that USDA
is concerned about the percentage of grain tonnage and revenues
moving at rates exceeding revenue to variable cost.
Now we know that grain, in some cases, moves in
international markets on as little as an eighth a cent a
bushel, right?
Probably the world's most significant grain export facility
is New Orleans.
Mr. Clayton. Yes, sir.
Mr. Oberstar. If you look at a map of the two hemispheres,
North and South America, and you look at Recife, Brazil, the
point of Brazil that sticks out into the South Atlantic Ocean,
it is 2,500 miles closer to markets than New Orleans. That is a
five-day sailing advantage at least.
Now if rail rates in the United States are so high as to
impose costs on grain shippers, they are that much less
competitive in those markets that Brazil serves competitively
with U.S. shippers.
Soybeans, for example, in that delta region of Brazil, the
Brazilian Government and the States of Brazil accelerated their
exploitation of the soil and of the development of soybeans, a
major competitor for the United States. If soybean rates have
gone up 53 percent, according to your testimony, we have been
that much less competitive in the international marketplace
with East Africa, West Africa and the Pacific Rim, if shippers
from Brazil have that kind of a shipping advantage.
That has got to be a concern to the U.S. Department of
Agriculture. It has got to be a concern to the Board. It is
certainly not a concern to the railroads. They are shoving the
rates up ever higher as they can.
For the record, it will be noted that Mr. Clayton is
nodding.
Mr. Clayton. I was searching for the question, Mr.
Chairman, but I did agree with what you said.
Mr. Oberstar. I expected you to draw your own conclusion.
Dr. Mulvey and Mr. Nottingham, one of the requirements in a
rate case for an appellant is to create a virtual railroad. In
the days when they were losing lots of money, I wonder why in
God's name you would ask them to do that and ask them to lose
that amount of money in creating a virtual railroad.
But in the days that they are making a lot of money, how do
you expect a shipper, a chemical company, a power company, an
REA to create a virtual railroad in order to pursue their case?
Isn't that an unreasonably high, steep hill to climb to
make your case or do you think this is a justifiable
responsibility of an appellant in a rate case?
Mr. Nottingham. Let me take a stab, Mr. Chairman, at an
answer, and then I will also ask Commissioner Mulvey to help.
He has more years experience on the Board and expertise on
this.
It is. It is a tall order. It is a high mountain to climb,
I must say, and there are reasons for that. Some of these major
disputes get up into the tens and I mentioned even eclipse a
hundred plus million dollars when you look at the Board's power
to prescribe a rate for 10 or 20 years in support of shippers
in the past, unfortunately for them not real recently.
Most days, I think it would be a lot easier to come up here
and say we have an exact 50 percent ratio. On any day of the
week we have 50 percent shipper wins, 50 percent railroad wins,
but it is never that simple with complex cases that get brought
forward.
We have to have a test. We have to be basically the
opposite of arbitrary and capricious. We have to show, before
we are forcing a private sector business, a railroad, to
actually change their rates and pay millions of dollars to a
customer, that we have actually done an extremely quantitative
economically-based analysis. That is how this so-called stand-
alone cost model has developed, and it has been endorsed by the
courts under appeal a number of times.
I would welcome suggestions for a better model if people
want to come forward. It has got to meet that test, though, of
not being arbitrary and capricious. It is the model that I
walked in and inherited. It seems to be very economically
sound, but we are always open to new ideas as well just as we
are with the very major and controversial issue of our
measurement of cost of capital.
Dr. Mulvey, anything?
Mr. Mulvey. The reality, of course, is whether or not
somebody could come into the industry, have a railroad, operate
a railroad for less and charge the shipper less than the
railroad is asking to charge.
What you are asking the shipper in building this virtual
railroad is say: Look, if you put together a railroad with
certain kinds of traffic and certain kinds of routes that carry
traffic, other traffic as well as your own traffic, and if you
meet all the expenses that the railroad needs to make to pay
its crews, to pay for the materials, to keep the railroad
operating and to replenish capital, if you took all of those
costs, what rate would you charge yourself in order to cover
your costs and is the rate the railroad asking for on those
bases, unreasonable?
That results in rates that are many times or a couple of
times higher than 180, the 100 percent revenue to variable cost
ratio because we say that railroads are allowed to
differentially price and to take captive traffic and extract
from them a premium to cover in those markets where the ratio
is less than 180.
Is it a good model? It is the model that the courts pretty
much approved. It is not necessarily what the Board wanted to
do, but it is what the court in the McCarty Farms case said is
a model that comports with current economic bearing.
I agree with Chairman Nottingham. We would if there was a
simpler less costly model that would pass muster with the
courts. Our hope is that our simplified standards and our three
benchmark approach will be one the courts will accept and not
say that that is arbitrary and that the new approaches do
comport with economic bearing.
Mr. Oberstar. There is a great deal of work for the Board
to do yet on this subject matter. At least in the last year,
the Board has begun to address this issue and to think it
through and reassess, but the 180 percent factor seems to me
needs to be adjusted.
Mr. Mulvey. As I said before, it is not something that we
can ever find out where it came from or what the science was. I
think you can best call it the best guess at the time. But I
think that you are right, that it is something we ought to look
at and see whether or not that is the correct standard.
Mr. Oberstar. Maybe it should be removed from law.
Mr. Mulvey. That is certainly an option.
Mr. Oberstar. In the Civil Aeronautics Board cases, where
airlines were competing for market entry and rates and where
rates were challenged, I don't think the CAB required the
challenger to go through such hoops. My recollection is that
was not the case.
Mr. Mulvey. No, it was not. They didn't have the same kind
of standard as we do. It was different. Of course, David
Heymsfeld on your staff would be very expert on that issue.
Mr. Oberstar. Mr. Shuster, no further questions?
Mr. Baker?
Mr. Baker. I will be real brief.
Mr. Chairman, just by way of an authority question, does
the STB have any control over ownership issues or an ability to
affect ownership issues, for example, the hedge fund
acquisition of controlling interest of rail stock?
The reason for bringing the question is that we do have
Federal prohibitions on ownership control with the airlines for
evident reasons. I worry about the same consequences to much
less consumer volatility but from the standpoint of delivery of
vital services and goods.
What could you do if an Iranian investment group wanted to
buy out five of the big railroads?
Mr. Nottingham. The best way to answer that is to say we
have broad authority in cases not like the one you are
proposing, in cases where a railroad seeks to merge or buy
another railroad. We have extremely broad powers there to
approve, disapprove, approve with conditions, force line-
sharing arrangements in certain areas for certain reasons, just
very broad power.
The discussions we are seeing out in the business press and
elsewhere talk about hypothetical cases that we have not yet
seen yet, but we have seen the real development of something
exciting from a level of investment perspective, that major
firms with access to private capital, not taxpayer dollars, are
actually putting those monies into the freight railroads to
help pay expenses and expand the system, we hope.
Now if some of those entities were to then actually decide
they want to get actively involved in the railroad business and
start managing a railroad, seek control of a board of
directors, for example, making a play as they call it in the
industry at control of a railroad, we would not have, if they
are non-railroad, we don't have much to say about that.
Mr. Baker. There is a concerted effort because the rails
have a relatively low debt to asset basis compared to
traditional leverage in the marketplace. They are significantly
under-leveraged, and that is why Buffett and others are
aggressively seeking rail ownership, to try to leverage
themselves up, spin up the value of those shares and reap the
profit and leave them to deal with it later. We can see that
repetitively through other areas.
So it is a two-pronged concern: Structurally as a board,
being logically constrained by due process, whether it is
advisable for us to consider granting authority paralleling
that granted to the airlines regulatory process to specifically
prohibit foreign ownership, given these terrorism concerns.
Then, secondly, as a business matter, to worry about the
long term as the Board properly does, is it advisable to allow
an investment takeover group to come in and drive the debt
ratios up and then leave town?
I worry about that from a generational perspective of safe
and sound operations. If you don't have the authority for
prudent financial governance or if there is a question, that is
something I think we should seriously investigate.
With that, I yield back, Mr. Chairman.
Mr. Nottingham. Mr. Chairman, could I just try to respond
briefly to that?
Mr. Oberstar. Briefly.
Mr. Nottingham. Thank you, Mr. Chairman.
I just want to clarify because this is a very important
area and an emerging area. As soon as a non-railroad actually
enters the business, though, and takes control under your
hypothetical, then of course that railroad will be completely
under the existing regulatory oversight of the STB. You don't
get some kind of carte blanche because you came in as an
outsider.
But you are right. You touched on an interesting gap in the
statute. It is an apparent gap that basically we don't have
broad approval of a transaction. It could happen overnight
before we would necessarily even know about it.
I would just urge the Committee to proceed with great
caution on doing anything that would discourage non-U.S. funds
from coming into our infrastructure, our rail infrastructure.
The Canadians, for example, are heavily involved currently in
moving freight and running railroads in the U.S.
From the perspective of looking at a situation that needs
investment, if we say that non-U.S. investment is not welcome
here, I think we want to be very careful and understand how it
is going to impact our ability to meet the challenge of
building out our system.
Mr. Baker. No. I don't deny that. We love people's money.
We just don't necessarily want voting control. In the same form
and fashion that we considered the airlines constraint, it may
be warranted in light of the essential necessity of the rail
service to the economic function.
It is just a question for review and, if appropriate,
comment at a later time. Thank you.
Mr. Oberstar. I thank the gentleman for raising those
issues, as usual, in a thoughtful questing manner.
The matter of rail is an under-leveraged sector attractive
to hedge funds, as you pointed out, something I raised earlier,
we saw the devastating consequences in aviation when Northwest
Airlines was the subject of a takeover. At the time, the two
investors put together with $25 million a piece. For $50
million, they acquired an airline.
I was asked about this, and I said, well, why would you
spend $150 million for a 747 when you could buy a whole fleet
of them for $50 million?
That is what these two investors did, Checchi and Wilson.
They took an airline that had two billion dollars in equity and
a billion dollars in debt and turned it into one that had two
and a half to three billion dollars in debt and less than a
billion dollars in equity, and it went precipitously downhill
from there.
You wouldn't want to see that happen to the rail sector.
There are comparisons. One aircraft engine is equal in cost to
at least that of a locomotive in the railroad sector.
Let me return, Dr. Mulvey, to the question I posed earlier.
Public utility commissions in all of our States regulate the
power entities, and they set reasonable rates, and they do so
without forcing rate payers to establish what it would cost. If
a new utility were to come into this area and build a facility
to compete with the existing one, does that model apply here?
Mr. Mulvey. It is traditional utility regulation, and it
differs from what we do. It is basically cost-based. What is
the cost of providing the service. There is a markup to give a
return to investors, and that is what the rate is. It is much
simpler. It is more straightforward, but that is not what the
law.
Nobody presumes at all that there is any competition in the
utility industry. Pretty much, for the most part, it is a
monopoly where as the argument is that much of railroading is
not a monopoly and only part of it was monopolistic areas. So
we are trying to regulate industry that is a part of an
industry rather than regulating the entire industry as you do
with utilities.
You don't have the same kind of cross subsidization issues
with utilities as you do with the railroads also. In some ways,
the railroads are more complex and more difficult to deal with.
Yes, the utility form of regulation is one in which you could
put back on the railroads, but that indeed would be re-
regulation.
Mr. Oberstar. Thank you.
That is just the start of the vote, and I have one question
for Ms. Hecker.
Are you aware of other Federal Government agencies that
self-initiate cases similar to those of the Board rate cases?
Ms. Hecker. I am also responsible for conducting studies of
Federal communications regulations, and just last year we
completed a review that, interesting, had very parallel
findings to what we observed in the review of rail rates and
the STB role.
Basically, we had concern that there had been such a
commitment to deregulate local markets, that there was no focus
on the effect on competition. We demonstrated that there was a
severe lack of competition. We then talked about the
commission's obligation that in our view the commission had an
obligation, in fact, to be affirmatively examining competition
and couldn't write itself out of the picture by having a
rulemaking that basically declared markets competitive that
weren't.
So it is interesting because it is another network
industry. It is like STB in some senses, largely deregulated
but some remnant regulation and it is that careful balancing.
But like our observation about the STB, we felt the Congress
had built a structure that left a remnant responsibility to
monitor the state of competition and, in fact, much as has
happened here, we have actually the commission focusing on
these issues. These are local competition rates or rates for
very large businesses.
If or you staff is interested, we could share it. Because I
also do airlines and telecom and railroads, it is very
interesting to look at some of the differences of the remnant
regulatory structures that were established, the different
authorities. But the presumption that this competition in our
view, in summary, is one that merits continuing oversight
whether there really is.
Mr. Oberstar. I think there is a strong appeal for self-
initiation authority with the Board. GAO has that authority.
You don't have to wait for Congress or a Committee or a Member
of Congress to ask you to inquire into something. You have
authority to look over the entire scope of Government agency
activities and see whether they are living up to their mandate
under the law.
Ms. Hecker. That is quite right. While we don't use it
lightly, I think the Controller General has used it in a very
strategic sense to raise major issues about the fiscal
condition of the Country, and it is one that no single
Committee was raising those issues for us.
Mr. Oberstar. There could be a question then in extending
the authority of the Board that we might have runaway Board or
they might exceed their authority. Perhaps it would be useful
if you meditated on that matter and gave us some thoughts about
limits to such authority.
Ms. Hecker. We would be glad to reflect because open-ending
that somehow there is a new regulator and that there is
regulation potential would have a chilling effect on the
performance of the industry. So it can't be done lightly, but
we think the statute already has an investigatory initiating
authority that is in place.
Mr. Oberstar. I concur with that, but I think we need to
approach it with further thought.
With that, I will call the second panel and thank our first
panel for very long endurance at the witness table and for your
very constructive responses to Members' questions and hold you
excused.
Our next panel consists of Glenn English from the NRECA;
Ron Harper for Basin Electric Power; Gary Spitzer for Chemical
Solutions Enterprise, DuPont; Terry Huval for Lafayette Utility
Service; Susan Diehl for Holcim; Wayne Hurst for the
Association of Wheat Growers.
We will stand in recess for a period of time. It could well
be an hour. I will say to all we will pursue the hearing until
whatever time it takes in the day to conclude hearing from all
the witnesses. Whatever refreshment you need right now, take
care of it.
[Recess.]
Mr. Oberstar. The Committee on Transportation and
Infrastructure will resume its sitting.
The Chair has already called the panel, panel two, but the
Chair at this time will recognize the gentleman from Louisiana,
Dr. Boustany, to introduce a constituent.
Mr. Boustany. Thank you, Mr. Chairman.
It is my privilege to introduce a constituent of mine, Mr.
Terry Huval, who is a panelist today. Mr. Huval is the Director
of the Lafayette Utility System in Lafayette, Louisiana, which
is also my hometown. LUS, Lafayette Utility System, is the
largest public power provider in Louisiana, serving 60,000
electric, water and wastewater customers.
He also serves as this year's Chair of the American Public
Power Association, the industry trade organization representing
the Nation's 2,000 plus publicly-owned electric utility
systems.
Since the beginning of his service to LUS as Director in
1994, LUS has propelled itself to be recognized as one of the
leading electric utility companies in the Country, setting
benchmarks for customer responsiveness and competitively priced
services. He was awarded the APPA James Donovan Award in 2007
for his innovative leadership on Lafayette's Fiber to the Home
Initiative.
Terry has previously testified on rail issues affecting our
community in Lafayette, Louisiana, in the Senate Commerce
Committee, the House Transportation and Infrastructure
Committee as recently as 2004. He has served as a member of the
Executive Committee of Consumers United for Rail Equity in 2005
and 2006.
I would like to formally welcome Mr. Terry Huval to the
Committee. Thank you.
Thank you, Mr. Chairman.
Mr. Oberstar. Mr. Huval, with that splendid introduction,
big things will be expected of you.
[Laughter.]
Mr. Oberstar. We will begin with our former colleague, Mr.
English, my classmate of 1974 and the 94th Congress. It is good
to see you back here in the halls of the House. Although we
didn't serve on the same Committee together, we certainly
served together with great affection and friendship and great
admiration for the gentleman from Oklahoma.
Please proceed.
TESTIMONY OF GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL
RURAL ELECTRIC COOPERATIVE ASSOCIATION; RONALD R. HARPER, CHIEF
EXECUTIVE OFFICER AND GENERAL MANAGER, BASIN ELECTRIC POWER
COOPERATIVE; GARY SPITZER, VICE PRESIDENT AND GENERAL MANAGER,
CHEMICAL SOLUTIONS ENTERPRISE, DUPONT; TERRY HUVAL, DIRECTOR,
LAFAYETTE UTILITIES SERVICE; SUSAN M. DIEHL, SENIOR VICE
PRESIDENT, LOGISTICS AND SUPPLY CHAIN MANAGEMENT, HOLCIM, INC.;
WAYNE HURST, VICE PRESIDENT, IDAHO GRAIN PRODUCERS ASSOCIATION,
ON BEHALF OF THE NATIONAL ASSOCIATION OF WHEAT GROWERS
Mr. English. Thank you very much, Mr. Chairman. I
appreciate that, and it is certainly a pleasure to be here and
to see that you have ascended to such a powerful position here
within the House of Representatives, a classmate of mine.
Mr. Oberstar. Well, elevation, yes.
Mr. English. It is always good to see classmates.
Mr. Oberstar. You just wait around long enough, good things
can happen.
Mr. English. I appreciate that, Mr. Chairman, and I
appreciate the opportunity to testify before the Committee.
I think most Members of the Committee know that I am the
Chief Executive Officer of the National Rural Electric
Cooperative Association. I also have the honor of being the
Chairman of the Consumers United for Rail Equity. I am wearing
two hats today, Mr. Chairman.
Some of that, though, I think it is worthwhile to think
back just a little bit about 1980. We were both here. Most of
the Members of the House were here, but there is something to
be said, I think, for understanding what the intent was of the
law and what was promised, and that is really where I think so
much of this should come from.
I noticed the time that I was in Congress, one of the
things I became very frustrated about and anybody who has been
very active, I think, in the legislative process understands
the frustration I am talking about. When you see a piece of
legislation pass, it goes over to the Administration or some
regulatory body and you see a group of people interpreting it
differently than what you intended whenever you passed it. That
is a very frustrating thing to take place.
If you recall back in the late 1970s, when we had a little
effort on a legislative veto, you remember that, in which you
would have one house veto and you would have these rules and
regulations come back and you could bring them to the Floor of
the House. If, in fact, the Congress found they were not in
keeping with the intent of the law, what the Members passed,
they could veto it.
Unfortunately, the Supreme Court said that was
unconstitutional, but that does not, I think, set aside the
importance of Members of Congress being able to see their
legislation carried out in the manner intended. I would suggest
to you that is the real issue that we have before us today.
Now everyone has talked about the Staggers Rail Act and the
success it had in bringing back vitality to the rail industry.
I think there is a lot of truth to that. I really do.
But there is that little piece, that little provision with
regard to captive shippers, and that one little piece has not
been in keeping with what Harley Staggers intended, and I don't
think anyone can disagree with that. I don't care what side you
are on. I don't think anyone can say that this thing has been
carried out in the manner in which it was intended.
If you remember back at that time, we had the Interstate
Commerce Commission, and they were a very active and powerful
commission at that time. They were really aggressively
enforcing what they saw as the requirements of the law as it
was passed.
Now the Interstate Commerce Commission is gone. We have got
the Surface Transportation Board, and in all honesty I don't
think it has the same kind of attention that we saw with the
Interstate Commerce Commission, nor do I think they have been
as active, nor do I think they have been as aggressive.
That brings us back to the problem that we are facing and
the reason that your legislation, Mr. Chairman, is so
important, and that is the fact that we deserve, those people
who are subjected to this law, those who are captive shippers,
we deserve to have the Staggers Rail Act carried out as
intended by the author.
That means that we deserve to have those protections that
Harley Staggers wrote into this legislation. We deserve to have
that enforced, and that is not taking place today and that is
what the problem is. That is the bottom line.
Now if you recall at that time, we had, as you pointed out
earlier today, Mr. Chairman, about 60 railroads. We were going
to bring competition in, and we were going to see all these
improvements take place. Well, 60 railroads competing, now that
is real competition. I think we would all agree that is a lot
of competition. You have got 60 Class I railroads competing.
But over the years, we have seen this thing shrink down.
Now, we don't have 60 Class I railroads. We don't have 40. We
don't have 20. We don't have 10. We don't even have five. We
have got four that have about 90 percent of the business in
this Country. That is what this thing has come down to, only
about four are left.
Anybody that is not served on a rail line on which you have
got two of those railroads operating, there is no competition,
and that is what is known as monopoly. You have got monopoly
power in those areas. Whenever you have got a monopoly power,
then you have opportunities for abuse and whenever you have a
regulator that refuses to regulate.
Mr. Chairman, I would like on page three to amend my
statement. I think there is an error in there. It says the rail
industry continues to be protected by the Surface
Transportation Board that is either unable or unwilling to
provide adequate oversight.
I think we ought to strike that unable. I think they are
just unwilling. I think that is where we are right now. That
has been the history of the Surface Transportation Board for 20
years. They have been unwilling.
Now, as I understand it, the reason that they say they have
been unwilling is because of the fact, well, we have got to
take care of the rail industry. The rail industry will go
broke. The rail industry is vital to the economy of the
Country.
That has been the case all along. We suffered this for
about 20 years.
Now, all of a sudden, the rail industry is not going broke.
They are in the black. They are the darlings of Wall Street.
Everybody wants to buy into them, take advantage of them. So,
obviously, they have done very well financially.
We have waited 20 years, Mr. Chairman, 20 years to see the
Surface Transportation Board--it started out as the ICC, but
the Surface Transportation Board--carry out promises that were
made in the Staggers legislation. That is what we deserve to
see happen today.
Now the GAO concluded that the rate relief process under
the Surface Transportation Board is largely inaccessible and
rarely used. Rarely used, now why would it be rarely used?
Well, I would suggest the reason it is rarely used is because
those who are stranded shippers see little hope in the Surface
Transportation Board taking care of the needs of the stranded
shippers.
Mr. Chairman, we have got record profits, record share
prices, and we have got enough revenue in the rail industry to
buy back billions of dollars worth of their stock, and we are
seeing that happen today. That is where we are today.
We have a situation in which the bulk of that money is
coming from stranded shippers. It didn't come from those
shippers where you have got competition.
You saw the GAO's graph up here where it showed in real
money how the rates were going down. You see the railroads will
produce a chart similar to that showing the rates are going
down.
What we should see is a chart that shows the difference
between those shippers where there is competition and those
where there is no competition. The rates are going down steeply
for those where there is competition. Where there is no
competition, what we see is the rates are going up.
That chart shows four different industries. That is just
the first quarter of this year. Look at the difference in those
rates. Now tell me that is what Harley Staggers intended. Just
tell me if that is what Harley Staggers intended.
I would suggest to you there is no way that this is meeting
the intent of the law. There is no way that the promise that
was made 27 years ago is being carried out here, and that is
what I think this Committee needs to address.
We have got a little issue here, Mr. Chairman, of the
integrity of the Congress--the integrity of the Congress. The
question that we have here is: Is the Congress simply going to
allow any group, I don't care who they are or what part of this
government, to ignore what Congress writes into the law, to
interpret it in their own way and to go merrily down the road?
Is Congress going to turn their back on that?
Now I would suggest to you if you disagree with that
provision in the Staggers Rail Act, the honest thing to do is
to offer an amendment to the Staggers Rail Act to repeal that
provision. Either Congress insists on its will being carried
out, the law that it passed being carried out, or repeal it,
get rid of it. But don't get into the sham that we have been in
for 20 years to pretend like there is some kind of protection
for stranded shippers, some little fig leaf out there.
We keep hearing the promise, next year, next year, next
year. We even heard it again today, Mr. Chairman. We heard
people promise, oh, we are going to change. Oh, we have got a
new approach. Oh, we have got a study underway.
Well, it is 20 years. My goodness, how many years do we
have to go before the Congress says enough is enough?
I would also suggest to you, Mr. Chairman, what we need to
have done here is look for results. What is the bottom line?
You heard members of the Surface Transportation Board say,
oh, we got some wins for the shippers and we got some wins for
the railroads, and I don't know when. It has been 2001 since we
had a win for the shippers. Before that, well, we had some wins
for the railroads--all this kind of stuff.
What it really comes down to, bottom line, the bottom line
it comes down to is what kind of relief has been provided to
those shippers? How much?
What they classify as being a win, most people classify as
being a loss. If you shave off 5 percent of a proposed rate
that is going to be increasing by 50 percent, I wouldn't call
that a win, but the Surface Transportation Board does, and that
is not right. It is not right.
The 180 percent of variable cost is an issue that was
raised today. Where did that 180 percent come from? Well, what
we heard was it was pulled out of thin air or some staff
thought it up during the conference.
Mr. Chairman, I will tell you this. I will tell you this.
Anytime we go through the legislative process, what we are
looking for is fairness. We are trying to do the right thing,
and I would suggest to you that is where the 180 percent came
from.
Now you think about it in terms of where Harley Staggers
was and what the legislation. Remember when you put that
together. You were on this Committee when they were talking
about coming up with this.
What they were trying to find was a place in which we knew
that it was abusive. You were getting up in the range that it
was just hard to see why it wasn't abusive and somebody needed
to take a look at it. One hundred and eighty percent sounds
pretty darn abusive to me, if you are looking at 180 percent of
variable cost.
I would suggest to you that Harley Staggers, Members of
Congress back in those days would look at that and say, well,
that 180 percent, somebody ought to take a look at it if it is
in excess of 180 percent. They were, in effect, saying well, we
will give you 180 percent. Anything above 180 percent ought to
be looked at by somebody because the chances are pretty good
that that is abusive.
What we are finding today is that this whole concept has
been turned on its head, Mr. Chairman. The Surface
Transportation Board comes back and says, you can't charge less
than 180 percent.
Anybody ever heard the Surface Transportation Board come
back and saying, golly gee, you have got too much? No. In fact,
now the question is: Is it too little? That is contrary to what
Harley Staggers had in mind.
The question is Congressional intent. The question is: Is
Harley Staggers' provision going to be carried out as it was
intended?
The real question that we come down to is not re-
regulation. The question is are you going to enforce the darn
law as you wrote it?
If you are not going to enforce it, then repeal it. Repeal
it, Mr. Chairman.
I have heard a lot of discussion, a lot of talking take
place here today. I am against regulation. Oh, I am against
regulation. I am for a free market.
I haven't heard anyone profess that they are opposed to
monopolies. I haven't heard anyone who has professed I am
opposed to abusing consumers.
I represent a consumer-owned organization. We have got 40
million consumers that own electric cooperatives. We are being
abused by each and every day by the actions of the railroads,
and the Surface Transportation Board could care less. That is a
fact.
Mr. Chairman, I want to commend you for your legislation. I
hope that you will continue to press forward. We want to work
with you and do everything that we can. We want to make sure
that the intent of the law as passed under the Staggers Rail
Act is fully carried out, every provision, and the Surface
Transportation Board be made to follow that intent.
Thank you very much.
Mr. Oberstar. If this were a tent revival, we would all be
saved.
[Laughter.]
Mr. Oberstar. I thank the gentleman.
Mr. English. You can be saved, Mr. Chairman, and I will be
happy to lay hands on if it does any good. I have got some
folks over here will be happy to lay hands on.
Mr. Oberstar. Thank you very much for that compelling
presentation.
Mr. Harper.
Mr. Harper. Yes, thank you, Mr. Chairman.
To start with, I am the CEO and General Manager of Basin
Electric Power Cooperative. I stand before you today,
representing the Missouri Basin Power Project which otherwise
is known as the Laramie River Station in Wheatland, Wyoming.
I want to put a couple stakes in the ground. When we got
into this process, and I will go through that here in a minute,
we took a position that we all recognize that we must have a
financially viable and strong rail system in this Country. That
is not the issue. We have been consistent in that message.
The second thing is I would like to applaud the STB for
recognizing that they need to be doing something to change the
processes. Unfortunately, some of their changes prejudiced our
case, and I will talk a little bit more about that in a minute.
A little information about the Laramie River Station, it is
approximately 175 miles south of the Powder River Basin in
Wyoming. We are exclusively captive to the Burlington Northern-
Santa Fe Railroad.
We had a 20 year contract that was due to expire in October
of 2004. Our negotiation process, if you will, started at a
reception that I was in attendance at in November, 2003, when
then an executive from Burlington Northern walked up to me and
said, Ron, I just want to let you know that you have enjoyed a
below market 20 year contract. Now it is our turn to get it all
back.
I found it interesting that you would start negotiations
for rail service under those terms. So needless to say, through
the process of close to a year, we were unsuccessful in
negotiating and that is why we then filed a complaint before
the STB on October the 19th, 2004.
Since that time, it has been quite an adventure to say the
least. We learned things about the rate-making process that
continues to make me scratch my head. I have spent 22 years in
Wyoming under rate regulation, and I understand how to make
cost-based rates and so on, but to create a fictitious and
mysterious rail system to justify rates, I find quite amusing.
But having said that, I would like to recognize that we
went through this process. It started again on October 19th,
2004, and lasted until February of this year. February 26th, I
believe it was. We spent $5.1 million on this case.
At that time, the February date, is when the STB decided to
suspend our case along with three others and propose to go
through rulemaking. The outcome of that rulemaking cost us
another $870,000, and again our case was prejudiced because of
that, because they changed the rules in the process. So, again,
we are quite concerned about that outcome and what it did to
our case.
We, obviously, on September the 10th did get a ruling, and
it was not good in our favor. It was ruled that we were unable
to prove that Burlington Northern's rates were unreasonable and
actually even questioned why we filed the case, that the rates
were very attractive and we should have basically accepted
those. So, again, it was bothersome from that standpoint.
We have been involved in this process. It has been
grueling. It has been frustrating, and it has been expensive,
again right at $6 million that we have had to go through.
Now, I don't know whether you consider this a small or
medium or large case. I am trying to define that in all the
discussion that took place earlier, but I consider it a large
case because I represent, along with the other five owners on
the Missouri Basin Power Project, the people at the end of the
line, and $6 million to file a rate case in their minds is
pretty excessive.
Here is one volume of the opening remarks. Over there is
just a sampling of the documents that we had to produce in this
case because once they went through the rulemaking we had to go
back and redo our case and refile it because, again, the
rulemaking process. That was that $870,000.
Now where we are at today is that the ruling that they gave
us, we have 30 days in which to decide whether or not we want
to refile because they recognize in their ruling that we were
prejudiced as a result of their rulemaking. So they are giving
us this 30 days to decide whether or not we want to spend
another half a million to a million dollars in this process.
Hopefully, through that we could get a positive outcome.
So, Mr. Chairman, I would submit to you that something
needs to be done for the fairness because I understand in
talking with Mr. English here for quite some time that the
purpose of the STB is to find a balance between the rail
industry and the shippers. I would hope through this process
that you are going through--and I very much applaud your
efforts along with all the other Members--that we can reach
that positive outcome.
Mr. Chairman, I would close by simply thanking you on
behalf of the Missouri Basin Power Project, the consumers that
exist in the nine States that we represent and thank you again
for your efforts.
Mr. Oberstar. Thank you very much, Mr. Harper. That file of
documents is very compelling, silent but powerful testimony to
the concerns the shippers have.
Mr. Harper. Thank you.
Mr. Oberstar. Mr. Spitzer.
Mr. Spitzer. Chairman Oberstar and distinguished Members of
the Committee and the panels, I am Gary Spitzer, Vice President
and General Manager for a global segment of the DuPont Company.
A competitive and efficient rail distribution system is vital
to DuPont's business and future. I want to thank you for
allowing me to discuss our railroad experiences and the reforms
that we believe are necessary.
DuPont is a global corporation founded in 1802 with
revenues of over $27 billion and operations in 70 countries. In
the U.S., we employ 36,000 people in 33 States. We market over
70,000 products and services for many markets including
agriculture, energy, national defense, housing and
transportation.
When Congress passed the Staggers Act in 1980, there were
over 40 Class I railroads. Today, the four largest account for
over 90 percent of U.S. freight rail revenues. Competition
between them has essentially been eliminated, resulting in
issues with pricing and service.
At 80 percent of our U.S. ship points, DuPont is captive,
served by just one railroad. In many cases due to volume,
distance traveled or material characteristics, alternative
transportation modes are not viable. Our recent experience as a
captive shipper shows that these railroads are fully determined
to exercise their monopoly pricing power even if it means
driving us and our customers out of certain businesses.
In an effort to combat excessive and unreasonable rate
increases, some exceeding 176 percent, DuPont has filed three
small rate cases with the STB.
Costs go beyond simple rail rates. A recent study
commissioned by the American Chemistry Council found that
between 2005 and the first quarter of 2007, the five major U.S.
railroads overcharged on fuel surcharges by $6.5 billion.
On service, we cannot reliably predict product transit
times or arrival times. Some of our plants have come
dangerously close to shutdown because of late deliveries. As a
result, we have added rail cars, raised inventory, all further
increasing our costs.
When Staggers was passed in 1980, Congress could not have
envisioned that 50 mergers and consolidations would lead to the
current lack of competition or that the STB would fail to
restrain railroad monopoly power. One such example is the
bottleneck issue. The STB has ruled that carriers are not
required to facilitate competition to or from captive locations
by offering a reasonable rate to the nearest interchange with
another carrier.
We suffer the effects of this at our Niagara Falls plant in
New York. In a competitive scenario, CSX, the only carrier
serving our plant would be required to provide a reasonable
rate for the 26 miles from our plant to the Norfolk Southern
interchange in Buffalo, New York. Instead, we are forced to use
CSX, all the way from our plant to Chicago at much higher
rates. In effect, the anti-competitive decision of the STB has
helped DuPont remain a captive shipper.
DuPont believes the time has come for reform which must
begin with a broken and ineffective STB. Passage of H.R. 2125,
the Railroad Competition and Service Improvement Act, would
remove many barriers to competition between railroads and
require the STB to fulfill its Congressional intent, promote
effective competition, prevent excessive and unreasonable
rates, and ensure efficient and reliable service.
DuPont also supports passage of House Bill 1650, the
Railroad Antitrust Enforcement Act. The Justice Department and
the FTC should be permitted to review railroad mergers under
antitrust law as they can in other industries. Railroads should
be subject to the same antitrust laws and consequences as other
industries. Unnecessary protections for the railroads must end
before their monopoly power harms U.S. competitiveness and our
economy.
In closing, Chairman Oberstar, I want to thank you and
Members of the Committee for allowing me to share DuPont's
views on this important issue. It is time for the railroad
industry to join with Congress and its customers to achieve a
balanced, market-based system serving the common interests of
carriers, shippers and our Nation. DuPont has participated in
such efforts before and stands ready to participate again.
Thank you.
Mr. Oberstar. Thank you, Mr. Spitzer, for your testimony.
Mr. Huval.
Mr. Huval. [Phrase in foreign language]--and thank you to
Congressman Baker for his help and support through the years.
I am Terry Huval from the heart of Cajun Country in
Lafayette, Louisiana, and I am representing today the American
Public Power Association for which I serve as Chair at this
particular time and LUS, the Lafayette Utility System, which is
a municipal-owned utility system in Lafayette, Louisiana.
I want to take the issue to talk about our customers. I
want to talk about my senior class high school English teacher,
Mrs. Moss, 84 years old, lives in Lafayette. She is a widow.
She called me the other night to thank me for what I am trying
to do to make life better in Lafayette, but she doesn't know
that $300 of her annual utility bill goes to pay for the cost
of rail captivity as it affects the delivery of coal to
Lafayette's Rodemacher power plant.
Then to my friend, Matt Stellar, who is an entrepreneur and
decided to build his own jewelry manufacturing business which
is amongst one of the largest in the world and has multiple
locations. He hired 1,700 people in Lafayette. Matt doesn't
realize that last year he paid an extra $120,000 more in his
electric bill because of the cost of rail captivity.
Then our education system in Lafayette, the university, the
schools, the elementary schools, the high schools paid 1.3
million more last year because of the cost of rail captivity.
Cost alone is not the only issue that affects our customers
and affects the customers of other entities that are served by
coal power. Seventy percent of our power in Lafayette comes
from our coal plant. The reliability of service has suffered so
much in the last several years, that we have had to take
extraordinary measures in order to ensure that that plant was
capable of operating to serve our customers.
We had barge-delivered Venezuelan coal that we had to bring
to Louisiana to help us. We had to truck-deliver Northwest
Louisiana lignite. Now we have to make the decision to move
forward with spending 19 million on aluminum rail cars so that
each rail shipment that we have of coal can bring us more coal
in the event that there is a disruption in rail traffic that it
doesn't impede our ability to operate our plant.
We are one of those entities, like Mr. Spitzer, that is
suffering from the bottleneck. We have a 1,500 mile trek from
Wyoming to our power plant of which 20 miles is the only
section that is captive. But because of the rules that the STB
has in place, all 1,500 miles are subject to a captive rate. We
don't think that is fair.
We can't get competing offers from the other rail provider
because there is no need to do that. They don't poach each
other's rates.
The STB rules, in my opinion, don't make sense. As a
regulated utility, we have rules that we have to follow that
require our rates to be approved ahead of time. In the case
with STB, that is not how it works. The customer has all the
burden of having to test out what the rates are. We believe
that is senseless.
Public service commissions in this Country regulate captive
arrangements, captive monopolies in a different way, and we
believe the same thing should happen here.
What has happened also as we have seen it evolve, I have
been testifying on this and this is my third time. Five years
ago I testified before the Senate Commerce Committee. At that
time, captive customers were dealt with differently, completely
differently than competitive customers.
Now we have what I call the small town, two gas station
analogy where the two gas stations owners collude with each
other as to what the price of the gasoline is going to be at
their station. As soon as one puts his price up a little bit
higher, the guy across the street does the same thing. What is
happening is almost all the coal providers and many others, all
coal shippers who have power plants are now in a position that
they are paying substantially higher.
When I hear some of the testimony raised earlier today
about that it takes these captive customers to help to cover
the cost of expansion. It makes me wonder if anyone really
realizes that it is people like Mrs. Moss and Stellar Settings
and our school systems that are paying the tab for that. They
are paying an involuntary tax to be able to support the costs
of the railroads' daily operations.
We don't understand why the rates go up. It just turns out
that way. We wonder where is the money really going. Is it
going to help out competitive routes and at the same time all
we are going to do is end up paying the bill for increased
costs of running the railroad companies?
We don't know, but we do believe that it is up to the
Surface Transportation Board to do their job, to be able to
look at non-competitive markets in a way that ensures that the
customers at the tail end are properly served, both from a
reliability perspective and a pricing perspective.
I thank you for your attention. This is a major issue for
our community and for many utility companies around this
Country. I look forward to your further comments. [Phrase in
foreign language.]
Mr. Oberstar. Thank you very much, Mr. Huval.
[Phrase in foreign language.]
Mr. Huval. [Phrase in foreign language.]
Mr. Oberstar. [Phrase in foreign language.]
Mr. Huval. [Phrase in foreign language.]
Mr. Oberstar. [Phrase in foreign language.]
Ms. Diehl.
Ms. Diehl. All the French speaking, I don't know. I need to
go take French now, I think.
Good afternoon, Chairman Oberstar, Ranking Member Shuster
and Members of the Committee.
My name is Susan Diehl, and I am the Senior Vice President
of Logistics and Supply Chain at Holcim, U.S. Inc. I am here to
speak to the Committee about Holcim's experience as a captive
shipper of a strategic building material, mainly cement.
Cement is the critical component of concrete, an
environmentally responsible building product used to build and
repair our Country's vital infrastructure. Concrete is the
second most consumed product in the world after water.
Although it is not the subject of today's hearing, Mr.
Chairman, we pledge to work with you and your Committee as you
take on the very serious challenge of rebuilding our Nation's
infrastructure.
Holcim is one of the largest producers of cement in the
United States with operations across the Country. Reliable and
cost-effective transportation options are critical to our
industry. Truck transportation increases our carbon footprint,
clogs our already crowded highways and is not economical much
beyond 150 miles. Simply put, we are reliant on railroads to
deliver our products.
Today, as a captive shipper at over 95 percent of our
origin destination carriers, we are forced to deal with near
monopolistic railroads that impose arbitrary and excessive
fees. We daily face uncertainty in rail service reliability,
and the prospect of new entrants to create competition is grim.
To remain competitive, we consistently make significant
capital investments in our company and our own infrastructure
to meet the demands of our customers. In the last decade,
Holcim has invested over $1 billion to upgrade its capacity and
better service customers while improving its environmental
performance.
Holcim is investing $1 billion additionally in Sainte
Genevieve, Missouri, on what will be the largest cement plant
in the United States. A major reason for this investment in the
location that it is, is on the Mississippi River which will
allow us to ensure cost-effective, environmentally-friendly and
reliable transport of our inbound raw materials and finished
cement by barge.
Because we must locate at or near our primary raw material
source, we count on and pick sites with rural rail service.
True to our experience, we will be captive to one railroad at
Sainte Genevieve.
Like its customers, we believe that the railroads must also
reinvest to serve customer needs in the years to come. However,
that investment cannot be conditioned on a continuation of
current monopolistic practices.
Throughout the rail competition debate, we have long sought
to be part of the solution and have taken action. In 2003, we
created HolRail for the purpose of constructing and operating a
2.3 mile common carrier rail line to establish competition at
our cement facility in Holly Hill, South Carolina, which was
captive to a single rail line with CSX.
Interestingly, our two cement competitors, operating with
in five miles of our facility, are both dual served. This
captivity has allowed CSX to provide poor and unresponsive
service while charging unreasonably high rates to Holcim.
Holcim determined that it could obtain competitive rail service
at Holly Hill by constructing its own railroad over that
distance to connect with Norfolk Southern railroads.
As we petitioned the STB to build that railroad, CSX has
attempted to stop our railroad by blocking the only
environmentally acceptable route. The STB has done little to
protect shippers or restrain the increasingly consolidated rail
industry. Given the track record of the STB, serving as a
virtual rubber stamp for the Class I railroads, it was not
surprising that after well more than two years and hundreds of
thousands of dollars of legal and consulting fees, our petition
was denied.
We cannot always pick sites with dual rail service. True to
our experience, we will be captive to one railroad at Saint
Genevieve.
Like its customers, we believe that the railroads must also
reinvest to serve customer needs in the years to come. However,
that investment cannot be conditioned on a continuation of
current monopolistic type practices.
Throughout the rail competition debate, we have long sought
to be part of the solution and have taken action. In 2003, we
created Whole Rail for the purpose of constructing and
operating a 2.3 mile common carrier rail line to establish
competition at our cement facility in Holly Hill, South
Carolina, which is captive to a single railroad, the CSX.
Interestingly, our two cement competitors, operating within
five miles of our facility, are both dual served. This
captivity has allowed CSX to provide poor and unresponsive
service while charging unreasonably high rates to Holcim.
Holcim determined that it could obtain competitive rail
service at Holly Hill by constructing its own railroad over
that distance to connect with the Norfolk Southern Railroad. We
petitioned the STB to build that rail line. CSX has attempted
to stop our railroad by blocking the most environmentally
acceptable route.
The STB has done little to protect shippers or restrain the
increasingly consolidated rail industry. Given the track record
of the STB serving as a virtual rubber stamp for the Class I
railroads, it was not surprising that, after well more than two
years and hundreds of thousands of dollars of legal and
consulting fees, our petition was denied.
While our company has the resources to take on this
challenge, many companies do not. It should not fall to
shippers to engage in litigation to become modern day trust-
busters. If competition is to be restored, we believe the
Congress must change the system to create a more level playing
field.
What is currently being proposed in H.R. 2125, under your
leadership, Mr. Chairman, and that of your Committee, has many
key proposals that help strike the balance between rail growth
and oversight. The re-regulation argument made by the rail
industry presents a false choice. Indeed, we would not advocate
for reform that would deter growth of our critical rail
infrastructure. We believe that Congress must especially
consider provisions that promote rate competition and expand
the STB's authority over service-related issues.
Thank you, Mr. Chairman, Ranking Member Shuster, and
Members of the Committee. We deeply appreciate this opportunity
to speak about issues that are not only vital to our industry,
but to our national infrastructure and future growth as well.
Chairman Oberstar. Thank you very much for your testimony.
I observe that the Latin origin of the word cement, camentum,
means to link together. And the product into which it is made,
concrete, ceconcraetum in the Latin, is to connect together.
Let us hope that you can connect some things together here with
your testimony. Thank you.
Mr. Hurst. Mr. Chairman and Members of this Committee, my
name is Wayne Hurst. I farm in southern Idaho and produce
wheat, sugar beets, potatoes, feed barley, alfalfa, silage
corn, and dry edible beans. I am the past president of the
Idaho Grain Producers Association and a member of the National
Association of Wheat Growers Budget Committee.
I am honored and pleased to be here today on behalf of the
Alliance for Rail Competition and the agricultural community.
The members of the Alliance for Rail Competition include
utility, chemical, manufacturing, and agricultural companies,
and agricultural organizations all working together. Producers
of the commodities as wide ranging as soybeans, dry beans,
lentils, rice, barley, peas, and sugar beets all have expressed
concerns similar to those I will share with you today. Together
these organizations represent growers of farm products in more
than 30 States.
I have submitted for the record a full statement and I
would like to summarize that statement for you in the five
minutes allotted to me. I would ask that the statement be
accepted into the record. Also, recently a letter was sent to
the Committee in support of H.R. 2125, and I would ask that the
letter be accepted into the record as well. The letter was
written by the Alliance for Rail Competition, American Soybean
Association, American Sugar Beet growers Association, the
National Association of Wheat Growers, the National Barley
Growers Association, the National Farmers Union, United States
Beet Sugar Association, USA Dry Pea and Lentil Council, U.S.
Dry Bean Council, and the USA Rice Federation.
First, the importance of rail to agricultural producers.
Wheat growers know that an effective railroad system is
necessary for the success of the wheat industry. As captivity
levels have risen, a larger and larger share of the cost of
transportation has been shifted to rail customers and State and
local governments. Here is the bottom line. We have between us
and our markets a railroad with the economic power to take away
our profits any time it wants. We captive shippers are tired of
subsidizing commodity movements that have rail-to-rail
competition and an STB that rules in favor of railroads and
against captive rail shippers.
Second, effects of growing rail captivity. Since the
passage of the Staggers Rail Act of 1980, the degree of
captivity in many wheat growing regions has increased
dramatically and today whole States, whole regions, and whole
industries have become completely captive to single railroads
as a result of many railroad mergers. What is clear is that the
areas of the country served by single railroads are
experiencing drastic increases in rate levels that are not
found in areas that have some rail-to-rail competition. The
farm producer bears the cost of transportation and cannot pass
it along to anyone else. So when we say agriculture is captive,
we are truly captive.
Third, the transportation cost shift. We have reports of
railroads raising their rates just to drive off unwanted rail
traffic, thereby abandoning common carriage. We also have
reports of the railroads refusing to service locations that the
railroads deem operationally unacceptable. The result appears
to be that railroad market power is being exerted to create
haves and have-nots in the shipping community. Every one of the
crops I produce is having trouble with the level of rail rates
and service. Let us look at just the crops I raise on my farm
and some of the transportation issues associated with each
crop, because what we find is a pattern that exists in all
facets.
Wheat. Following the wheat harvest in July of this year,
there were more than 10 million bushels of Colorado wheat
stored on the ground, primarily in areas where there was a lack
of adequate rail service--captive branch line areas. Such wheat
lying on the ground, exposed to the elements sustains an
economical loss or poses a food safety risk and threatens its
marketability. The elevator I sell to has told me that delays
in service are threatening its existence because railroad
delays cause cash flow problems. This company is one of the
pioneers in identity preserved wheat marketing, which matches
wheat varieties and characteristics to individual customer-
specific needs. Shipments in smaller lots like identity
preserved wheat are not what the railroads demand in their
business model. Yet the identity preserved business practice
holds one of the future keys for American agriculture to
maintain market position in the world.
Sugar. I am a member of a grower-owned co-op, the Snake
River Sugar Company which supplies about 10 percent of our
nation's sugar. When the railroad decided it did not want to
haul sugar beets about 10 years ago, it just quit hauling. Now,
with one exception, all the beets in Idaho have been forced to
truck.
Potatoes. In the potato industry, we supplied potatoes to
the G.R. Simplot plant in Heyburn, Idaho for many years until
the plant was shut down several years ago and moved to Canada,
resulting in the loss of hundreds of local jobs. Mr. Simplot
told us the reason was high freight costs. And indeed, most of
the shipment of frozen and fresh potatoes in my area today has
been forced to trucks.
Barley. Idaho feed barley used to easily capture 50 to 60
percent of the California dairy feed and grain market,
amounting to between 60 and 70 million bushels annually, but
today amounts to less than 200,000 bushels. What happened? The
railroad serving Idaho chose not to allow barley movements into
the traditional market over moving corn. It is no secret today
that the monopoly railroads have no desire to move barley and
will price these movements as high as needed to eliminate what
would otherwise be competitive barley markets.
Loss of malting barley markets. Rail rates and service
failures have also closed off access to traditional U.S.
malting markets to U.S. barley producers. They have been
replaced by Canadian supplies with lower freight rates. This
has resulted in a 20 to 30 percent cut in contracted acreage in
2006. Why? The U.S. market dominate railroads focused their
resources on shuttle trains and were not willing to participate
in shipments that did not conform to the shuttle
configurations.
In conclusion, agricultural growers together with members
of the Alliance for Rail Competition truly believe that a
healthy and competitive railroad industry is essential for
their continued viability. However, increased captivity levels
with poor service, a lack of available cars, increased rail
rates, and a regulatory agency that does not meet the needs of
shippers has made it increasingly difficult for 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
industry. We believe the railroad industry can survive and
prosper in a competitive environment. Indeed, we know from
history, that competition breeds innovation and efficiency.
Wheat growers and other producers along with the members of
ARC believe that both railroads and shippers would be better
off with more competition in the marketplace. They support
provisions in H.R. 2125, a bill that calls for increasing
competition without increasing regulation. We fervently believe
that the final offer arbitration, as outlined in H.R. 2125,
will produce a host of benefits where competition cannot
physically be created.
Providing for final offer arbitration and the removal of
paper barriers will restore balance to the commercial
relationship between the railroads and their customers. Both of
these remove the STB from the process, an organization that
seems only interested in the welfare of the railroads and not
the shippers, and, furthermore, provides a commercial solution
between the railroad and the shippers. We in agriculture and
the members of ARC believe this legislation will improve rail
transportation by providing fairness and openness to the
negotiations between railroads and their customers over rates
and service. Thank you.
Chairman Oberstar. Thank you very much for a very
comprehensive statement and very detailed. Your full statement
of course will appear in the record. Thank all the members of
the panel for their presentations.
Mr. English, are there members of the NRECA who own their
own rail cars to haul coal?
Mr. English. Indeed. Mr. Harper here is a member of NRECA
and certainly Basin Electric has to own their own cars. Many of
our members do. Obviously, we have seen a substantial reduction
in the amount of rail equipment, talking about percentage-wise,
of rail cars that are available through the railroad. If I
recall correctly, about a 20 percent reduction. Back in 1980,
if I remember correctly, Mr. Chairman, we had about 60 percent
of the rail cars owned by the railroads. Today, it is about 40
percent. Certainly that has been the case for a lot of our
members.
Chairman Oberstar. That is a cost shifted to a consumer, on
the one hand, and to a shipper, on another. When you went out
to acquire your cars, Mr. Harper, did the railroads offer you a
reduction in rates?
Mr. Harper. Actually, the 20-year contract that I spoke of
earlier did have incentives in there for us to make investments
in the assets, of which we did with cars and our rates got
lower. Today, they require us to purchase the cars with no
incentives, no lowering of rates. In fact, we just spent a
little over $10 million for a fourth train sent to the Laramie
River Station in order to get our coal supply out.
Chairman Oberstar. Over $10 million to acquire cars?
Mr. Harper. Yes, Mr. Chairman.
Chairman Oberstar. But no compensation on the other side in
the form of a rate reduction?
Mr. Harper. No, Mr. Chairman.
Chairman Oberstar. That is cost-shifting.
Mr. Harper. Pretty much.
Chairman Oberstar. Mr. English, you discussed the high cost
of bringing a rate case to the board. What recommendations do
you have on lowering these costs and improving the fairness of
the rate proceeding at the board?
Mr. English. Obviously, Senator Dorgan spoke to that this
morning and he is addressing this issue. I think there is no
question that this is exorbitant. There is no reason for cost
of this magnitude. Now we got into some discussion here about,
well, they have to pick up the cost of the Surface
Transportation Board. If I recall correctly, that is an entity
of the Federal Government that is here to provide a service.
And if you go back again to the original intent of the
legislation, they are supposed to be here to hear these kind of
disputes and to deal with the injustices in accordance with the
intent of the law. I think it has to raise questions, Mr.
Chairman, given the exorbitant amount, if this is here not to
pick up the costs of the proceedings but instead to discourage
people from bringing proceedings.
Again, this goes back to the issue, what is the Surface
Transportation Board here for? If they are not here to address
these issues and to hear from those who have grievances and, in
effect, find the proper solution in accordance with the law,
then I do not know why they are here. This again raises the
issue and goes to the heart of your legislation. I want to
commend you and Mr. Baker both for working on this. You had
some very nice questions, Congressman Baker. Great job. Thank
you.
Chairman Oberstar. As Dr. Mulvey said in his testimony, the
Staggers Act greatly reduced the economic regulation of the
industry. It did not eliminate it. It did not totally take the
Government out, but provided a safety valve for the shippers
and consumers. Just a further question. You own the cars. Who
maintains them?
Mr. Harper. We do. We have to pay for the full maintenance,
whether it is the wheels, the cars themselves, or whatever. The
cost for maintaining those train sets is the responsibility of
the owner.
Chairman Oberstar. That is a sweet deal.
Mr. Harper. Depends on which side you are on.
Chairman Oberstar. For the railroads, a sweet deal.
Mr. Spitzer, you described a number of situations that were
painful for your industry and for your company. But I recall
that period of time when the Union Pacific acquired the
Southern Pacific, whose rail infrastructure was in very bad
shape; the roadbed was in bad condition, the rolling stock had
deteriorated. As one person at a meeting I presided over in
Beaumont, Texas said, one of the customers, it was held
together with chewing gum and baling wire and then it all fell
apart when the UP acquired it because the SP management somehow
knew how to keep it going even though they were losing money
and it was not a very profitable operation. And then when the
UP acquired it, the average transit time on coal shipments was
seven miles an hour. There was a meltdown on chemical shipments
from the West Coast to the Gulf. Chemicals were being off-
loaded from large vessels onto smaller vessels and shipped
through the Panama Canal and up the Gulf of Mexico and into the
Gulf Coast. Were you affected by that period of time?
Mr. Spitzer. I do not have the specific details on that,
Mr. Chairman. I would be happy to get back to you in writing
with how that specifically impacted us. If I may say, while
over time there have been benefits of the Staggers Act and
perhaps improvements in infrastructure in some cases, today we
are seeing a number of service issues.
[Subsequent to the hearing, Mr. Spitzer added the
following: DuPont experienced major rail service disruptions
and delays from the Union Pacific-Southern Pacific merger. It
took years to recover from the merger and some geographic areas
continue to have lingering service issues.]
As with Mr. Harper on the panel here, we too have seen a
shift in costs to us for rail cars, a large fleet that we own
and maintain in our company as well, and a number of service
issues, as I detailed in my testimony, into and out of our
sites.
Chairman Oberstar. You recently filed three rate cases with
the board. What has been the outcome and your experience in
that?
Mr. Spitzer. I think our experience before, as has been
discussed today, is the large and medium rate cases have
largely been prohibitive. Way too long and too expensive. Since
this is ongoing litigation there is not a lot I can say. The
rate cases are on the STB website. I heard a lot of discussion
earlier about 180 revenue to variable cost. In these cases we
have 300, 400 percent revenue to variable cost. And on an
overall basis, both with CSX and what we have recently
experienced, we have seen increases from on average 30 percent
up to 176 percent.
Chairman Oberstar. The American Chemistry Council issued a
report which I have claiming that fuel surcharge by the five
Class I carriers overcharge shippers by more than $6.5 billion
dollars. The Association of American Railroads takes issue with
the study, with the premise on which it was founded. What is
your response to that issue?
Mr. Spitzer. In addition to that report by the American
Chemistry Council, it has been discussed here today that the
GAO also took a look at it and validated a significant increase
in miscellaneous charges. We are now paying fuel surcharges. In
the past in some agreements it was imputed as part of the
overall underlying rate. Now, as contracts expire, we are
seeing the fuel surcharges come in. And they are just part of a
number of miscellaneous charges that are coming up. If I may,
Mr. Chairman, add one more point. One of the reasons for
concern and I believe the timeliness of action is that many
contracts are expiring. When you read some of the Wall Street
analysts talk about legacy contracts and the great profit
opportunities for the railroads due to triple digit increases,
that is currently what we are experiencing today, those triple
digit increases.
Chairman Oberstar. Thank you. Ms. Diehl, do you have any
data that would reflect percentage of the cost of a ton of
cement represented by the transportation cost of that cement?
Ms. Diehl. Yes, Chairman Oberstar. Before I proceed with my
answer, I just want to correct something on the record. I
inadvertently said that we have invested over a million
dollars. It has been over a billion dollars in the last decade.
So my colleagues have informed me that there is a big
difference between the two and I just want to make sure it is
right on the record.
Chairman Oberstar. As Ev Dirksen was fond of saying.
Ms. Diehl. In terms of our overall transportation costs,
not just rail, they used to be one-quarter of our overall
costs. We are looking at rates that are almost double that as a
component of our overall cost of cement. So it is something
that is of great concern to our company. What we are looking
for is really to level the playing field so we have
opportunities. And we have tried to be part of the solution. We
tried to create our own competition using our own investment
dollars and we were denied that opportunity.
Chairman Oberstar. Thank you. I will withhold further
questions.
I now recognize the gentleman from Pennsylvania, Mr.
Shuster.
Mr. Shuster. Thank you very much. And all of you can feel
very comfortable I will not ask any questions in French. I do
not speak French.
[Laughter.]
Mr. Shuster. I certainly do believe that we need to make
some changes at the STB and I think they have started down that
road, at least this board that we had in front of us today has
put some things in place. Also, as I said in my opening
comments and I think all of us have to be cognizant of, if we
pass something we may get some unintended consequences and one
of those may be going back to the way the rail system was
before 1980. I do not think anybody sitting on this panel or
anybody in this room or this country wants to see us go back
there. So with that being said, a couple of specific questions
and then a general question that I want to ask you, because I
am trying to figure out how we move forward without potentially
going back to 1980 or before the Staggers Act was put in that,
from my standpoint, saved the railroad industry in this
country.
The first thing is on the fuel surcharges. Again, I think I
know the answer but I am not quite sure because I get
conflicting information when I read things. It is $6.5 billion
in surcharges. Nobody filed, from my understanding, with the
STB to get a remedy there. The question I guess is, is that
accurate? And why did not anybody file? Was it the cost was too
much and you did not think it was worth it. Anybody can take a
stab at it or everybody can take a stab at it if you wish. Yes,
Mr. English?
Mr. English. I think it is an indication of the lack of
confidence that people have in the Surface Transportation
Board. That is the whole point. And I think we have seen that
throughout the history of the board. We have waited for 20
years and you have not finished implementing the legislation
that was passed in 1980. That is what this is all about. The
Surface Transportation Board is not cutting it. There is no
other way around it. So the question is whether the Congress is
going to fix, whether in fact you are going to complete the
1980 legislation and make certain that it does the job, or
whether in fact you just scrap the whole thing and forget it,
because I do not think it is going to make a whole lot of
difference.
Mr. Shuster. Did not the STB come forward and say the
railroads did not account for it properly and thus everybody is
getting some remedy?
Mr. English. That is correct. Now what would you expect out
of that? I would think you would expect----
Mr. Shuster. Well, $6.5 billion is a lot of money.
Mr. English. That is correct. Would you not also expect
that if any body, respected body in this town who has this kind
of responsibility and obligation made such finding, would you
not expect that they would insist that money be turned back to
the shippers? But they took no such action. The second thing,
would you not also expect that they would suspend that kind of
abuse immediately? They did not suspend it immediately.
So the question is--that is correct, they found it--but the
question is, what did they do about it? How did they deal with
it?
Mr. Shuster. From what I understand from the testimony
today, you got some of that money back and some they said they
just moved forward. Which is not a very good answer for your
industry.
Mr. English. I am not aware that they put any back. They
said they were going to stop it going forward. But that is $6.5
billion. That is a lot of money.
Mr. Shuster. Anybody else want a crack at that?
Mr. Huval. What I heard of the testimony today is that
actually some shippers approached the STB to let them know this
was taking place. I think it is good that the STB did take a
look at it themselves. But they did not come up with it on
their own. There were some shippers that pointed out that this
was becoming an issue because these prices continued to go up.
So I commend them for looking at it. But I think it is the sort
of thing the STB should have been doing all along. And, again,
it does raise a lot of questions when an industry is allowed
$6.5 billion, or whatever the number is, anything over-
collected is over-collected and it is improperly done, it
should be refunded back to the shippers that were harmed by
that.
Mr. Shuster. Absolutely. I agree with that. Again, my
question, I would have thought somebody would have said hey,
let us file a case, let us all band together and do something
to get this stopped. So that is really the question I had.
Because I agree with you that if something was done improperly
it should have been addressed. It was. It was not maybe going
through the proper channels, but something was addressed.
The second thing on car ownership. When did the shift occur
on car ownership? I am not quite sure I know that some
industries today are buying more, some I think in the past
have. Your industries, have you always owned your own cars,
have you recently, are you buying more, are you buying less?
Mr. Huval. In our particular case, we always owned our own
cars. We had some steel cars in place that still probably had
another 10 years of useful life left to them, but because of
the reliability of getting coal, the reduced reliability, we
felt that we needed to move forward to replace those cars with
aluminum cars so that every shipment brings us in more coal.
And that is just because of lack of maintenance of the rail
lines. But we always took the position of wanting to own our
own cars. We are just now in the position of having to
prematurely replace those cars with aluminum cars.
Mr. Shuster. Right. What about DuPont, have you always
owned your own cars?
Mr. Spitzer. For us it began in the mid-1980s. At this
point, we feel it is necessary to have them to ensure
availability and timeliness.
Mr. Shuster. What about liability?
Mr. Spitzer. Reliability?
Mr. Shuster. The concern that you wanted cars, you wanted
to make sure that they were your cars, and that if something
happened you knew and were responsible. I am talking about
legal responsibility. Liability.
Mr. Spitzer. I would say the Department of Transportation,
the FRA have clear regulations and guidelines relative to car
design that we think industry on an overall basis is held
accountable to meeting. In our case, it has grown since the
mid-1980s to approximately 5,000 today.
Mr. Shuster. Yes, sir?
Mr. Harper. Yes. I believe our ownership can track back to
the mid-1980s as well. As I said a minute ago, there was
recognition of incentives in the contract that we had at the
Laramie River Station. But since that time, we have also had to
buy, because we own the Dakota gasification synthetic fuels
plant in North Dakota, we have had to buy ammonia cars, so on
and so forth, we have had to buy many cars. So we have a lot of
ownership in cars that we do not really want to be in, but we
are there.
Mr. Shuster. Portland Cement industry, has that industry
always owned its own cars?
Ms. Diehl. I know that we have owned our own cars for at
least the last decade. We currently own about 2,000 cars. And
there have been some times in the past where we have not been
able to use those cars. Certainly our concern is, as we divert
our own investment dollars towards rail cars, we are not
investing in our own capacity and infrastructure, and that if
the capacity turns, and now the railroads have extra rail cars,
we may be stuck because they are utilizing their capacity and
we are not utilizing ours.
Mr. Shuster. Right. Mr. Hurst?
Mr. Hurst. Well, I do know that some agriculture companies
do own their own cars and service is tough to get. Just last
week I was unloading a load of beans at a local warehouse and
they said, you know, from the time we order cars, it is often
21 days to sometimes 30 days before we get the cars, and often
we have to fix them when they show up, and then it is 3 days
from the time we have them loaded until that order arrives at
our customer. So, 60 days usually.
Mr. Shuster. I guess the last question I have, it is a
pretty broad question and it is why we are here today. And I
understand each of you is here representing your own companies,
your own industries. I was in business before and I certainly
wanted the best deal. But we are looking at a system which is a
national system. A couple of people I think mentioned today
about the days when there were 60 railroads out there. I do not
know that any of them really provided national service that we
can get today. And I do not know if anyone really wants to go
back, as I mentioned early, back to pre-1980. We do have seven
Class I railroads in this country. It has been reduced,
consolidations have occurred, and now we have a profitable
industry that is spending 18 percent of its revenues to build
the infrastructure, reinvest.
If we are going to start the change--and differential
pricing is something that I am trying to get my head around. I
understand how the airline industry does it. That is what is
happening in the rail industry and some people feel they are
paying unfairly. But we have a railroad system that is the envy
of the world. It is the most efficient system in the world.
Overall, the prices that you pay are lower than in the rest of
the world. And as the Chairman mentioned earlier, it is to
serve broad public interest. And in my view, the taxpayers are
not paying money to support the system. So how do we move
forward without disrupting that and go back to 1980? Mr.
English? And Mr. English, please be brief because the Chairman
is going to start to whack the gavel on me and I want to make
sure I get your response.
Mr. English. I will put in a good word for you.
Mr. Shuster. I know, it is a tough, big question.
Mr. English. Very quickly, the point is just this. The
problem is with the Surface Transportation Board. The problem
is with the attitude. And certainly I think what you can do is
this Congress can send a very strong message that you expect
that the Surface Transportation Board carry out their
responsibilities. Now you go strictly to the issue of fairness.
Why is it that 20 percent, and I am using that 20 percent
figure that Professor Grimm from the University of Maryland
testified here in 2004 and said it was 20 percent, unlike the
10 percent you heard here today, probably more today, but why
should that 20 percent pay for everything? That is who this
thing is resting on. We are already at 180 percent of the value
that was laid out earlier under the Staggers Act. That is the
threshold before the Surface Transportation Board even gets
involved. Now why should it be 300 percent, 400 percent, 500
percent, 700 percent? Why is there no limit?
Mr. Shuster. I think the answer to that question is,
somebody said earlier who is much smarter than I am, you have
to look case to case, what were the capital investments. And I
understand that.
Mr. English. But only the captive shippers get stuck.
Mr. Shuster. Mr. English, if I did not know it, I would
think you were a former Member of Congress.
[Laughter.]
Mr. English. Thank you very much.
Mr. Shuster. And if you were a Member of the House, you
would be in a filibuster now.
Mr. English. And your father was a great man.
Mr. Shuster. I appreciate that greatly. Could everyone just
take a quick crack at that.
Chairman Oberstar. Very briefly, because we are going to
have votes in just a few minutes and I want to get to other
Members.
Mr. Harper. Mr. Shuster, as I said a while ago, I think
what the STB has to do is find that balance. I do not think
there is any one of us sitting here who is not willing to pay
for good service. We all recognize that, period.
Mr. Shuster. Okay. Thank you.
Mr. Spitzer. I come back, Congressman, to what Chairman
Oberstar said, that if the railroads are there to serve in our
national interest, it is hard for our industries and businesses
to be globally competitive when there is a monopoly power in
the middle of our supply chains. It is remarkable to me that
with the bottleneck issue, competitive switching, and paper
barriers, the STB has over many years made decision after
decision that has served to reduce competition. I believe it
needs to be addressed if we are going to turn it around. In the
chemical industry alone, there has been a $30 billion change in
imports and exports in the trade balance. It still remains a
very vital industry in this country.
Mr. Huval. As Senator Russell Long would say, ``Don't tax
me, tax the man behind the tree.'' Well, the man behind the
tree in our industry is the customer. The customers are paying
the cost, a substantial cost for these investments that
railroad companies are getting. That is an important thing we
cannot forget. It is not just coming from just free market
operations. The customers are forced to pay for that because
they are only being served by one utility. So we need to make
sure we consider all of that in the big scheme of this.
Mr. Shuster. Ms. Diehl?
Ms. Diehl. From our perspective, we certainly believe that
we need the railroad going forward and it is a key decision
point when we decide whether or not we are going to continue to
reinvest in capacity. The STB, as ineffective as it stands
today, and given our recent experience which has happened in
the last 13 months, we do feel like we are not getting the
attention of the STB to create competition when they
opportunity has been provided to them. And so from that
perspective, all we want is to level the playing field. We have
monopolistic railroads who are not regulated and, as I heard
this morning, we cannot have the worst of both worlds, which is
monopoly and no regulation. And that is all we are looking for
is just to level the playing field so that the railroads are
playing under the same sets of rules and whatever oversight
body is striking that balance to make sure that we can promote
the growth but also to make sure that things stay fair.
Mr. Hurst. From agriculture's perspective, we need and have
to have a strong railroad. The Staggers Act basically had two
things. One was to improve the financial state of the railroad,
and they have done that very well through the STB. Secondly, it
was to protect captive shippers that would come from
deregulation. That has failed to happen in the last 27 years.
From our perspective, the answer to the STB problem is to
give us final offer arbitration. That is a mechanism whereas we
have the tool to solve our own problems with the railroad
outside of regulation, outside of Washington even. We can take
care of it on a commercial level. And so that is why we feel so
strongly about final offer arbitration.
Mr. Shuster. Thank you all very much. Thank you, Mr.
Chairman.
Chairman Oberstar. Ms. Brown.
Ms. Brown. Thank you, Mr. Chairman. Mr. Spitzer, I have got
a couple of quick questions for you. DuPont recently announced
it would have a buy back of $1.1 billion in stock. Since you
are doing it, what is wrong with share buy backs by freight
railroad if DuPont is doing the same thing?
Mr. Spitzer. We do not have an objection to that. On the
other hand, we are not out there, as some railroad companies
are, talking about difficulties in investing in capital and in
infrastructure while at the same time doing multibillion dollar
buy backs. There seems to be somewhat of an incongruity in
those two statements.
Ms. Brown. I do not know. The hedge funds are moving in and
they are buying up some railroads. One of the things they want
to do is for them to raise the price of the shippers, which is
just the opposite of what you are saying here today.
Mr. Spitzer. We are currently----
Ms. Brown. I mean the market is part of our discussion
here.
Mr. Spitzer. Yes. I would just say, Madam Chairwoman, that
we are, both in the rate cases that we brought--I mean, I will
just say that in the negotiations that took place with CSX, as
an example, I just want to share what it is like dealing with
being a captive shipper. We shared the impact that these rate
increases would have on our customers, on our business, and
they were ignored.
Ms. Brown. What percentage of your pricing is established
by a third party? Arbitration, what percentage?
Mr. Spitzer. To my knowledge, and I will get back to you
with anything different, I am not aware of prices that have
been established through arbitration in our particular case.
[Subsequent to the hearing, Mr Spitzer added the following:
Prices within DuPont are generally set by competitive market
conditions or through negotiations with our more significant
customers. Alternative Dispute methodology, including
arbitration, is generally used to resolve disputes. The rail
industry that we face is distinguished from our market-based
rate setting in that no competition exists that would otherwise
curtail or limit monopoly-based pricing practices. In the
absence of true competition, mediation, under the supervision
of a government sponsored agency, is one method by which
reasonable pricing that satisfies the needs of both parties and
the public good might be achieved.]
Ms. Brown. In your particular case. Anyone else on that
issue? Okay, the other question. Good or bad, lower rates are
not going to deal with the significant capacity problem that we
have in the United States. What suggestion do you have for
funding rail expansion?
Mr. Spitzer. I would say in one word, it is competition. I
believe that we need the infrastructure----
Ms. Brown. Do you think competition is going to help expand
the system?
Mr. Spitzer. Yes, I do.
Ms. Brown. It surely did not do it with the telephone
industry.
Mr. Spitzer. I would just say that in the----
Ms. Brown. A lot of people made money and you do not know
who to call.
Mr. Spitzer. Well, yes, there are those rare exceptions.
But I would say that my experience in the industry that I am in
and dealing with customers that span everything from
electronics to food to a whole variety of industries, our
Nation is based upon competition. We would see, I believe,
innovation, we would see new technology, we would see
competition between railroads. If I may also add, the whole
idea of having infrastructure and expanded capacity, we also
want to be sure that we have U.S. produced goods to put on
those expanded railroads that have occurred.
Ms. Brown. Absolutely, and jobs. And this is something that
we cannot send overseas. Thank goodness. But, for example, you
talk about what you ship. You have the capacity to use trucks,
which I am not encouraging it, as an alternative to rail. Let
us say as with plastic, for example. Certain goods, like coal,
coal needs to go rail. But you have the capacity with, as you
just said, your diversity to use other kinds of alternatives.
Mr. Spitzer. Well, yes, we do use a variety of means of
transportation. However, (1) rail is one of the safest means to
transport material; and (2) based upon the long distances that
may be involved or the volume, in many cases truck is simply
not a viable option for many of the products that we move. And
I believe that is why when we are in these negotiations it is
very clear to the carrier that we do not have a viable
alternative and therein comes the take it or leave it offers or
the triple digit types of price increases.
Ms. Brown. Mr. Hurst, you mentioned beans and corn. I am no
expert on any of that. But my question is why would it matter
to the railroads what you are shipping? I am just curious. You
said that they did not want you to ship barley, they wanted you
to ship corn. Why would they care?
Mr. Hurst. Because I understand they load, say, Nebraska
corn in large shuttle trains and they deal in 100 car shuttle
trains instead of dealing with 25 cars at a time with barley.
They prefer corn. They are set up for corn and that fits their
model, so they just basically said to Idaho barley, forget it,
we do not want to mess with you.
Ms. Brown. I thought you said you have your own cars.
Mr. Hurst. Some companies do. But producers, we do not own
our own cars. We sell to an elevator or a grain buyer and some
of them do.
Ms. Brown. Would someone else like to address the expansion
capacity? You know, we do have a problem. I want to see more
passenger rail. We have an explosion, which is exciting, but we
do have an explosion as far as products, goods and services. We
need to be competitive with China and other places. But no
matter who I talk to, whether it is the Russians or the
Europeans, they think we have the number one rail in the world.
But I am listening and I hear you saying that there are some
problems. But this industry has just started operating in the
black. I see a couple of hands and I guess I have got a couple
of minutes. So, yes, sir.
Mr. Harper. Very quickly. I think what we want are fair and
reasonable rates and have and understand that there is
someplace to go to air our concerns. I am in the electric
utility business. I am not in the rail business. I want to have
a supplier that has my best interest at heart. And if he has
that, then he is out there building the infrastructure that is
necessary to get our products to market and get coal to my
power plants. That is my biggest concern.
Ms. Brown. He is investing 18 percent of his product back
into the industry. DuPont is not doing that. Nobody is putting
that amount back into the industry.
Mr. Harper. Well, if I may. Right now, we have a workplan
of $5.2 billion in front of us over the next 10 years. Yes,
ma'am, I do think we are investing in our system, with all due
respect.
Ms. Brown. Mr. English?
Mr. English. Thank you very much, Chairwoman Brown. I think
there are a couple of issues here. One, you should not just
have a small segment of the population in this country or a
small segment of the shippers who pay the entire freight. If we
are going to take this on as a national policy, everyone should
be involved in paying for it. It is too big for one thing, and
the second thing is it is not fair.
The second issue, I have heard that 18 percent, and I hope
you will challenge that a little bit and found out if that
includes the maintenance and upkeep as well. If that is
maintenance and upkeep, that is not what I think you are
alluding to as far as investment in infrastructure. Thank you.
Chairman Oberstar. The Chairwoman's time has expired.
Ms. Brown. Yes, sir.
Chairman Oberstar. Mr. LaTourette. We have seven minutes
remaining on a vote but only a handful have voted so far. So we
have plenty of time.
Mr. LaTourette. I thank the Chairman and I will try to be
brief. I learned from my very brief tenure as the Chairman of
the Rail Subcommittee not to mess with Congressman English, so
I will not be asking you any questions today, sir.
[Laughter.]
Mr. LaTourette. Mr. Spitzer, following up on where the
gentlelady from Florida led off. One of the arguments that is
made by the advocates of re-regulation, and you sort of I
thought in your testimony took a whack at the railroads for
buying back stock and I was prepared to talk to you about
DuPont's stock buy backs. But in answer to Ms. Brown's
question, I think she asked the right question. And Congressman
English, I will challenge it. I do not think it is 18 percent.
I think it is 17 percent that railroads invest in capital
expenditures, and that comes from the Surface Transportation
Board. But you did in response to Ms. Brown's question, Mr.
Spitzer, indicate that you do not have any problem with stock
buy backs as long as they make investments. Do you know how
much DuPont makes in capital expenditures based upon a function
of revenue per year?
Mr. Spitzer. Well, I mean, this year it will be over 5 to 6
percent, in that range. But it is a different type of industry
and I am concerned that perhaps we are getting a little bit off
of the point. I am not an expert in national policy or how to
go ahead and deal with the railroad funding issue. I am here
saying that as a captive shipper I think there are some very
serious imbalances, a very uneven playing field, and
unreasonable and excessive rates. And to add on to Mr. English,
the whole idea that the captive shipper ought to be the place
through differential pricing where you fund railroad capital I
do not agree with.
Mr. LaTourette. Let me be clear. I want to agree with Mr.
Harper's observation. I think that people that feel aggrieved,
whether it is the railroads or the people that ship on the
railroads, should have a place to go where they get treated
fairly. And if that is what you are all here telling us, I
could not agree with any of you more. And of the Surface
Transportation Board, I was impressed by Chairman Nottingham. I
think some of the changes they have made in small shipper and
cost of capital are steps forward. But like anything else, you
should be able to have a forum where you are treated fairly. So
if that is what you are telling me, that is fine. I will tell
you I cannot agree always on how you are getting there.
That brings me back to you, Mr. Spitzer. One of the
observations the railroads make, and it goes to the Chairman's
opening statement when he set up and talked about that big map
of all the land that was given to the railroad and everything
else, is that they have some kind of national responsibility. I
agree with that too. But they have a common carrier
responsibility and they come to me on a pretty regular basis
and say you know what, if we do not have to carry your
chlorine, we are not going to have the exorbitant insurance, we
are not going to do this. And so I do not think that your
company or any other chemical company in this country would say
you would trade a beefed up STB and lower rates if they were
relieved of their common carrier obligation. Right? That is
part of this mix that we are in, which is why people need to be
treated fairly.
And the last question, because the vote is pending. When
the World Bank took a look at this in 1998, and it has actually
be updated, their observation at the World Bank, from a guy
named Lou Thompson, is ``Because of the 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 give the world's most cost-effective
freight rail system. Unsubsidized U.S. frail rates are not only
the lowest of any market economy, they have been falling every
year since 1980 even though U.S. labor costs are high.'' And I
would refer you to Figure 2 in Ms. Hecker's presentation from
the GAO earlier today. Figure 2 shows that really the only
sector that has seen an increase in rates since 1985 is the guy
at the end, the guy in the ag business. Everybody else has been
seeing rates go down.
So I think that maybe I am going to leave this hearing with
the view that rates are going down except for the ag guy who is
having a problem with some of his stuff. But maybe the coming
together thing here is having an organization like the STB that
when you leave there you feel you have been treated fairly. Mr.
Spitzer, do you want to say something about that?
Mr. Spitzer. If I can, Mr. Congressman. I would not want
you to leave with let us say a misimpression. We have not had
our rates going down over the past 20 years. Our rates have
been going up and that does not even account for all of the
other so-called accessorial charges, rail cars that add on to
it.
Mr. LaTourette. I do not want to beat up on you, but my
view is fairness. My steelworkers come to me and say that
DuPont has cornered the market on something that is called
neoprene, which I do not even know what neoprene is, but they
need it to make rubber and that your company stands in the way
of bringing in neoprene from Canada, Japan, and other places.
So again, I leave this hearing, Mr. Chairman, with the
belief that re-regulation of the railroads is wrong. However,
if we can develop a system at the Surface Transportation Board
or someplace else so that these folks feel that their
grievances are at least being fairly dealt with, then that is
something I can get behind. I thank you and yield back the
balance of my time.
Chairman Oberstar. Thank the gentleman. We do have two
minutes remaining. I would say that if the purpose of this
legislation were to impose rates, that would be re-regulation.
But as Mr. Mulvey said, the Staggers Act reduced, and greatly
reduced, economic regulation. What we are working on here is a
process by which we can determine fairness in rate setting.
Mr. Baker?
Mr. Baker. I shall be brief and just make a statement, Mr.
Chairman. There will be adequate time for our witnesses to
respond in writing if they so choose.
I just wish to observe that the bill that we have under
consideration does address bottleneck reciprocal switching and
the paper barriers, which have been mentioned by the various
witnesses as important elements. If we are to assume that we
may move forward with at least those essential elements, there
is apparently one open door which the STB has provided us with
the comment period on the capital asset pricing model. That
being integral to rate decisions and a lot of other assessments
the STB must make.
They have held out earlier today that if you do not like
the CAP M approach, what are the alternatives. There are some
alternatives, arbitrage trading practice, for example, and
there may be others. And Mr. Spitzer or any of the
representatives at the table who have access to financial
guidance could advise the Committee or, more importantly, the
STB. Now their comment period closed September 13 but it does
not foreclose or forestall what this Committee might do in
moving forward.
If there is a better way to bring about responsible pricing
which blends the ability to make a profit with a regulated
utility in this case, that is what we are looking for. Because
from what I understand, the pricing models used to date was
discounted cash flow, and for years past while the rest of the
world moved on. They have said give us a better way to do this
and we will consider it. Well, I do not want to let that
opportunity pass by. We have never had this opportunity since
Staggers passed. We may not get it for another 25 years. So
among all the people who are the rail concerned stakeholders,
this is a window for this Committee to act and for us to
deliver to the STB a product that might make a great deal more
market sense. With that, Mr. Chairman, I yield back.
Chairman Oberstar. Thank you very much, Mr. Baker. Well
said and thoughtfully said.
We will excuse this panel and call the final panel for the
day, panel III. We have three votes which could take as much as
a half an hour. So we will resume sitting as soon as votes are
concluded.
[Recess.]
[After 6:00 P.M.]
Chairman Oberstar. The Committee on Transportation and
Infrastructure will come to order and resume its sitting.
We welcome our final panel, Panel III, including Mr. Jim
Young, chairman, president, and chief executive officer of
Union Pacific; Charlie Marshall, vice president of development,
Farm Rail System; and William Rennicke, director, Oliver Wyman,
Inc. The piece de resistance, as they say in French.
Mr. Shuster. What does it mean?
Chairman Oberstar. It means the main course.
[Laughter.]
Chairman Oberstar. That has many implications. Mr. Young,
welcome. You have waited a long time today, you have been very
patient, sat through all the previous testimony, and now is
your turn.
TESTIMONY OF JIM YOUNG, CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE
OFFICER, UNION PACIFIC; CHARLIE MARSHALL, VICE PRESIDENT OF
DEVELOPMENT, FARM RAIL SYSTEM, INC.; AND WILLIAM RENNICKE,
DIRECTOR, OLIVER WYMAN, INC.
Mr. Young. I feel like I have been working on the railroad
today. Chairman Oberstar, Ranking Member Shuster, Members of
the Committee, my name is Jim Young and as of January of this
year I became chairman of Union Pacific Corporation. I
appreciate the opportunity to testify today on behalf of the
rail industry. I have attached the testimony of Wick Moorman,
the CEO of Norfolk-Southern, to my written remarks. He had
submitted testimony on behalf of the entire freight rail
industry.
Mr. Chairman, as you know, our Nation is facing an
infrastructure crisis. Every mode is being stretched beyond its
limits. You and your Committee are at the very heart of this
debate and will play a critical role in solving this great
challenge. My message today is a simple one. The results of
your deliberations will determine how much investment is made
in the private rail system and how much traffic gets shifted to
the over-burdened highway system. Let me explain why.
As the only transportation mode that pays for its own
infrastructure, the rail industry must generate enough revenue
to build new capacity while replacing existing infrastructure
as it approaches the end of its useful life. Union Pacific is
investing for growth. Our capital budget for this year is $3.2
billion, the largest amount in history. We are making
substantial investments in growth capital because we believe
our financial returns will continue to improve to justify these
high levels of investment.
If we are going to continue to prudently invest in the
capacity that our customers want and our Nation needs, we need
some assurance that we can earn revenues sufficient to justify
making those investments. Unfortunately, the current
legislative and regulatory climate threatens those returns and
makes future investment in additional capacity uncertain.
Some of our customers will tell you they are paying too
much for rail service and their prices should be lowered. They
are advocating proposals that would in essence cap the rates we
charge and shift railroads to a cost-plus rate regime that
ignores the market, impairs service, and penalizes efficiency.
There is an interesting dichotomy between what we are hearing
in Washington and what I hear when I meet with the CEOs of many
of those shippers, as I do regularly. I can tell you that for
the vast majority of the CEOs their primary concern is whether
we are investing to handle their future growth. What I tell
them is that as our financial returns improve they will see the
benefits in the forms of better service and more capacity.
We are concerned about the Surface Transportation Board's
recent proposal on the calculation of the industry's cost of
capital. And while we have always supported the STB finding a
way to streamline rate cases for small shippers, we are
concerned about the board's new regime for bringing those rate
cases. The board's new rate case regime will undoubtedly lead
to lower rates for some customers and will adversely affect our
revenues. This will be compounded by the board's new
calculation of the cost of capital. The new calculation
establishes a cost of equity level below similar calculations
by economic experts in other agencies for network industries
such as electric utilities. This also increases the amount of
traffic subject to rate regulation and will force a reduction
in our rates as calculated under the board's rate review
processes.
We have concerns with the approaches that the board is
taking in these two cases and will continue to participate in
the process. At the end of the day, it is clear the regulatory
landscape has shifted and that our revenues will be effected.
As a publicly owned company, we have a fiduciary duty to
our owners to operate the company in a profitable manner and
make prudent decisions regarding capital investment. The
shareholders of Union Pacific will not allow management to
invest capital in projects that have an unreasonably low rate
of return. Since the inception of the rail industry, many of
the challenges we have faced have changed. But one constant
remains the same. We can only build and maintain the size rail
network that our customers are willing to pay for. The
decisions you and the STB make about our regulatory structure
will control how much investment we will be allowed to make. If
you believe, as we do, that there is a transportation
infrastructure crisis, then we should be doing everything we
can to accelerate investment.
Our company and this industry have demonstrated that we
will invest when the market demands it and when the returns
justify it. Our country's freight railroads are finally
approaching a point where the financial returns justify new
investment. It would be tragic indeed if Government policy
changes would step in now to stop the growth potential for a
significant component of our country's vital infrastructure.
That concludes my testimony. Thank you again for giving me
the opportunity to represent the railroad industry. I would be
happy to take any questions.
Chairman Oberstar. If there is anything else you wish to
add, all witnesses are cautioned to keep their remarks to five
minutes, but you are certainly welcome to extend.
Mr. Young. Thank you. I am sure I will have the opportunity
with the questions. Thank you, sir.
Chairman Oberstar. Mr. Marshall.
Mr. Marshall. Thank you, Mr. Chairman. My name is Charlie
Marshall. I am senior vice president of Farm Rail. Farm Rail is
a 350-mile railroad in western Oklahoma. But I am here today
representing the American Short Line and Regional Railroad
Association, which is composed of about 500 small railroads all
across the country. The short lines together operate about
50,000 miles of track, we have 23,000 employees, and we blanket
the Nation.
I would like you to think about two characteristics of
small railroads. One is that we do not go from A to B. We got
to A and then we count on the big railroads to handle the
freight the rest of the way to B. So we are intimately tied to
the fortunes of the large railroads. The second characteristic
is that a large part of the freight we carry is merchandise,
things like lumber, and paper, and waste, and food products,
and things that can, and do, regularly travel by truck. Indeed,
we handle some 42 percent of U.S. merchandise carloads for at
least some part of the haul, according to a study that a fellow
from MIT made earlier this year.
Now as you look at this merchandise business that we
handle, one of the things that worries us is that it is one of
the less profitable pieces of business that the big railroads
handle. And when the big railroads run into a capacity crunch,
as they have several times in the past several years, what they
do is favor the most profitable business, like any rational
operator would do, and they squeeze out the lesser profitable
business. Well, we are the less profitable business. We are the
merchandise. And if that happens, when that happens, the
traffic that we handle will not move by us, it will move by
truck.
And that is our point here today. We urge this panel to
think very carefully before adopting measures that would take
revenue that could supply capacity away from the large
railroads and thereby as an unintended consequence divert the
small railroad traffic onto our crowded highways. Thank you
very much.
Chairman Oberstar. Thank you, Mr. Marshall. Mr. Rennicke.
Mr. Rennicke. Thank you, Chairman Oberstar and Ranking
Member Shuster. I am William Rennicke, the director at Oliver
Wyman. Since I started my transportation career over 40 years
ago as a brakeman on the bankrupt New Haven Railroad, I have
been an active participant in both carrier operations and
management as well as an advisor to the transportation
industry, government, financial institutions, and users of
transportation worldwide.
In the late 1970s I was fortunate to be an active
participant in the public and legislative process that led to
the Staggers Act. I believe that Congress, shippers, the
carriers, labor, and all other industry participants should be
quite proud of the results of the Staggers Act and the
subsequent restructuring of the U.S. rail industry. From the
late 1960s to the mid-1970s, over half of the U.S. rail system
was in bankruptcy or in financial distress. The Staggers Act
turned the rail industry into a self-sustaining freight network
and the U.S. regulatory and carrier model is now seen as a
standard and benchmark for the freight systems worldwide.
In the last 20 years, Oliver Wyman and our North American
consulting competitors have actually made an industry out of
exporting this success story to most foreign countries. In
every country where we have worked, the objectives of
restructuring have been to create a self-sustaining railway
network that supports the domestic economy, facilitates
international trade, and is funded as much as possible by the
private sector. However, despite decades of efforts in other
parts of the world, with the exception of the United States,
Canada, and to some extent Mexico, no rail system anywhere in
the world survives without direct or indirect support from the
government and taxpayer. The billions spent by the U.S.
Government to correct Conrail's situation was the last
significant investment in the U.S. railroads.
I believe proposed provisions of H.R. 2125 raise the issue
of whether the United States wants a freight rail system to
continue to be funded and developed by the private sector or
will there be a need to shift some part of the funding
responsibility to tax-based subsidies. The principles and
policies of differential pricing are generally recognized as
the most effective path to railroad pricing. There are,
however, some unavoidable realities that are embedded in the
characteristics of any large transportation network that is
both complex and where market-based pricing is used to maximize
contribution and avoid the need for taxpayer support.
First, on pricing. For any mode or sector where pricing
policy permits differential pricing there will always be some
users who pay more and some users who pay less. Human and
economic nature being what it is, no one in the United States
or any other economy likes to be in the differential pricing
bucket that is at the highest or higher than others. No one
celebrates paying higher prices. No traffic manager or shipping
executive receives a bonus or is compensated for being the
highest revenue to variable cost ratio.
It is to be expected that there will be a continuous and
natural tendency of those parties paying the higher ratios to
try and modify the pricing structure to restrict the workings
of differential pricing. It has been my experience over the
last 25 years however that the differential pricing does not
work when regulation cuts off one end of the range and tries to
move as much as possible artificially to the lower levels.
Service. Overall service in the U.S. freight rail system is
the envy of the world and many U.S. network planning and
business practices have become global benchmarks. For example,
in the United States there are over 2 million origin-
destination combinations, and in 2006, 1.31 million rail cars
moved 32.1 million carloads carrying almost 2 trillion tons.
Even in a situation where some are unhappy about being on the
high end of the rate curve or have experienced the frustration
of even one service failure, it is important to recognize that
the U.S. freight rail system is still the best in the world and
I believe has the opportunity to be even better.
Here are several facts.
As I think it has been pointed out a couple of times here
this morning, by a wide measure, if you measure just the
freight rates, the U.S. freight rates are the lowest in the
world, and to some extent Canadian freight rates. No taxpayer
contribution is required for either of the freight service
infrastructure.
The graphic I have up on the board shows the variable costs
or the out of pocket costs the governments must pay in the
countries that are listed on that chart for infrastructure. And
as you can see, in some case, on the lower end of that chart,
the users are paying only 10 to 15 to 20 percent of the cost of
the infrastructure. There is no mention of capital on that
because 100 percent of the capital cost in those countries is
funded by the government. So as you looked at the prior chart I
had where the freight rates are the lowest, not only are the
freight rates the lowest in the United States, but when you
compare them against foreign countries, that measures the
freight rates that the customer is paying but then also the
taxpayer, as I presented in this chart, is paying primarily for
the infrastructure and some other kinds of subsidies.
The U.S. system is the most productive in the world. The
U.S. railroads reinvest more capital in infrastructure and
equipment than almost any other sector in the economy. And I
think the graphic on the left shows, whether you think it is 17
percent or 18 percent, that is a phenomenal amount of the
individual dollar revenue that comes into a railroad to be put
back into the property.
The chart on the right is even more interesting. It shows
the return on equity or the returns the different industries in
the United States earn. And while the railroads are putting the
largest percentage of their revenue into investment, they
basically have the lowest return of the large industries.
The other important point to take from this chart, and this
gets into the realm of maybe unintended consequences, is that
every one of the shipper groups, with the possible exception of
agriculture, who spoke to you today are in an industry that has
a far larger or far greater return on equity than the
railroads. In the financial markets, when the railroads go to
attract funds, they are not just competing against other
railroads, they compete against all industries. So every effort
that is made, for example, to move freight rates is basically
going to take any of those bars in chemical or petroleum or
utilities or automotive and push it farther to the right and it
will take that small bar on the left and push it to the left.
So, in essence, the legislation also may have the possibility
of being a redistribution of where returns are. Thank you.
Chairman Oberstar. All right. Thank you for those very
interesting and instructive charts and for your testimony.
Mr. Marshall, you set the record for testimony today for
brevity and to the point, and made your point most effectively.
Mr. Young, on behalf of the industry, do you agree with or
disagree with Dr. Mulvey's observation that the Staggers Act
greatly reduced economic regulation of the industry?
Mr. Young. I agree it reduced economic regulation of our
industry. If you look at it in total, I also agree it was a
tremendous success. It saved this industry. There is no
question in terms of where we were heading in the 1980s and
where we are today.
Chairman Oberstar. I certainly concur. And I say that, in
furtherance of my opening remarks, as a Member of the House at
the time, rubbing worry beads about was this the right vote to
make. It was a good vote to make. It was an era of deregulation
that the Congress engaged in at that time.
The railroad sector has such an evocative force with the
American public. Hardly a county in my district, and there are
hundreds, maybe thousands of towns across the Nation, hardly a
town that does not have a railroad and thousands that do have a
memory of the railroad era, either a caboose, or a locomotive,
or a freight car, or in the iron ore mining country iron ore
carrying cars. And time and again when the economy flounders,
people will say well isn't it time that we make a big
investment in railroads and have the Government put some money
in and build more rail track and create thousands of jobs. And
I explain to them that we do not do it that way. But I say that
because there is such a powerful appeal. There was a very
effective ad that the Association of American Railroads ran in
the 1970s and into the 1980s of a former astronaut whose
concluding statement was, ``America's railroads, who needs
them. We all do.'' And we do.
But in the deregulation language, we reduced but did not
eliminate Government oversight of rail rates and service. In
1930, the freight rail network counted 249,000-plus miles. By
1957 that diminished to 220,000. By 1970, it was 202,000. By
the Staggers Act, it was 176,000 miles. Today it is just
slightly less than the mileage of the National Highway System,
which is 156,000 miles, and 140,000 miles of rail network
including short line and regional railroads. Clearly, in this
era of resurgence, it is not enough. We need more miles of
track. We need more double and triple tracking, as many of your
association members and Union Pacific have been doing. But in
this process there are concerns, as you heard voiced all
throughout the day, of service and of rate increases to captive
shippers, and a very cumbersome, complex process by which the
Surface Transportation Board, remnant of the ICC, remnant of
the regulatory era, with very limited, focused authority can
deal with.
And so I ask the question of you that I asked of the STB
panel. Can you envision a rate that is so high a percentage of
variable cost that the board should use its power to declare
the rate unreasonable?
Mr. Young. I cannot envision a rate that high. Although one
of the things that we need to think about is what rate should I
charge for chlorine moving on the railroad. And I will give you
an example. In terms of the small shipper process that they
have in play today, they are going to treat a load of lumber
the same as they will treat a load of chlorine. And we know the
risk profile on chlorine. At Union Pacific we handle 36,000
carloads of toxic inhalants a year. That is chlorine and
anhydrous ammonia. And again the question there is I am not
certain you could set any rate that would justify hauling that
business.
Chairman Oberstar. When setting rates, and you make a very
good comparison of a toxic substance and one that, logs, for
example, that would not be toxic. It would be damaging if it
fell on people but not toxic. And rate setting there is a
challenge for your industry. And the purpose of this hearing is
not to inquire how you do that. But when you do, you do not
have to have approval of the Surface Transportation Board, do
you, to set a rate.
Mr. Young. We have to work within the regulations that we
operate under.
Chairman Oberstar. But the setting of a rate by a railroad
does not require approval by the Surface Transportation Board.
Mr. Young. That is correct. Yes.
Chairman Oberstar. That rate comes into question only if a
shipper or consumer contests it; is that correct?
Mr. Young. That is correct.
Chairman Oberstar. So if there is a process in place for
challenge of rates, then should not that process be equitable
both for the railroad and for the challenger?
Mr. Young. I think the changes that are proposed by the STB
will help address some of the concerns you have heard from
small shippers.
Chairman Oberstar. But we have discussed today, and you
have heard the discussion, of the filing fee just to get in the
door to file a complaint. Do you find the filing fee system
that is currently in place equitable? Burdensome?
Mr. Young. I think the changes that the STB made, including
when they looked at their filing fees here--again, the
discussion was one on the costs at the STB. I do not think they
are unreasonable. We talk about small shippers. I find that
DuPont has three rate cases at the Board. I quite honestly do
not see them as small shippers and they certainly have the
capability to cover the costs of that fee.
Chairman Oberstar. And the timeframe for pursuing a case,
many of these go three years, some at least four years. Do you
think that is a reasonable period of time in which to resolve a
case?
Mr. Young. No, I do not. I think whatever you can do to
accelerate the resolution is fine. It would be a positive.
Chairman Oberstar. Good for the railroad, good for the
shipper, good for the consumer. And in your judgement or in
your review of the world and economic sector in which you
operate, should there at all be a rate reasonableness appeal
process?
Mr. Young. Well, the question becomes one on what are the
options for a customer. When we look at Union Pacific, I take
our pricing very seriously. We try to understand what does it
mean to the customer, what does it mean in terms of their
competitive position, what are the alternatives. It does us no
good in our industry to make a customer non-competitive. I need
to have growth long term. The question becomes what is
reasonable overall in terms of what will the market bear. And
many of my customers, I heard today off in discussions that
there is no competition. I have lost hundreds of millions of
dollars in revenue in the last year alone to other railroads,
to the highway truckers, to business moving through Mexico,
business coming over Canada, container business moving all
water around the Canal to the East Coast and to the rivers.
There is a substantial amount of competition when you look at
the industry today.
Chairman Oberstar. My question goes to the fundamental
issue of whether there should be in the view of the railroads,
your brothers and sisters in the rail business, or should there
be a process as exists in aviation where airlines just charge a
fee and enter a market without any review by the Department of
Transportation?
Mr. Young. I am not quite certain what your question is.
Chairman Oberstar. I am asking whether you disagree with
the fundamentals of the existing system or whether you are
prepared to continue to live within it.
Mr. Young. Well, we will live within it. The question
within the system at the end of day here is what type of
investment, how much investment do we want in the railroad. If
you look at the system as we are defined today, and it is not
clear to me if you are talking about what you are proposing in
the new bill, the fundamental question will be what return will
be set and how much investment we want in the business.
Chairman Oberstar. Where in the introduced legislation does
the proposed bill set rates for the railroad?
Mr. Young. Well, if you look at I believe it is----
Chairman Oberstar. Where does it set rates?
Mr. Young. Page 15, Section 302, it talks about improvement
of rate reasonableness standard.
Chairman Oberstar. It does not set rates. It deals with the
process.
Mr. Young. What it has is a formula that is a cost-based
formula that considers variable and fixed cost and an adequate
return. Maybe the term rates is not the appropriate term. It is
fixing the investment, the margin, the profitability of the
business. But either way it may not necessarily reflect the
market.
Chairman Oberstar. It does not fix. It deals with the
process. That is the difference that we have over the way your
association reads the legislation and the way the legislation
reads. In your report to your workforce, you say a Federal
bureaucracy would determine who could use which tracks
regardless of who owns them, and it would also set the rates
that the owner of the track could charge. We are dealing with a
process, not setting rates in this legislation.
Mr. Young. Mr. Chairman, the way I look at what is
potentially out there is expanded, let us not call it re-
regulation, expanded perspective or process on the rates that
can be charged in a particular area. It will be a cost-plus
formula. We have within the bill a proposal that the Government
will determine areas that lack competition. That brings into
account reciprocal switching, trackage rights, which the
Government again will determine how are those rates set when
you look at it. Let us forget we are talking about setting
rates. What we are talking here about is setting the returns on
the business.
Chairman Oberstar. The bill does not deal with trackage
rights.
Mr. Young. I think in the area where you talk about the
areas of inadequate competition it talks about terminal
trackage rights or some type of access in terms of the network.
Chairman Oberstar. But does not set them.
Mr. Young. Well, somebody will determine the----
Chairman Oberstar. But there is a process in which
railroads will have a voice, in which shippers will have a
voice, and consumers will have a voice.
Mr. Young. Mr. Chairman, I think the question becomes one
of are we confident of the process--again, ultimately the
challenge you and your Committee have is to decide how much
investment do we want in the rail network. And the question
becomes one of how will we peg whatever that return is, how
will we peg the margins in the business, how do you incent
productivity and investment will flow. There is no question in
my mind today. My first year as president of Union Pacific I
went into my board three times and asked for an increase in
capital. My board supported me 100 percent. They supported me
under the perspective that we were starting to see the
financial returns in this business move up. We had a debate
about should we do it now or should we wait. We said we need to
do it now under the context that we can continue to improve
these returns. My concern again is simply we are introducing a
lot of uncertainty. I am making decisions on the Sunset
corridor, you know that corridor, it runs from L.A. to El Paso,
an old Southern Pacific railroad, it should have been double
tracked years ago. We are making a $1.5 billion bet that the
future financial returns can support that investment.
Chairman Oberstar. One factual question. In your statement
of capital investment for the railroad and generally for your
association, how much of that figure is maintenance and how
much is new track and new locomotive and new rail car? What
percentage?
Mr. Young. The 18 percent, 17-18 percent, UP is actually
investing 20 percent this year but we will use those numbers,
it is all either brand new expansion or replacement of assets.
If you want to put maintenance in, it is 40 percent of the
revenue dollar.
Chairman Oberstar. Thank you. Mr. Shuster.
Mr. Shuster. Thank you, Mr. Chairman. First I wanted to
make a comment reflecting back on your decision in 1980. As we
have moved through this process, I have got my worry beads out
and I hope that we are going to do the right thing and do not
do something that has unintended consequences. Because as I
look back and study what has happened over the 27 years, I
think it has been a great success.
So I am very concerned about how we move forward and making
sure that we do not overstep and cause great harm to an
industry that, as Mr. Young said, is just now beginning to have
the returns to make these bets. And they are bets, because you
have uncertainty everyday in the economy; is the economy going
to continue to grow, is it going to go into recession, what is
going to happen. But now you also have to deal with a
regulatory process that is uncertain at best and certainly can
use some improvement.
But I turn to Mr. Rennicke. If you would, I see your
company Oliver Wyman deals with shippers, it deals with the
transportation companies. You yourself, and we have had a
discussion, you have dealt with shippers and rail companies.
Can you talk about some of the shippers that you have dealt
with. Is half of your business shippers? Is 10 percent of your
business shippers? I am trying to establish your credentials
here before the Committee.
Mr. Rennicke. If you look at our overall firm,
transportation is about 10 percent and the other 90 percent
basically works for auto companies, chemical companies,
utilities, et cetera. So, in general, the company is oriented
that way. I spend most of my time now working primarily for
financial institutions that are looking to learn more about how
the railroad industry works. I would say that is about 70
percent of my time. Probably 20 percent of the time is working
for some shippers who are interested in is there a different
way that we can approach, other than through litigation or
regulation, our position in the industry. Most of that has been
in coal and utilities and food products, consumer products. The
other 10 percent is time where I actually work for carriers,
both trucking companies and railroads.
Mr. Shuster. You deal across the gamut. Are you familiar
with Mr. Spitzer's testimony? On page 9 there is a table
dealing with captive shippers, page 9 I believe it is, and how
they define captive. Are you familiar with that?
Mr. Rennicke. I have looked at that a number of times
because it has actually been on a number of websites. As best I
can determine from that, how they define captive I believe is
the average of rates above 180, and non-captive are the rates
below 180. So what this is to some extent is a little bit of a
self-fulfilling prophecy. Are farm products captive? That is
basically an average rate, median or something that is above.
We actually talked to the company that did this several years
ago when they first came out to see did they do a survey, did
they actually try to go customer to customer and find out if
they were really captive or not captive. And as best we could
determine from what they said, it is a pure mathematical
exercise using the spread of rates that are in the----
Mr. Shuster. Right. In your experience, are there customers
that only have one railroad serving them that are paying less?
Mr. Rennicke. Absolutely. I think the comments today, there
is a whole series of competition that people do not think of--
product, source competition, moving into Mexico, Mr. Young
mentioned all water. They are starting to build 12,000 TEU
ships. And part of the reason why the liner companies are doing
that is maybe to avoid land movement of containers. So you may
find many shippers who basically are paying rates that are far
lower, have competitive options in that regard that are not
rail.
Mr. Shuster. Right. In your view, H.R. 2125, the bill in
question here, do you believe that it will in the end reduce
the rate to returns and the costs that can be recouped, the
prices that are going to be charged over the railroads?
Mr. Rennicke. I think the biggest concern that I have, in
all due respect with the process that you are going through in
legislation, is that when you have an undefined process the
financial community looks at that as being risk because they
cannot get their arms around it.
As I said, in the last couple of years we have worked
extensively for many of these. You know, 24 months ago an
equity investment in the railroads may not have been an
interesting thing. Now pension funds, not all just hedge funds,
that name was mentioned a lot today, but these are pension
funds, teachers' pension funds, retirement funds, as well as
hedge funds and private equity firms, they are asking us to
look at the carriers. Their first question when this bill came
out earlier was what does all this mean. Do we have to start
dealing now discounting for uncertainty? Because there is a
whole bunch of undefined things here. There is trackage rights,
there is haulage, there is the definition of what is really in
the non-competitive area versus what is in the competitive
area. All of those things create risk and the grand daddy of
them all is final offer arbitration, which is Monte Carlo,
almost baseball arbitration. It is almost a roll of the dice to
figure out how those kinds of decisions are made.
So all of that creates risk and I believe will reduce their
interest or it will increase the cost of capital because they
will risk adjust the funds that they are lending to the
railroads.
Mr. Shuster. All right. I see my time is up. I am going to
ask one question if Mr. Young if that is okay.
Chairman Oberstar. Okay. Go ahead.
Mr. Shuster. Okay. Thank you. Mr. Young, I continue to hear
people saying the railroads are buying back stock. I have some
idea of that, but I wonder if you might be able to explain
this. And you need to use the KISS principle here--keep it
simple. Why are you buying back stock? And I think today
somebody was saying that railroads are buying back stock and
that is somehow a bad thing. I do not believe it is. But if you
could explain it so I understand it better and we can get it on
the record.
Mr. Young. Well, buying back stock is very common. In fact,
in the S&P 500, last year 300 companies bought back stock. In
fact, of the 23 members of the American Chemistry Council that
are in the S&P 500, 21 bought back stock. In fact, I think the
total I read was almost $17 billion. In fact, one of the
customers represented up here accelerated their program. It is
a very common measure to provide improved returns to
shareholders.
Union Pacific this year announced our share purchase
program, the first time we have had one in many, many years,
and it was based on this kind of logic here. The first thing we
looked at is investment in the business. Where are those
returns. And $3.2 billion was the test. What do we need to do
with customers, how to think long term. The next thing we did
is start to think about how do we accelerate returns for Union
Pacific shareholders. And that comes from a combination of
share repurchase. What it does, it takes shares out of the
market, increases average earnings per share, stock prices go
up, shareholders see a return. It is actually pretty simple
logic that is out here.
I will tell you, Congressman, no matter how you cut the
returns in the railroad industry, they are still below the mean
in the S&P 500. Dividend yields, return on assets, the dividend
payout ratios that they have, return on equity. The ACC today,
when you look at it, the average return in equity of those
companies was around 20, 22 percent. UP this year was 11
percent.
Mr. Shuster. So in essence, what I understand, when you are
buying back stock it makes it more attractive for people to
invest in your company, which gives you more capital to do the
things you need to do.
Mr. Young. What it does is it boosts earnings per share.
Mr. Shuster. Final question. The cost of capital, the STB
has come up with a new way to view that. My understanding is
that they are taking their lead from Wall Street and Wall
Street calculates the cost of capital differently from the
railroad industry. Can you give me a little bit of background
on that and your view. Or is that not accurate and you view
cost of capital the same as folks on Wall Street, the analysts.
Mr. Young. Well, there is not a Wall Street analyst out
there that says I am earning my cost of capital. What they look
at in the industry, there are a lot of different methods,
discounted cash flow is one, the CAP M model. In theory the CAP
M model and the discounted cash flow model should move the
same. But there are a lot of assumptions that can be made in
that CAP M model that can really cause a pretty major
fluctuation in the results. Any model that takes the cost of
equity and literally cuts it in half I have a concern with in
terms of long term. I internally look at the cost of capital
for the Union Pacific long term as 10-plus percent. We have a
long ways to go.
Mr. Shuster. And so again, what Wall Street is doing, they
are using a different formula. You mentioned they are cutting,
I do not quite understand, they are cutting it in half?
Mr. Young. No, no. The new methodology. Again, CAP M and
discounted cash flow should move together at some point. The
variables are the assumptions that go into the equation, like
the risk premium on equity. My point is when the STB results
came out and you looked at the cost of equity compared to the
discounted cash flow and CAP M, you cut the costs almost in
half. That is a significant change that concerns me. Because
ultimately what will happen is you are going to set the returns
that you want for the industry. That will drive investment. The
math is very straight in terms of as returns go up or go down,
capital investment follows.
Mr. Shuster. Okay. Thank you very much.
Chairman Oberstar. Ms. Napolitano.
Mrs. Napolitano. Thank you, Mr. Chair. That is a little
confusing because I do not understand a lot of the terminology
in the dialogue that was just going on. But I would refer to
the recent comments that you made to STB where you state the
board's new calculation of cost of capital is mistaken both
technically and from a public policy perspective. Of course the
STB announced that it intends to adopt the cost of capital
calculation method closer to what is used in Wall Street. Why
do you feel this is not fair or that the board should not do
this?
Mr. Young. Well, again, Congresswoman, the assumptions you
make in these methodologies, and they can be fairly
complicated, can have a wide range of results.
Mrs. Napolitano. Based on?
Mr. Young. Based on assumptions on what the risk premium is
for equity, what is an investor willing to accept by investing
in railroad equities. My point with all of this is if you look
at ultimately what the two methodologies show on cost of
capital for the industry, there is a huge difference. If you
look at what was being used before by the STB and the CAP M
model today, it is almost 200 to 300 basis points, that is
percentage points difference. That is a 20, 25 percent
difference, and it is lower. Ultimately, if the cost of capital
is where this industry moves or where regulation moves, it will
control how much investment is made in the business.
Mrs. Napolitano. Anybody have a comment on that?
Mr. Marshall. May I add something on that. I have a sort of
layman's view of revenue adequacy and cost of capital. That is
if you see people buying railroads and then see them taking
money out of railroads, that says that the railroads are not
earning enough money. If you see Warren Buffet buying
Burlington Northern and then Burlington Northern says next year
we are going to build more track because we are going to earn
money on the track, that is saying that they are earning their
cost of capital and are revenue adequate.
If you have some money and you are trying to decide whether
to give it to Jim Young to put in his railroad or give it to
one of the other industries that was up there on the chart that
earns more on its investment, you might want to do a little
further analysis, but presumptively you would go with the big
numbers rather than with Jim. And when we get our business up
so that we are earning as much money as other people do, then
you would be more likely to send money our way. So that is sort
of the gut check that I would use on whether what is going on
at the STB is the right thing to do.
Mr. Rennicke. Thank you. Just to echo what Mr. Marshall
said. And I think that chart had a good deal of meaning, which
is why I put it up there. I think the railroads are lagging the
other industries right now. So in a competitive marketplace
where, again with the dealings I had with those funds, this
week they are interested in railroads, the last 20 or 24 months
they have been interested in railroads. But the fact that they
came in, they could also leave very quickly if they have a
sense that basically the risk profile and the returns are going
to get out of whack.
They represent billions of dollars of pension money, a lot
of it is pension money, and they have an obligation they see.
They make their money on making money for the people who have
invested in pensions. And if you show them a high risk
situation or if there is a lot of uncertainty in a particular
path, they are going to walk away from it and they are going to
put it into those other industries that traditionally have had
rates of return that are much higher. Look at petroleum on
there, it was three times the rate of return of the railroads.
So they would be much safer putting it in petroleum or
petrochemical companies or chemical companies than they would
in putting it in the railroads.
Mrs. Napolitano. I would beg to differ with you on a
personal basis.
Mr. Young, the recent GAO report found that railroads were
transferring many costs traditionally born by the railroads
onto the customers. Maybe that is one of the reasons why you
had banner years. But let me tell you, I have heard from some
of your customers. Can you discuss some of these costs and why
UP has decided to shift them onto the customers.
Mr. Young. Well, let us take freight car ownership. That is
one that has been talked about quite a bit today. First of all,
there is a different rate for a customer that owns their own
cars versus the railroad. There is a lower rate if you own your
own cars.
Mrs. Napolitano. Roughly, sir, what percentage are we
talking about?
Mr. Young. It will compensate them for the cars in terms of
their capital investment. In fact, in many cases, some of the
customers, their credit rating was higher. They could actually
borrow at a little bit lower rate to finance those cars. But
that was not the reason why what has happened here. If you look
at the capital needs in the industry, and the issue is
replacing assets, in terms of what we are faced with, the first
priority where we put capital is in the ground--building our
own highways, maintaining those highways; the second place is
locomotives; and the third would be freight cars. In fact, if
you get that order wrong, your railroad is not as efficient, it
is slower, and you end up needing more cars. So the first place
is in the infrastructure. It is a simple prioritization.
The capital requests that we look at every year in the
railroad far exceed what we spend. And in a priority order, we
said we have got to get it in the highway first, locomotive
second, and in many cases our customers are willing to work and
assume some of that investment risk as long as I reduce their
rates. A great example of that risk right now. I have 20,000
freight cars sitting idle. I heard some discussion today about
grain sitting on the ground. It has nothing to do with the
railroads. It has everything to do with the markets. But that
is the kind of risk that some of our customers were willing to
invest in.
Mrs. Napolitano. And I got into rail cars because my
concern is that most of them, I do not know if it has changed,
are not built in the United States. We have lost that
manufacturing capability. The other question that comes to mind
has to do with the demarge. Like I said, I had two customers in
my area, your customers, that had complained. In fact, they
were in litigation if I remember correctly. Do you feel that
shippers unfairly incur those demarge charges on rail cars that
are left in the railroad yards due to delays or early
deliveries or are just left sitting on their private property
because the railroad cannot pick them up and then the shippers
end up paying for that demarge.
Mr. Young. Congresswoman, I would agree with you demarge
was the number one complaint that I had from customers if you
go back two, three years ago. We worked hard to simplify it to
take a lot of the complexities out. But the fact is the
railroads were the lowest cost of warehousing for many
customers for years. When you had excess capacity, having a
freight car loaded with lumber that sat on a track for four
days was a pretty low cost for many customers. With capacity
now being very tight, the whole logistics chain must get more
efficient. I will give you an example. If I show up on a Friday
afternoon with one customer, they have chosen not to unload on
the weekend, so those cars will sit until Monday. I have other
customers that invested in turning those assets. Demarge is a
piece of that that says I am willing at the end of the day to
be a temporary warehouse but there is a cost for that. And it
really should be reflected in terms of the logistics chain.
Mrs. Napolitano. Back in the 1980s when I was on local
council, I can remember having to call the railroad because
they were storing those cars behind people's homes for many
days at a time. That was back then and I have not heard that
complaint here, so I am assuming that has been one of the
things that you have addressed in dealing with some of the
issues that you have faced.
Mr. Young. That is correct.
Mrs. Napolitano. The other area is, I am assuming part of
your cost is new technology for communications in order to be
able to move your cars more efficiently.
Mr. Young. That is correct. We invest in--really, a lot of
this is about safety in terms of wayside detectors. You have
the traditional hot box detectors that would read a wheel if
you had a problem. We are looking at acoustic detectors today,
very advanced in terms of reducing accidents. It is a
technology investment but, quite honestly, it more than pays
for itself in terms of improved safety.
Mrs. Napolitano. Is there new technology being utilized to
be able to determine whether or not you have any problems, say
faced with some kind of a terrorist attempt?
Mr. Young. Well, the closest we could look at would be
maybe GPS in terms of some of the tankers. But I will tell you,
when you operate a 33,000 mile factory out in the open, it is
pretty tough in terms of ensuring complete security for the
product moves. We have cameras in key locations, we are doing
much more visual inspections, advanced notice in terms of cars
moving. But I haul, as you know, a significant amount of toxic
inhalants in our system and we are doing everything we can to
keep them as secure as we can.
Mrs. Napolitano. Certainly. I would like to submit other
questions for the record, Mr. Chair. And with that, I thank you
very much and it is good to see you again Mr. Young.
Mr. Young. Thank you.
Chairman Oberstar. The gentlewoman's questions will be
received and submitted to witnesses for a response to the
Committee.
The Chair recognizes the gentleman from Ohio, Mr.
LaTourette.
Mr. LaTourette. I thank the Chairman very much. And I want
to thank you, Chairman Oberstar, for having this hearing. It
has been a great opportunity for me to reacquaint myself with a
number of the railroad issues. As the Chairman knows, because
of my work with the Chairman on Amtrak and with the railroad
industry in the last Congress, I have been promoted to the
Coast Guard Subcommittee now and so I do not get the chance now
to involve myself in these issues. But one of the things that I
enjoy very much about the Chairman is not only is he bilingual,
but he has a great sense of history, institutional history but
also history, and he also asks great questions.
Mr. Young, I want to go back to a question that the
Chairman asked just to make sure that I am clear in your
answer. When former Congressman English was here--and I said
last year when he appeared before the Subcommittee that if I
was running an association in Washington I would hire him
because he is like a firecracker in representing his members--
but he intimated that we should make sure we inquired of you on
that 17 percent figure, I think Ms. Brown used 18 percent, you
mentioned 20 percent, whether somehow, he did not say you
padded it, but somehow that it not only included new build-
outs, but it also somehow had a maintenance figure. And just to
be clear, if you put maintenance together with your capital
investment in infrastructure, what is your railroad spending?
Mr. Young. At UP, $3.2 billion this year for capital. Of
that $3.2 billion, $2.2 billion would be replacing assets that
have worn out. The other billion would fall into the category
of absolute new, going from single track to double track,
double track to triple track, or locomotives. The percent that
we had talked about, unfortunately, in a lot of cases the term
is maintenance capital, but that includes taking a 30 year old
piece of railroad or a 35 year old tie and replacing it. That
is not maintenance. We have to make a decision to put those in.
Now if you talk about another piece which is ordinary
maintenance in terms of ensuring that the are bolts tight, it
is like changing oil in your car, those numbers add up to about
40 percent of every revenue dollar that we spend. It covers
both replacing existing assets, expanding new assets, and
maintenance.
Mr. LaTourette. Okay. I thought that is what you said. And
I want to talk a little bit about, I got into it with the
DuPont fellow, but this common carrier obligation. I think the
Chairman is right, that given the history of the railroad
industry in this country, there is sort of a public
responsibility. Which is why I think we still have this common
carrier obligation on behalf of the rails. Is carrying toxic
inhalants a money-maker for your railroad?
Mr. Young. You cannot make enough money. It is such a high
risk. And you know the safety record in the railroad industry
is very good. It is what is called six sigma, or greater. But
the problem is one accident in the wrong location, and forget
about the financial consequence, you talk about the lives that
would be lost. You cannot charge enough.
Mr. LaTourette. Let me, when we had hearings on this we
talked about positive train control, which is where a lot of
the railroads, I think BNSF calls it something else just
because they are difficult in that regard. But have you done an
evaluation as to what it would cost to install positive train
control on your railroad?
Mr. Young. The latest numbers we are looking at, it could
be close to $800 to $1 billion.
Mr. LaTourette. And one of the purposes, it is not the only
purpose, but one of the purposes is to make sure that we do not
have disasters or accidents like Granitville and Minot, North
Dakota, dealing with toxic inhalants. When the last panel was
here, and I have not heard anybody dispute it, Ms. Hecker was
here on behalf of GAO and she took a look and she has as Figure
2 what has happened to railroad rates in this country since
1985. And except for the lentil guy, and I suggest maybe you
ought to get together with the lentil guy and the ag guys,
everybody has gone down. Rates on our Nation's railroads for
motor vehicles, miscellaneous mixed shipments, and coal have
all decreased.
And so that I think brings me to the question, the crux of
this hearing. And we had a hearing in the Coast Guard
Subcommittee and I am very sensitive to this issue. The
merchant mariners in this country were making the allegation
that because they were losing a lot of cases they felt that the
administrative law judge system within the Coast Guard was
rigged in their favor. And to me the crux of this hearing, and
it is not the Chairman's intent, but the complaint that some
shippers are making is because there are only seven Class I
railroads in this country, that somehow those seven Class I
railroads are taking advantage of people that have no rail
opportunity, no rail option. And we had testimony about
intermodal water, trucks, things like that. But I am sensitive
to the guy that is in North Dakota someplace that cannot ship
stuff by truck reasonably to Ohio. But that somehow your
industry is taking advantage of those people that have no other
choice. And really on behalf of the industry, I would invite
all three of you, but start with Mr. Young first, is that what
you are doing?
Mr. Young. Absolutely not, Congressman. I said earlier I
take our pricing very seriously in terms of understanding what
does it mean ultimately to the customer. Unfortunately, if you
look at the past 20 years, the pricing that we saw, 95 percent
of it went back to the customer in terms of productivity. As
you saw the one chart earlier, you have a 100 percent increase
in volume with little capital investment is not sustainable
going forward.
The discussion about taking advantage of a customer, we
have had some 100 percent price increases. I know every one of
them that we have at that kind of level. If you look at it, I
will tell you the example usually of what you see. You have got
a long term contract, no price escalator, fuel was 70 cents a
gallon. In many cases we try to work with our customers to help
them understand that that is not what is out there today.
Yesterday we paid $2.40 a gallon for fuel.
So what you have is a contract that really had no pricing
over a long time and now it comes up, it is due. At a minimum,
fuel recovery in many cases can be a 40, 50, 60 percent price
increase. And no customer, I have not had a customer thank me
for a price increase. And for many of my customers, what they
want is to know where I am putting investment and what we are
doing for the service. Again, I cannot sit here and explain to
you why a 100 percent price increase makes sense. But if you
step back and look at the reality in terms of where we have
been and where we are going, it is very, very real.
Mr. LaTourette. And before I turn to the other gentlemen on
that question, with the Chairman's indulgence because I am a
couple minutes over. I recently saw an ad in one of the
political newspapers here on Capitol Hill, Mr. Young, and the
quote was that the railroads walked off with over $6 billion in
customer fuels charge money. Can you tell me what your
perspective is from your industry since you are representing
your industry on that question.
Mr. Young. Well, thank you for asking that question,
Congressman. When I read that ad, I have to tell you, I really
had to contain myself. I take it personally. That was a
personal attack on 53,000 hard working men and women of Union
Pacific. If I practiced that kind of creative accounting in my
sector, somebody would go to jail. I am probably the only one
in this room that was involved with fuel surcharges back to day
one. Back in 2003 when fuels started to move away from $25 a
barrel, we sat down with our customers and we said we have to
have some mechanism to recover fuel. Our customers told us keep
it simple. They actually liked the truck sector which had had
fuel surcharges for years which was a percent of revenue. And
again, no one wanted to pay higher rates. But what they wanted
was assurance that when fuel goes back down they get a rate
reduction. That is what a fuels surcharge does.
No one at that time predicted $80 a barrel fuel when we put
fuel surcharges in place. No question about it. What the STB
did, and there is no perfect methodology, the STB came back in
and said instead of using a percent of freight, a more accurate
model would be a mileage basis. I will tell you that when we
made that change I did a customer survey; half of them liked
it, half of them did not. The key though is when fuel goes back
down the customers will see the benefit of that immediately in
terms of lower costs.
Mr. LaTourette. Thank you. Mr. Chairman, with your
indulgence, I did invite the other witnesses to talk about
whether or not it is a good business model for the railroad
industry to take advantage of people who have no choice.
Chairman Oberstar. Please continue.
Mr. LaTourette. Thank you. If you have an observation,
great. If you do not have an observation, then I can be done.
Mr. Marshall, do you have an observation?
Mr. Marshall. That is a difficult question until you step
back and look at the alternatives. I think, if I understand
your question, what you are asking and what I heard here today
from the shippers is I have a one railroad power plant and I
pay a lot, and he has got a two railroad power plant and he
pays less. In other words, competition lowers rates. And that
leads one to say well, what we need to do is artificially
create a two railroad situation at all points. Unfortunately,
we have tried that.
In 1975 there were seven railroads in the Northeast.
Virtually every town of any consequence offered shippers a
choice of one or more railroads, Altoona being a notable
exception.
Mr. LaTourette. That is because the Shusters represent it.
[Laughter.]
Mr. Marshall. In fact, there were five ways to get from New
York to Chicago. All seven railroads went bankrupt. What that
lesson is is that the level of competitive rates, the two
railroad rate level does not provide enough money to keep the
railroads going. It may pay the engineer and buy the gas for
the train but it is not going to keep the track fixed. And so
sooner or later the railroads will collapse, as they did. And
the result was Conrail which provided one railroad service to
everyone.
In the Staggers Act, the compromise that we made, we being
everyone here, being everyone who lived in the Northeast, was
that some places could have the benefit of competitive pricing,
and North America is the only place in the world where anybody
gets the benefit of competitive pricing, and others would have
regulated pricing. And the regulation, unfortunately, is
complicated. It has gotten more complicated than any of us had
imagined. But this system of differential pricing, taking
advantage of competition where it exists but making sure that
others do not pay more than the total cost of the railroad that
serves them, is something that I think has served everyone very
well since 1980. But it is not an easy issue to explain,
unfortunately.
Mr. LaTourette. And with the Chairman's indulgence, Mr.
Rennicke, do you have something to add?
Mr. Rennicke. I think just one comment to add, and this
goes back to some earlier comments that were made by Mr.
English. I think there is a sense that it is only people that
are over 180 that are carrying the load. Differential pricing,
if you go down to 100, the very first shipper that is just to
bed of 100, let us say they pay 1.00.01. Every one of those
dollar amounts above 100, as the whole spectrum of rates work
up, they are all making a contribution into the fixed cost of
the railroad. That is what differential pricing is about. You
want to capture as many of those contributions as possible.
Two-thirds of the rates are less than 180. All of those
customers are in various parts of the competitive spectrum but
almost all of them are making a contribution to the process.
Certainly, some at 181, 200, 250, 300, 350 are making a bigger
contribution but they are not carrying the load for the whole
system. You are maximizing the contribution across the whole
spectrum of rates. So I do not think that it is good policy to
just tag one group. But I do not think that is what is
happening.
Mr. LaTourette. I thank you for your answers. And I thank
you, Chairman Oberstar, for your courtesy.
Chairman Oberstar. Thank the gentleman for sharing with us
his wisdom, his years of experience as Chair of the Rail
Subcommittee and his great work on behalf of Amtrak. We all owe
you a debt of gratitude.
I want to come back to the question that I propounded to
Mr. Young at the outset. Do you, does your association accept
the status quo; that is, the existence of the Surface
Transportation Board and the authorities that it has?
Mr. Young. Yes.
Chairman Oberstar. Then within that context, you can accept
some adjustments or adaptations, or at least we can discuss
some.
Mr. Young. As I said earlier, I think some of the proposals
that they made will address some of the issues that have been
raised.
Chairman Oberstar. Mr. Marshall, when Class I over time has
spun off certain segments of its operations in a way that they
can continue to operate they negotiate a deal with the
surviving entity. That typically is a contractual agreement
that prevents short line or regional rail from providing
customers access to competitive service on one or more of the
other competing systems. Correct?
Mr. Marshall. That is often the case, Mr. Chairman. It is
not universally the case.
Chairman Oberstar. Not universally, but it is generally the
case. Those agreements typically require a short line to
deliver all or most of its traffic to the major carrier that
originally owned that short line. What is inappropriate or
wrong or objectionable to a finding by the STSB that this would
be inconsistent with the public interest, that it would
interfere with competition?
Mr. Marshall. I think there would be two objections. The
first one may be a parochial interest that I have in seeing a
growing short line business because I think short lines serve
their customers well, often better than the Class Is, and the
customers benefit from that. The instant that the STB declares
paper barriers, as they are often called, to be against public
policy, there will be no more short lines formed. I am
convinced.
Chairman Oberstar. Why?
Mr. Marshall. Because it will, one the one hand, cause big
railroads to fear that they will lose traffic at lower rates to
their competitors. Now I will come back to that in a moment.
Chairman Oberstar. They do not like competition, do they.
Mr. Marshall. Well, they do not like to reduce a flow of
revenue at a time when they need. On the other hand, they might
be willing to sell the short lines on terms that would
compensate them for the loss of revenue. But that would
increase the cost to the buyer to the point that I think there
would be very few lines purchased. There have been some in the
past. They have tended to be ones near the point of abandonment
anyway.
I think the other reason that I would be concerned, apart
from the no new short lines fear, is that it would by giving
multiple railroads access to points that previously had access
to only one railroad, it would pull down the rates. I know that
is what everyone who ships wants. When I go to a restaurant I
want to pay less for the meal than I am billed. Everybody wants
to pay less. But taking revenue flow away from Class I
railroads is not good for short lines.
Chairman Oberstar. There is another side to that coin. The
other side of that coin is the shipper or the consumer. Now let
us pose another situation, not necessarily hypothetical,
although it could be hypothetical, but it is a real situation
in a part of my district where the Class I discontinued service
and a successor short line railroad is there. They are capable
of providing a service. But they are not going to interconnect
with another rail. They just want to use a switch. They want to
cross a line. They want to use maybe a mile of track. And the
Class I said no. If we do not carry it, you do not carry it
either.
Mr. Marshall. That sounds unfair to me. But let me tell you
what----
Chairman Oberstar. It is unfair. It is unfair to the
farmers, it is unfair to the grain elevators, it is unfair to
the consumers. I mean from a Class I standpoint, they want to
protect their turf, protect their rates. And I understand that.
That is the competitive marketplace.
Mr. Marshall. The short lines and the large railroads have
gotten together and formed a process to negotiate just those
circumstances so that service to shippers is not ended. If big
railroad number one does not want it, big railroad number two
can get a crack at it. And that process seems to be working. I
am told there are over 100 cases where----
Chairman Oberstar. That is interesting to hear. And I do
not take the part of those who say, well, as a short line we
want to cross Class I track in order to provide service to a
competing Class I railroad. The Class I owning that track has a
legitimate argument against doing that. But not where the short
line wants to serve the customer who has been literally cut off
because the line was discontinued by the Class I and turned
over to a short line. There is the public interest to be served
here. And there has to be a process by which that public
interest can be served.
Mr. Young. Mr. Chairman, can I provide some perspective?
Chairman Oberstar. Yes, of course.
Mr. Young. Remember the advent of short lines was really a
function that said they were not economically viable under the
Class I railroad labor requirements, flexibility. It was either
abandon or do a short line. The short lines in many cases could
operate more efficiently. They did not have the same kind of
labor conditions that were employed. The requirement in terms
of the business is a function of efficiency.
I will just give you an example. Railroads are efficient as
they handle more volume. You drive unit costs down. You are
obviously more efficient running a 100 car train than a 50 car
train. In many cases what you looked at or you look at today is
if you want to say all right, let us split the business up, let
another railroad take half of it, what you are going to do is
end up with higher costs overall. Because what will happen, as
we make the interchange we will have less traffic. That drives
unit costs up. It is less efficient long term.
So I think we need to be real careful in terms of
ultimately the discussion about allowing the short line to go
ahead and send its business to another connecting railroad
because it will disrupt efficiency in that process. Also, in
many cases the Class Is have provided the short lines with no
rental in terms of locomotive, no car hire in terms of
equipment. We have kept that in our account. So again, to me it
is going back to the fundamental driver between why short lines
really evolved.
Chairman Oberstar. I said a moment ago, in fact postulated
that I think you have a legitimate argument in the case where a
short line railroad would take business, use Union Pacific line
in order to deliver that commodity to a competitor Class I
railroad. You have got a legitimate argument about access in
that case. But where the short line is going to serve that
customer but needs to use a mile of track but can do so only at
an outrageous sum or is prohibited from doing it at all, I
think the public interest has to be served there.
Well, there are other matters but I think we have covered
these largely.
Mr. Shuster. One question, Mr. Chairman.
Chairman Oberstar. Of course.
Mr. Shuster. When we are talking about competition, there
is barges, trucks, other railroads. One of the questions I have
is how much does this come into play as companies decide to
build new facilities. A coal mine, coal is where the coal is so
they have to mine it there and they have to deal with what they
have to deal with transportation-wise. How many companies do
you see today that are looking to locate where they can be
served by two railroads or two different forms of
transportation. I would guess if I were a railroad, I would be
trying to convince customers to locate on the main line, I want
to service you. Because that has got to be in the competitive
mix where you are looking to keep people on your line and they
are looking to find two railroads or other transportation
modes.
Mr. Young. Congressman, in all six of my business groups--
agricultural, the industrial products, chemicals--we have seen
customers pick UP only to build new facilities. Twenty-three
ethanol plants were built last year on UP only lines. Chemical
industry has expanded and built new facilities where they had a
choice to go on a dual serve line. They picked UP. Rock
customers in Texas have several announcements, new mines that
are single served UP. What they see is the value. They do see
some protection in terms of the maximum rates. But what they
see is value in the proposition. So I have seen that really
across all the business groups.
Mr. Shuster. That makes a pretty large statement if they
are picking you only.
Mr. Marshall, what have you seen in your experience?
Mr. Marshall. Well, one of the things we sell is on short
lines that do connect with more than one Class I, we try to get
people to locate there. But I think what Mr. Young is saying is
true, that there are plants that sometimes choose a single
railroad. That is not probably in a majority of the cases, but
it does happen.
Mr. Shuster. Mr. Rennicke?
Mr. Rennicke. I think a lot of it depends on several
factors. It depends on what the company's perspective is in
their dealing with the railroads. We did a big project for a
very large utility to help them figure out where to site
plants. I was absolutely amazed. They had a number of places
where they could site at a junction where they could get two
railroads. That particular utility said we want the service
here, that is a main line, carrier X is investing in that main
line, and I am more worried about whether the main line is up
or down than whether I have two carriers there.
So that is one group. You get other groups where first
thing in the door they say I do not care where you look but
there better be two railroads or locate me on a terminal
company. So it is a mix. But there are a large number of
companies including power plants that are willing to cut a long
term agreement with the railroad and locate at a single service
point.
Mr. Shuster. Thank you very much. And I would point out to
you, Mr. Rennicke, there is a number of places in my district
that I can locate companies that are served by two railroads.
So in the future if you need to talk to me, we can talk.
Thanks.
Chairman Oberstar. I thank the panel for participating, for
waiting so late in the day, interrupted by votes and by
extensive questioning of the earlier panels. I invite the
Association of Railroads through you, Mr. Young, to submit your
specifically written observations about provisions of our bill.
Mr. Young. We plan to do that, sir.
Chairman Oberstar. We will welcome those comments.
The hearing is adjourned.
[Whereupon, at 7:18 p.m., the Committee was adjourned.]
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