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PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Transportation and Infrastructure. Additional material pertinent to this transcript may be found on the web site of the Committee at [http://www.house.gov/transportation]. Complete hearing records are available for review at the Committee offices and also may be purchased at the U.S. Government Printing Office.






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MARCH 12, 1998: Resource Requirements
APRIL 22, 1998: State of the Railroad Industry
MAY 6, 1998: Inter-Carrier Transactions, Construction and Abandonments
MAY 13, 1998: Rates, Access and Remedies

Printed for the use of the

Committee on Transportation and Infrastructure



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MARCH 12, 1998: Resource Requirements
APRIL 22, 1998: State of the Railroad Industry
MAY 6, 1998: Inter-Carrier Transactions, Construction and Abandonments
MAY 13, 1998: Rates, Access and Remedies

Printed for the use of the

Committee on Transportation and Infrastructure


BUD SHUSTER, Pennsylvania, Chairman

THOMAS E. PETRI, Wisconsin
HOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
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JOHN L. MICA, Florida
SUE W. KELLY, New York
RAY LaHOOD, Illinois
FRANK RIGGS, California
CHARLES F. BASS, New Hampshire
JACK METCALF, Washington
ROY BLUNT, Missouri
JOSEPH R. PITTS, Pennsylvania
JOHN R. THUNE, South Dakota
CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
JON D. FOX, Pennsylvania
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J.C. WATTS, Jr., Oklahoma

NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
ROBERT E. WISE, Jr., West Virginia
BOB CLEMENT, Tennessee
ELEANOR HOLMES NORTON, District of Columbia
PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
BOB FILNER, California
FRANK MASCARA, Pennsylvania
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GENE TAYLOR, Mississippi
BILL PASCRELL, Jr., New Jersey
JAY W. JOHNSON, Wisconsin
JAMES P. McGOVERN, Massachusetts
TIM HOLDEN, Pennsylvania

Subcommittee on Railroads

BOB FRANKS, New Jersey, Chairman

KAY GRANGER, Texas, Vice Chairwoman
JOHN L. MICA, Florida
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JOSEPH R. PITTS, Pennsylvania
JON D. FOX, Pennsylvania
BUD SHUSTER, Pennsylvania
  (Ex Officio)

ROBERT E. WISE, Jr., West Virginia
ROBERT A. BORSKI, Pennsylvania
BOB CLEMENT, Tennessee
BOB FILNER, California
  (Ex Officio)




Proceedings of:

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March 12, 1998

April 22, 1998

May 6, 1998

May 13, 1998

MARCH 12, 1998

    Morgan, Linda J., Chairman, Surface Transportation Board


    Morgan, Linda J


    Shuster, Hon. Bud, of Pennsylvania

    Wise, Hon. Robert E., Jr., of West Virginia


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    Franks, Hon. Bob, a Representative in Congress from New Jersey, Recommendations of the Railroad-Shipper Transportation Advisory Council

Morgan, Linda J., Chairman, Surface Transportation Board:

Outyear Projection of Offsetting Collections to Agency Resource Requirements, chart

Appropriation History of the Interstate Commerce Commission and Surface transportation Board, chart

Surface Transportation Board Budget Request, FY 1999

User Fees at the Surface Transportation Board: an options paper, April 12, 1996

FY 1999 Congressional Budget Justification Workload Summary, chart

Significant Actions, Surface Transportation Board, report, March 10, 1998

ICCTA-Related Rulemakings

Surface Transportation Board FY 1998 Enacted Salaries and Expenses, chart

Occupational Composition of the Surface Transportation Board, chart, March 9, 1998

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    Association of American Railroads, statement

APRIL 22, 1998

    Crowley, Thomas D., President, L.E. Peabody & Associates, Inc., on behalf of the Western Coal Traffic League

    Hatch, Anthony B., Independent Rail Analyst

    Kahn, Alfred E., Professor Emeritus, Cornell University

    Levine, Mark S., President, United DC, Inc., on behalf of the Society of the Plastics Industry, Inc



    Loftus, William E., President, American Short Line and Regional Railroad Association

    Month, Stephan, Managing Director, Credit Suisse First Boston Corporation

    Phillips, Karen Borlaug, Senior Vice President, Policy, Legislation and Communications, Association of American Railroads
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    Rastatter, Ed, Director of Policy for Rail and Motor, National Industrial Transportation League

    Rennicke, William J., Vice President, Mercer Management Consulting

    Robinson, Eric, Director of Distribution, Chemical Products, FMC Corporation, on behalf of the Chemical Manufacturers Association

    Wyss, David A., Chief Economist, Standard & Poor's DRI


    Crowley, Thomas D

    Hatch, Anthony B

    Kahn, Alfred E

    Levine, Mark S

    Loftus, William E

    Month, Stephan

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    Phillips, Karen Borlaug

    Rastatter, Ed

    Rennicke, William J

    Robinson, Eric

    Wyss, David A


    Alliance for Rail Competition, statement

    Green, Hon. Gene, a Representative in Congress from Texas, statement

MAY 6, 1998

    Ackerson, Nels, the Ackerson Group

    Barr, Hon. Bob, a Representative in Congress from Georgia, accompanied by Thomas D. Bevert, Businessman, and Past Vice President, Powder Springs Business Association, Powder Springs, GA

    Burwell, David, President, Rails-to-Trails Conservancy
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    Cameron, David O., Senior Communications Coordinator, International Brotherhood of Teamsters

    Guinan, John F., Assistant Commissioner, Passenger and Freight Transportation, New York State Department of Transportation

    Haley, John J., Jr., Commissioner, New Jersey State Department of Transportation

    Kucinich, Hon. Dennis J., a Representative in Congress from Ohio

    McCarren, Reilly, Executive Vice President and Chief Operating Officer, Wisconsin Central Transportation Corporations, North American Rail Operating Properties, on behalf of the American Short Line and Regional Railroad Association

    Morgan, Linda J., Chairman, Surface Transportation Board

    Paolello, Ray, City Attorney, City of Yakima, Washington, on behalf of the National League of Cities

    Phillips, Karen Borlaug, Senior Vice President, Policy, Legislation and Communications, Association of American Railroads

    Wytkind, Edward, Executive Director, Transportation Trades Division, AFL–CIO, accompanied by David Griffin, Assistant General Counsel, Brotherhood of Maintenance of Way Employes
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    Shays, Hon. Christopher, a Representative in Congress from Connecticut


    Barr, Hon. Bob, of Georgia

    Blumenauer, Hon. Earl, of Oregon



    Kucinich, Hon. Dennis J., of Ohio

    Moran, Hon. Jerry, of Kansas

    Shays, Hon. Christopher, of Connecticut

    Shuster, Hon. Bud, of Pennsylvania


    Ackerson, Nels

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    Bevert, Thomas D

    Burwell, David

    Cameron, David O

    Guinan, John F

    Haley, John J

    McCarren, Reilly

    Morgan, Linda J

    Paolello, Ray

    Phillips, Karen Borlaug

    Wytkind, Edward


Moran, Hon. Jerry, a Representative in Congress from Kansas:

Donative Quitclaim Deed, S.C. Gordon, General Manager-Real Estate, Omnitrax
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Woolwine, Gerald, Clark County Attorney, letter, January 23, 1998

    McFarland, Thomas F., Jr., letters, February 20, 1998, and April 27, 1998

    Ackerson, Nels, the Ackerson Group, response to a request from Rep. Bachus

    Port of Seattle and the Port of Tacoma, statement

Morgan, Linda J., Chairman, Surface Transportation Board:

Review of Rail Access and Competition Issues, Surface Transportation Board Decision, April 16, 1998

Review of Rail Access and Competition Issues, Surface Transportation Board Decision, May 4, 1998

Response to question concerning construction of track segments

Responses to questions from Rep. Blumenauer

Response to questions from Rep. Sandlin

    Phillips, Karen Borlaug, Senior Vice President, Policy, Legislation and Communications, Association of American Railroads, responses to questions from Rep. Bachus

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    Executive Intelligence Review, statement

MAY 13, 1998

    Blaydes, Lonnie E., Jr., Vice President, Commuter Rail and Railroad Management, Dallas Area Rapid Transit, on behalf of the American Public Transit Association

    Donnelly, Michael, Chairman, National Grain and Feed Association

    Duff, Diane C., Executive Director, Alliance for Rail Competition

    Emmett, Edward M., President, National Industrial Transportation League

    Loftus, William E., President, American Short Line and Regional Railroad Association

    Morgan, Hon. Linda J., Chairman, Surface Transportation Board

    Phillips, Karen Borlaug, Senior Vice President, Policy, Legislation and Communications Department, Association of American Railroads

    Schwirtz, Mark W., Manager, Environmental and Fuel Resources, Arizona Electric Power Cooperative, on behalf of the Western Coal Traffic League
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    Szabo, Robert G., Executive Director and Counsel, Consumers United for Rail Equity

    Theurer, Robert J., Manager, Logistics Industry Affairs, AMOCO Chemical Company, on behalf of the Chemical Manufacturers Association


    Voltmann, Robert A., Executive Director and CEO, Transportation Intermediaries Association


    Shuster, Hon. Bud, of Pennsylvania


    Blaydes, Lonnie E., Jr

    Donnelly, Michael

    Duff, Diane C

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    Emmett, Edward M

    Loftus, William E

    Morgan, Linda J

    Phillips, Karen Borlaug

    Schwirtz, Mark W

    Szabo, Robert G

    Theurer, Robert J

    Voltmann, Robert A


    Felker, Brian, Manager of Land Transportation, Shell Chemical Co., and Agent, Shell Oil Co, statement



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U.S. House of Representatives,

Subcommittee on Railroads,

Committee on Transportation and Infrastructure,

Washington, DC.

    The subcommittee met, pursuant to call, at 2:00 p.m., in Room 2167, Rayburn House Office Building, Hon. Bob Franks (chairman of the subcommittee) presiding.

    Mr. FRANKS. Good afternoon.

    I'd like to begin our hearing. Before we begin the questions for STB Chairman Morgan, I want to remind all Members of the Subcommittee of the legal and ethical rules that preclude Chairman Morgan from discussing matters that are currently pending before the Board. In addition to the risk that undue congressional influence can taint an Agency's ruling, there is also a general legal ban under the Sunshine Act on ex parte communications with the Agency's decisionmakers about any pending case.
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    In light of these very important rules, I would encourage Members to use good judgment in not posing questions for Chairman Morgan that involve specific matters now pending before the Board. Doing so might not only endanger the legal propriety of such cases, it could potentially bring discredit upon this Subcommittee, something that particularly today I'm sure all Members on both sides would hope to avoid.

    Again, I want to welcome everyone. Today's hearing on Agency Resource Requirements for the Surface Transportation Board will be the first in a series of hearings to be held by this Subcommittee covering the full range of STB issues.

    This process will include hearings on the substantive laws that the STB administers, including the merger and rate standards. However, today I think it is important to focus on the resource needs of the Agency, given the fact that one of the important aspects of the reauthorization will be funding levels for the next several years.

    This is the first oversight hearing of the Surface Transportation Board since it was created on January 1, 1996, by the Interstate Commerce Commission Termination Act of 1995. The current Chairman, Ms. Linda Morgan, and the other member of the Board, Mr. Gus Owen, have been responsible for managing the dramatic changes that were called for in the ICC Termination Act.

    This landmark legislation called for the elimination of many ICC functions as well as changes in the laws administered by the STB. As a result, in FY97 the STB's first full year of operation, the STB operated with a budget of $15 million and 134 FTEs. That reflected a 63-percent reduction in funding compared to FY95, the last full year of ICC operation, and a 69-percent reduction in staffing levels. Since then, the STB has received only very modest increases in funding to keep pace with inflation, and virtually no staff increases. Chairman Morgan and Mr. Owen are to be commended for so ably managing this complicated transition process.
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    In FY99, the President's budget proposes to fund the entire STB from user fees. This proposal is not for the typical transaction-based user fee which the STB already imposes, but for an across-the-board assessment of fees on an unspecified class of fee payers, presumably the railroads, trucking companies and shippers who are affected by STB regulations.

    There are many concerns regarding this proposal which I hope to address at today's hearing. The Administration has never submitted legislation to enact the fee proposal, although it would appear that legislation would be necessary in order to initiate such a fee.

    One concern I have is whether this proposal actually represents a fee, or is in fact a tax, since the entities required to pay would presumably have no discretion as to whether they were subject to the fee.

     These are critically important times for the railroad industry. Major mergers have led to increased consolidation in the industry, and additional mergers are either under review or being proposed.

    The STB has a major role in ensuring that such changes in the railroad industry are in the best interest of the public and are accomplished without diminishing service quality or hampering competition. It is therefore imperative that the STB be provided with an adequate level of resources and staff to carry out their important mission.

    Today we are interested in exploring further what the appropriate resource level is for the STB. I look forward to the informative testimony of our witness, but first I would like to recognize our Ranking Member, Mr. Wise.
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    Mr. WISE. Thank you very much, Mr. Chairman, and I wish to be the first one on the official record of this Subcommittee to welcome you as chair. It's a pleasure to sit beside you and to have you guiding this Committee. You've already shown incredible judgment by asking me if I needed any new Amtrak stops. We're going to work well together, Mr. Chairman.


    On a serious note, though, I appreciate the attention that you have spent on rail even before you were the chair, and the efforts that you took to make sure that the Amtrak bill came to a satisfactory resolution.

    I appreciate also the warning that you gave all Members of the Subcommittee about trying to exercise undue congressional influence. I'll be honest, Mr. Chairman, I've been trying just to get due congressional influence sometimes recognized, not as successfully as I'd like, I must say.

    But I am pleased that you have been at the helm all of one day, and we've already started a hearing because I think this is one of the most important areas that our Subcommittee is going to work in this year, in taking this on.

    We have few remaining legislative days ahead of us and a lot of work to do, and I look forward to additional hearings on this subject and was delighted to have a chance to talk with you a few minutes ago and learn your thoughts on that.

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    This hearing is the first opportunity to review the work that was done several years ago when we terminated the Interstate Commerce Commission. One of the primary reasons for that legislation was the perception at least among Members of Congress that the ICC was unresponsive. As we move to reauthorize the STB, it is imperative that the Congress review and support the functions of the Board to ensure that it will be able to respond to the demands of maintaining a healthy and competitive—and I emphasize competitive—national transportation infrastructure.

    Today's hearing is simply the STB budget and funding levels, very important, but it is my hope, Mr. Chairman and Chairman Morgan, that we will be together again because there are a number of significant issues dealing with this STB reauthorization that need to be fully aired.

    There have been a variety of funding mechanisms proposed for the STB, and today the Board is funded through a combination of appropriated funds and user fees such as merger filings. It is important to determine whether or not the staffing and funding at the current levels are adequate, and I do look forward to hearing Chairman Morgan's testimony today and discussing the budgetary concerns of the STB with her.

     There are going to be other hearings to address the issues in depth. I would like to call to your attention my concern about the current status of rail service, especially on Union Pacific, and the current and future status of rail competition and possible efforts that may be made to increase competition. That does have an impact on the budget because it obviously determines what kind of staffing levels you need and what kind of oversight you have to perform.
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    I understand that like other industries, mergers are one of the main features of the railroad landscape today, and I would point out, however, as recently as this week, the Department of Justice has indicated that they are going to take a step back to look at how the mergers they are reviewing will affect the competitive and economic balance in business.

    The STB has recently approved two large mergers and a third is pending. The number of Class I railroads have dropped dramatically over time. I believe we have gone from 43 to five in the period of the Staggers Deregulation Rail Act of 1980, and there are fears, not completely unfounded, that the numbers will shrink even further. In addition, the STB will be considering the first ever international merger following the announcement of a merger of Canadian National and Illinois Central.

    So, it occurs to me, Mr. Chairman, that in the space of just a few months, the STB will have in front of it, or has in front of it, not only the pending merger and acquisition of Conrail by Norfolk Southern and CSX, it has the oversight and continuing review of Union Pacific, and additionally it will now be taking on Canadian National and Illinois Central, not a light workload by any means.

    While I recognize that mergers can provide efficiencies by allowing more direct routings and reducing transfers of cargo from one railroad to another, I believe that the huge railroads that result from these mergers need adequate oversight to ensure that service is not only maintained but, when at all possible, improved. In addition, mergers need close scrutiny to make sure they meet the needs of shippers and employees and not just the needs of the stockholders.
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    Ultimately, the Congress and the STB are charged with ensuring that the nation maintains a strong railroad infrastructure that serves passengers and shippers well. The STB Reauthorization of 1998 should enable the STB to make decisions so that railroads remain healthy as well as provide competitive options for shippers to get their goods to market to keep our economy on tract into the 21st century.

    So, Mr. Chairman, I look forward to working with you, and to the Chair of the STB, I appreciate the cooperation you've always afforded our office, and we look forward to hearing your testimony.

    [The prepared statement of Mr. Wise follows:]

    [Insert here.]

    Mr. FRANKS. Mr. Wise, thank you very much for your comments. The chair would be delighted to entertain opening statements from the Members.

    Mr. Bachus.

    Mr. BACHUS. I thank the Chairman, and I'm pleased to say that I think that the STB members have approached their responsibilities in the last two years with competency, professionalism, fairness, and a concern for the welfare of the nation's transportation system, and I want to commend you on that.

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    A regulatory agency handling controversial matters can never satisfy every party coming before it, but I think that the Board's diligence and hard work merit praise.

    The members of the Surface Transportation Board have demonstrated, I believe, over the past two years, their complete commitment to doing what is necessary to do the job, and for your fair consideration of the issues, and also for the public interest you've demonstrated.

    As the members of the Board embark upon consideration and decision of the most significant railroad case in a generation, I want you all to know that many of the Members of this Committee appreciate and commend your dedication to public service.

    You are a small Agency. I think you've done a good job under a heavy workload. We've streamlined from the ICC, we tried to streamline things, make things go quickly and, in doing that, we downsized quite a bit. And I'm not sure that it was our intention for you to have the workload you've had, for such a small Agency. You've had a difficult situation in the past two years.

    So, I guess that pretty much sums up what I'd like to say, but I do hope that the other Members do appreciate that you've had a tremendous workload. You've been hit with a lot of complex issues, and that you are working with a small staff, and we've made a change from the ICC to this. I'm sure there are going to be people that are going to always be asking for reregulation or new laws, but I don't think we've had a chance to let these work, and I think the first two years has demonstrated that we did the right thing in forming the Surface Transportation Board, and I believe we have capable members on that Board. Thank you.
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    Mr. FRANKS. Thank you, Mr. Bachus, for your statement. Mr. Clement.

    Mr. CLEMENT. Thank you, Mr. Chairman. I want to thank Chairman Morgan for joining us here today as we discuss reauthorization of the Surface Transportation Board, and I look forward to hearing your testimony.

    Since its inception, the Surface Transportation Board has met a number of needs in an independent bipartisan manner. With its broad responsibilities and its wide range of jurisdiction, the mission you face is a steep one, and we're appreciative of your service.

    Since 1980, the number of large railroads has decreased from 45 to five. This is a staggering contrast. But let us not take lightly these mergers and the potential effects they could have on competitive forces in the industry.

    Again, thank you for joining us today, and I look forward to hearing your comments.

    Mr. FRANKS. Thank you, Mr. Clement. I recognize the Committee's Vice Chair, Ms. Granger.

    Ms. GRANGER. Thank you. I have no opening remarks. I do want to congratulate you, Mr. Chairman, and tell you I'm glad to see you in that seat and look forward to working with you. Thank you.
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    Mr. FRANKS. Thank you.

    Ms. Morgan, welcome. We look forward to your testimony. Thank you for appearing this afternoon.


    Chairman MORGAN. Mr. Chairman, Congressman Wise, and other Members of the Subcommittee, first of all, let me say that I do appreciate the kind comments that have been made here today, and I think those comments should really be directed to the staff behind me and to the staff who is back doing work while I am here doing this work.

    My name is Linda Morgan. I am the Chairman of the Surface Transportation Board. I am appearing today on behalf of the Board at the request of the Subcommittee to discuss the reauthorization of the Board, and specifically the workload of the Board and the resources appropriate to handle that workload. My understanding is that substantive discussion of the statutory responsibilities of the Board will occur at a later hearing, and it is in that vein that my testimony is presented here today.

    I understand that I have five minutes for oral presentation; therefore, I will briefly summarize my testimony and ask unanimous consent that my full written statement with the eight attachments be included in the record.

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    In 1995, Congress abolished the ICC, but it concluded that an independent body such as the Board was needed. There continues to be a need for the Board, and it should be reauthorized. The need for the Board today is no less than it was when it was created, and my testimony goes into greater detail as to the important Board responsibilities.

    The steady workload of the Board, particularly in the rail area, clearly indicates the importance of the Board and its work, and the importance of maintaining at least the current resources. The Board has had, on average, between 400 and 500 pending cases since its inception.

    The Board should be reauthorized for an extended period, preferably for five years, but for no less than three years, and at no less than the existing staff and funding levels. The Board currently has a staffing level of roughly 135 people and a budget of roughly $16 million.

    With respect to total funding by user fees, the Board has indicated that it supports continuing the existing mix of appropriations and user fee collections until such time as Congress changes direction. At such time as Congress determines that total funding by user fees is the appropriate way to go, the Board is prepared to work with Congress to craft necessary legislation and to develop the necessary rules to implement that approach. The Board cannot be totally funded through user fees under its current authority, and I have attached an Options Paper that describes that in greater detail.

    In tackling its work, the Board has utilized its limited resources to its fullest. While we have staff whose job descriptions connote a particular expertise, the staff has become accustomed to utilizing all of its skills to the fullest and working in teams to achieve maximum efficiency and expertise. In addition, we have encouraged constructive participation by parties before the Board in working toward resolution, particularly through moving proceedings forward and also promoting private sector solutions.
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    The Board has not avoided tackling the hard issues even when its decisions will make some interests unhappy. This commitment to putting out the work does not always enhance the Board's popularity, but we were created to resolve controversial cases and Congress and the transportation community expect no less. Also attached to my statement is a comprehensive digest of all of our decisions to date. We have, on average, issued 1400 decisions annually, and have met in a timely manner all deadlines.

    In doing its work, the Board has fulfilled its Congressional mandate. It has done more with less, compiling what I believe is an impressive listing of accomplishments. It has attempted to strike a fair balance of interest in accordance with the law in resolving the many complex matters before it.

    The Board will continue to be committed to fulfilling congressional intent in implementing its responsibilities. I would be happy at this time to answer any questions.

    Mr. FRANKS. Thank you, Madam Chair. I have a couple to lead with. In your prepared statement, you mention that the Administration proposes to defray all STB costs through so-called ''user fees''.

    As I understand the proposal, which is similar to the now expired FRA rail safety fees, the revenues from these fees simply go into the Treasury's general fund and are not in any way earmarked for the use of your specific Agency. As a result, in this scenario the STB would need to go before the Appropriations Committee annually and ask for its full appropriation just as if the user fees did not exist. Is this your understanding of how such a user fee system would work?
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    Chairman MORGAN. Well, I do not believe it is clear how the particular proposal of the Administration would work. If you look at our current user fee approach, we cover most of our costs through appropriations, and we cover the rest through user fees. The user fees that we collect do come directly to us to cover our expenses, and I would presume that if we were to be totally funded through user fees, than that would be the approach. In any event, we do have to come before the Appropriations Committee to get the authority and the level of funding that we would need.

    Mr. FRANKS. You've submitted options to the Committee in terms of how such a user fee system might be put into place. Has the Administration further fleshed out the concepts that they have put forward with any specific proposals? I know they haven't done it in legislative form, but have they made materials available to the Board for consideration?

    Chairman MORGAN. No, they have not. The Options Paper that you reference is one that we did in 1996 in response to the Administration's proposal to fully fund us by user fees, but at this time I do not have any specific proposals from the Administration on which we are supposed to comment.

    Mr. FRANKS. In FY97 the STB collected over $3 million in Title 31 transaction based user fees, yet in your testimony for Fiscal Years 1998 and 1999, the projection is for only about $2 million in user fees. Can you tell us what accounts for that projected reduction in fees?

    Chairman MORGAN. Well, first of all, let me say that with respect to the user fees that we collect, they are based on the filings. And so anytime we estimate, it is always an estimate of what we think will be the filings coming in.
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    The other point I think that is important here is that without a merger filing and the fees associated with a merger, we collect, on average, somewhere around $100,000 per month. So, $100,00 per month gets you to about $1.2 to $1.4 million, depending upon the filings, and then in the last two years we have had merger-related filings that have upped the collections that we have been able to bring in. Without those collections, we have to moderate the amount of fees that we can collect.

    So, for example, related to the pending Conrail merger, we have collected roughly $2 million in user fees from that filing because it is essentially two filings plus several related applications.

    Mr. FRANKS. So the volume and types of transactions that you would anticipate being filed before you would dictate the amount of money that you would anticipate receiving in fees?

    Chairman MORGAN. That is correct, and so when we anticipate how much we think we are going to collect, we base it on what we think are going to be the filings.

    Mr. FRANKS. So, relatively, you're telling me proportionately you anticipate fewer transactions that are subject to fees coming before you next year.

    Chairman MORGAN. Well, I think what I am saying is that you can not count on a merger coming in every year with a significant amount of fees associated with it. Apart from mergers, we seem to be pretty regularly collecting $100,000 to $110,000 per month in user fees. So, that is our base, and then to that we add what we think will be merger-related—
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    Mr. FRANKS. Cynics among various folks could presume that if the Agency can anticipate greater revenue intake during periods of proposed mergers, that the Board might let it be known that the environment might be right for consideration of such activities.

    Chairman MORGAN. Well, all I can say is that from my perspective and the perspective of my fellow Board member, we have not attempted to use our decisionmaking in any way to encourage any sorts of filings associated with fees. We have been honest with the Congress when we felt that we were going to collect the fees that we estimated and when we were not, and it has not been in any way related to what sorts of decisions we have rendered.

    Mr. FRANKS. Thank you, Ms. Morgan. Mr. Wise.

    Mr. WISE. Thank you, Mr. Chairman. I just might observe that if they are counting on mergers and the fees coming in to pay their way, we're running low pretty soon. Forty-three to five, there just isn't that much left to go, I don't think, at least in Class Is.

    But that is actually the area, in a budgetary sense, that I would like to pursue with you, Madam Chair. In the closing out of the ICC, I noticed in your statement somewhere that there were 428 FTEs with the ICC, and that was, I believe, following the trucking deregulation bill. But I'm just curious, of the 428, how many would have been rail-related?

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    Chairman MORGAN. Well, I think the way to answer that question is to look at how many people transferred to the Board after termination of the ICC who were considered to be rail-related staff. As you know, when we transferred staff to the Surface Transportation Board, it was under the personnel laws associated with transfer of functions. So, you identify people that are to go with the functions.

    Two hundred people were identified to go with the rail functions to the Surface Transportation Board, but I did not have the money to pay 200 people. So my first act around Christmas and the New Year of 1996 was to seperate some 70 individuals because I did not have the money to pay them.

    Mr. WISE. I mentioned in my opening statement—and I agree with everyone who has spoken on how much work you have handled and how well—and you and your staff have quite a workload. And as I mentioned, you have not only concluded the Union Pacific-Southern Pacific merger, you are now involved in oversight, very important oversight, on that. You've got the Conrail-Norfolk Southern-CSX matter and you've got a pending, I believe, if they haven't filed already—it looks like they will—the Canadian-Illinois Central situation, on top of the other things you do.

    I'm greatly concerned about whether you have enough staff to handle that. Do you want to make any observations on that, particularly in light of the fact that you had 200 before and you had to let 70 go?

    Chairman MORGAN. Well, I guess the way I would answer that is, first of all, to say that clearly Congress made the determination when they terminated the ICC and created the Board as to what resources would be available to the Board to do the work that Congress assigned to it. And so we have done that. We have, I feel. I'm very proud of what we have done given the resources that we have had, and I would in no way suggest that Congress erred in allocating the resources that it did.
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    Now, if Congress now decides, in looking at what we have, that there would be need for some additional resources, I can assure you that whatever additional resources I am given will be put to good use and will be worked very hard.

    Mr. WISE. Very diplomatically stated, Madam Chair. You did work in the Senate for a while, didn't you? I can tell.

    Chairman MORGAN. Yes, I did. And I have been rehearsing that answer for quite some time.


    Mr. WISE. In the matter of Union Pacific and the present tie-up in Houston, is this an area that perhaps Congress did not—and in that you have issued one or perhaps two Emergency Orders, I believe, or had Emergency Proceedings. The STB quite properly has been trying to unsnarl that situation. But I'm curious whether you had the staff to handle that, whether in terms of training and credentials or in terms of numbers, you may have some who are capable of doing it. And is that something that perhaps Congress did not foresee? It's one thing to oversee the actual process of a merger. It's something else to oversee the aftermath and what needs to be done as follow-up.

    Chairman MORGAN. Well, you are correct that we have issued one Service Order, which we have extended and expanded upon twice, as it relates to the UP matter.

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    In terms of resources, I do have operational and other transportation industry experts who have focused a great deal of their time on the UP situation. So in terms of the expertise that I have, I do have the expertise.

    As we discussed in your prior question, obviously, if I get more resources, I will put them to good use in this regard. But I do feel that the people that I have working now on this matter have the expertise, and I will be continuing to explore ways to put more expertise at a staff level on this particular matter because it clearly is one that we are going to continue to be involved in until we believe the service situation has been improved.

    Mr. WISE. Thank you, Madam Chair. I will have additional questions at another time.

    Mr. FRANKS. Ms. Granger.

    Ms. GRANGER. Thank you. First of all, thank you for coming by my office and briefing me, I enjoyed that very much, it was very helpful to me.

    Congressman Wise brought up Union Pacific and, of course, we talked about some of the problems and really substantial problems in service that have been created particularly in the Houston area.

    Could you tell me, be a little more specific about what actions the Board has taken regarding the Union Pacific problem?

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    Chairman MORGAN. Yes. Well, we initiated a proceeding in early October. Our first hearing was a 12-hour hearing, and we heard from a lot of different affected parties. Subsequent to that, we issued a Service Order—we declared an emergency in the West and issued a Service Order that was intended to focus on congestion in Houston. It was intended to relieve the congestion in that area by either rerouting around Houston or offering some opportunities to move through the congestion in Houston. We also directed that a significant amount of data be filed. We have used that data to monitor the service situation in Houston and elsewhere. We also, in the first Order, directed the railroads in the West to submit plans related to the movement of agricultural products and seasonal traffic.

    We then held another hearing 30 days later, during the first week of December. That was an eight-hour hearing. We subsequent to that extended the original Service Order and expanded upon it both in terms of options available in the Houston area and in terms of data. We also directed that the agricultural community and the railroads come together to discuss how to prioritize the movement of grain, which was an issue at that time.

    We extended that Order until mid March. We then recently extended the mid March order through August 2nd, and also directed additional filings from Union Pacific. And we have indicated, as I said earlier, that we are to remain in this matter until we believe that it has been resolved. I believe that the Board has been involved in this in an unprecedented way, but we feel that it is an important issue and we must do what we are doing.

    Ms. GRANGER. Good, and I appreciate that. Do you foresee at anytime setting a deadline for resolution of the problems?

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    Chairman MORGAN. Well, I think what we are doing is monitoring and being on top of it on a daily, weekly, monthly basis. We get weekly filings from Union Pacific, and we also get filings from the Burlington Northern-Santa Fe on some specific issues.

    The filing that came in this past Monday from Union Pacific actually imposed a deadline. They indicated that, if within 30 days this situation is not resolved, they will take other measures. But I think we are just continuing to be on this, and continuing to be available to do what we feel could be the next step.

    Ms. GRANGER. Good. It is a very serious problem, as you of course know. One last question. It's very remarkable that you've cut your budget by 50 percent, and yet continue to perform the basic functions. Could you tell us, are there some particular management techniques that you think have been important, that might be replicated by some other Government organization, and particularly was the electronic workplace a factor in what you've been able to do?

    Chairman MORGAN. Well, yes, I guess I would answer that a couple of different ways. First of all, I think the key is to start with agreement among all that there is a commitment to get the work done. And I know that sounds simple, but clearly for the Board, that was critical. So, we started January 1, 1996, with a commitment on everybody's part to get the work done, and that has been the case since then.

    I think, second, we have what I consider to be very good morale at the Board. I think everyone knows that they are there to contribute, to participate, to resolve important matters. That is our job. And I think everyone comes to work with that attitude, and I think that has been very important in how we have been able to get our work done.
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    I think, third, we have used the team concept. Rather than a hierarchical review, a bureaucratic-type review, we pull the experts we need together all at once, and we get on top of the issue and reach a resolution that then obviously is given to the Board members for final review.

    And then, lastly, I think everyone at the Board is versatile. I think there is no feeling that that is not my job, and everyone is prepared to do whatever is necessary to do whatever needs to be done on a given day or in a given month. And as I have said, I think those all sound simple, but they are important and certainly for the Board they have worked. So, I would commend simple management tools to anyone in this situation.

    Ms. GRANGER. Thank you. You are to be complimented. Thank you very much, Mr. Chairman.

    Mr. FRANKS. I'm delighted that we've been joined by the distinguished Ranking Member of the full Committee, Mr. Oberstar. Any questions?

    Mr. OBERSTAR. Not at this time.

    Mr. FRANKS. Fine. Mr. Clement.

    Mr. CLEMENT. Mr. Oberstar, I'll vote for you again, too, as our Ranking Democrat. I deeply appreciate you yielding to me, which was not necessary, but thank you.

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    Madam Chairman Morgan, do you believe that the Surface Transportation Board has an obligation to expand competition as a way to preserve quality efficient rail service for the public and, if so, what proactive measures are you taking to increase competition?

    Chairman MORGAN. Well, I think, obviously, we have several responsibilities at the Board, one of which is competition. And I think we are attentive to that in the proceedings where the law directs us to be attentive to that.

    With respect to the mergers that we have approved—obviously I can not discuss the one that is pending—but with respect to the ones that we have approved, we have looked at the competitiveness of the transportation system in the context of determining what transportation benefits might exist in connection with those mergers.

    We also oversee line construction cases which are an important way to bring competition into the system. We have several pending now that are very significant. We have approved some in the past. We also have responsibility for resolving compensation issues when new lines cross existing lines, and we have resolved those, we believe, in favor of creating a competitive situation.

    Mr. CLEMENT. But do you think you have the authority now to bring about increased competition?

    Chairman MORGAN. Well, again, I think it depends upon the transaction that we are looking at and the statutory responsibilities that we are trying to implement, and I think we have looked at that in the context of the law in the cases that have been before us.
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    Mr. CLEMENT. But if you have any hesitation or reservation about whether you have enough authority to bring about competition, why wouldn't you ask for more authority to bring about competition?

    Chairman MORGAN. Well, again, I do not know that I am asking for more authority. I think the question is, if Congress decides that the situation exists in which members want to amend the statute to create additional opportunities—for example, competitive access—then Congress would have to look at the law and see if we would need additional authority.

    Mr. CLEMENT. Well, how do you compare the authority the ICC had versus the Surface Transportation Board?

    Chairman MORGAN. Well, in terms of rail matters, we have essentially the core functions to oversee the rail industry that the ICC had. There was some streamlining with respect to the rail laws, but the core functions of the Staggers Rail Act were continued and are now implemented by the Board.

    Mr. CLEMENT. I know there's a lot of discussion about the Union Pacific and Southern Pacific, and about whether we should have a third carrier to serve Houston for northbound and southbound traffic. Where are we on that particular problem, or is it a problem?

    Chairman MORGAN. Well, of course, that issue is pending before the Board. With respect to the Union Pacific situation, we have two separate proceedings. We have the service proceeding that addresses the emergency, and then we have our ongoing 5-year oversight as it relates to the UP-SP merger and the conditions that we imposed there.
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    We do have a filing before us that the Kansas City-Southern has put before the Board in the context of oversight that does address the question that you have raised, and we will need to make a decision on that. So I clearly cannot comment on that because that is a matter that I will be having to make a decision on.

    Mr. CLEMENT. Thank you.

    Mr. FRANKS. Thank you. Ms. Fowler.

    Ms. FOWLER. Thank you, Mr. Chairman. And I welcome Chairman Morgan, and just want to add my compliments to those I know you already received earlier in opening statements. I think you've done an excellent job with half the resources and staff, and have really worked very hard to continue in that vein, so we really appreciate it. You're an example of how an agency should be run, and we really appreciate that.

    I know you, as you referred earlier, have worked on Capitol Hill before, and I know you wouldn't be surprised, nor any of us up here, to learn that occasionally when we write a statute, we make a few mistakes. And as you are dealing closely with—you and your staff—with the law that created you and the ICC Termination Act, if you come across some of the technical glitches that we need to address legislatively this year and we could do probably through this bill, I think it would be helpful to the Subcommittee if you could submit for the record a list of any of these problems that you have seen because it's a long way from writing it to the implementation. And as you begin to implement it, I know sometimes you see there are some problems that we could correct sometimes fairly easily. We would certainly welcome anything you could do on that.
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    And the other question I have, when we established the Surface Transportation Board, the intent of Congress was that you would be able to exercise independence from the Administration in the communications with Congress and your budget issues as well as on your legislative recommendations and testimony before Congress.

    In your view, have you been able to uphold this independence?

    Chairman MORGAN. Well, I believe that I have performed my decisional responsibilities with independence, as was intended by Congress. I feel I also communicate freely and independently with Congress. I am organizationally housed within DOT, so in terms of the budget, I do go through the DOT budget process and they deal with OMB on my behalf, and that is associated with being organizationally housed within DOT.

    Ms. FOWLER. Well, I think as noted earlier, and I was reading in your testimony, that the Administration and OMB thinks you can get all of your operating budget from user fees, and there's a small problem with doing that under the current authority that you have. I think that does show when we need to make sure that you are funded adequately so that you have a level of appropriations that keeps you able to do what you do with the minimum staff that you have to do it with. So, I'm sure we'll be working closely with you on that. Again, I just want to offer my appreciation for the hard work you do and the good job you're doing in the area. Thank you, Mr. Chairman.

    Chairman MORGAN. Thank you.

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    Mr. FRANKS. Mr. Sandlin, any questions for the witness?

    Mr. SANDLIN. Just briefly, thank you.

     Madam Chairman, Mr. Clement was asking you about the situation in Houston. Do you feel like the past and current problems that we're enduring there in Houston, is that a result of a lack of competition, or is it more a result of UP having difficulty incorporating the Southern Pacific operations?

    Chairman MORGAN. Well, our analysis to date of the record that we have accumulated indicates that certainly merger operational integration issues were a factor in where we are today—decisions about how to integrate the systems, whether it be computer systems or workforce integration or capital expenditures. We feel that certainly those were factors. There are other factors that have come into play—the state of the infrastructure in Houston, and the surge in the economy that we have seen. And in fact, in the West, there has been a continuing increase in the carloads in the West, so this clearly reflects the growth in the economy in the West, along with some other factors that were reflected in the record.

    Mr. SANDLIN. Of course, if it was a lack of competition, that seems to be more permanent than if it's a problem with the incorporation of the operation of the railroads, and I guess that's what I'm getting at. Is it something that's going to be solved over a period of time due to operation problems, or is this a more permanent problem because of no competition. What's your best opinion on that?

    Chairman MORGAN. Well, again, as I indicated earlier, we do have an oversight proceeding relative to the Union Pacific-Southern Pacific merger. In that oversight process, we are going to continue to be looking at competition and whether the competitive conditions that we opposed in that merger will—are, indeed, ameliorating any of the harm that we thought might occur had we not imposed those conditions.
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    As part of that, we do have a filing before us, and I am sure that we will be reviewing that issue as part of that oversight process in the near future.

    Mr. SANDLIN. Based upon the information that you have right now and as an expert in this field, do you feel like competition would be a positive thing for Houston now?

    Chairman MORGAN. Well, again, I really do not want to conclude that yet because we will be looking at this petition that has come in relative to the question that you have asked. So, I cannot really make a conclusion—

    Mr. SANDLIN. Like we say in Texas, those are mighty pretty words.

    Chairman MORGAN. Excuse me?

    Mr. SANDLIN. I said, those are mighty pretty words, but I'm just asking you, based upon what you know now, do you feel like the competition would be a positive thing or not?

    Chairman MORGAN. Well, as I have said, I think to date what we have seen is that there have been issues, operational issues, associated with the merger that have brought about some of the service difficulties. I do not believe that the record to this date shows that there has been an abuse of market power that has caused the service failures, but this is something that we are going to have to keep looking at, and that is why we are going to be looking at this issue in the context of the oversight. I do think that long-term the situation in Houston needs to be resolved to the comfort of everyone, whether it is by oversight or infrastructure improvements. As to the latter, of course, the Board has directed that plans be put together as they relate to infrastructure in Houston, which we feel is critical to ensuring the service improvements in the Houston terminal area itself.
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    Mr. SANDLIN. I'm just not sure if you said that competition would be a positive thing or not positive thing.

    Chairman MORGAN. Well, again, I think because we have this matter before us and I will be compiling a record on that, I really cannot pre-judge what the record will show in the context of oversight. We do have this petition before us and we will be taking evidence on that, and that is the issue, whether we need to add a third carrier, add competition.

    Mr. SANDLIN. And I don't know if we do or not, I'm just asking, and if you don't want to comment that's fine.

    Do you think is there any point in time that you think that it would be necessary or advisable to require UP to give up a line to a competitor, a parallel line, or not?

    Chairman MORGAN. Well, I think that is something that we are going to have to continue to review. To date, we have not specifically directed that on a permanent basis. We have directed it on a temporary basis as part of the Service Order, and then separately the Union Pacific and the Burlington Northern Santa Fe have worked on an arrangement dealing with a particular line that runs from Houston to New Orleans and how the shippers along that line will be served, and how the ownership will be handled of that line. As I said earlier to someone, I think we are going to have to be continuing to oversee the situation in Houston both short-term regarding resolution of the emergency and also more long-term regarding the issues that you have raised and whether the merger is working on a competitive basis as we envisioned.
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    Mr. SANDLIN. I believe my time is up. Thank you. Thank you, Mr. Chairman.

    Mr. FRANKS. Thank you. Madam Chair, in your testimony, the authorization levels suggested on page 3 are for the entire resource level of the Agency, including the amount that the STB collects in transaction-based user fees. Since the authorization is only for appropriated amounts, wouldn't it be more accurate to authorize the lower amount that does not include the user fees? For example, in FY99, you're requesting an appropriation of $14 million and user fees you're anticipating at some $2 million. So the appropriate authorization amount would be $14 million.

    Would you please supply the Committee with the outyear estimates for user fee collections?

    Chairman MORGAN. Well, I think there are two questions I heard. One is what would be the authorization level that would be appropriate, and whether it would include user fees. And as I said in one of my earlier answers, the user fee number also must go through the appropriations process so that we get a total level of funding from the Appropriations Committee, and that obviously needs to be reflected through the authorization figure.

    In terms of the outyears, I would be happy to provide those to you. We have obviously provided one number, and that is as part of our budget request for Fiscal Year 1999, but I would be happy to provide to you for the record the rest of the outyears and the estimates for fees.
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    [The information follows:]

    [Insert here.]

    Mr. FRANKS. That would be appreciated. In your statement additionally on page 3, a funding estimate covering FY99 through 2003, assuming the FY99 staffing and funding level. I understand that in addition to the regular federal pay raises, there is already in place a schedule for increasing Agency contributions to both Federal retirement systems. Is this correct and, if so, are the effects of these increased contributions included in your outyear estimates?

    Chairman MORGAN. Those numbers, as I understand it, are included in the base figure, to which we then add the pay raise, the estimated pay raise, and whatever inflation needs to be built into the budget. So those numbers should take care of that issue, the numbers that you have before you.

    Mr. FRANKS. Thank you. One account I found interesting, I notice in your salaries and expenses estimate that the travel requested for FY99 is a very modest $43,000. Given the variety of purposes for which Agency personnel, particularly with jurisdictions like the STB, are in charge of, is this amount, in your judgment, realistic and sufficient to cover the variety of needs and responsibilities that Agency personnel have?

    Chairman MORGAN. Well, first of all, that number covers travel by Board members, the General Counsel's office going to defend cases in courts around the country, environmental site visits, auditing that we do at the railroads' places of business, and then some other miscellaneous travel.
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    About 75 percent of my budget is personnel-related, and that is obviously a fixed amount, presuming I need the staff that I need, and I do need the staff that I have. So, in addition to that then, I have other expenses that are not discretionary, such as rent and telephone and so forth, which leaves about 12 percent of discretionary money with which I can play, and that is related to training, travel, equipment purchases and so forth.

    So, in allocating the amount that I allocate to travel, I really do not have a lot of money to deal with in terms of those discretionary items that I mentioned, so I have to come up with an amount of travel that I can given the budget that I have. Obviously, if there was more money available, then travel might be something that we would spend some more money on, but it is just a question of once I get beyond the 75 percent plus the additional 12 percent for rent and so forth, there is not much left to parcel out to travel and other matters.

    Mr. FRANKS. Thank you. Mr. Wise, twice I have tried to thank and recognize and welcome the Ranking Member of the full Committee, Mr. Oberstar, here, and I would turn over to you or to Mr. Oberstar this afternoon, but thank you, Mr. Oberstar, for coming.

    Mr. WISE. He's can be pretty obstinate sometimes, but he's a pretty good guy to work with. I'm going to see if we can thank and welcome him for any remarks he might wish to make.

    Mr. OBERSTAR. Thank you very much, Mr. Chairman, and congratulations on assuming your new role and one which you are well prepared, well disposed.
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    These are very important hearings, and this is a very auspicious beginning, having the Chair of the Surface Transportation Board here to set the framework for the subsequent hearings to come, other aspects of the very important matter of reauthorization, and an opportunity to assess the work of the Board and the state of the railroad industry.

    The successor to the ICC has a much more limited mandate than the ICC did. It is more focused on the railroad industry, and its work has had a rather substantial, some would say dramatic, impact upon the economy. Approval of the Union Pacific-Southern Pacific Railroad merger has perhaps not gone quite the way it was planned. As I read through the transcript of the Board's hearings and the great expectations, efficiency savings, tremendous service improvements, shorter routes, extended single line service, enhanced equipment supply, new operating efficiencies, savings of $627 million a year, and then look at the mess in Texas and the problems on the West Coast, the enormous effort that UP has made and continues to make to overcome all of its obstacles, perhaps that is not as good a deal as it looked at the outset as the Board portrayed it. Some are suggesting that the adverse impact is as much as $2 billion on the national economy.

    We now have a more concentrated railroad sector. As we saw in the aftermath of aviation deregulation, we had a huge expansion, 22 new entrants in the first five years after deregulation, and then what I call the ''galactic black hole'' effect of the concentration, of the enormous gravitational force of those few powerful carriers that drew all the others in, swallowed them up, and now we have only one left of those new entrants. And it seems the same is happening in the railroad sector where we have five dominant railroads, and maybe soon only four and, if the trends continue, we might even have only two.
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    I don't think that's what we intended when we voted, not in this Committee but in the predecessor Committee and certainly on the House Floor, to have less rather than more competition in the railroad sector.

    The questions that come to mind for me are whether the Board has the necessary authority and the will to protect shippers, employees, and small railroads from market power that is emerging from its decisions for a few large railroads. Is the oversight adequate? Are the legal tools for curbing abuses in market power sufficient? Does the Board have adequate resources to oversee and to regulate the monopolies that are emerging from its decisionmaking process?

    The Board has taken the position that in reviewing a merger, it is allowed under the statute only to maintain whatever degree of competition already exists. I think there could be a different reading of that statute.

    The Board has taken the occasion of a merger to—has refused to take the occasion of a merger to enhance competition by giving captive shippers more competitive options than they had before the merger.

    The mandate of the Board is ''to ensure effective competition among rail carriers''. I'm just wondering whether we need additional legislative authority to instruct the Board to seek opportunities to enhance competition, not just maintain the status quo.

    One of the effects of the dissolution of the ICC, creation of the Surface Transportation Board, was preemption of state and local authority regulation of the railroads. I thought at the time it was rather curious for Congress bent on returning power to local governments, to take power away from local governments. Cities like Cleveland, Wichita, Reno, Auburn, Washington, now see dozens of freight trains gridlocked in their communities, and those communities have no power—at least not the authority they had previously—to address the issue.
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    Either we ensure that the STB takes adequate account of the needs of states and the needs of cities, or we have to consider giving those local governments authority to protect interests on their own.

    The ICC, and the STB now, presided over abandonment of thousands of miles of track over the past 17 years. Track miles have fallen. Small communities complain they no longer have LCL service. And trucks aren't coming in to replace what the railroads have abandoned. There's growing congestion on the track that remains. We've seen that in Texas, but elsewhere. It's going to increasingly be a problem across this country.

    We have, it seems to me, just from the review that I've done of railroad infrastructure, substantial deficit in infrastructure in the railroad sector, as we have in our highways, our bridges, and our airports. The difference is, we've left it to the railroads to generate the capital to make the investments. We don't have a Railroad Trust Fund as we have a Highway and Aviation Trust Fund, to invest. But whatever its effects may be on the corporate bottom line, the effect of the railroad infrastructure deficit is significant for the rest of the transportation sector of our national economy.

    Goods sit idle on sidings. Communities see grade crossings tied up for hours of the day. Safety is compromised. I hear from maintenance of way employees that they don't have enough hours in a workday to get on the track to do the maintenance that's necessary because the trains are running so fast. That's great for the railroad, and great for the bottom line, for their profit, but not so good for safety, and it's not so good for track infrastructure.

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    There should be a means of ensuring that railroad infrastructure decisions reflect society's needs as well as those of the railroads.

    The Board has had authority to abrogate contracts when this is needed to carry out a merger. For the most part, it's been the railroad employees who have seen their contracts abrogated, but now we see shippers discovering that their contracts are abrogated as well. An American steamship line talked to me recently about the prospect of its containers being entrusted against their will to their chief competitor before they reach their destination. I don't think we intended the Board to have authority to set aside freely negotiated contracts.

    Mr. Chairman, there is a creeping reshaping of the nation's railroad sector by these incremental decisions of the Board, each of them focused on the instant case, and there isn't an overall broad view, global view, of the need of the rail sector, a comprehensive view at how the rail sector will deliver quality service, lowest prices to shippers, and accommodate all the competing and contrasting needs to ensure reasonable rates and high quality as well as a safe sector.

    So, rather than ask some questions and if there is time available, I'd invite Chair Morgan's response. She is a brilliant manager of railroad issues, knows the subject thoroughly, has an extraordinary encyclopedic grasp of the subject matter, but I fear limited by rather overly narrow law and insufficient opportunity to address these broad policy questions that I've raised.

    Mr. FRANKS. While time has expired, I certainly want to grant all due courtesy and discretion to Mr. Oberstar, so, Madam Chair, if you would care to comment on any of the remarks made by Mr. Oberstar, please feel free.
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    Chairman MORGAN. Well, Congressman, you know, you and I had this same conversation, actually a good meeting for about 2 hours last week, and discussed many of these issues that you have raised here today. With respect to whether the Board—what kind of view the Board has—I think that, as I indicated to you in your office, the Board's view is what the law is, and what the standards in the law are, as it relates to the matters that come before us. And I think that that law does set forth certain goals that Congress believed the implementing body should fulfill.

    There are several goals that must be balanced, and sometimes that balancing is not a clear one and not an easy one, but obviously when you are trying to deal with an industry like the rail industry, there are differing goals that are difficult to administer and do need to be balanced. And I believe that the Board has implemented the law as we see it. I do not think we decide cases myopically or with blinders. I think we try to see the statute as a whole, and we try to implement the statute, and we try to make decisions in line with the statute and the goals that Congress has set out in the statute.

    With respect to some of the specific issues that you have raised, we discussed infrastructure, for example, in your office. And one of the things we discussed was the fact that infrastructure in Houston is, I think, a serious issue. If we are going to permanently resolve service in the Houston terminal area, the infrastructure there must be upgraded. And I think that the Union Pacific has indicated a commitment to put money to that effort and submit plans to us on that, and I think that infrastructure is important.

    With respect to infrastructure, I think it is also important to remember that when Congress passed the Staggers Act of 1980, one of the things that Congress was concerned about was what would be the capital investment in the rail industry infrastructure, and how could we ensure a regulatory scheme that would be in place that would ensure the kind of infrastructure investment that at the time was not happening in the industry. So I think infrastructure is important and, as we also discussed, the Board may very well look at that issue further.
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    With respect to state and local concerns, there is obviously discussion of involving the state and local concerns more in the process at the Board, and I want to be careful how I comment on that because obviously we do have a pending merger matter that does involve state and local concerns, but I would just like to describe briefly how we do address the state and local concerns as they relate to the environment and to safety because that is clearly where these concerns are coming from.

    As part of transactions, rail transactions, that we approve, we are to review the environmental impacts of those transactions, whether it be an abandonment, a line construction, a merger, or some other transaction. And these environmental reviews can be very expansive, depending upon what the transaction is at issue.

    As part of that review, we have a significant outreach program. We have to do this under the environmental laws. We are required to do that, and we do significant outreach, and we reach out to the state and local communities and discuss their concerns as part of the review process. And then at the end the Board does have the authority as part of the approval process to impose what we call ''mitigating conditions'' that address what we believe to be environmental and safety concerns that would result from whatever transaction we approve.

    So there is a process. I know this is a debate that is out there and will continue but, for the benefit of the Subcommittee, there is an extensive process and we are very much involved in that.

    With respect to abandonments, again, I believe that since the Board has been in existence we have continued to implement the law on abandonments as we feel is appropriate. I will say, though, that the abandonments that we see now are a lot more difficult than the ones we used to see, and I think some of that is because the abandonments that we saw before involved truly unprofitable lines that were to be shed as part of the Staggers Rail Act of 1980 restructuring that was to go on in the industry.
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    The abandonments that we see now—and the Board has denied several abandonments—are the ones where you really have to carefully balance the needs of the community for continued service with the need of the railroad to get out of unprofitable service, which is the balance that is in the Act.

    So, with respect to abandonments, if you look at some of our decisions, you will see a slightly different turn in that regard.

    We also discussed competition and mergers in your office. We discussed with respect to prior mergers that in analyzing competition, one of the standards is whether there is going to be an adverse effect on competition—and the amendment that was adopted as part of the ICC Termination Act was to look not only regionally but nationally—and that is obviously one of the criteria that we feel we have applied in prior mergers, and we will be applying it in the pending matter.

    And, finally, with respect to abrogation of contracts, the APL issue that you have mentioned is one in the pending matter involving Conrail, so I am very aware of that issue, but obviously cannot address it.

    And, finally, I am aware of your concern regarding collective bargaining agreements and the abrogation of those, and I am sure we will get into more discussion of that at later hearings. But the Board has indicated previously that there is a statutory provision in the law that we believe is self-executing, which does direct the abrogation of collective bargaining agreements under certain circumstances. So I am sure we will be having more dialogue, but I think I have hit all of the matters that you raised.
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    Mr. OBERSTAR. Thank you.

    Mr. FRANKS. I note the return of Mr. Bachus. Questions?

    Mr. BACHUS. Thank you. Chairman Morgan, as I told you earlier, I think you all have done a fine job, and I am concerned about your workload and that you have taken that into consideration when you make this budget request. I know you've had a lot of mergers to deal with, those are expensive things, they are complex.

    I want to talk to you about something else. You know, the mergers get the spotlight. Labor issues are always in the spotlight, carrier-shipper issues that you have to deal with, issues you've just mentioned about relations between the railroads and the communities as they may relate to an abandonment or change in service.

    I want to talk to you about a fifth area, and it's one that people maybe outside the industry are not even that aware of, and that's the dealings between the ever-diminishing number of big railroads and railroads which are getting bigger all the time, and your regional railroads and your short-line railroads, because oftentimes the issues of the regionals and the short-lines in relationship to the Class Is is really a life or death issue.

    Do you feel like you have the staff—and I think that the Surface Transportation Board is the perfect place, I will say this. I think it is the Agency that—you know, I don't want reregulation. I don't think new laws are in order. But I do believe that you all basically do have a mission in addressing those issues between the short-lines and the Class Is, particularly as you may have—and I'm sure that you know—but if you look at your mileage now on railroads, your fastest growing segment of the railroad industry are your short-line railroads.
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    I recently noticed in Mississippi that for the first time since 1930s, they've actually added a few rail miles, and that's the result of short-lines reclaiming some abandoned rail lines. But would you like to comment on that? And I usually don't like real long questions like I just gave, I like to ask little short questions, but I would just like to ask you about that.

    Chairman MORGAN. Well, I think you are asking about the future role of regional and short-line railroads in the rail network, and how the Board feels about that and how we are involved in that.

    I have indicated in public statements that I have made that to me the future overall health of the rail industry depends a great deal upon not only the large railroads, but the role of the smaller railroads. And I think in the market that the rail industry serves, there is a place for the larger railroad and a place for the smaller railroad, and that the interaction between those is critically important to ensure that the shipping community is served as it should be. So the relationship between the larger railroads and the smaller railroads is very important.

    In terms of the role of the Board in that respect, in the context of mergers, for example, we do get into issues related to the role of a smaller railroad in a particular market and how we address that. We are also involved in line sale issues, and that involves the smaller railroads. The smaller railroads have been an option in the past to abandonment, and that is the line sale process. And what we have seen is that the abandonments have decreased and the line sales have increased over time, which means that there is rail service being continued in areas where that is important.
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    Also in terms of interchange between the smaller railroads and the larger railroads, we do have the authority to oversee that and to respond to complaints that come to us as it relates to matters of that sort.

    So, I think as a general matter the relationship is an important one, and specifically the Board does get involved in those transactions through the law that it implements.

    Mr. BACHUS. Thank you. And I'd like to encourage you to, as you've recognized, our short-line railroads, our regional railroads, are even becoming increasingly more important to our local communities and to their need for rail service. And if they are not viable, particularly our smaller communities and our smaller cities are really left at a disadvantage. Thank you.

    Mr. FRANKS. Thank you. Madam Chair, as you know, the ICC Termination Act established a Rail-Shipper Transportation Advisory Council. I didn't see any mention of a funding item for that council in the STB budget request.

    As I read the current law, it doesn't specify or provide for any specific funding level for the council, just the use of federal funds, and I quote, ''to the extent provided in advance in appropriation acts''. The law also appears to contemplate that any request for federal funds for travel and so forth would come from the council. Has the council, in fact, requested federal funds, and do you think it would be appropriate for any reauthorization bill to spell out some level of resources for the council?
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    And on a related point, I know the STB also has a Grain Car Council that, unlike the Shipper Council, was created administratively. Do you think that the Shipper Council should continue to be a creature of statute, or should its structure and operations be a matter within the STB's administrative discretion?

    Chairman MORGAN. First of all, with respect to funding for the Railroad-Shipper Transportation Advisory Council, they have not requested any funds from me. They have funded themselves privately. I do provide the meeting space for the Council, so they do use Board facilities to meet. And I am an ex officio member of that Council, along with my fellow Board member, Mr. Owen, but other than that, the expenses that they incur, they cover themselves privately. So they have not asked me for any additional funds, and I do not expect that they will be asking you for any additional funds.

    With respect to whether they should be continued in the statute, I see no reason to change that. It was established by statute. It has functioned, I think, as Congress intended it to function. In fact, I think it has functioned extremely well in accordance with what Congress directed it to do, so I see no need to change the structure of that. You might want to ask them separately if they have any concerns along these lines, but I do not sense any concern on their part.

    Mr. FRANKS. I'm reluctant to ask people if they want our money.

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    Chairman MORGAN. Right, I understand.

    Mr. FRANKS. I think this afternoon's hearing has underscored the vitally important mission of the STB and the extraordinary power that resides within it. In that regard, one concern that has been voiced to me is the absence of a third voting member on the STB. This situation has persisted since January 1, 1997. The ICC Termination Act enacted in late 1995 made it quite clear that as to the seat occupied by former Commissioner Simmons, a new confirmed member would have to be in place by the beginning of 1997, yet the Administration didn't even submit a nomination for the empty seat until late 1997, a nomination that is now pending along with the recent renomination of Vice Chairman Gus Owen.

    I realize this is not a matter within the control of you, as Chairperson, or of the STB members currently. But my question is, doesn't this situation run a substantial risk of facing the prospect of potentially deadlocked votes one-to-one, that could conceivably render the Agency essentially impotent on some very important policy matters?

    Chairman MORGAN. Certainly there is that potential, but Mr. Owen and I have pledged that we have work to do and that we will get the work done. We have done so. We have had no deadlocked votes, and I expect that we will continue to keep that commitment to one another and to Congress because I think Congress expects us to get the work done that we have before us, and we are a collegial body, so the two of us do work collegially to come to resolution on the matters before us. So, deadlock is certainly a possibility, but one that we have so far avoided.

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    Mr. FRANKS. Let me commend your spirit of bipartisan cooperation and your pledge to try to avoid that outcome, but let me underscore the congressional intent. And we've heard references in your answer consistently today to the Board. I think it's rather remarkable that a Board of this power is currently two people.

    Chairman MORGAN. Well, I would be very happy to be at full strength.

    Mr. FRANKS. I think that is what, indeed, the Congress contemplated.

    Chairman MORGAN. We were intended to be three members, and I would very much like us to be three members, and have been anxiously awaiting that day, but we are not three members, so we have a job to do and we are committed to getting the job done.

    Mr. FRANKS. I want to thank you for your testimony. Mr. Wise.

    Mr. WISE. I wonder if the Chairman would like to comment, if three is good, is five better? But we've been there, haven't we?

    Chairman MORGAN. You know, it was five when I started at the ICC. I have seen a lot of change.

    Mr. WISE. I may have some questions, Mr. Chairman, in writing that I would like to submit, and we'll go over that. But as you say, we'll be together again on some of the issues Mr. Oberstar brought up.
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    The challenge, I think, before us, Madam Chair, in this authorization is that I do agree, and I respect the fact that you follow—you and the Board are maybe one and the same sometimes—but you follow closely the statute, and you are quite correct that it is the job of Congress to decide the policy. But in deciding policy, it's also necessary to look at real world results. And my concern is that what the ICC did in its tenure, and perhaps indeed what might have been envisioned and what the policy was for the STB is changing because of developments. It is a far different world today when we go from 43 railroads, major railroads, to five, and the potential at least for further consolidation.

    Congress perhaps envisioned one thing, but never foresaw the kind of snarl and tie-up that we now see in the Union Pacific situation in Houston and, indeed, I was just looking at a newspaper article today in which UP has come back before you in a report and stated that it may have to stop accepting new shipments within 30 days. Congress never foresaw that in drafting the legislation under which you're operating.

    So as we move through the process in the upcoming weeks, I guess what I'm asking is, there's a need for the Board to be willing to state where there may have been unforeseen consequences, or where it's important to look and see what kind of action Congress should take or permit you to take.

    I guess I think there's a lot different economic impact when you've got the kind of consolidation that we've had. The reality is we're not going to go back. There are not going to be seven or nine or building back up to major Class I railroads, I don't think, in at least my tenure here.
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    So, how do we deal with what we've got in front of us and, at the same time, at least enhance competition, which I do think was part of the Staggers Deregulation Rail Act as an overall purpose.

    The economic situation shifts, and so we need to be aware of the practical impact of the decisions, the policy decisions, that the Congress makes as it reconstitutes or reauthorizes the STB. You and the Board are the best ones, perhaps, better said, to supply us with that information.

    And so what may have—I guess I don't think that anything is static, and I don't think the conditions that led to the demise of the ICC, in turn, of the creation of the STB, I don't think that those conditions are necessarily the same today and, indeed, I think that perhaps the conditions today say that Congress needs to go back in this reauthorization and look at where there have been problems created and where you need additional tools, or perhaps where—well, I'll just leave it at that—or does there need to be additional legislation or the ability to deal with certain situations that perhaps we didn't envision before.

    I have seen—my observation—and I'm not asking you to comment on it—my observation is that from the time that the STB was created, I have seen some evolution in the Board and the willingness to go—perhaps to push the envelop a little more—recognizing that there are some economic impacts that are occurring that no one has foreseen, which I'm delighted, and I'm also delighted that in the case of the Conrail merger, what the STB did was to extend the period of time so that there could be a safety review as well, harkening back to some previous situations.
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    So, I just ask—I think it's important that we enter into this period of reauthorization with that in mind, and we look closely to you and the Board, of course, for suggestions and guidance on that. Thank you.

    Chairman MORGAN. Well, I certainly hear your comments and I certainly agree that all of us need to be flexible and attentive to the environment in which we find ourselves. And I think the Board tries to do that in the context of its statute, and has done that since it was established.

    One important point to make is that in the context of where we are today relative to the rail industry, the Board will be holding rail access and competition hearings starting on April 2. We have had some 80 requests to appear at that hearing, those hearings, and we will be determining how many days and how we organize that. As I indicated to Congressman Oberstar when I met with him last week, I believe that we will get some very important information in those hearings, and to specific proposals. We have an open mind as to where they will lead us, but I think they are important. I also think that the hearings that we held on the UP situation and rail service in the West were instructive hearings as well. I think we learned some things in those hearings—I think everyone learned some things in those hearings—it's not just the Board, but the shippers and the railroads and other interested parties. That is the kind of effort that is important, and I think in recent months we have tried at the Board to be attentive to the needs of the changing marketplace.

    Mr. WISE. Thank you, Madam Chair. Thank you, Mr. Chairman.

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    Mr. FRANKS. Madam Chair, we thank you for your testimony today, and can tell you that we anticipate a minimum of two additional hearings in order to give Members on both sides of the aisle full and ample opportunity to examine a variety of issues that were not the core of today's hearing, but that have been alluded to by many of the questions here today.

    So, we look forward to seeing you in the near-term future, and have three brief unanimous consent requests, if I can. First I ask that unanimous consent that the opening statement of Chairman Shuster be included in the record at the appropriate point. Without objection, so ordered.

    [The prepared statement of Mr. Shuster follows:]

    [Insert here.]

    Mr. FRANKS. I ask unanimous consent that the record be held open for 30 days so that interested parties may submit written testimony for the record and also so that Members may submit written questions and receive written answers from the witness. Without objection, so ordered.

    Lastly, I ask unanimous consent that the recent recommendation of the Railroad Shipper Transportation Advisory Council proposing proposed STB user fees be included in the record of this hearing. This recommendation was made as part of the Council's November 1997 report. Without objection, so ordered.

    [The information follows:]
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    [Insert here.]

    Mr. FRANKS. The hearing is concluded.

    [Whereupon, at 4:00 p.m., the Subcommittee was adjourned.]

    [Insert here.]




U.S. House of Representatives,

Subcommittee on Railroads,

Committee on Transportation and Infrastructure,

Washington, DC.

    The subcommittee met, pursuant to call, at 10:30 a.m., in Room 2167, Rayburn House Office Building, Hon. Bob Franks (chairman of the subcommittee) presiding.
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    Mr. FRANKS. Good morning, I would like to call the hearing to order. Today we will be conducting oversight of the current condition of the railroad industry.

    The purpose of this hearing is to provide the subcommittee with a comprehensive overview of rail transportation today. We will be hearing from three panels. The first panel consists of economists and financial experts from a variety of Wall Street and financial management companies. We will hear from the rail carriers on the second panel, and the shippers will testify on the third panel.

    Additional hearings, which will take place on May 6 and May 13, will address the Staggers Rail Act standards. These three hearings in combination with the hearing already held on March 12 on the resources of the Surface Transportation Board are meant to lay the groundwork for our reauthorization of the Surface Authorization Board, which is due by the end of this fiscal year.

    The railroad industry is an integral part of the United States economy. The railroads are responsible for carrying nearly 40 percent of U.S. intercity freight traffic in terms of ton miles, which is over 1 trillion ton miles a year. By contrast, the trucking industry carries less than 30 percent of the ton miles of intercity freight.

    These figures, however, mask the absolute dominance of the railroad industry in moving certain commodities. For example, the railroads haul close to 60 percent of the coal produced in the United States and 70 percent of new automobiles. The plastics industry depends on rail since it requires the use of chlorine, nearly 75 percent of which is shipped by the railroads. These few examples, and there are many others, show that it is clearly in the interest of the shipping community and the public at large that we maintain a healthy and robust railroad industry.
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    In the 1970s, the United States experienced a near total financial collapse of the railroad industry. With the bankruptcies of the Penn Central, Rock Island and the Milwaukee railroads, nearly 20 percent of the Nation's traffic was in bankruptcy. The Congress responded with a number of actions, which has set the stage for the rail industry of today. Conrail was formed out of the six bankrupt railroads of the Northeast and was privatized in 1987. Amtrak was created, relieving the railroads of their obligation to operate money-losing passenger service. And finally, the Staggers Rail Act was enacted which largely deregulated railroad rates, legalized shipping contracts and simplified abandonments.

    In the past 20 years or so during which these policies have been implemented, the rail industry has undergone dramatic changes. The last comprehensive series of Congressional hearings on the railroad industry took place over a decade ago. I think today's hearing combined with our other two subsequent hearings will shed significant light on the many critical issues that the industry currently faces.

    For today our task is to evaluate the performance of the railroad industry. What is its financial status? Are the railroads poised for growth in the future, or has the industry matured to the point where future growth opportunities are now limited? How are the railroads performing compared to historical trends? How do they perform compared to other industries and other nations' railroad systems? Are they attracting capital at a sufficient rate to maintain and, where necessary, expand their infrastructure? My hope is with the witnesses who have graciously agreed to appear before us today, we will have comprehensive answers to these and other questions.

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    Before we begin the hearing, I do want to note for the record my disappointment around the fact that several of the witnesses appearing today have not followed the request that we have made of all witnesses, and that was that today's focus was to be solely on an overview of the state of the rail industry, not on specific complaints, proposals or defenses of regulatory standards or policies under the Staggers Act. Those matters, as I indicated before, will be covered in great detail in subsequent hearings. And notwithstanding the unambiguous instructions that the committee issued, several witnesses have chosen to ignore them and have instead devoted major portions of their written statements to the matters that will be covered at later hearings.

    It is unfortunate when witnesses purposely or inadvertently undermine a coherent and coordinated series of hearings which have been developed by this committee and its staff. I would therefore ask as a matter of courtesy that all witnesses during their oral statements confine themselves to the subject of today's hearing.

    Let me state explicitly one more time that we will be examining in full all aspects of the Staggers Act standards and policies and those of Surface Transportation Board at scheduled hearings that are already on the docket.

    I would also like to recognize the fact that the distinguished Ranking Member of the subcommittee Mr. Wise is not with us today, but he is at a very important event back in his own district with the Vice President and President of the United States with the purpose of Earth Day ceremonies today. That is why he is not here. He has asked that Representative Blumenauer replace him as the Ranking Member at today's hearing.

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    As I recognize Representative Blumenauer, let me indicate that this committee hearing room is scheduled to hold another full hearing by another subcommittee beginning at 1:30, so there are real time constraints on moving expeditiously through this morning's hearing, and I will reemphasize my request that we keep today's comments by the witnesses consistent with the mission of today's hearing.

    Those opening remarks, I would like to call upon Representative Blumenauer for any opening statement.

    Mr. BLUMENAUER. Thank you, Mr. Chairman. I appreciate the admonition about how tight our schedule is. I will submit my formal comments for the record.

    I would like to express my appreciation for having this hearing, and I feel you clearly illustrated in your opening remarks how vital a role is played by a healthy railroad industry in this country. We are looking forward to hearing from the witnesses to focus on how well the industry is, in fact, performing for its stockholders, employees and, most importantly, for the customers of America. I am looking forward to finding out if there are shortcomings, that different policies will enable the industry to perform better.

    Our interest in looking in particular at the financial return as a performance measure valued by shareholders and shippers alike. Clearly a successful industry must have its performance valued by its shareholders and shippers. Successful industries have monies to invest in infrastructure and capacity expansion, which enables them to serve their customers properly.

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    I have been hearing a great deal about this back home in Oregon as well. We have learned some difficult lessons in the 1970s that we can put into effect here today. I appreciate your focusing later on safety as an important part of that equation. The rates that are charged to customers are another key measure of performance.

    I am hopeful in the course of our discussion here today we can get beyond general data referring to revenue per mile, per ton mile, looking at those critical smaller variations which affect critical small industries, particularly smaller companies, the variations that have such a profound impact on small communities. I am looking forward to hearing the details to better understand this performance and what is happening to some shippers who may not have much in the way of alternatives. Changes in the length of the hauling, the extent to which the shippers supply their own cars that make changes in the revenue per ton mile appears to be an unreliable measure of the cost of service to the shippers.

    The notions regarding the service predictability and consistency in the final analysis is probably the most important thing that I am worried about. The recent problems make it clear that rates are not the only consideration, and indeed in many cases they become secondary if people cannot get their product to market.

    Here again, the hearing, I think, will help us focus in on the data that will enable us to evaluate the quality of service. The data on Union Pacific produced at the request of the Surface Transportation Board has provided a review and window on the quality of the service provided by a single carrier on certain rounds.

    We generally lack comparable information about other carriers, and we need to consider whether the data we have is adequate in order to make the best decisions for the task proposed.
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    Mr. FRANKS. Thank you.

    Mr. Bachus.

    Mr. BACHUS. I know that we have time constraints, and I will simply say this is very a important hearing. Railroads always are heavily burdened by the government in one way or the other. It is a scary time for railroads with the Kansas City Railroad and the mergers, because for the railroads—health of the economy of the United States is very dependent on the railroads and the financial condition. And I look forward to these hearings, and I am very much interested in making sure that we don't undo all the progress that has taken place in the railroad industry since railroad deregulation. Freight rails were sick puppies back in the 1970s, and I think we have seen some very, very substantial improvement. That is not to say there are not some excesses in some of the lines, enormously serious problems which we have to address, but I think we must be very careful that we don't undo the progress that has been made as we move ahead to improve the situation further. Thank you.

    Mr. FRANKS. Mr. Clement.

    Mr. CLEMENT. It is a pleasure to be joined today by our distinguished guest and panelists as we again take up the issue of reauthorizing the Surface Transportation Board.

    As we deliberate the reauthorization of STB, it is clear that America's railroad industry is at a crossroads. The entire face of the railroad industry continues to evolve. It is imperative that Congress carefully review the role of the STB and their future role of overseeing the rapidly changing face of the American railroad industry.
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    In today's competitive world it is impossible to run a successful business without the elements of customer service, reliability and low cost, and yet many businesses have fallen victim to repeatedly delayed shipments, closed operations, increased costs, lost revenues, and have even had to lay off employees as a result of the disruptions that have proliferated along the UP system.

    Shippers of all kinds of raw materials, finished products and agricultural commodities have experienced severe economic hardship as a result of the traffic tie-ups on the UP system. Let's remember that these losses ripple through our entire economy. American manufacturers, farmers and consumers need a railroad system that guarantees on-time delivery without exception. Unfortunately we don't have this today on many parts of our rail system. In fact, if we are not careful, American industry will look overseas for production of various products because they are assured on-time raw material delivery elsewhere. It rests squarely on the shoulders of the STB to make sure that the reliability problems experienced in the U.S. are reversed and do not happen again.

    Still, I am not here today to condemn the railroads nor the STB, but to look for solutions in dealing with the problems that we are facing. I am one of Congress's biggest proponents of the rail industry and believe Congress and the STB must ensure that railroads, large and small, continue to thrive into the 21st century.

    I don't know what the answer is to some of the problems we are facing, and while I am not suggesting sweeping changes of the STB, some changes may be necessary. I applaud STB's recent statement calling on the Class I railroads and the shortline railroads to work together in efforts to provide more competition on certain routes and give shippers more choices. I hope that their efforts will lay the foundation for increased competition for shippers. Again, I look forward to the testimony of today's panelists and thank you for joining us.
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    Mr. FRANKS. Let me introduce quickly the witnesses who are before us today. On the first panel is Mr. Anthony Hatch, an independent rail analyst. We also welcome Mr. Alfred Kahn, the Robert Julius Thorn professor of political economy at Cornell University. We have Mr. Stephan Month who is the managing director of Credit Suisse First Boston. We have Mr. William Rennicke, vice president of Mercer Management Consulting; and Mr. David Wyss, chief economist, Standard & Poor's.

    Gentlemen, thank you very much for attending today. Mr. Wyss, we can begin with you.


    Mr. WYSS. I am used to people starting at the beginning of the alphabet and not the end.

    I am happy to talk about the financial conditions of the railroads. As you know, Standards & Poor's is most concerned with financial condition from the standpoint of the debt outstanding of the railroads, and right now I think the position can be loosely described as satisfactory. That sounds like damning it with faint praise, but—

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    Mr. FRANKS. Excuse me, Mr. Wyss, can you move the microphone closer.

    Mr. WYSS. That sounds like it is damning with faint praise, but the fact is it is a tremendous improvement from the sorry state of the railroads during the 1970s and 1980s when rising costs, high interest rates, weak volumes had driven them nearly into bankruptcy. The major railroads are now all currently rated triple-B. That is probably about where they ought to be in terms of their financial structure.

    Right now they do have significant capital needs. As a result we think it is critical that they maintain their investment grade status, but being at the bottom of the investment grade is probably not a bad place to be. It should be noted that this is particularly true since much of the problem today is really shortage of equipment, and the equipment trusts that they use to finance equipment purchases generally come in one full credit rating above the general rating of the railroad since they have direct collateral behind them.

    The merger activity of the last few years has been a major factor of pushing ratings a little bit lower. It has not been a uniform rating. Certainly one major railroad, Illinois Central, moved up most recently. Still net debt tends to run about half of total capital, except for Norfolk Southern, which is more heavily capitalized, about 31 percent debt. Most of them are running in the low 50s. That is about average for American industry. They are not particularly high-indebted. The leverage ratio is about average, which is not unreasonable given the high degree of fixed costs of their operating nature.

    The heavy fixed costs of their operations, of course, means that their profits are critically dependent on volume increases. The strong economy in the last few years has driven volume generally higher. Last year was a little bit soft with 1.1 percent increase in traffic. However, that was unusually soft in part because of the warm winter weather, which meant lower coal shipments. Coal shipments slipped by half a percent last year on the railroads, reflecting largely a warm winter, although also a little bit of loss of market share to barge traffic.
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    Coal is important because it accounts for 40 percent of railroad volume, although only 22 percent of revenue. It is also the lowest margin business since this is largely based on long-term contracts with very concentrated shippers, the utilities and the mines.

    Grain traffic is obviously a critical issue, particularly for export. Grain accounts for only 10 percent of tonnage carried, but if you measure by ton mile, it is a lot bigger since the hauls for grade are much longer than for coal. Grain rates are higher, and margins are generally stronger than for coal because the contracts are less concentrated.

    We are worried about this volume going into the near future because of the expected loss of experts particularly to the Asian market. With Asia slipping into recession, we expect a decline in our exports of foodstuffs to Asia. It should be noted the food we ship to Asia is not primarily eaten by people. It is eaten by animals. That is a lot more income-elastic. It will drop much more if the people start shifting from eating beef and chicken to eating tofu and rice. Asia accounts for 42 percent of agricultural exports, so that is a very critical issue for rails right now.

    Despite the sharp rise in rail volume, rail rates have not risen very significantly. Last year's increase in rail rates was only 0.9 percent and that was the first increase since 1992. With a consolidation of the railroads and with increases in traffic, I do expect to see somewhat greater rate increases this year and next. They have been held down in 1997 and 1998 in large measure by the decline in fuel costs, and that has offset some of the pressure for higher margins.

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    The primary problem that we have right now we feel is the shortage of cars for shipment, more than the problems with the rail lines themselves. That is in part because of higher volume because—it is also in part because turnaround times have deteriorated. Some of that deterioration seems due to Mexican traffic. The increased volume of trade with Mexico is causing some lineup of cars, shall we say, at the border.

    The other problem that you are seeing, however, is some hoarding of cars and also just some plain congestion because the increased traffic makes it harder to deliver the cars as quickly. The Union Pacific/Southern Pacific merger has also increased the turnaround time because of operating issues with combining the two systems.

    Overall we expect profits to reach $6.9 billion. That is a 15 percent gain for 1997 and is the second highest return of 8.8 percent recorded by the industry in the last 50 years. That is an excellent performance. It should justify keeping their investment grade ratings. However, the ratings outlook remains stable to negative for most of these railroads. There is no major railroad with a positive credit watch status currently. A lot of that reflects merger-related costs. A lot of that also reflects continued pressure to hold rates down because of competition and a shortage of equipment, which is also driving some of the costs up.

    But still after many years of narrow profit margins and market share loss, the railroads are fighting back. Traffic volumes are rising. Margins appear to be on the rise, and we expect that to continue.

    From the equity standpoint, taking a brief look with my other hat, the stock prices of the railroads have generally risen, but they have underperformed the market. It is hard to find any stock that has fallen over the last 3 years. The railroads have also been carried up by the rising tide, but in general trailing the market. Some of that is, however, probably due to large holdings in commodity and natural resource companies, since natural resource companies generally have underperformed the market and have been particularly punished in the last year because of the Asian debacle and the general drop in commodity prices.
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    Overall the railroads can be defined as good, but not great. They remain solidly investment grade, and we expect them to continue in that status. The financial performance is likely to continue to improve as long as this economy avoids falling into the next recession. Thank you.

    Mr. FRANKS. Mr. Wyss, thank you very much.

    Mr. Rennicke.

    Mr. RENNICKE. Since the passage of the Staggers Act and the deregulation of the rail industry, from our analysis and the work that we have done in the industry both for railroads and shippers, and be actually taking the story of American railroads to many other countries of the world and working on restructuring—there are several things that I think need to be considered.

    One, how will the railroads continue to manage their financial situation facing year-over-year inflation and in situations where there are still some declining rates, both in nominal and real terms? Since 1980, the cost of the resources that railroads have purchased has increased by about 90 percent. That means for every $1 they spent in 1980, they are close to spending $2 to buy the same amount of resources today.

    With the exception of the recent upturn in rates that was enjoyed at least in 1997, since 1980 most rail rates have fallen, and today in the United States we enjoy the lowest freight rates of any industrialized country. Probably from the shippers' standpoint, only what are called single-purpose railroads, like iron ore railroads and railroads in foreign countries, have a lower rate structure.
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    But comparing the performance of the rates versus inflation since 1980, about a 106–110 percent differential has grown between inflation and rates. That 106 is a correction over the number that I have in the statement that I gave you, and I apologize for that, but this is a phenomenal gap between inflation—what the railroads have to pay for individual items that they purchase—and the rates that they receive from their customers.

    The only way that they have been able to produce the levels of income and the financial performance that they have is through massive amounts of productivity savings. Clearly, the U.S. railroads are the most productive in the world, and we use them as examples all over the world in restructuring railroads.

    For example, in terms of the use of the network, the productivity per mile is up 106 percent. In terms of output per personnel, it is up 272 percent. Productivity changes for locomotives is 115 percent; for the railcar fleet, up about 50 percent.

    Since 1987, this accumulation of productivity improvement has in essence saved about $25 billion out of the cost structure of the U.S. railroads. In other words, had they not continued with the productivity trend since 1987, their costs would have been $25 billion higher. $20 billion of this, or 80 percent of this savings, was passed on to shippers and other providers. Some of it went to steamship companies in the form of lower rates to move their containers. Some of it went to leasing companies, so that the vast majority of the productivity improvements that have been made in the industry have been given back directly to parties other than the railroad industry. Therefore, the only way that they have been able to stay viable and improve their financial performance is to improve productivity faster than this gap grows between cost inflation and rates.
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    In recent years, however, the productivity improvements for key items have slowed down. Locomotive miles have actually been falling in the last couple of years. Trips per year for freight cars in the last 3 to 4 years plateaued, and the revenue dollars for employee compensation have flattened out.

    What we are seeing is a substantial shift in the source of productivity available to the railroads. They have exhausted the operating productivity that was left in the system in 1980 when Staggers came. They were able to find billions and billions of dollars of productivity without having to really invest heavily in capital during this period. Going forward, the productivity will have to come, quite frankly, from a substantial increase in capital well beyond the rates that they currently have.

    If you look at history in 1987, railroads reinvested about 3 percent of revenue back into the business in terms of capital expenditures. By 1996, this amount had risen to 12 percent.

    If you use any metric, and one particularly good one is EVA, or economic value added, the railroads have not had a positive EVA for at least the last 10 years. And when you look at the key components of what drives EVA, volume, revenue yield, operating ratio, capital turnover, and cost of capital, you find no signals that EVA will turn positive in the future.

    So in summary several things have gone on. There have been declining yields measured in whatever way you wish. The merger and other productivity benefits have plateaued, and will be declining. Other types of productivity are flattening out, and really the only source of major productivity change will come from capital improvements.
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    So the cost-cutting and productivity gains have allowed the railroads to narrow the gap between return on capital and the cost of the capital in the case of steadily declining yields. However, it is unlikely that the industry can sustain this historic rate. Productivity improvement was achieved by the rationalization of assets and resources in the last 16 years. In order for the railroads to remain competitive and grow, they will need to find new sources of productivity, and we believe this only can come from massive borrowings of external capital.

    In order to attract capital, the railroads will have to demonstrate that they can equal or exceed their cost of capital, and therefore, injecting any type of uncertainty into the structure of a system at this point, we believe, will severely diminish the railroads' ability to borrow capital at attractive rates to fuel the further productivity improvements. Thank you.

    Mr. FRANKS. Thank you.

    Mr. Month.

    Mr. MONTH. As has been abundantly shown, there is no question that deregulation under the Staggers Act triggered substantial windfalls. That trend since 1980 has been financially healthier railroads, more efficient railroad service and lower real prices to shippers, and the stock market has applauded this Railroad Index since the Staggers Act outperforming the S&P 500.

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    The outlook for the future is somewhat cloudy. We focus first on top line or revenue growth.

    Since the Staggers Act, volume has grown by slightly over 2.1 percent per year, yet according to S&P, the only significant commodities with growth prospects in excess of general domestic economic expansion are intermodal containers and automobiles, which comprise a relatively small portion of the railroad industry's business mix.

    Rates meanwhile have been dropping in real terms and implying an overall real revenue growth rate since 1980 of negative 1.8 percent.

    The story with respect to cost reductions is even more pronounced. Labor costs from 1980 to 1996 have dropped by nearly 50 percent. Track miles have been reduced. Number of locomotives and rolling stock has been reduced.

    Going forward, however, once again the sources of cost savings are not clear. Savings due to deregulation have been achieved, underperforming assets are off the books, and not much, if any, significant consolidation opportunities are left. So while growth in earnings in the railroad industry post the Staggers Act have been just over 9 percent per year, the EPS of the S&P 500 has grown at 10.4 percent.

    Going forward, however, the railroad industry is likely going to find it difficult to grow earnings even at this pace, and since the capital markets value companies more on earnings growth potential than anything else, the prospects for access to capital are somewhat hazy.
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    The next question then is whether the railroads really need Wall Street in the years ahead. Earnings are positive. Revenues, in nominal terms at least, should grow. Why will the railroads need Wall Street at all? And of course the answer there lies in the tremendous capital investment the railroad industry is going to need to make in order to maintain and upgrade their infrastructure.

    The railroad industry is extremely capital-intensive. Since 1980, the U.S. railroads have invested over $200 billion in track and equipment, and I think a comparison of the magnitude of these expenditures with those of other industries is somewhat instructive.

    Since 1990, the U.S. railroads have invested more in capital expenditures than any other major U.S. industry sector. Certainly no mode of transportation faces these kinds of capital costs. The truckers, for instance, pay very little towards maintenance of the infrastructure that they use.

    Another point of reference, in 1995 the railroads had capital expenditures in excess of 19 percent of their total revenues. This is compared interestingly to 4.7 percent for steel mills and 6.5 percent for paper products. In general, railroads require about three times as much capital as the average S&P industrial company.

    Looking forward, these capital expenditures are not likely to end any time soon. The high rate of investment is not slowing. My colleagues at Mercer Management estimate that over the next decade the railroad industry will have to significantly increase its capital expenditure budget in order to sustain its economic viability. So clearly capital expenditures are a necessary and unavoidable element of a railroad's future.
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    We have established that the railroads have relied heavily and will continue to rely heavily on external sources of debt and equity financing. The problem that the industry faces from Wall Street's perspective is that investors demand a particular rate of return on the investments that they make. The lower the likelihood of earning such a return, the less likely it is that the investment is going to be made, and the less likely it is that the capital will be available to the railroads.

    The attack financial analysts make on the railroad industry is that it never earns its cost of capital, and indeed the railroads pay that gap, the difference between their cost of capital and return on investment, from new money that they raise from investors year after year. Now this money has been and will continue to be forthcoming, but only on the expectation that the railroads will eventually return at least, if not more than, their cost of capital. This expectation is not unfounded since the gap between return on investment and cost of capital has been narrowing, in fact, since 1980, yet the prospects of earning the cost of capital diminish as earnings growth prospects diminish, and as we have seen, the prospects of growing earnings in the railroad industry are at something of a crossroads today.

    Obviously I am not here to speak to the host of non-financial issues facing the industry, but I can state that unless an environment conducive to growing revenues and earnings is created, the railroads are going to find it costlier to raise the money to maintain the infrastructure and develop their business.

    Mr. FRANKS. Thank you.

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    Mr. Kahn.

    Mr. KAHN. I want to apologize for having the first portion of my testimony talk about remedies. Had I been aware of your desire and instructions to confine ourselves to the financial condition of the industry, you may be sure that I would have done so. Perhaps it can be explained by the fact that I live in a centrally isolated town in western New York, and sometimes the news takes time to get there. So I will confine myself to the last five pages of my testimony.

    We have already heard statements time and again of the irrebuttable fact that if the railroad industry is going to continue to be able to raise capital on satisfactory terms, it must offer the investors the prospect that it will earn the cost of capital.

    We have, second, heard statements already several times that the industry has not earned its cost of capital over its entire last 18 years; it is getting closer to earning its cost of capital. Now that is usually based—those statements which financial analysts periodically make and the railroads periodically make are based typically on the findings by the Interstate Commerce Commission and now the Surface Transportation Board that the industry is revenue-inadequate; that in the last several years, 8 out of 11 of the Class I railroads have been found to be revenue-inadequate, and on the basis of that, financial analysts periodically say, you see, we are not yet earning the cost of capital.

    That showing, that finding, has been totally discredited, as the Vice Chairman of the Surface Transportation Board himself has proclaimed over the last several years, but it is most totally discredited by what—the valuation that the stock market itself places on this common stock of the railroad companies.
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    Now I am not a financial analyst, but I have specialized in the area of regulation for the last 30 years. I was chairman of the New York Public Service Commission, and for 3 years I certainly had it drilled into me what kind of indicia told me whether we were or were not giving the companies that we regulated a fair opportunity to earn the cost of capital, and what was drilled into me for those 3 years was look at the market valuation of the securities of the companies.

    If investors are willing to pay prices voluntarily, nobody is forcing them to buy this stock, are willing to pay prices that exceed the book value of the company, then that is the most objective and definitive demonstration that investors expect to be able—those companies—to generate enough net revenues to return to them the cost of capital, and if they didn't, they wouldn't buy them. Nobody is forcing them to buy them.

    I then looked at the market-to-book ratios of the railroads that have been found continuously to be revenue-inadequate, and I find that in recent years they are two times the book value. That tells me, from everything I learned and from everything my financial analysts told me when I was chairman of the New York Commission, that the investors see every prospect of earning more than the cost of capital. Therefore, they are willing to bid up the price of securities to twice the amount of dollars that are actually invested in the companies.

    Now, I observe similarly then that when the investment analysts talk, they say, we are getting closer, the industry is getting closer to earning its cost of capital, paying in effect lip service to these discredited measurements by the ICC and the STB. But at the same time they say—and this is a statement by investment analysts in the bottleneck case—investors, confident that the new regulatory regime, talking about the Staggers Act, gave railroads the opportunity to earn a competitive return on capital, have been willing to supply investment funds to the industry.
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    They are talking with approval of the record of the last 18 years since the Staggers Act was passed. Now if in those 18 years the industry had continuously fallen short of earning a competitive rate of return, which is the market cost of capital, where did they get these crazy investments—investors willing to pour hundreds of millions of dollars into the securities of these companies? Moreover, during the last 5 years, the management of these companies have plowed back the earnings to the extent of 68 to 72 percent right back into the company. What business have they had plowing earnings back into the company if the industry is consistently not earning the cost of capital? They ought to be lynched by the stockholders. So there is at least a discontinuity here between the actions of the companies and the indicia that are clear of their continuously being able to sell scores of millions of dollars of new securities, plowing back earnings continuously into the industry.

    Now, I take great pride in the role—limited role that my office played in the late 1970s in pressing for the Staggers Act. I think it was a marvelous step forward, and I agree with everything that has been said about the beneficial effect it has had, except that the investment analysts always stop short and say it has been a great thing and that the railroads are infinitely better than they were. I have figures in my statement of selling $2 billion worth of securities, and we are also plowing back earnings, but we are not quite there.

    Well, I think there is a total discontinuity between those, and I suggest that it might be useful, as I suggested to the Surface Transportation Board, that it bring in some academic, impartial, disinterested—by which I don't mean uninterested—financial analysts to say, what do you say to people who say over the 18 years that the industry is revenue-inadequate and is not earning its cost of capital?
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    I think—just two other observations, and then I will stop. Nobody wants to introduce the net reforms such as the ones that I have been advocating if we believe that there is a real danger that they will then push the industry back into revenue inadequacy, but every time any reform is mentioned, any time there is any attempt to reverse what has happened in the number of Class I railroads, from 26 to something like 5, we have clearly had a diminution in the amount of competition. Every time that is mentioned, people say, don't interfere because you will interfere with the financial integrity of the railroads.

    We have deregulated or are the process of deregulating telecommunications. We are in the process of deregulating the electric industry. In both of those industries, an inherent part of deregulation, a central part, is requiring those industries to make access to their bottleneck facilities available to their competitors. It is the local telephone network which the Telecommunications Act requires. It is the wires, the transmission and distribution lines in the electric industry.

    I see no evidence that those reforms, which I think are universally conceded as necessary—if you are going to have competition in the industry, I see no evidence or statement by anybody that the result is that the electric and telecommunications industries are unable to raise capital.

    And I guess the second question is where does the burden of proof lie? The commentators seem to say, no movement in the direction of competition. And remember, the central premise of deregulation, and since I played a major role in deregulating the airlines, a central premise is the expectation that there will be competition that will protect consumers. Given that was the central premise of the Staggers Act as well, I would suggest that the burden of proof, and I am not talking about a legal burden but an economic burden, rests on those people who cry ''catastrophe'' at any attempt to apply the antitrust laws, at any attempt to get the Justice Department involved in these proceedings, at any attempt to create equal competitive opportunities for rivals such as we have done in electric power and the telephone industry. Thank you.
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    Mr. FRANKS. Mr. Kahn, thank you.

    Mr. Hatch, welcome.

    Mr. HATCH. Thank you. I am honored to be here. I am Tony Hatch. I am one of those dreaded equity analysts that we just heard about, so I have a slightly different viewpoint here.

    I have covered rails and trucks since 1985.

    Do you have the slides?

    Since the late 1980s, I have noticed that the rail industry was presented and in some rare cases seizing the terrific opportunity provided by deregulation to leverage its ever-decreasing cost structure with increasing levels of service to recapture market share after an almost century-long decline. That is the essence of what I and others have labeled the railroad renaissance.

    Indeed, in this decade, increasing unit and margin growth made the rail opportunities seem limitless, but the work is far from done. In the last few years problems associated with mergers and other service breakdowns have clouded the picture. Nonetheless, I feel the opportunities are too great for too many shippers, railroads and for their shareholders for the carriers not to succeed.

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    I believe that the interest of the railroad, the shipping and the financial communities are one and the same. That is, better service equals more volume, equals better financial results, equals capital to invest, equals better service, et cetera.

    That is, unless some artificial restraints are placed on the industry, we should not allow this temporary crisis, no matter how severe, to lead to any change in the regulatory environment that will, as some of my colleagues here have said, chase away investment capital which is critical for capacity growth, which will take care of some of these service problems.

    I have given in my written work a brief summary of the merger effect, et cetera, and I will summarize my view here with a couple of slides.

    A general summary, as some my colleagues have said, deregulation has worked for the rail industry and its customers. Witness the operating improvements since 1980 and the corresponding decline in rates. Ours is indeed the best freight railroad system in the world. The industry has evolved from one of corporate empire to pure railroading, from dormant to dynamic, from losing market share to in some cases recapturing business, from the brink of insolvency to financial stability and even growth.

    It is, however, a work in progress. This is a list of our mergers. Recently, of course, the Union Pacific crisis has created significant doubt about the vitality of this entire rail comeback. Has consolidation gone too far? Are the new systems too big to manage? And most importantly to me, is the damage to the industry's reputation in a service comeback business, is that reputation damaged permanently?
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    What I see here overall is in the rail industry what we call the merger effect. We are convinced that after this initial honeymoon of cost-cutting, that railroads run into a difficult merger point where the two railroads try to become one, and that is where trouble begins, usually from culture clash, the loss of institutional knowledge and, perhaps most importantly, the information systems conversion. However, as we are seeing at Burlington Northern, this phase will pass.

    This complicated slide which is in your written work shows where we are chronologically in this process. We are seeing Burlington Northern leave its crisis period, and they reported excellent results yesterday. We can see that the railroads can get through this.

    Indeed, there are some recent signs amid all this carnage that the underlying long-term trend of progress is actually intact. They include, number one, as I have stated, Burlington Northern's recent performance demonstrating that railroads can and absolutely will survive what we call the merger effect.

    The second is that railroads can evolve into service companies. There is no one that is completely successful, but there are some recent examples including Norfolk Southern and their Ford Mixing Center contract; the recent Burlington Northern and hub intermodal agreement; or the Canadian National, Illinois Central and Kansas City Southern alliance are—actually, all of the truck competitive intermodal business which has grown from a small fraction of the total to fully a fifth of rail revenues.

    The third point here, and most importantly, is we believe most customers want rail service. We view the customer outrage at the problems in the West as an indication that the glass is half full. Customers want to give more and more business to the railroads if they can trust their service because it actually saves the customers money.
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    So two questions have emerged from this. One is the most direct: Will Union Pacific ever get fixed? And our answer is of course they will. We are encouraged by the most recent service scorecards which suggest that UP might very slowly but still steady be working itself out of its crisis.

    And relevant to that, our second question is will Conrail suffer the same kind of merger effect, and while it is possible, we don't think that there is any crisis imminent. I have witnessed the levels of planning by both CSX and Southern firsthand, as well as the cooperation by all three rails involved, and they will be prepared, and in the East we expect a much, much smoother ride to integration.

    So five points in conclusion.

    One, we believe there will be a calm after this merger storm, and Burlington Northern right now is our best example that we can survive this.

    Two, in the future rail growth will only come with service improvements, and that is both growth in volume and growth in the equities, thereby aligning shareholders and shippers. Earnings can no longer be expected to grow through savings alone, so the message is clear. Service improvements will translate quickly into better profits, higher stock prices, happier customers and reduction in the crisis mentality. Progressive rail management and better rail service are the only elements that will allow the rail industry to take the next step, in the opinion of both shareholders and shippers.

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    Three, capital needs are huge, but the Street is skeptical. Unlike what you may have just heard, the rail stocks have underperformed significantly. They have missed this great bull market, and they are trading at a 40 percent discount to the Street average, to the average S&P 500 stock. That reflects Wall Street's skepticism about the railroad's ability to grow. The railroads are therefore financially motivated to partner with the customers because the status quo will not work.

    Recent huge capital spending plans, over $8 billion are slotted for this year alone, and an emphasis on new products suggest that railroads are aware that their old ways must change. Without the likelihood of improving returns, investment capital will dry up, and remember the market is based on expectations, not on what is happening now.

    The fourth point, we need to facilitate the health of the industry. Its returns are approaching adequate by any measure whether we use STB's or general stock market measures. Even the threat of regulation or other radical response to this very severe Western congestion crisis would significantly reduce the attractiveness of the railroads as investments and raise the cost of capital, which ironically would serve to reduce service and therefore growth capability and end this renaissance.

    Finally, my fifth point, rails are heavily incented to succeed. Left essentially unencumbered, the railroads and those with allied interests, which we think are customers now, and future customers, and shareholders and potential shareholders, will make the needed capacity and information and improvements culturally necessary to sustain their comeback. They don't really have a choice.

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    Mr. FRANKS. Thank you, Mr. Hatch.

    Let me begin with a couple of quick questions for you. On page 9 of your testimony, you state that the Union Pacific service failures can be attributed in part to an overemphasis of cutting costs to the exclusion of customer service.

    Isn't that, in fact, an irrational choice given that the ultimate result of that cutting is often to produce service failures that are extremely expensive for the railroad to fix?

    Mr. HATCH. In my opinion, yes, that was irrational. At points we in the investment community are allied with shippers and railroads, as I tried to point out. At times we can appear to be on the opposite side, and the desire to please us by showing this quite expensive merger will generate returns quickly has led to hasty decision-making in this case. That is my opinion. It is not generally accepted, but I think that they rushed a little quickly in order to generate excellent returns in the first few quarters rather than waiting for a better return down the line.

    Mr. FRANKS. Thank you.

    Mr. Blumenauer.

    Mr. BLUMENAUER. Thank you.

    I was interested in Professor Kahn's assessment that given what has happened over the course of the last 18 years, it would appear that the market is suggesting that there is not as much of a problem. I am curious if the other panel members would care to comment on Professor Kahn's analysis.
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    Mr. WYSS. I tend to agree there is not a huge problem here with the railroads. There certainly was a huge problem with the railroad in the late 1970s before the passage of the Staggers Act.

    However, I do doubt some of Professor Kahn's analysis, and particularly reliance on the price-to-book ratio. One problem in the book ratio in the case of the railroads ignores much of the natural resources that they have. Much of the land is carried on the books at essentially zero. It is not worth zero. In many cases that may be the most valuable part that the stock market is valuing.

    As a result, I think the price-to-book is not a good guide to what is going on. I think what is happening with the debt ratings and what is happening with the fact that rail stocks have generally underperformed the market in the last few years is a better indicator of the market opinions of the rails.

    Mr. MONTH. Just to also respond here, I think from my perspective what Wall Street is looking at, Wall Street—or equities are valued, we believe, in large part on the expectation of earnings growth, of cash flow generation, and what we see as the concern is not necessarily that Wall Street is all of a sudden going to wake up and decide to not put money in the industry. However, what investors will do as the prospects for growth in earnings going forth, at the prospects for cash flow growth going forward diminish, Wall Street will start to make the pricing of its securities costlier and costlier, and that is going to—what that will eventually do if that continues ad infinitum is create a situation where the actual costs incurred by the railroad are going to exceed their revenues, exceed the earnings that they generate fundamentally, and will create an economically unviable entity going forward.
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    The concern is not that tomorrow the industry is going to be denied access to capital, but the concern is that the cost of that capital is going to increase because the investors don't believe that the railroads will have enough opportunities to grow their revenues and to grow their earnings. That is the equity markets.

    With regard to the debt markets, the analogy is similar. Investors in debt want to make sure that they get paid back their return as well as their principal.

    To the extent that the capital expenditures of the railroads continue at exorbitant rates and at rates that are well in excess of the ability of the railroad to generate cash, to generate earnings, to generate EDBA, one of the measures that we use a lot, the cost of that debt capital, is going to increase, and you are going to end up with a vicious circle because the higher cost of that debt increases, the greater pressure is put on earnings. The greater pressure that is put on earnings, the more the stock price is going to be hurt and impacted. And so it is the future trend and the future expectation that is the concern.

    Mr. HATCH. I agree. The point is that when investors are putting in money today, it is not a sign of what is happening this minute but what they expect might happen. And, in fact, what has happened recently is the stock market has passed the railroad industry to a degree.

    They are trading at a 40-percent discount to the average stock in the market. In 1993, when things seemed—the future seemed bright and we were not in the congestion crisis—they were traded at about a 10-percent discount. That is, they were almost equivalent to the average company. Right now, they are almost half the valuation in terms of that future earnings expectation, et cetera, of the average company; which suggests to me that the market is quite skeptical about the growth potential.
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    However, they do continue to buy new issues out there, because there is a great opportunity if the railroads continue to make progress, and they will.

    Mr. BLUMENAUER. I find it interesting that we are now taking the exuberant market as the standard that we are relying on.

    Mr. KAHN. May I respond just very briefly? Of course, I agree that market prices of the stock are based primarily on expectations. If investors expected that additional dollars, several billion dollars a year, invested in this industry would earn less than the cost of capital, they would not be willing to pay two times the book value.

    I certainly take the observation that the book value—and I have actually referred to it in the written submission we made on the revenue adequacy test—may not reflect the value of the natural resources in the land, but expectations clearly are not the ones that are driving the stock market generally. I think we all know the stock market has, by my standards, gone crazy, with respect to particularly the stocks that are expected to grow very, very rapidly.

    The fact is that if they expected additional investment here, additional dollars to put in, earn less than the cost of capital, they would not pay what they are paying for the stock. And I would call to your attention on this question a statement by Standard & Poors, saying although the industry is failing to earn its cost of capital as defined by the ICC, it is, in fact, a picture of health. And that was in late 1995. And since then matters have improved. And we just heard a prediction here that profits will go up 15 percent in this year, in 1998.
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    Mr. BLUMENAUER. Thank you, Mr. Chairman.

    Mr. FRANKS. Mr. Bachus.

    Mr. BACHUS. Thank you. I have been scrambling around the last few minutes looking at a Barron's that I purchased this weekend. And the reason I did that is because Professor Kahn, you said investors were willing to pay twice the book value for the railroads. That must mean they consider it a very good investment, they must consider their future prospects bright, and sort of used that as an argument that the market feels the railroads are quite viable.

    I don't know whether you have looked at the airlines and their book values and what they are paying for, but let us just compare that. Norfolk Southern, for instance, is selling for about twice the book value, which is consistent with what you said. CSX's $23 book value, selling in the low 50s. And Union Pacific, I am not sure what that stock is trading at right now, but has a book value of 30-something. But how about Delta Airlines; do you know what the book value on Delta Airlines is?

    Mr. KAHN. No, I do not.

    Mr. BACHUS. Twelve dollars. Is it selling for $24? No, it is selling for $125. It is selling for 10 times the book. United Airlines has a book value of minus $8. It is selling for $90. Delta Airlines is selling for—book value of 12—selling for $125. USAir has a negative book value and it is selling in the high 70s.
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    And Yellow Freight and U.S. Freightways are selling for—I didn't get those figures. I tried to look at them. But I suspect from my memory that they are selling for about three or four times book, which means that their future seems to be twice as bright from an investment standpoint.

    How about Coca Cola? Coca Cola is selling for $75. Book value of Coca Cola is not $37, it is $2. Two dollar book value selling for 75. Disney has a minus $3 book value and selling for $113.

    And these are the last two I will use. Merck and General Electric both have a book value of $4. If the investors thought they had a bright future, you would think maybe they would bid the stock up to $8; right? Twice book value? Merck is selling for 120; G.E., 87.

    If you compare your railroad stocks with any other—and I didn't get into the Internet stocks, which are selling for 700 times book to no book and selling for $80—but if you used the judgement that people would pay twice book for an investment if they thought it was going to have a good return over the next few years, the only stocks that would qualify under that test are the railroads because they are so low.

    Mr. KAHN. May I?

    Mr. BACHUS. Why are people paying 10 times book for the airlines and 5 times book for the freight lines? Can you use that same argument to say they are that much more?
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    Mr. KAHN. May I respond?

    Mr. BACHUS. Yes.

    Mr. KAHN. As best I can. I don't purport to be a financial analyst myself, but it is obvious to me from the examples you have cited that you are dealing with stocks that are subject to extraordinarily wide ranges of expectation over time. If you would look at the stock of those airline companies 5 years ago, I suspect that it would be hard for anybody to be willing to buy them at all. I know USAir stock was selling way below $10 a share.

    Mr. BACHUS. But it had a negative book.

    Mr. KAHN. I understand. Those stocks are based, those expectations are based exclusively on expectations of the future. Those expectations are subject to extraordinary ranges. Merck, for example. Clearly, there is an expectation of immense growth in earnings. I am sure the company, whoever it is, that is selling the virility drug, or whatever it is, which I gather is going like hotcakes, that that stock is many, many times book as well.

    That is not the determinant—the relative value is not a determinant of whether the railroad industry is or is not capable of raising capital for investments that are economically desirable to be made.

    I might turn the question around and say how can it be, in view of the circumstance that you have cited to me, that the railroad succeeded in selling $2 billion worth of securities last year? It is clear you wouldn't pay anything for it if you did not expect those additional dollars themselves to generate enough revenue and more to cover the cost that you, the investor, require to get in order to continue to invest in it. Railroad stocks are simply not comparable with Merck or airline stocks.
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    Mr. BACHUS. But I thought what you said, I thought you said the fact that investors were willing to pay twice the book value of the stock showed that they could attract capital; that they had a bright future from a revenue standpoint; that the industry was certainly very, very healthy. And if you compare that with the—I mean, two times book is about as low as you find for any industry. I think the only other Dow stock was Alcoa that came close to


    Mr. KAHN. Well, I know myself that when California first announced its intention to introduce competition into the electric industry, the average market-to-book ratio of the electric companies declined from something like 1.7 to something like 1.4.

    I might turn it around and say I am trying to explain a fact, sir, and your line of questioning suggests you are trying to explain a nonfact. The fact is that investors are willing to buy these securities. I have looked through the reports of investment analysts, of Value Line and Standard & Poors, over the last 5 years, and they generally have suggested purchasing railroad stocks is a good buy.

    Mr. BACHUS. A good buy.

    Mr. KAHN. Yes. They have generally cited, and I can cite you—I don't have it in my pocket, but I went through all the Value Line over time. I am not saying they said this is the place in which you have a possibility of—
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    Mr. BACHUS. I am not—I am sorry.

    Mr. KAHN. I am not saying they say this is a possibility of really huge capital gains, but they have suggested that this is a perfectly good recommended investment.

    Mr. FRANKS. Mr. Kahn, thank you very much for your response. Mr. Lipinski.

    Mr. BACHUS. Mr. Month wanted to say just one thing.

    Mr. MONTH. Can I respond, too?

    Mr. FRANKS. I want to keep in mind time constraints.

    Mr. MONTH. I apologize. With all due respect, I checked the Value Line before I came down this morning, and the railroad industry is listed as number 65 out of, I believe, something in the mid-eighties in terms of industries with respect to timeliness of investment. So even Value Line is starting to realize that the railroad sector overall is sort of in the bottom kind of 30, 35 percent of stock investments overall.

    What does that indicate? What that indicates is that there is no question that in the environment post-Staggers Act, there has been an environment whereby earnings are growing and investors are making investments in growth companies, in companies that have seen revenues and earnings growing. What the concern here is, is that as those opportunities to grow earnings and grow revenues start to go away, that capital is not going to vanish but it will become costlier. It will become costlier to the point of two times book value vis-a-vis 100 times book value in some other industries.
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    And I think just two times book value is actually sort of precipitously close to perhaps a liquidation or a bankruptcy-type of level. If you look at a company that is valued at one time book value, that is basically what can be realized in a liquidation scenario. I am not trying to paint that picture, that that is what is going to happen here, but the two times book value is coming precipitously close to that.

    And the issue here is that if the environment going forward is not conducive to continued revenue and earnings growth, stock prices will go down, P/E ratios will go down in the railroad industry, which makes the cost more costly to issue stock, rates on debt will go up, and what will happen is those earnings will be squeezed and the railroads will ultimately find it very difficult to generate any positive earnings at all.

    Mr. HATCH. Can I add a line? Do you mind?

    Mr. FRANKS. If you do it quickly.

    Mr. HATCH. I will do it really quickly. One, why were so many securities sold in the rail industry? Because there were sold cheaply. Two, relative value is the critical element. Three, that is what addresses the point about the exuberant stock market. That is the competition for capital, whether it is fairly priced or not. That is where the money will go and not to this industry, unless this industry improves.

    Mr. FRANKS. Thank you. Mr. Lipinski.

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    Mr. LIPINSKI. Thank you, Mr. Chairman. One of you gentlemen mentioned over the course of the last 18 years the railroads have managed to reduce their labor costs by 50 percent. Could you tell us how they managed to reduce it by 50 percent? That is a very significant number, I believe.

    Mr. RENNICKE. I think what we were talking about, at least the number that I had, was that during the last 18 years the railroads had improved the productivity of their workers by 272 percent, which is even probably, on a relative basis, greater than the 50 percent. And they have done that by reducing the workforce from about 500,000, roughly, in the late 1970s to about 200,000 today, while traffic was growing at a very substantial rate.

    So it has come through the introduction of efficiency practices that were not in place at the time. It has come through decisions from PEB cases and in negotiated labor decisions. But it has essentially come from a reduction in the work force and a very substantial increase in the output that the railroads achieved.

    Mr. LIPINSKI. Let me ask all the panelists another question. It seems to me that the railroads were in terrible shape before deregulation and then after deregulation they started to improve. And the picture I am getting from most of you today is that the railroads are still a good investment, but maybe not as good as they had been in recent years, because maybe they have wrung out all the productivity they can and there is really no place for them to go to improve.

    And yet there is a continual consolidation in the railroad industry. Each year goes by, we have fewer and fewer railroads, really. And it seems to me that there is a tremendous amount of business out there for those fewer and fewer railroads. So it wouldn't seem to me that railroads were in a weaker position today; it would seem to me that those that still exist are in a stronger position than they have been any time since deregulation because they have less and less competition.
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    On top of that, I believe that although we are not going to do it next year, we are getting closer and closer to where we are going to have a transcontinental railroad out there someplace, or maybe two of them out there, and that certainly should help productivity. That certainly should bring down costs and, of course, that opens up the number of markets for these railroads. But I would like to have anyone on the panel that would like to comment on that do so.

    Mr. RENNICKE. First of all, I think the thing to consider, and I presented it in the horizontal written material I gave you, is that the first cost hurdle the railroads had to overcome was a 90 percent increase in inflation over the last 18 years. And then, whether you argue about the length of haul or other issues, there has been probably somewhere between a zero and a 20 percent decrease in rates. So there has been a 100 point gap, between inflation and rates unprecedented in any industry.

    Now, after Staggers, they started looking for what people typically called low-hanging fruit. And they found opportunities for efficiencies, they found a lot more price competition, and over time they exhausted those productivity opportunities. Mergers in the railroad industry, I would say, are far less a focus on market expansion or the ability to price differently; it is just a desperate search for another source of productivity, because in no year since 1980 have the railroads come even close to earning the inflation that they faced in those areas.

    So as they have exhausted the noncapital items, they are now facing the only way that they can find productivity, which is to buy more efficient technology in machines and things that they have avoided more or less over time, and that is where the productivity is going to come from.
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    Mergers, whether they are transcontinental or the current round, are just another manifestation or another step they are using to try to survive under this gap that they have between rates that they receive from their customers and what they have to pay to their suppliers.

    Mr. LIPINSKI. Anyone else have a comment?

    Mr. MONTH. Yeah, I'd like to. Two comments. First of all, the significant consolidation opportunities are diminishing. With Illinois Central, Canadian National, with Conrail, obviously, with Norfolk Southern and CSX, following UPSP, following BN Santa Fe, following UPC&W, you are left principally with four trunk carriers in the country, the two in the East and the two in the West. So the major consolidations are limited.

    Second, with respect to transcontinental, I think that the opportunities to cut costs in a transcontinental merger are going to be significantly less than in a consolidation or in a merger where you are looking at a merger in sort of more of a similar region, an eastern-based merger or a western-based merger where there are more parallel lines and where there are more opportunities for abandoning spurs and for cutting costs because of redundancies. You have much less of that in a transcontinental merger, where fundamentally you have to operate each side of the Mississippi River, and with the same level of efficiency at least that you had prior to such merger.

    Mr. LIPINSKI. Anybody else?

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    Mr. HATCH. Yeah; I think competition now, and increasingly so, is not interrail but with other modes, primarily the highway. I think it is a competition that the industry can be effective at and in certain distances if they get their service together. So I think that is really the major competitive pressure, and the future will be in the so-called intermodal area.

    And the second point, you asked if railroads are in a good position now post-Staggers and all this. And summing it up, where they are today, I believe they are in a terrific position to seize an opportunity. They are not there yet, but I think they have all these things in front of them. And I think if they continue to solve the question in the West and other things, they can take advantage of this and pick up a lot of business they have lost over the preceding decades.

    Mr. LIPINSKI. Thank you, Mr. Chairman.

    Mr. FRANKS. Thank you, Mr. Lipinski.

    Mr. Moran.

    Mr. MORAN. Mr. Chairman, thank you. Mr. Wyss, you were the one who mentioned grain traffic. I am interested in knowing the role that the movement of grain has in the profitability of railroads, and in particular how elastic that opportunity for business is, what the competition is with barges or transportation over the road.

    Mr. WYSS. Well, grain traffic, of course, is about 10 percent of growth revenue right now. So it is a very significant part of what is happening with railroads and it is one of the big swing items because it can change a lot from year to year.
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    The dominance is with port traffic, and that means it is dominated by the export trade, particularly to Asia, which accounts for about 40 percent of U.S. ag exports. And, of course, that is under danger right now, with the Asian recession that we are seeing.

    It tends to be about an average profit item. It has much better margins than coal but not as good a margin as the intermodal, which is also the faster growing. But still it is a good business.

    Mr. MORAN. How much of a problem is created in grain transportation because of fluctuations? Is there a fluctuation from season to season that impacts the desirability of hauling grain?

    Mr. WYSS. I grew up in Indiana. You all harvest to send stuff at the same time, and that means you pretty much try to ship it—

    Mr. MORAN. I didn't know whether you would know that or not; I am sorry.

    Mr. WYSS. That creates a big problem, particularly for the cars, not so much for the locomotives; but you are using specialty cars for this, covered hoppers, et cetera, and it is hard to keep those fully occupied all year when you only have one harvest a year. So, short of changing the climate structure of the United States, I don't think you are going to change that, really.

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    Mr. MORAN. How much competition is there, how much ability do shippers have to move to something other than rail?

    Mr. WYSS. Competition is very serious. You are seeing a lot of movement back and forth, particularly between barge and rail, probably more than to truck, because the primary grain port for the United States is the Port of New Orleans, even for traffic to Asia. And, of course, barge traffic down the Mississippi, down the Ohio, is a very significant competitor to the railroads on that route.

    You can move rice from Arkansas down the Mississippi River or you can move it down the Union Pacific Railroad, and you do it whichever one is the cheapest at the time. And barge is very heavily subsidized by the U.S. Government.

    Mr. MORAN. I don't know who to direct this question to, but I am interested in knowing the analysis as to what role the shortlines play in the profitability of the Class I carriers. How important are they to the business of the major carriers?

    Mr. RENNICKE. I think the shortline phenomenon has been excellent for the U.S. railroads. Because what happened, and this gets back to the push for productivity, on many parts of the system the cost structure of the large companies just doesn't fit. And I think the U.S. railroad industry and the people in it in the last 20 years responded. I think it is giving the railroads, let's say, a pickup and delivery capability in regions the Class I railroads probably today could not handle or could not have stayed in, and it has really become the envy of the world.

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    We have done restructuring projects in virtually all of the continents, and most countries would like to see how they could get a shortline program like they have in the U.S. set up in their country. And, in fact, many of the U.S. shortlines are in fact bidding and winning the ownership or the right to run railroads in other parts of the world, like New Zealand, Australia, different parts of Latin and South America.

    Mr. MORAN. Would the trends still be toward abandonment of rail lines, too, shortlines, or is that process waning?

    Mr. RENNICKE. I think there will still be some more of it in the U.S., because I think certain parts of the system, as the Class I's again look at it, feel their cost structure doesn't fit, and if they can find a shortline partner there will be a huge opportunity. In Canada they are just starting the process. So I think it will be a vibrant and necessary part of the business.

    Mr. MORAN. Are there incentives created by tax codes otherwise that encourage the abandonment of railroads, railroad lines, such as rails to trails? Is there an incentive because of the tax nature of giving away your property?

    Mr. RENNICKE. I am not sure how many—I think a very small portion—of the overall U.S. rail system ultimately went in rails to trails. And I really don't know that much about the other part of the Tax Code. But I think the industry has found that we are going to survive at the end of the shortline; that that is a far better way of disposing of the operation.

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    Mr. MORAN. Mr. Chairman, thank you for the opportunity to question.

    Mr. FRANKS. Mr. Clement.

    Mr. CLEMENT. Thank you, Mr. Chairman. Chairman Kahn, good to see you again. I was Chairman of the Tennessee Public Service Commission when you were Chairman of the New York Commission, and I know both of us have seen many changes in the industry over the years.

    I know you commented a while ago about that the rail industry is more similar to the electric and telephone industry than the airline and trucking industry. Could you expand on that statement?

    Mr. KAHN. Yes. Glad to see you again.

    Mr. CLEMENT. Thank you.

    Mr. KAHN. What I had in mind was that in the case of the airlines and trucking, we didn't conceive that there were essential facilities, bottleneck facilities, to which competitors had to have access under regulated terms to make sure the competition was possible. We were not entirely right, because it turned out the computerized reservation systems were something like an essential facility. And it is interesting that in that case, the Department of Transportation moved to see to it that all competitors had equal access to getting their listings on those computerized reservation systems. But apart from that, we didn't see the glaring instances of need for continued regulation.
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    In the case of electric, you cannot have competition among generators unless you can assure that all generators have equal access at regulated rates to the transmission facilities, which are a natural monopoly, and to the local distribution lines. And in the same way of the telephone industry, you cannot have competition in long distance unless all long distance companies can get to people, the 120 million telephones where people receive calls and place calls.

    So there again there is a bottleneck facility, and it is in that respect that it appears the railroad industry is more like them. And that is because while there is no question that there is a lot of competition protecting a lot of people and, therefore, passing the Staggers Act was a good thing, my understanding is that shippers of bulk commodities, many of grain and of coal, have only a single railroad to serve them for either part or all of the transportation trip. And, therefore, you can't have effective competition unless you have some sort of enforced access of all possible sources of traffic to those bottleneck facilities. And that is where the crux of my recommendation is.

    Mr. CLEMENT. This is to the entire panel. I know with all these submergers, acquisitions, changes that we have seen, and whether it be trucking, airline, telecommunications, gas, electric, railroad, whatever, do any of you see any movement at all or see any reason that we should move toward reregulation, or are all of you pleased with deregulation as we have it now?

    Mr. RENNICKE. I think that regulation, I would say—and we had it mild in the U.S. compared to other countries—has been a very destructive thing to railroads. And, in fact, if you look at the trends in the world, as fast as they can do it most countries are undoing their regulations.
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    I think the system has worked well. I think you have a vibrant railroad system. And I think if you look at any other industry in the U.S. or anywhere in the world, you will find out how they have been able to shoulder the kind of cost increases that the railroads have and yet not pass those costs through, even 50 percent of those costs through in that kind of inflation to customers. I don't think you are going to find that situation.

    So I think we have a very vibrant competitive industry and I think the regulatory structure is attracting investment and for the most part is working well.

    Mr. HATCH. I think even the threat of regulation would hurt the industry. I think what has happened since then has severely damaged the industry in terms of investors, and I think regulation would kill it in their eyes.

    In terms of competition, the U.S. highway system provides extremely effective competition. In fact, most of the years, the roads have lost in that competition.

    Mr. KAHN. May I try briefly? I think nobody wants to see reregulation either. Nobody responsible. But it is important to understand the difference between applying the antitrust laws, policies, intended to preserve competition, and regulation. In fact, philosophically, they are the opposite.

    When you regulate an industry, you are not relying on competition, you are relying on regulation to protect the public. When you deregulate you do so responsibly only if you believe that competition will be sufficient to protect the public.
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    Now, by an interesting coincidence, I am testifying before a subcommittee of the Senate Commerce Committee on problems in the airlines. There is a growing movement to reregulate the airlines. I oppose that strenuously. But I think one important reason why the movement is growing is that we have failed to apply antitrust-like policies. And that is why I can answer you that, yes, I feel strongly we not think about reregulating the railroad industry, but we must look carefully at antitrust-like policies to make sure they don't tie, for example, their control of the bottleneck facilities to the control over competitive services.

    So, yes, I do see the need for regulation in the sense of assuring people access to the bottleneck facilities, just as they do in telecommunication, just as they do in the computerized reservation system.

    Mr. CLEMENT. My last question, and I will say this quickly, I know the comment was made a while ago that railroads may be running out of opportunities for the future because of everything that has already happened. But isn't this what the problem was years ago? The railroad industry years ago thought they were in the railroad business rather than the transportation industry, and that is why they got themselves in so much trouble. Maybe the railroads ought to realize they are in the transportation business and not just in the railroad business.

    Mr. HATCH. It is critical they change to become service companies. That is what my point was about. I think they have every incentive to do so, but you are right, they don't run trains. They are increasingly thinking that way, but it is an evolutionary process.
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    Mr. WYSS. I would add I think the railroads are beginning to think that way. They are thinking in terms of being hired to move goods from point A to point B, not to set up a set of tracks from point A to point B. That is why you are seeing an enormous increase in intermodal and much more cooperation with port facilities.

    I think that has to continue to be encouraged, because they do have competitors. Their competitors aren't just the other railroads, their competitors are water transport and truck transport, and they have to think in terms of moving goods, not running iron.

    Mr. CLEMENT. Thank you.

    Mr. FRANKS. Thank you. Mr. Fox.

    Mr. FOX. Thank you, Mr. Chairman. Mr. Month, at the conclusion of your statement you mentioned that changes in the nature and scope of economic regulation of railroads could seriously impact the railroads' financial health and their ability to attract capital.

    Does this mean legislation that would limit the ability of the railroads to earn as high a return as possible would ultimately be harmful to the railroads and their customers?

    Mr. MONTH. I am not sure I am completely following the question. I believe that reregulation would not be a good thing, I mean if that is sort of where you are heading to, because I believe—as Mr. Hatch indicates as well—that from a financial market perspective a reregulation, unless it is some kind of ridiculous construct, ultimately is—I don't know if I would say it is the immediate demise of the industry—but it will significantly create uncertainty among investors, and that uncertainty is going to result in higher costs of capital to the railroad industry if limited, if not completely limited access.
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    Mr. FOX. Thank you. Mr. Rennicke, the question I would ask you, if I could: Isn't it true, absent the mergers we have been having, that the railroads would have to maintain an adequate inflow of capital for its infrastructure?

    Mr. RENNICKE. Yes; I think that the whole family of activities that the railroads have performed, which is put under a banner of consolidation, of sharing loans, of pooling locomotives, et cetera, if they had not engaged in those kinds of transactions as well as mergers, it is clear they would have run out of steam in terms of this reservoir of productivity opportunities 10 years ago.

    And Mr. Month's comment earlier about the transcontinental having very few productivity opportunities left I agree with, and that means that if they are going to make the next step they will have to go back to the capital markets and look for more capital activities.

    Mr. FRANKS. Mr. Nadler.

    Mr. NADLER. I regret that I have been unable, because of another commitment, to be at this hearing until just now, so I didn't hear and have not had an opportunity to read the testimony of any of the panelists. I notice one of the panelists, Mr. Hatch, is a constituent of mine, so I particularly wanted to hear his testimony. He was kind enough to put his address on his testimony, so I noticed that.

    Let me ask one general question, because I will be reading all this testimony, and if the question is not relevant to the panel, I apologize, and you can say that.
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    I will ask this of anybody: Does any of the testimony that you offered have any particular application to the consideration of a Conrail merger; not really a merger, but what is currently going on? And in particular, we had one concern in the New York area, and let me ask you if you have a comment about this. The final systems plan of Conrail, approved 20-odd, 25 years ago, did not provide for appreciable service east of the Hudson River below Massachusetts, so that we have had virtually no rail service in Rhode Island, Connecticut, New York.

    The current merger plan provides no change, in that there is very limited line coming down the Hudson. Basically no competition. The plan is that CSX and Norfolk Southern would compete northeast but not east of the Hudson River below the Worcester area.

    Do you think that it is appropriate—and if it isn't, should we change the law to make it appropriate—for the Surface Transportation Board to be able to make a judgment and say it is practical and, therefore—unless it isn't, but assuming it is—for them to say it is practical for us to order a change in the plan so as to provide for competitive rail service, not just to continue but to be created where there is none?

    In other words, this whole area of the country has not been offered rail service. We have this merger. We will use this merger as an opportunity to order a change in the plan to give competition to a region where there is no present competition. Do you consider that beyond the current authority of the STB? And, if so, do you think we should change the law to make it within the authority of the STB?

    Mr. Kahn first, and then everybody else.
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    Mr. KAHN. May I try?

    Mr. NADLER. Please.

    Mr. KAHN. I think that if you are contemplating having some government agency determine that there is an unfulfilled need for service and then have the authority somehow to order it being provided, I think I might find myself in agreement with these other gentlemen at the table.

    Mr. NADLER. I haven't heard what they said.

    Mr. KAHN. It is a question, first of all, whether that is consistent with relying on the market and whether it doesn't contemplate something which the government actually, in effect, assumes a managerial role and tries to command capital to go where it is apparently unwilling to go. That is one possible interpretation of what you are saying.

    But, secondly, if there is a possibility of competitive access to tracks and that access is being denied by the company that controls those tracks, then I think that it is practical for the government, under the competitive antitrust policy, to say that is a bottleneck facility.

    Mr. NADLER. I need to be more specific in my question. Conrail is being dissolved and its assets are being purchased, roughly 50 percent by CSX and roughly 50 percent by Norfolk Southern. The plan which has been advanced provides east of the Hudson River you will only have CSX.
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    Is it within the authority of the STB—and if it isn't, should it be—to say we don't agree with the plan you have put before us because that will permit only monopoly service in a whole region of the country; we demand, as a condition of approval of this merger, that you change the plan so that both railroads go to this region and not only one railroad?

    Mr. KAHN. I am with you. That is the kind of thing that I think is necessary as a condition for approving mergers.

    Mr. NADLER. Even if it is a monopoly now.

    Mr. KAHN. It is apparently part of the agreement that is called the shared assets provision, which decrees large portions of their territories. Both carriers will have equal access to facilities in order to serve particular parts of the public.

    What you have now described seems to me perfectly within the compass and the spirit of the antitrust laws as a condition for merger, making sure that you have the maximum opportunity for competition. And I must have misunderstood you when I interpreted that as saying the government should decree that service be provided.

    Mr. NADLER. No, no. Some people have interpreted the authority of the STB to say it is a condition of a merger; we, the STB, can order a change in the plan so as not to eliminate competition where it now exists, but that the STB does not have authority to order a change in the plan so as to create competition where it now doesn't exist. And that is my real question. Does it have that authority and, if it doesn't, should it?
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    Mr. KAHN. I am not going to answer the legal question.

    Mr. NADLER. But should it, if it doesn't?

    Mr. KAHN. Although I did play the Lord Chancellor in Iolan the once. But I think it should, yes, as a condition for a merger establish some conditions as opening the opportunity for competition. That I think is perfectly acceptable.

    Mr. NADLER. Does anybody else want to comment on that?

    Mr. HATCH. Yeah. I think in the past the STB has responded to applications to modify the merger from outside parties. I believe it did successfully to some degree, or allowed the applications in the case of the Texas-Mexican Railway and the Union Pacific merger. It denied others, such as Conrail's attempt.

    So I am not a lawyer either, and I am not sure if I am comfortable with the government jumping in there, but the market might be able to provide that. There are applications from New York, the Troy line, whose name I can't recall now—that I am sure you know—for the Connecticut shortlines or the Providence or Worcester.

    Mr. NADLER. Or the local government?

    Mr. HATCH. Or the local government, who is also allowed. And I believe right now they have the ability to act favorably or not on those kinds of applications to modify. That is why people come in—for or against a merger on the way in.
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    Mr. NADLER. And if they don't have that authority, they should?

    Mr. HATCH. Well I am not sure they impose it if nobody objects.

    Mr. NADLER. No, no; if somebody asks they should have the ability to order that as a remedy if they don't have that ability now.

    Mr. HATCH. I will be honest, I will have to study that.

    Mr. NADLER. Certainly if nobody asks.

    Mr. HATCH. Right. If nobody is directly harmed. If there is no rail service or no intentional rail service carrier that requests it, I am not sure that they should. But that is off the top of my head.

    Mr. WYSS. Maybe an analogy could be drawn with the past bank mergers, because in bank mergers many times the Federal Government is required to sell various branches as part of the condition of the merger. And that has been done, I believe, on occasion, even when it was not branches that were directly affected by the merger. Perhaps there is a way of writing an analogous type of authority for the STB.

    Mr. NADLER. Thank you. Thank you, Mr. Chairman.
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    Mr. FRANKS. Thank you. Mr. Bachus.

    Mr. BACHUS. Thank you. I am going to submit a question to the panel, if I could. They will be written questions, and if you could all respond to them later.

    And basically there are two ideas. First, if Congress were to enact legislation that reduced huge rail revenues, would that ultimately mean less capital available for rail infrastructure investment; and, if so, what implication would that have on the railroad industry, on shippers, and the economy as a whole?

    And I would also like to submit two or three questions to you on the viability of shortlines and whether or not there is a need for public investment in their infrastructure.

    Thank you, Mr. Chairman.

    Mr. FRANKS. This is an appropriate time. I think there has to be unanimous consent that the hearing record be allowed open for 30 days for members to submit questions and for receiving written answers in the record. So, without objection, we will do that.

    We will also ask unanimous consent that the opening statement of Mr. Shuster, the Chairman of the Transportation Infrastructure Committee, be included in the hearing record at the appropriate point. Without objection, that is so ordered.
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    [Mr. Shuster's prepared statement follows:]

    [Insert here.]

    Mr. FRANKS. Let me thank this panel. It has been extraordinarily helpful individually as well as collectively and has helped us to establish a sound factual basis for the work of this subcommittee. Thank you very much. Excellent.

    Panel two, please, will come forward. While they are finding their seats, let me thank and introduce Mr. William Loftus, the President of the American Shortline and Regional Railroad Association, who has joined us on panel two, as well as Ms. Karen Phillips, Senior Vice President, Policy, Legislation and Communications Department, the Association of American Railroads.


    Mr. FRANKS. We thank you very much for your attendance, and Ms. Phillips, would you like to begin?

    Mr. BACHUS. Mr. Chairman, one thing I might note is Mr. Loftus has announced his retirement, which I think is greeted with sadness by all of us on this committee. Very knowledgeable industry representative, and I, for one, am going to miss him.
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    I am hoping it is not true. I am hoping he will reconsider. I think the railroads, the shortline industry, the regional industry, and we will lose a friend on the Hill if he retires from the Association and doesn't go on. Bill, we will miss you.

    Mr. LOFTUS. Thank you, Mr. Bachus. At the end of the year. And it is a long year to go yet. Thank you, though.

    Mr. FRANKS. Ms. Phillips.

    Ms. PHILLIPS. Thank you, Mr. Chairman and members of the subcommittee. The Association of American Railroads appreciates this opportunity to present its members' comments on the financial and physical condition of the railroad industry. I would ask that my full written statement be included in the record as AAR's submission.

    Railroad service is coming under intense scrutiny recently as a result of serious service problems in parts of the West. We regret these problems deeply and are committed to working with our customers to resolve them. These problems cannot be solved unless the industry continues to invest enormous sums of capital in both infrastructure and equipment.

    Railroads are extraordinarily capital intensive. Railroads require almost $2 in net investment to produce $1 in revenue. This is three times as high as the average Fortune 500 company and four times as high for our most vigorous competitor, the trucking industry.

    New locomotives, for example, cost upwards of $2 million each, and Class I railroads own almost 20,000 locomotives. Between 1990 and 1996, Class I railroads purchased almost 4,400 new locomotives, a 71-percent increase over the previous 7-year period. This investment in modernization has reduced the average age of the locomotive fleet from 13.9 years to 10.6 years.
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    Track improvements, which are essential for relieving congestion and handling more traffic, also are expensive. For example, adding double track to a single-track line can cost upwards of $1 million a mile. But railroads have done that. They have installed heavier rail beds with higher grade steel. They have improved and upgraded maintenance techniques. And between 1990 and 1996, Class I railroads installed 2.9 million tons of new rail and more than 94 million new cross ties. In fact, just since 1990, Class I railroads have invested more than $100 billion to maintain and improve tracks, terminals, signaling and communication systems, locomotives, and freight cars.

    Before they were partially deregulated in 1980, railroads were headed toward oblivion. At the heart of the railroad problem was the regulatory system that subjected virtually all rail services to Federal price controls and prohibited the most efficient use of railroads, track, and equipment. The change in the railroad industry has been remarkable since that time.

    Track and equipment have been upgraded and maintained to higher standards than ever before. Train accident rates have declined by 70 percent since 1980. Loss and damage claims have declined by 65 percent. Productivity of track and equipment more than doubled between 1981 and 1996, and labor productivity has more than tripled.

    Most of these productivity gains have been passed on to shippers in the form of lower rates. Between 1981 and 1996, average revenue per-ton mile has declined 56 percent on an inflation-adjusted basis and 26 percent on a current basis. These lower rates were spread across every major commodity group moving by rail.
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    While rail customers have reaped most of the benefits from those productivity gains through lower rates and better service, railroads have been able to retain enough to sharply improve earnings. Those improved earnings have in turn been invested in improving the industry's infrastructure. But those earnings remain below the industry's cost to capital, which is the standard used by economists in judging the long-term viability of an industry and used by the Surface Transportation Board in judging railroad revenue adequacy.

    Reasonable people can disagree whether that is, indeed, the appropriate standard, and the STB last week in fact instituted a proceeding to determine just that. But the fact is that no matter what standard is used, return on investment, return on equity, dividends, or price earnings ratios, railroads lag behind other industries, including most of the railroad industry's customers.

    While profitability of this industry has risen since 1980, those improved earnings have not been adequate to finance totally the industry's tremendous capital needs. Railroads must routinely have access to capital markets for additional funds. Every year since 1980, railroads have found it necessary to obtain funds from outside sources. Railroads have had to tap those sources for 40 percent of their capital funds since 1980, or more than $25 billion out of $65.5 billion in total capital expenditures.

    Reregulation of railroads would close the very capital markets to which railroads must have access if they are to continue building for the future and resolve current service problems. Reregulation would be a policy mistake of enormous proportions.

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    Thank you again for the opportunity to testify on this important matter, and I would be happy at the appropriate time to answer any questions you might have.

    Thank you. Mr. Loftus, welcome.

    Mr. LOFTUS. Mr. Chairman, I am glad to report today that the financial condition of the Shortline and Regional Railroads is relatively good. The smaller railroads benefit, of course, from the present good state of the overall economy and the improving financial health of the rail industry as a whole, reflecting, I suppose, the old adage that a rising tide lifts all ships.

    This is particularly gratifying to persons such as myself who remember the dire financial straits the railroad industry found itself in two decades ago when more than a quarter of this Nation's rail mileage was owned by companies operating under the protection of bankruptcy courts and the rest of the railroads were on shaky financial footing.

    Today, as others have reported at this hearing, the industry has turned around dramatically. Part of the story was a significant amount of restructuring within the industry. The large Class I railroads pared down their systems to core main-line, high-speed, high-traffic density lanes and spun off thousands of miles of light-density branch lines at the fringes of their systems to new operators. Literally hundreds of new shortline and regional railroads were formed in the process.

    These new small businesses, with entrepreneurial management, a favorable cost structure, and efficient operating practices were able to thrive in almost all cases, retaining service and building back rail business. These new shortline and regional operators have generally been able to avoid significant problems. Bankruptcy or business failures have been very minimal.
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    Although the small railroad portion of the industry is healthy today, there are several significant areas of concern which I would like to highlight. Small railroads need significant investment in maintenance and capital improvement of their physical plant and equipment. Many of these lines face an uphill struggle due to deferred maintenance of the former Class I owner. This infrastructure investment is critical for continued success, yet finding the dollars to do long-term projects is a major challenge. The trend towards heavier loads, such as 286,000-pound freight cars, necessitates track and bridge upgrades. Shortlines also face an uphill struggle to acquire new and/or used cars under the current industry car compensation system.

    At the same time, smaller railroads have significant problems in getting all the funds they need from the capital markets. Through your help, this subcommittee, and Mr. Shuster in the full committee, we have been able to achieve in the House bill, H.R. 2400, several provisions which could be very helpful to the small railroads. The CMAQ provisions of ISTEA are retained in the reauthorization bill. These funds have been used in several instances to improve small railroad intermodal infrastructure in air quality nonattainment areas.

    In addition, the House bill contains a light-density rail line pilot project program, authorized at the $25 million per year level, and an updated section 511 loan guarantee program authorized at the $5 billion level. This will indeed help small railroads in both car acquisitions and infrastructure improvements.

    In addition to these small, focused programs of State and Federal grant and loan assistance for small railroad infrastructure needs, the other vital element to ensure future success will be to grow the small railroads' piece of the industry's revenue pie. Our share has stood at 9 percent a year; about $3 billion a year. As the industry total grows, so does ours, but our percentage share remains stuck at 9. This is because as the small railroad revenue share stays the same, the small railroad percentage of track owned and operated has continued to grow. My conclusion is that the small railroad share has been getting steadily squeezed, even though our infrastructure maintenance and improvement needs have been steadily growing.
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    A brief word about service. In regard to service, the small railroads share the concerns of all shippers over current rail industry service problems. At the local level, small railroads are service oriented, and on a person-to-person first-name basis with most of their customers. Small railroads are constantly working with the major Class I carriers on improving interchange, car utilization, safe and timely movement of goods in order to better provide service for shippers. In my view, small railroads can and should play a larger role in providing local pickup and delivery and terminal operation functions and in maximizing the competitive options that are available to rail shippers.

    These issues must be worked out by the industry. Indeed, I can report that talks are underway at the highest levels between the Class I's and the small railroads. Competitive options, fair ratemaking treatment, and car supply issues are all on the agenda, and I am hopeful that meaningful results will be forthcoming soon.

    I do want to emphasize, however, that more legislation is not the answer. The heavy hand of government economic regulation nearly crushed the rail industry. Its health today reflects reforms of the Staggers Act. Going back to the heavy hand of regulation is not the answer. There are issues which must be resolved in order to create a climate in which small railroads can thrive, and I think it is in our industry's best interest to create that climate within the industry, and I am optimistic that the industry can do so.

    Thank you.

    Mr. FRANKS. Thank you.
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    Ms. Phillips, on pages 22 through 25 of your testimony you have charts which demonstrate an impressive gain in productivity made by the railroads between 1981 and 1986. But having achieved such dramatic increases in productivity, I am wondering if there are still opportunities for lowering costs and specifically what areas are railroads looking to to try to secure lowering costs?

    Ms. PHILLIPS. We are always looking to try to keep costs as low as possible. Some of the consolidations—indeed since 1980 I think there have been close to 30 different mergers and consolidations—have been with the goal of trying to get lower costs through single line service, through more efficient service.

    One of the things that we are trying to do to keep our costs low is to provide more efficient service through the various types of capital investment that this industry must undertake. We are hopeful that as we get more locomotives and continue to lower the age of the fleet, purchase more freight cars, lay better track, and overall continue the infrastructure investments that this industry is making, that we will continue to be able to keep our costs as low as possible.

    Mr. FRANKS. A number of shippers in the West have complained that service problems in that area of the country are as a result, at least in part, of inadequate capacity.

    As you note in your testimony, the large productivity gains in the past 15 years have produced lower rates for shippers. I am wondering now if the industry is in a position where if it has to increase capacity and therefore perhaps reduce current productivity levels, can we expect to see a commensurate increase in rates?
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    Ms. PHILLIPS. Since I don't run a railroad myself, it would be difficult for me to talk specifically about how they would want to do their pricing, but certainly it is in our best interest to keep prices as low as we possibly can for our customers. In many cases our customers can go to trucks or barges. It is clearly in the railroads' best interests to try to price our services in a way that we can continue to carry that freight. We need to continue to generate the revenues and have the volume of freight in turn to be able to the make the capital investments that are necessary. So keeping our customers and keeping the rates as attractive as possible for our customers is a key factor for us. It would certainly be one of the primary goals of the railroads to try to keep the rates as low as we possibly can while still making all of these needed investments.

    Mr. FRANKS. Thank you. Mr. Lipinski.

    Mr. LIPINSKI. Thank you very much, Mr. Chairman. I don't have any questions for Karen or Bill. It is a pleasure to listen to them. Normally I listen to them under different circumstances than here in Washington. I have no questions, and I look forward to the next time I listen to them at a slightly more exotic location.

    Mr. FRANKS. Mr. Bachus.

    Mr. BACHUS. Mr. Chairman, I would just like to stress something that Mr. Loftus said in his testimony and that is that there are two provisions which will very much help the short line railroads. One is the light density rail line pilot project program, and the other is the updated section 511 loan guarantee program, and Mr. Nadler and Mr. Lipinski and I join with several others in urging the Senate to adopt the House version and we would—I am sure the panel is going to support that request, and I just hope that we can be successful in getting that through.
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    As Mr. Loftus has said, these two provisions of the House bill are vital for the continued viability of small railroads. Many of them built Class I railroads which were abandoned by them 30, 40 and 50 years ago or given over to the short lines and many of them have not had a lot of maintenance or capital improvements in years. They are reaching toward the end of their depreciation cycle and—

    Mr. LOFTUS. I thank you for the leadership role that the committee took, particularly Mr. Bachus and Mr. Clement, in acquainting the full committee and the Congress with the needs and value of small railroads, and the fact that for us to stay as productive in the industry as we must, we do need to improve—both our track infrastructure and our bridges to handle the heavier loads that are going to be a major part of our industry, particularly in all bulk commodity business, and we do appreciate it and we hope the conference goes well.

    Mr. BACHUS. I hope another chairman will be a vocal supporter of these two provisions.

    Mr. FRANKS. Mr. Nadler.

    Mr. NADLER. Thank you, Mr. Chairman.

    I too join in saying—in agreeing that these supervisions are vital and I know that they will be retained in conference.

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    Let me ask you, Mr. Loftus, you say in your testimony that CMAQ provisions of ISTEA are retained in the reauthorization bill for the railroads.

    It was my impression that CMAQ was somewhat narrowed with respect to the railroads and before the committee mark came up I had expressed myself to the staff of the committee chairman that we shouldn't narrow it with respect to Arizona in any way, but can you comment on the narrowing and how damaging or not damaging that is?

    Mr. LOFTUS. What we were trying to do in the development of the bill was to expand it, to really clarify the fact that railroad projects, small or large, are a very valuable aspect of CMAQ and congestion mitigation attainment and also the States had to be somewhat clever to use CMAQ funds to achieve what they had to do. So our discussion with the committee and the staff was to expand it and clarify it. I think the end result was let's not do anything, let's keep it where it is, but as far as we are concerned, CMAQ is still there for the States to use for attainment of their environmental—

    Mr. NADLER. It wasn't narrowed in any way?

    Mr. LOFTUS. It wasn't. It did not expand the clarification that we hoped for, but we still feel that we can argue for railroad projects that fit the CMAQ requirement.

    Mr. NADLER. Thank you.

    Second, I would like to ask Ms. Phillips, you state in your testimony on page 13, ''As detailed in Fig. 2, the Class I railroads have been ridding themselves of duplicative and unproductive roadway.'' Then you say that ''Marginal lines have been sold to regional and local railroad operators, while uneconomic routes have been abandoned.''
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    Some of us, at least in the Northeast, think that there has been too much route abandonment, too much tearing up of tracks and that we are going to have a lot of problems, and in fact after the Conrail merger is completed, both CSX and Norfolk Southern are going to find that in terms of the great expansion of the market which is possible and necessary, they are going to have real capacity constraints as a result of abandonments in places like New Jersey and Pennsylvania and Maryland.

    Do you think that Conrail, for example, or any others have overabandoned track that we are going to have to replace at great cost, if it is still replaceable?

    Ms. PHILLIPS. My understanding of the various railroad abandonments is that these are not actions taken lightly. One of the things that the railroads try to do first is to see if there is an opportunity to form some sort of short line or regional railroad; if not, the railroads would abandon track where it is economically not viable anymore to provide that service.

    So I could in no way suggest that anyone has ever overabandoned because I think in each of these cases they have been economically rational decisions which have been made. I would add in each case that these abandonments are taken to the ICC and now to the STB for them to rule on and there are opportunities for all of the various parties to comment. The ICC and now STB take a look at all of those factors in determining whether it is appropriate for a carrier to abandon that particular line of track. So there are a lot of safeguards in place for the regulatory process and have been for a number of years.

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    Mr. NADLER. In the Northeast I would strenuously disagree with you, but that is interesting.

    Thank you, Mr. Chairman.

    Mr. FRANKS. Thank you both to Ms. Phillips and Mr. Loftus. Let me thank you for appearing today. We have lost some of our Members or there would have undoubtedly been more questions. I thank you very much for your testimony.

    If the third panel would come forward.

    While they are finding their way to their respective seats, we have Mr. Thomas Crowley, President, L.E. Peabody & Associates, on behalf of the Western Coal Traffic League; Mr. Mark Levine, President, United DC, Inc., on behalf of the Society of Plastics Industry, Inc. We have with us Mr. Ed Rastatter who is the Director of Policy for Rail and Motor National Industrial Transportation League; and finally Mr. Eric Robinson, Director of Distribution Chemical Products, FMC Corporation on behalf of the Chemical Manufacturers Association.

    I want to thank our panelists for their attendance today and look forward to their testimony.

    Mr. Crowley, would you like to continue?

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    Mr. CROWLEY. Welcome, Mr. Chairman and members of the subcommittee.

    I am here today on behalf of the Western Coal Traffic League, who I will refer to as WCTL. WCTL is an association comprised of electric utilities which purchase and pay for the transportation of coal mined west of the Mississippi River. WCTL members currently ship in excess of 95 million tons of western origin coal yearly at delivered coal costs of approximately $2 billion annually. I have been asked by WCTL to provide this subcommittee with my views on the condition of the railroad industry. As this is a broad subject, I will address a few selected topics.

    Since 1980, when the Staggers Act was passed, the Interstate Commerce Commission and its successor the Surface Transportation Board have approved numerous rail mergers and other forms of rail acquisitions.

    As a consequence of these mergers rail industry concentration is at an all time high. For example, transportation of coal in the West is a virtual duopoly, with BNSF and UP controlling almost 100 percent of coal originated in the western United States.

    Eastern rail transportation is also far more concentrated today than it was in 1980. Indeed, if pending mergers are approved by the STB, rail transportation in the United States will be dominated by four mega carriers: BNSF, the UP, Norfolk Southern and CSX.

    The rail industry has benefitted tremendously from the post-Staggers Act mega mergers and the industry's aggressive use of pricing and service freedoms accorded to it under the Staggers Act.
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    Using the BN as an example, BNSF's return on investment has increased 52 percent between 1980 and today. Its net operating income has increased, return on equity has increased 23 percent, while debt as a percentage of capital has declined 64 percent over the same time period.

    All of these indicators show the financial strength of BN. Similar results were realized by UP, NS and CSX during this time period.

    The railroad industry has maintained that despite increases in concentration, average industry revenue per ton-mile have decreased since the Staggers Act became law in 1980, so rail shippers should have no concerns about the current concentrated state of the rail industry. The railroad's argument is misleading and so is their ton-mile measure.

    To the extent western coal shippers have retained rate reductions, they have been the result of actions vigorously opposed by the rail industry or by individual members thereof, including the opening of the Southern Powder River Basin, Wyoming coal fields to two-carrier service, the development and application of the ICC/STB coal rate guidelines and the construction or threats to construct second carrier access lines at captive utility generating stations.

    The difference in pricing levels between coal shippers with and without competition is dramatic. For example, for shorter movements, movements under 600 miles, western captive coal shippers pay rates that are almost three times higher than rates on competitive movements.
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    As this subcommittee is undoubtedly aware, many rail shippers, including WCTL, support increased rail competition. The rail industry has attacked proposals put forward by WCTL and others to increase competition. The railroads argue that increasing competition will destroy the gains made by the industry after the Staggers Act, prevent the industry from having sufficient revenues to invest in the rail infrastructure and ultimately bankrupt the industry.

    I disagree. Increasing competition will not kill the rail industry. My actual experience in the coal transportation marketplace confirms that competition will not bankrupt the rail industry. BNSF and UP compete on some coal movements originating in mines in the Powder River Basin of Wyoming.

    I have seldom seen rates for this competitive traffic fall below 160 percent of the carriers' variable cost. Rates that exceed cost by 60 percentage points reap large returns for the involved carriers, earning them substantial monies to invest in infrastructure and to pay a competitive return to their shareholders.

    In summary, increased competition will not bankrupt the railroad industry. It will simply make railroads compete rather than allowing them to continue to exploit captive shippers.

    On behalf of WCTL, I thank the subcommittee for the opportunity to participate in this important hearing.

    Thank you, Mr. Crowley.
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    Mr. Levine.

    Mr. LEVINE. Good afternoon, Chairman Franks and members of the subcommittee.

    I am Marc Levine, President of United DC, a warehouse, packaging and distribution center for the plastics industry located in Houston. I am proud to be the third generation of my family who has made their livelihood from the plastics industry.

    United DC, which began operations in 1981, employs 150 people at its three facilities in the greater Houston area, and we have annual revenues of approximately $15 million. United DC is also a member of the Society of the Plastics Industry, the national trade association for this industry. I sit before you today on behalf of SPI. We very much appreciate the opportunity to address the members of the subcommittee regarding the topic of today's hearing, reauthorization of the Surface Transportation Board and examination of the state of the railroad industry.

    In representing the plastics industry, I speak on behalf of a $275 billion per year industry that employs over 1.3 million people nationwide. It is an industry that collectively pays over $1 billion per year to the railroads for transportation of its raw materials. Few industries in this nation are more dependent and few are more profoundly affected when the railroads are not operating at an acceptable level, and they are not.

    In fact, for the last eight months the plastics industry has been experiencing what Union Pacific Railroad has labeled the worst rail crisis of the 20th century. This statement alone should be sufficient to use today's hearings as an opportunity to begin seeking answers to some tough questions, principally how and why was this crisis allowed to happen.
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    And this question speaks to a more fundamental concern, why was the UPSP merger approved in the first place. As you may recall, SPI testified that the merger was ill-conceived. We were convinced that competition would suffer, leading to a decline in service, transit inefficiencies, labor and safety problems, and the list goes on.

    Unfortunately, the STB did approve the merger and we have seen many of our fears realized. If the Surface Transportation Board is going to continue its role of being the only agency that has issue jurisdiction over the powerful railroad industry, the members of the board must be highly knowledgeable and very familiar with all aspects of the shipper-carrier relationship. Just as the American justice system allows citizens to be judged by a jury of our peers, so too the STB should be comprised of individuals who represent a true cross-section such that all parties are represented equally and fairly.

    Lastly, I question why railroads need to operate in a monopolistic system at all. The railroads are financially sound, as was voiced here earlier this morning by the first panel. Wall Street clearly sees them as a safe financial risk. Loans amounting to billions of dollars have been given to the railroads, even to those reporting recent quarterly losses. The railroads should not be the only industry in this country allowed to conduct business protected from the forces of competition.

    Congress is now faced with a landmark opportunity. In reauthorizing the STB, you can ensure that shippers will have competitive options and that competition will be infused into the rail industry, allowing the railroads to compete in the same market as every other industry in this country.
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    Therefore, the existing regulatory system must be changed legislatively to ensure that the STB will have the authority to promote competition. This is where we need your help. In so doing, you can begin to give back hope to shippers who now have collectively suffered up to $2 billion in damages from the rail service meltdown. At the same time you can reinforce the American standard that free enterprise is the fabric of our great democracy.

    It is all too clear that we must set aside parochial interests and forge ahead with the help of Congress. Senator John Rockefeller has joined with others to introduce the Shipper Protection Act. This bill, which SPI supports, addresses issues which could begin to introduce competition into the U.S. rail system. SPI also supports the Shipper Bill of Rights from the Alliance for Rail Competition, and we support our own principles of competition. We believe these documents, which we will be happy to provide to the subcommittee, lay the groundwork for a successful resolution.

    In summary, the shipper community needs relief and we need leadership from the U.S. Congress. The message is clear. Continuation of the status quo is unacceptable. We must infuse competition into the rail industry. Competition should be fostered and not feared. We must act now. The plastics industry asks your help, Mr. Chairman, to ensure that the STB protect the shipping industry from growing rail market dominance and restore confidence between shippers and the railroad by promoting a competitive rail environment.

    All that we ask is the railroads be governed by the same set of rules by which all other U.S. industries abide. Mr. Chairman, I cannot emphasize that all we ask is that the railroads are governed by the same set of rules by which all other U.S. industries abide.
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    Thank you again for this opportunity to address the committee, and if you have any questions I will be happy to respond.

    Thank you.

    Mr. Robinson.

    Mr. ROBINSON. Good afternoon, Mr. Chairman and members of the committee. My name is Eric Robinson, and I am the Director of Distribution for FMC Corporation. I am here representing the Chemical Manufacturers Association and would like to summarize our written statement submitted on behalf of CMA.

    The U.S. chemical industry is highly dependent on railroads for the safe and efficient transportation of our products. In 1996, our industry paid over $4.6 billion in rail freight charges. Without a reliable rail transportation system, many raw materials would not reach manufacturing plants and many of our products would not be shipped to customers, including our export customers.

    Mr. Chairman, it is time for Congress to seriously review and clarify the statutory authority of the STB in order to expand and promote rail competition. The severe rail service problems of the last year, exacerbated by the continued dependence of many shippers on a single rail service provider, cry out for this review.

    We are not recommending additional regulation of the rail industry. What we are asking is that the processes currently in place be more responsive to shippers. As an example, FMC's own experience in bringing a case to the Surface Transportation Board illustrates how difficult it is for captive shippers to seek remedies. Under the STB's own published guidelines, FMC expected to have a decision within 16 months of filing our case. Our proceeding has been delayed and discovery, which was scheduled to close as of January 14, is still ongoing. As a result, our projected legal and administrative costs will rival what is required for litigating a complex antitrust case and it could take as long as 3 years to prepare, argue and obtain a decision. Most of the delays thus far have been caused by overreaching discovery demands. This process was properly criticized by the STB in a decision served on April 17 of this year. While we welcome this first step toward creating a more expedited process, we still do not have a firm deadline for discovery to end.
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    The current system affords captive shippers little choice but to accept either noncompetitive rates or challenge them under an arcane and overly complicated system. This is not a reasonable or fair way for captive shippers to seek relief after they have tried to resolve their issues through private negotiations.

    Captive shippers would be better served by access to more cost effective and timely regulatory oversight. To address these issues CMA believes changes in the current rail regulatory system should adhere to the basic principles outlined in the written statement.

    Shippers should be able to choose between independent competitive rail routes from origin to destination. Rail-to-rail competition must be preserved in future mergers. Trackage rights or haulage rights when used as a means of providing competition is not as effective on a cost for service basis as railroad ownership of rail routes. The STB needs to have clearer authority and responsibility to provide competing railroads access to essential rail infrastructure, including terminals, storage and transit facilities, rail yards and the like. Railroads should be subject to the same laws and regulations that apply to mergers and business practices in other industries.

    We support beginning an orderly process to deregulate the rail industry and make the rail industry subject to the same antitrust conditions as other American industries. These principles should guide administrative and legislative changes to the way the STB regulates the rail industry. Today where chemical and other industrial facilities are served by more than one railroad, both shippers and carriers reap the benefits of more competitive businesses. But in too many situations captive shippers must compete in global markets against non-captive competitors.
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    We appreciate this opportunity to appear before you today and thank you for your consideration of our statement.

    Mr. FRANKS. Thank you.

    Mr. Rastatter.

    Mr. RASTATTER. Thank you, Mr. Chairman. I am appearing today on behalf of the National Industrial Transportation League, which has over 600 members, so diverse we represent makers of candy, rice, underwear, automobiles, you name it. Our people carry it by truck, rail, barge, ocean shipping, air, everything.

    Whether or not the financial indicators show that the railroads are in good shape, and I see that we have a lot of confusion as to whether that is true or not today, many of them show that the railroads are in good condition, excellent condition, except the one based on revenue adequacy. As measured by the STB, only about three railroads this last year were adequate.

    Some of these railroads have bounced in and out of revenue adequacy because of investments that they chose to make; for example, mergers with railroads that were earning less than they were. This is like a profitable firm buying a marginal firm for its tax losses.

    Since 1980, the railroads have done a good, imaginative job of searching for more revenues and bigger economies of scale and scope. The mergers helped lower their administrative and operating costs. They also provide a wider geographic scope of operations, which is important to many shippers who want to deal with a carrier who can reach all of their markets. The railroads have also succeeded in effecting large reductions in their labor force; we have heard figures of up to 60 percent reduction.
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    There have also been major spinoffs of light density lines to the short line railroads, which has been a very successful program. This lets the major railroads concentrate on increasing the scope of their operations on their main lines, which is what they do best. They have also succeeded in closing off numerous interchange points with other railroads, including economic closure by increasing their reciprocal switching charges. This helps them increase their length of haul, and also increases their revenues.

    The big question is, have the railroads maxed out in terms of these economies of scale and scope? A big part of the current railroad service problem, at least in the West, appears to be one of stretching their operations level to and beyond the limits of their capacity.

    Another problem may be the due diligence problem in mergers. They haven't done a good job of assessing the proper condition of the assets they were buying. For example, UP is spending large amounts of money and resources to fix the assets that they received from the Southern Pacific. This drains their resources and equipment simply to play catch up and return to normal operations.

    Moreover, there have been a number of exogenous events, for example bad weather, accidents, bridge burnings, changes in inspection methods, which have caused massive tie-ups and congestion. This has required extraordinary solutions, such as embargoing traffic and generally yielding poor service.     The fewer the railroads, and this means two at most for most shippers, the worse the service competition level, whatever happens to rates. And I think the analysis of the STB and the railroads is certainly questionable in showing large decreases in rates since 1980.
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    Since the shippers have so few options, there is nowhere they can turn when service problems occur. I think if you asked Mr. Levine here about the plastics industry. He would tell you that the plastics industry was set up to deal solely with the railroads. If you went to see a plastics plant, you would see that it was set up only to ship by railroad. Those plants were sited in happier times when they had better relationships with the railroads. To shift to truck or barge operations would be an expensive and massive change.

    The single best indicator of the overall condition of the railroads, I think, is the attitude of the shippers towards the railroads. The shippers that the NIT League represents are very unhappy and they want some changes to railroad legislation and regulation. If you refer to my written statement, you will see some of those that we suggest.

    I would just close by asking the question, what other industry can continue to survive and prosper when so many of its customers are unhappy?

    Again, thank you, Mr. Chairman, for inviting us here.

    Mr. FRANKS. Thank you. As I understand your critique of data that is usually described as demonstrating a long-term decline in rail rates since the Staggers Act, you are saying that using average revenue per ton-mile actually masks actual rate levels mainly because of the increasing concentration of the major carriers on long haul, high volume traffic. Let's for a moment assume the validity of your criticism.

    What would be a more authoritative, accurate measure of the actual trend in rail rate levels, especially in light of the fact that two-thirds of U.S. rail traffic now moves under negotiated confidential rates?
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    Mr. RASTATTER. I don't know what the real level of reduction has been or whether in fact there has been a reduction in rates. If you go back to the early 1980s, you will see that the Association of American Railroads actually put out an index of railroad rates. Up through 1986 or 1987 it showed a decrease of about 7 or 8 percent in average rates, at the same time that an index based on revenue per ton-mile fell by 33 percent, about four times as great. I don't know what it is now because those numbers are not published. We don't have access to the actual rates.

    Mr. FRANKS. Mr. Levine, if I may, on page 7 of your statement you acknowledge that some of the railroad's cost savings flow through to the customer. Mr. Rennicke, the first panel, estimated the flow-through at about 80 percent of the total of $25 billion in cost savings achieved in the last 10 years.

    As I understand your complaint, it is that a disproportionate share of those benefits flow to shippers with other transportation alternatives.

    I guess my question is: Isn't that true of the products that you sell as well, that you have to price your product lower or something else will do as a plastic substitute than where plastic is the only suitable material?

    Mr. LEVINE. I am not sure that I understand your question.

    Mr. FRANKS. As I understood it from your written testimony, you were complaining that a disproportionate share of the cost savings passed through to shippers went to those shippers who had other alternatives in transportation?
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    Mr. LEVINE. Okay.

    Mr. FRANKS. I am wondering if those same rules of market, if you will, don't apply to your pricing of your products where other substitutes exist to your products you need to—

    Mr. LEVINE. No. In true competition you have various segments of your market and you must be competitive within each segment in order to stay within that segment.

    If you are a monopoly, you have freedom to do otherwise, so they do that in the railroad industry, but I believe that in a truly competitive system or situation that does not happen because the market simply will not allow it.

    Mr. FRANKS. Okay. Mr. Nadler?

    Mr. NADLER. Thank you, Mr. Chairman.

    Mr. Levine I think and also Mr. Robinson referred to the UP crisis out West.

    Can you explain exactly how in your opinion a rail merger produced that service crisis?

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    Mr. LEVINE. The SP Railroad prior to the merger was very sick, and I liken this to a virus. When my kids or grandkids go to school and somebody has a virus, they are going to spread it throughout. That is what happened here. The UP was basically sound prior to the merger. The SP was not. The UP basically had happy customers. SP did not. When they merged, I don't think that the UP had any choice but to get sick, to have that same virus come into their—

    Mr. NADLER. The virus analogy is very nice, but why did the UP—in other words, the UP now has the same number of locomotives, the same number of tracks, the same amount of mileage as both railroads combined did before the merger. It could presumably have continued the good service on its lines, continued the not so good service on the SP lines and slowly as it could improve that. Why did this create a crisis all over the system where there hadn't been a crisis before? Why did the poor service expand, in other words?

    Mr. LEVINE. I think the UP bit off more than it could chew. It was too much to handle it. It became the largest railroad in the system.

    Mr. NADLER. It didn't have the managerial capability?

    Mr. LEVINE. I wouldn't say that. I think that they did not look forward and do enough due diligence when they were preparing—

    Mr. NADLER. I have been frustrated trying to get the answer to this for months now. Everybody says that they bit off more than they could chew. Fine, but if they had simply continued operations with all of their new employees and all of their new equipment, you would presumably have had the same reasonably good level of service where it already existed and bad level of service where it existed.
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    Why didn't that simply continue or with good management slowly improve the bad service over time? Why did it suddenly make things worse than before the merger if they didn't scrap hundreds of locomotives—or did they? They didn't eliminate a lot of their assets and equipment, so why did a bad situation here and a reasonable situation here suddenly become a very bad situation all over?

    Mr. LEVINE. I think you are not getting a good answer after all of these months because it is a very hard question to answer. The problem has been exacerbated by the concentration in the Houston area, so when you have something that is not particularly a good situation, and you focus and concentrate it in a very small area, everything gets exacerbated. That is the best way that I can answer the question.

    Mr. NADLER. Maybe Mr. Robinson or you can answer this question.

    You both said essentially that you shouldn't have a captive shipper for anyone and that also trackage rights, haulage rights, line ownership determines control over the investment safety and service and operating efficiencies, trackage rights or haulage rights when used as a means of providing competition has not proven to be as effective on a cost of service basis.

    I certainly agree with that second statement. We are currently fighting over that question elsewhere right now.

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    My question, in a lot of places you have a situation where even if you achieved competition in the region of two Class I railroads, such as in the Continental merger, you still—for a lot of shippers you are going to have a monopoly of one short line to create access to the system. What is the impact of that and what would you do about it?

    Mr. ROBINSON. In some extent it is the lesser of two evils. The perfect competition would be for me to do what I do with a truck. I call up several carriers and I select who I want. We work out our service and safety obligations, et cetera, and we turn that into a contract and haul our freight. We don't have that opportunity with railroads. Having a short line pull the freight out of the plant and deliver it to a Class I for the long haul is certainly a better option, in our view, than only having the one option of a single railroad where you have no leverage, no ability to negotiate service, safety, cost.

    Mr. NADLER. Let me ask you one further question. Again in the Continental merger, which I am very involved in which you might suspect, we have a situation where east of the Hudson River there is no Class I railroad providing service basically except for a very extremely limited amount. We have a brand new short line railroad that has the trackage rights for publicly owned railroads for an entire region basically.

    Would you think it best to, if it could be achieved, to give two Class I railroads trackage rights over the same tracks as the short line, or do you think that the short line has—that the short line should control access to those two Class I railroads even if east of the Hudson?

    Mr. ROBINSON. Since I don't have any operations east of the Hudson, I think I might be speaking out of turn to answer, but in principle what we would say is that you want to establish competition. Competition will drive innovation within this industry.
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    We talked—there were folks earlier who talked about railroads being rail haulers to transportation companies. Well, competition is the type of thing that will drive that difference, and to the extent that east of the Hudson having two Class I's come in and available to a particular area will drive competition—

    Mr. NADLER. One last question, and I thank you. From a public policy perspective, if you have a large publicly owned railroad which is both commuter and freight and the State a couple of years ago privatized the freight operations and gave the short line railroad the freight operations on that public railroad, and now we are trying to get Class I railroads to come into that area and give competition, what do you think of the argument that we should not do that, we should not from a public policy perspective bring Class I railroads into that area because that would violate the contract that the State made with the short line?

    Mr. ROBINSON. I am not an attorney so I don't know what the contractual arrangement was.

    Mr. NADLER. I am asking public policy, never mind the legal.

    Mr. ROBINSON. I don't know that I can answer that.

    Mr. NADLER. Thank you.

    Mr. FRANKS. Mr. Bachus?

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    Mr. BACHUS. Thank you, Mr. Chairman.

    Mr. Robinson, you have advocated letting one rail line run on another rail line; is that right?

    Mr. ROBINSON. I believe in competition, yes, sir, that there ought to be competition.

    Mr. BACHUS. Part of that is you have advocated UP being able to run on BN lines?

    Mr. ROBINSON. In certain instances.

    Mr. BACHUS. You represent the chemical companies?

    Mr. ROBINSON. Yes.

    Mr. BACHUS. Do you advocate one chemical company being able to use another chemical company's factory to produce chemicals if they don't have a factory to produce those chemicals?

    Mr. ROBINSON. No. But as a chemical company all of our assets—

    Mr. BACHUS. What if it would increase competition? What about patents? You all have—your members have patents, right?
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    Mr. ROBINSON. Sure.

    Mr. BACHUS. Doesn't that sort of keep the cost of producing those goods up? What if you didn't have the patents and you let every chemical company use the same patents, that would certainly bring down the cost of the chemicals, wouldn't it?

    Mr. ROBINSON. I don't think that the comparison between intellectual property rights and railroad monopoly really applies here.

    Mr. BACHUS. I would think that Pfizer—they have a monopoly on a certain type drug, don't they?

    Mr. ROBINSON. Given the fact that it was provided by Congress to provide incentive to investment in that technology.

    Mr. BACHUS. It was provided by Congress, you are right. If Congress hadn't said that, they wouldn't have any proprietary right.

    Now, the railroads have exclusive control over that rail line because of a property right, not some governmental grant. They have more of a claim. That is their rail line, but actually you are advocating Congress say to—that we just dictate that one railroad company be allowed to use another company's lines if—I mean, couldn't we apply that to all industries and start saying—where would it stop?

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    Mr. ROBINSON. We apply it to the electric industry.

    Mr. BACHUS. We are struggling with that.

    Mr. ROBINSON. I understand that. We have applied it to the telephone industry.

    Mr. BACHUS. In the chemical industry why not—to bring down the cost of chemicals, why not just—

    Mr. ROBINSON. We don't exist in a monopolistic market.

    Mr. BACHUS. When you have a patent to produce a certain product, then people have to come to you to get that product.

    Mr. ROBINSON. I understand that.

    Mr. BACHUS. We could bring down the cost and if we gave that patent to everybody that could produce it, we would have a hundred companies.

    Mr. ROBINSON. But a patent was done with a specific intent to incent technological advancement.

    Mr. BACHUS. I agree with that. So you invest a lot of money and you develop that patent and you do that because you know that you get a patent and you get a right to have a profitable operation of that line.
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    Don't you think that the railroad companies built their rail lines—do you think that they would have built rail lines if they thought that anyone else could get on their tracks and run on there?

    Mr. ROBINSON. I don't run a railroad.

    Mr. BACHUS. Would your members build a chemical plant if they thought that Congress could just dictate that any company could use that facility?

    Mr. ROBINSON. Probably not.

    Mr. BACHUS. Do you think that the railroads if we dictated that other railroads could run on all those lines, do you think that they would continue to reinvest in the infrastructure?

    Mr. ROBINSON. If we instill competition into the rail industry, we will get more innovative services.

    Mr. BACHUS. We are not talking against competition. There are all sorts of ways to increase competition.

    Mr. ROBINSON. I think if you look at the statement that we filed, what we said was that individual railroads owning their individual lines is highly preferable. The true competition would be that I could go to whichever railroad I chose and choose my service. That would be the ideal world and we are not there today.
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    Mr. BACHUS. Does that trouble you that Congress would start dictating to an industry that—or to a member of an industry that another member of an industry, one of their competitors, be allowed to use their physical plant?

    Mr. ROBINSON. I don't believe that what we are asking for is greater regulation.

    Mr. BACHUS. You are not asking us to say to one railroad you can run—or to tell one railroad that another railroad can run on their line?

    Mr. ROBINSON. What I am saying is that we should not allow an individual railroad to apply its monopolistic power on captive shippers.

    Mr. BACHUS. What about patents? Do you agree with patents which give people monopoly positions?

    Mr. ROBINSON. I don't think that the analogy between the two is valid. If you want to know if I believe in patents, yes, I do.

    Mr. BACHUS. I would say it is more valid. You have members who have a patent to produce a product that no one else can produce. With a railroad, at least there is competition with the truck lines, with the barges.

    Mr. ROBINSON. Can I give you an analogy? We have a facility in Green River, Wyoming.
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    Mr. BACHUS. A power company, you say they may be on a certain rail line.

    Mr. ROBINSON. You are talking about competition. We make soda ash in Green River, Wyoming at our plant. For us to truck the soda ash out of that plant it would take 350 trucks a day, 365 days a year to move that product out of that facility. It is not viable. It is not competition for the railroad.

    Mr. BACHUS. I agree. Should we create that competition by telling another person—do you think that Congress ought to have the right to tell another—an industry that someone else can use their facility?

    I mean, we can always bring down the costs by—if we said to all of the telephone companies you can—Bell South, anyone can use Bell South lines to place local calls, we would get lots more competition. It might be unconstitutional. Doesn't that sort of open Pandora's box?

    I mean that it would bring down the cost and it would be good for your industry, but also it would be bad for your industry if we started doing some of those things and direct them at your industry.

    Mr. ROBINSON. If a shipper is captive and has no option but to use a particular railroad from origin to destination and is paying by the railroad's admission significantly higher rates than an equally competitive move, there is something wrong. I view that there is something wrong with that.
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    Mr. BACHUS. I have a town in my district that has a Wal-Mart that doesn't have any other department stores, but I am not going to tell Wal-Mart that they have to use 20 percent to let their competitors come in and start selling goods.

    I like competition but I also think that we have property rights in this country and if you spend your money and resources to build a rail line, this Congress by fiat to save an industry some money and say that any other rail company can run on that line, if we start applying that to all our industries—what if Standard Oil had an oil field and we decided that they could pump more oil. We have an oil shortage, we say anybody can go out there and pump oil.

    Do you see my concern?

    Mr. ROBINSON. Yes, I do.

    Mr. FRANKS. I've tried to let this go on because we have come in under our obligation here in terms of vacating the room by 1:30, but Mr. Nadler asked to be recognized.

    Mr. NADLER. Thank you. I thank the chair for its indulgence. Mr. Bachus' questions raised a comment in my mind.

    I would like to read a quote from a great President, Teddy Roosevelt, who said ''Every man holds his property subject to the general right of the community to regulate it to whatever degree the public welfare may require it.'' I think we may be describing such a situation.
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    I have two questions, Mr. Robinson.

    One, isn't it the current law and hasn't it been the law for a heck of a long time, I think since the origin of the Interstate Commerce Commission, that the ICC first and now the STB has the authority to order trackage rights from one railroad to another if in its judgment the public necessity requires it, so that what you are requesting is an exercise of an existing power of government which has been existing for a long time and not a new power of government, and that is my first question?

    Mr. ROBINSON. I believe that the STB does have the authority. How well it is exercised may be a subject for—

    Mr. NADLER. I think that question has been unquestioned for a long, long time, has it not?

    Mr. ROBINSON. I believe so.

    Mr. NADLER. My second question is simply again when Mr. Bachus refers to your request that one railroad give what amounts to trackage rights to another in the Houston area and you say that the trackage or haulage rights have not proven to be effective, you are saying—do you see it as a contradiction or are you simply saying that trackage rights are not as effective, two railroads having—

    Mr. ROBINSON. That is a relative answer.
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    Mr. NADLER. It is better than a monopoly, though?

    Mr. ROBINSON. I think so.

    Mr. NADLER. Thank you.

    Mr. FRANKS. I want to thank the members of the panel for their contributions to today's hearing. You have contributed a great body of information to the work of the subcommittee. We are gratified for your help and declare this hearing adjourned.

    [Whereupon, at 1:25 p.m., the subcommittee was adjourned.]

    [Insert here.]



U.S. House of Representatives,

Subcommittee on Railroads,

Committee on Transportation and Infrastructure,
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Washington, DC.

    The subcommittee met, pursuant to call, at 11 a.m., in Room 2167, Rayburn House Office Building, Hon. Bob Franks (chairman of the subcommittee) presiding.

    Mr. FRANKS. Good morning. I would appreciate everybody finding a seat. We need to get started. We have been delayed somewhat by a Full Committee markup.

    Good morning. Today, we are holding the third in a series of hearings on the reauthorization of the Surface Transportation Board. This hearing will address the Staggers Act regulatory standards governing transactions between rail carriers, including mergers, trackage rights, pooling arrangements and interchange and routing obligations.

    In addition, the hearing will also address line construction, abandonments and line sales. Our first hearing dealt with the STB's resource requirements, and the second hearing addressed the state of the railroad industry. Next week we will complete the set of scheduled hearings with the remaining Staggers Act standards, including rate and access issues.

    It has been almost 2 1/2 years since the enactment of the Interstate Commerce Commission Termination Act, which established the Surface Transportation Board. One of the changes made in this law was to require periodic oversight of the STB. The STB's predecessor, the Interstate Commerce Commission, had a permanent authorization so that oversight occurred only on a sporadic basis.

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    I am interested to hear from the witnesses today whether the regulatory standards for intercarrier transactions, construction, and abandonments that were established by the Staggers Act and revised by the ICC Termination Act are working, and whether there are any problems in the law that should be addressed in the STB reauthorization legislation.

    One of the most high-profile areas that the STB deals with is railroad mergers. The ICC Termination Act maintained the public interest standard that was a feature of the Staggers Act regulatory regime. Under this standard, the STB has the authority to impose conditions on a merger to mitigate anticompetitive effects.

    One of the changes made in the ICC Termination Act was to require the STB to examine the effect of a merger on competition in the national rail system. Previously, the ICC looked at the effect on competition, only in the affected region.

    I will be interested to hear from the STB and other witnesses about how the merger standard is functioning and whether any additional changes are warranted.

    Construction is another important area of STB jurisdiction. This standard was maintained virtually unchanged in the ICC Termination Act. In recent years, the STB has received a number of applications for approval of construction projects. Frequently, there have also been competitive implications.

    In the past 20 years, hundreds of small railroads have been created through line sales from the larger carriers to smaller operators. These line sales have kept in rail service trackage that would otherwise have been abandoned and have led to a dramatic increase in the number of shortline railroads. I was surprised to learn at our last hearing that 27 percent of the railroad track in this country is currently operated by Class II and Class III railroads.
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    In a related area, certain track that is slated for abandonment is permitted by the STB to be converted into recreational trails. Under this process, known as rail banking, a continuous corridor is maintained for possible reactivation of rail service in the future.

    Today we will hear from proponents of the current program, as well as from a representative of property owners who have been affected by the program. I want to thank our witnesses for appearing today, particularly those who have needed to travel in order to be here.

    At this point I would like to recognize the distinguished Ranking Member of the subcommittee, Mr. Bob Wise.

    Mr. WISE. Thank you, Mr. Chairman, and thank you again for convening this hearing, one of several that the subcommittee is holding as it looks toward the reauthorization of the Surface Transportation Board; and it is also, of course, going to be joined by our colleagues who will be testifying, Congressman Barr, Congressman Kucinich and Congressman Shays, and we appreciate your appearance here as well.

    The Surface Transportation Board has been involved in approving mergers, of course, for a long time and is a predecessor of the ICC. With the exception of the proposed Southern Pacific-Santa Fe merger 12 years ago, the Board has approved all of the proposed Class I mergers, although generally imposing conditions which were designed to try to preserve competitive options for shippers who had enjoyed competitive options prior to the merger.

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    There are a lot of policy questions that need to be explored in this hearing and in subsequent hearings we are going to be holding as we lead up to the reauthorization of the Surface Transportation Board: To what degree has this policy been in the public interest? Has the reduction in a number of Class I freight railroads, from around 40 in 1980 to probably seven by next year, really made shippers and other members of the public in the same or a better competitive position? Have significant amounts of competition been lost as the consolidation has progressed, or, as many will argue, was there really any choice? Were these mergers going to take place as a natural shakeout occurring from the implementation of the Staggers Deregulation Rail Act? Well, if there is no choice, or if this is an inevitable course that we are on, what should be the role of the STB in approving and in monitoring this? Are there opportunities in future mergers or further mergers, although we don't have too much further to go, to enhance competition, for example, through awards of trackage rights, rather than merely preserving competition—that is always a lively topic, of course—or can the Board truly influence what happens after a merger?

    I was delighted to see, in the testimony of one of our witnesses, the Chair, Linda Morgan, of the STB, her reference and some discussion of the UP-SP situation, because I think this has certainly been a test of the STB as it oversees mergers that have occurred.

    Also, I think it is important to look at the Board's authority to preempt other Federal, State or local laws that might stand in the way of achieving the goals of the merger.

    Obviously the subject of collective bargaining agreements comes up a good deal. It applies as well to States and localities who have local public safety and environmental laws that can be overridden, and whether shippers are beginning discover their contracts are subject to universal alteration.
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    So these are provisions, I think, that need to be looked at, too.

    One area that is sensitive in my area, but I think it is probably sensitive across the country, is that of the subject of abandonments. The Board has the authority to approve abandonments when they are in the public interest. We need to discuss what is the public interest and how is it defined. In particular, in cases where rail banking is an issue, we will want to find out why the Board appears to have delegated this decision with important public interest considerations to what seems to be the discretion of the railroad.

    So there are many important issues to discuss today, and I look forward to hearing from the panel. It will be good again to see many of you who have been directly involved. We appreciate your participation. It is going to be a long day, but a very important one. Thank you, Mr. Chairman.

    Mr. FRANKS. Thank you, Mr. Wise.

    For opening statements, I will call upon each Member present, but would, by unanimous consent, ask that we make everyone's opening statement a part of the record.

    Mr. Quinn.

    Mr. QUINN. I have no statement, Mr. Chairman.

    Mr. FRANKS. Thank you.
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    Mr. Blumenauer.

    Mr. BLUMENAUER. Mr. Chairman, I will submit a statement.

    I do want to, I guess, express two feelings that I have very strongly. One is I am looking forward to the comments of our distinguished colleagues because of the reference to public interest and how we can have the STB and the railroads deal with our commitments to our communities, and I have seen some interesting ideas from our colleagues about ways that we can help use this approach to make communities more livable.

    Second, I am very pleased that you have given time and attention in focusing on rail banking. I am one person who thinks these rail rights of way that have been accumulated at great expense and cost to the taxpayer over the years are a precious national resource, and I am looking forward to making sure we are able to retain them on into the future.

    I will just submit my full statement for the record, and I appreciate again how you are taking this subcommittee forward.

    Mr. FRANKS. Thank you.

    [The prepared statement of Mr. Blumenauer follows:]

    [Insert here.]

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    Mr. FRANKS. Mr. Moran.

    Mr. MORAN. Mr. Chairman, thank you. I do have an opening statement I will submit for the record in the interest of time. This is an awfully important topic to the country, but also to my constituents, and I am glad you are having these hearings. Thank you.

    [The prepared statement of Mr. Moran follows:]

    [Insert here.]

    Mr. FRANKS. Mr. Nadler.

    Mr. NADLER. Thank you, Mr. Chairman.

    Mr. Chairman, I want to begin by thanking you for calling these very important hearings. I believe the Surface Transportation Board has a job that is second to none in importance in this country in maintaining a viable—in ensuring that we maintain a viable rail system for our shippers and ensuring that there is viable freight service and competition throughout the country.

    I think that most people will now agree that some errors were made in hastily approving the Union Pacific-Southern Pacific merger, despite ample warnings of what would happen if certain precautions weren't taken. Those warnings have been borne out, unfortunately. I hope the Surface Transportation Board will learn from that mistake, and in considering the Conrail merger and in considering the proposal and in considering any other things that may come along.
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    For my part, I must say that a major mistake was made, a major historical mistake was made, in the approval of the final systems plan for Conrail 25 years ago, roughly, in 1975, which ensured—it wasn't supposed to, but did ensure that the Northeast would be subject to monopoly rail freight, and that there would be virtually no service east of the Hudson and south of the Boston-Albany access, and that an area with 10 percent of the country's population would have virtually no rail service.

    I hope that the STB's consideration of the Conrail merger will be used as an opportunity to rectify that mistake, and I hope that if the STB incorrectly believes that they don't have the ample statutory authority to do what has to be done or, in fact, to mandate they do what has to be done, that we will correct that in the authorizing legislation. And I hope these hearings will be useful in bringing out what the STB's interpretation of its own statutory authority is here and whether it is necessary to increase the statutory authority or the mandate on the STB to ensure that rail competition is initiated where there is now no rail competition, but where it is physically and financially feasible to have rail competition.

    I believe it is wrong for 10 percent of the country's population to have no rail competition and to suffer the environmental and economic problems that have been caused and will continue to be caused if we don't fix it. Of course, I am a biased observer since I am an intervener in that proceeding, and I will have to be careful what I specifically ask the STB people since they will be constrained, I imagine, from commenting on a pending proceeding.

    But I do think in general this hearing will be useful in seeing the STB and others' interpretation of existing statutory authority, whether we should change it, and whether in particular we should, perhaps, as I am proposing in a bill that we are drafting but haven't introduced yet, whether it might be advisable to give to shippers and to affected local governments the right to demand a reopening and a change in a merger decision if it turns out that rail competition does not develop where it was anticipated that it would, or if it turns out that rail service is not adequately delivered where it was anticipated that it would be.
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    So I thank you, Mr. Chairman, for giving us all the opportunity to explore these questions.

    Mr. FRANKS. Thank you.

    Mr. Sandlin.

    Mr. SANDLIN. No statement, Mr. Chairman. Thank you.

    Mr. FRANKS. Thank you.

    We are delighted to have three of our colleagues before the subcommittee today. Each of them has been outspoken in adding to both the range and the quality of the debate in considering the issues before us today. I want to welcome them, and I apologize for our late start.

    I know that Mr. Barr has been brought out of a committee markup to be here, and I am going to ask him to go first, but briefly let me introduce our three Members.

    Mr. Barr is with us from Georgia. Mr. Kucinich is with us from Ohio. Mr. Shays is with us from Connecticut.

    We are delighted to have you all here, and we thank you for the work you have done on this issue heretofore.
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    Mr. FRANKS. Mr. Barr, why don't we begin with you.


    Mr. BARR. Thank you, Mr. Chairman.

    I would like to thank you and the members of the subcommittee for allowing me the honor of appearing here today to make a few brief remarks and introduce two friends from my district. I would also like to say it is an honor being here with my two colleagues from Ohio and Connecticut, Mr. Shays and Mr. Kucinich.

    I don't want to take a lot of the time of the subcommittee. I would prefer to leave that to Mr. Bevirt, who is with me here to my right, who is a colleague from our district, from Powder Springs, Georgia, in the Seventh District of Georgia, is a community leader, and has been taking the lead on the issue which I present today to this subcommittee.

    On my left, not ideologically, but simply by virtue of the geography of the table here, is the Honorable Richard Sailors, who is the mayor of Powder Springs, Georgia, a beautiful community also in my district, in Cobb County, Georgia, where the quality of life would be drastically and negatively affected by the subject matter which I bring before the subcommittee today.

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    Mr. BLUMENAUER. Are we to understand the mayor is to his right politically?

    Mr. BARR. I would prefer to leave that up to the mayor. All I can tell you is he is not to my left ideologically. Thank you very much, Mr. Blumenauer.

    Mr. Chairman, I would like unanimous consent to have my printed remarks printed in the record.

    Mr. FRANKS. So ordered.

    Mr. BARR. I would simply like to state, and I will not rehash all my printed remarks, but simply to state, Mr. Chairman, that essential to the proper functioning of our government, and according to the constitutional framework envisioned and put in place by our Founding Fathers well over 200 years ago is the notion of balance, balance between the different branches of government, for example, so very important to our legislative work here in the Congress.

    Also important in the running of our country, our economy and our society is the balance between Federal and local and State interests, and those frequently change over time. For example, Mr. Chairman, if we look at the power of the railroads in America, the balance necessarily and very properly was shifted in favor of those transnational railroads back in the 19th century. I think very few people, if any, would contest the fact one of the reasons America became a great continental and transcontinental power was because of our railroads and the foresight by our national and State and local leaders over 100 years ago in providing necessary legislation and power to make sure that no local community could unnecessarily or improperly stand in the way of directing those and building those transcontinental railroads necessary to move goods and provide services to people all over this great land and to strengthen the economy.
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    But that balancing act is something that this Congress has to look at from time to time because of the shifting concerns and because of the changes in circumstances. The America of 1998 is not the America of 1888. And the authorities, the Federal authorities, under which railroads have been able in past years, often legitimately, to ignore local zoning ordinances and local concerns of citizens and local governments' needs to be looked at in light of today's economy, the quality of life, the environmental concerns, the public safety concerns, the water quality concerns of life in our communities today.

    And we are presented in my district in the community of Powder Springs, among other areas affected, by a proposed intermodal rail facility, intermodal rail transfer facility by Norfolk Southern, and the basis on which they are proceeding, ignoring local ordinances to the contrary, and ignoring community, Chamber of Commerce, local government and citizen concerns to the contrary, is found in Federal legislation. And that is why I have proposed to the Congress and would very respectfully and strongly urge consideration by this subcommittee of H.R. 3468, which would simply restore that sense of balance in our governmental system, which is so very important to all of us on both sides of the aisle.

    The legislation I propose is not antirailroad, it is not anti-Norfolk Southern, it simply says that Norfolk Southern and other railroads seeking to build and place in communities huge intermodal rail transfer facilities must do the same thing that any company would do if it were proposing to place a shopping mall, an airport facility or any other major facility; that is, to abide by the wishes of the community, abide by local zoning ordinances, abide by local regulations and State regulations and ordinances as well.

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    The proposed facility that Norfolk Southern is proposing to place in my district, in the community of Powder Springs, would have, we believe, and as Mr. Bevirt will state in more detail, a devastating impact on the quality of life, on emergency response times in the district, on the air quality, because of the thousands upon thousands of tractor-trailers that would be moving in and out of that small community on a daily basis.

    So I would respectfully urge the subcommittee to consider favorably the legislation during the course of its deliberations, and would now be happy and honored to introduce Mr. Tom Bevirt, who the subcommittee also has very appropriately and we appreciate them inviting him here today to share some comments. And I am sure both he and Mayor Sailors would be available to answer any questions the Chairman or other members of the subcommittee might have with regard to this particular project and legislation. Thank you, Mr. Chairman.

    Mr. FRANKS. Mr. Bevirt, welcome

    Mr. BEVIRT. Thank you, Mr. Chairman, Thank you, Congressman Barr, for your assistance with us in this ongoing problem that we have been fighting for 22 months. And thank you, Members, for being here today to listen to me.

    I have lived in Powder Springs, Georgia, for about 20 years, and I am past vice president of the business association. I own a little business, a little exterminating company. I think another member of your body once also owned an exterminating company. I employ two persons, so we are just a little business.

    Powder Springs is a small, quiet, middle-class town, comprised primarily of single-family homes and small businesses. It is the kind of place neighbors know each other, where children can walk around town without worrying about traffic or crime, and where the pace of life is quiet and relaxed.
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    Since July of 1996, 22 months now, everything we love about our community has been threatened by a proposed Norfolk Southern intermodal rail facility. The facility will take up over 400 acres and will allow thousands of trucks to load and unload rail cars every day, 24 hours a day.

    After doing our homework, citizens and local officials became convinced the facility will be devastating to our area. Here is just a few of the things we foresee happening: The yard will bring up to 3,500 trucks per day into our small town on roads that are unable to handle such heavy use. We have gridlock at times already in our roads. It will bring unwarranted companion businesses to support all of these trucks, truck stops and truck repair places that really would not appeal to the majority of the public. Train speeds would be dramatically reduced at crossings, closing streets, slowing emergency vehicles and splitting our town in half, making the city park and museum almost useless. If you can't get to it, you can't utilize it.

    The proposed site has numerous environmental problems. We fear that if the facility were constructed, flooding would increase in an already flood-prone area. Other problems include noise, diesel air pollution and loss of valuable wildlife habitat. The Environmental Protection Agency has so far opposed the project.

    Our citizens and elected officials are united in opposition to this large facility and have fought long and hard against it. We are fighting a huge conglomerate that can, for example, spend, I believe, 5.5 or $5.9 billion to purchase 55 percent of Conrail. They seem to have a legion of attorneys, lobbyists and publicists. They have consulting engineers and high-priced consultants for nearly everything.
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    Our problem is this: Fighting an 800-pound gorilla is one thing, but adding Godzilla on the side of the gorilla is entirely another matter, and this, folks, is what we are facing, and that is why we flew up here this morning. The Godzilla is the Federal Government, backed up by Federal judges, and it works this way: There is a Federal law that gives railroads preemption over State and local laws. We found out about this, and I think a lot of other communities around the country are starting to find out about this.

    The locating city, Austell, Georgia, about 10 miles from where I live, denied a zoning permit to Norfolk Southern for the rail yard. In July of 1997, the Federal judge ruled Austell had no right to zone railroads and cited the 1995 Interstate Commerce Commission Termination Act, ICCTA. Austell decided to appeal and has already incurred over $65,000 in legal expenses, and this is just a little community of 5,000 people. In return, Norfolk Southern has threatened to bankrupt the city by suing them for attorneys' fees, damages and so on.

    Norfolk Southern has arrogantly bullied the community at every opportunity. Their attorneys have objected to establishing a small historic district near the proposed rail yard. Their attorneys wrote this letter to the county citing this ICCTA law. Now we can't even have a small community name to the historic site because the railroad objects to it. Isn't that something.

    There are further problems with the law. The railroad proposes to use it to unilaterally take over three public roads without even paying for them. One road has five lanes and is less than 10 years old. Somehow the railroad believes it has a right to condemn State and county roads, this is public property, and force taxpayers to foot the bill. In one case alone, the replacement road will cost us taxpayers in the county $4.3 million. I didn't make up the figures, these are the estimates.
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    No one is arguing transcontinental railroads should be held up because one community won't grant a crossing. All we are asking is that railroad companies be required to work with communities before arbitrarily building a 400-acre facility. I am not exaggerating when I say the facility will completely destroy our community.

    We hear a lot about the need for returning power to State and local governments, yet a 1995 law allows the railroad to completely supersede local authority. Therefore, today we are asking, we are really begging, Congress to make a simple change in Federal law so Powder Springs and other communities across the country can work with the railroads on a level playing field. It is simply unjust to give such a powerful force even more power by stacking Federal law in its favor. We are counting on you good people here today to right a serious error.

    Thank you so much for listening to me today.

    Mr. FRANKS. Thank you.

    Does the mayor have any comment, or is he going to be available merely for questions? Mayor, I would encourage, if possible, if you can await questions of the subcommittee because I have some time constraints of the other Members, if that is all right with you and Mr. Barr.

    Mr. BARR. That would be fine, Mr. Chairman.

    Mr. FRANKS. Thank you.
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    Mr. Shays, I know you are under some exigent time constraints as well, so if I can put you on now, and we will move directly to you.


    Mr. SHAYS. Thank you, Mr. Chairman. I have a statement I would like to submit for the record, and I will just be 2 or 3 minutes. I represent the Fourth Congressional District, Greenwich to Bridgeport, along the coast, with the New Haven rail line. When I was 8 or 9 years old, I lived there before we had the New England Thruway. I remember seeing the New England Thruway being built and houses being moved. But I also remember going along the rail line and literally rejoicing and counting the number of freight cars that would go down the rail, and whenever I hit 100, that was kind of neat. Most of the time it was 80, and there was always the red caboose at the end.

    We have no freight trains anymore, none whatsoever. We have lots of traffic, and we have lots of trucks. In the southern part of New England, rail freight comprises only 3.8 percent of all freight—3.8 percent.

    The Poughkeepsie Bridge burned down, so you don't see any freight coming up north. The freight trains go to Albany and then to Boston. There is a rail monopoly, and now we have this opportunity to look at what happens to Conrail.

    It is absolutely imperative this committee weigh in to make sure CSX and Norfolk Southern both have access to some of the rail lines. For instance, CSX does not have road railers. Without it, you can't get through the tunnel from New York into lower Fairfield County. Mayor Giuliani has talked about, one, building a tunnel—that needs to happen. Second, to have barge rail like they used to have to bring some cars across the Hudson and then brought by rail.
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    I strongly urge this committee to recognize the need for rail freight east of the Hudson River. In my judgment, you are one of the most important committees in Congress because our rail lines have been underutilized. The rail freight average is 40 percent nationwide. In New England, it is basically less than 4 percent. We need to see this committee weigh in with the STB and encourage them to provide competition and to provide access via the rail lines.

    And there is so much more I could say. In conclusion, competition is important, choice is important. It is something I think both Republicans and Democrats believe in, and I know the public does. And I thank you very much, and I thank Mr. Kucinich for allowing me to kind of move in here and get on my way. Thank you.

    Mr. FRANKS. Thank you, Mr. Shays.

    Mr. Kucinich, thank you very much, and thank you for the work you have done on this issue today.


    Mr. KUCINICH. Thank you very much.

    I certainly want to acknowledge the presence of Mr. Barr and Mr. Shays here on this issue, and thank Chairman Franks and Ranking Member Mr. Wise for holding this hearing today and allowing me to testify. I also want to put into the record my appreciation to Mr. Quinn, who gave me some early advice on this issue, and also to Mr. Nadler for his guidance and for his advice on railroad issues.
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    Your work on this subcommittee is of the utmost important. Railroads are a significant part of our history and will continue to be a major force in transportation for decades to come.

    As we have seen from the Union Pacific-Southern Pacific railroad merger, the subject matter we are addressing today can have serious national consequences, so how we handle mergers now will continue to be very important to satisfying the transportation needs of this country.

    The Greater Cleveland area, which includes a district that I represent, is a hub of railroad activity, the extent of which I became better informed of after Norfolk Southern and CSX Transportation filed with the Surface Transportation Board to divide up Conrail between them. Berea, a suburb of Cleveland, is the location of what is known as the big X, where Conrail's two main lines cross. Right now, Mr. Chairman, Berea has about 80 trains a day that go through this small suburb. The acquisition proposal that is currently pending before the Surface Transportation Board would transfer one arm of the X to CSX and the other arm of the X to Norfolk Southern. So the very heart of this merger is in my district.

    The merger, as it was originally proposed, would be very detrimental to my district. One of the rail line segments, a single track that is an offshoot of the big X, runs through Lakewood, the most densely populated residential area between New York and Chicago. Lakewood has more at-grade crossings than any other rail segment in the United States, 27 crossings, over 2.7 miles. The line also bisects this densely populated residential area into northern and southern sections, with half the population on one side, while hospitals, fire stations, police stations and other emergency services are located on the other side. So some of the issues raised by Mr. Barr we understand perfectly in my district.
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    Now, despite all these factors, the original proposal for this transaction was to increase the number of freight trains on this rail line segment from approximately 16 trains per day to as many as 48 trains per day. That, of course, would be a disaster for Lakewood and for other communities, for part of the city of Cleveland, the west side of Cleveland, for Lakewood, for communities known as Bay Village, Rocky River, Westlake and other surrounding communities.

    I learned about this proposal last August, Mr. Chairman, and I guess what I didn't know is that I was going to have trains for Christmas and trains for Easter as well, because I have been working since then with local officials at both railroads, Norfolk Southern and CSX, to try to come up with some solutions to the problem. We have had very intense negotiations, and I am pleased to inform this committee that negotiations have been going very well. We really don't have an agreement yet, but I think we are on our way to achieving one.

    And I also want to note for the record that Mr. Goode of Norfolk Southern and Mr. Snow of CSX have become personally involved in this, and we have had many meetings to talk about our problems. We have put together—and this is important for Democrats and Republicans to be aware of this—we have put together a bipartisan coalition of public officials, suburban mayors and city officials to present our concerns, and our ongoing talks with the railroad have been very important in having a chance for solutions.

    I will get right to an issue that I think is extremely important, if I may, Mr. Chairman, and that is that I think there are serious flaws in the STB's evaluation of mergers. First of all, the effects of a merger on a community are evaluated by a subsection of the Board known as the Section on Environmental Analysis. That is not a problem in and of itself, except the Board does not necessarily have to consider the recommendations made by the SEA; and second, the SEA's evaluation process is not adequate.
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    The SEA uses arbitrary formulas for evaluating things such as noise, traffic delays, railroad crossing safety, et cetera. While a certain amount of uniformity is needed, there are no variables to account for radical differences in circumstances, and the same formula for evaluating an acceptable level of traffic delays is exactly the same for a rural area as it is for a densely populated residential area.

    So despite all the circumstances surrounding this rail line segment in Lakewood, Ohio, as I said—the most densely populated residential area between New York and Chicago, more at-grade crossings than anywhere in the country, emergency services on one side of the tracks, where half the population resides on the other—despite all this, the SEA applied their formulas and determined it would be perfectly fine to triple the number of trains on this rail line segment. Clearly, something in the SEA's evaluation process is amiss.

    I believe, Mr. Chairman, and I will wrap this up, that the SEA needs to develop a more highly specialized evaluation process to determine if local communities need mitigation in order to deal with a railroad merger, and the STB should be compelled to mitigate where the SEA has determined it is needed.

    It is obvious, I think, after looking at this process for 9 months now, that the STB needs more resources to carry out the awesome job of evaluating these very complex mergers and to be more sensitive to the concerns of local communities. I wholeheartedly support efforts to get the agency resources that it obviously needs. These rail line segments run through communities that have traditionally been ignored when these mergers are looked at. I am grateful to be part of a trend towards more accountability, and the Chair is helping to make sure of that with this hearing, but local communities have to spend considerable resources to protect themselves. The STB needs to take the concerns of local communities into serious consideration when evaluating mergers, not relegate community issues to a subsection of the STB that has no regulatory authority.
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    I am trying to use my best efforts to ensure that my district will be assured—be spared, rather, the adverse effects that would have occurred by the original acquisition proposal, but have no illusions that this will be the last merger to directly affect my district. So it is incumbent upon me to communicate to the subcommittee the flaws I have encountered in the merger evaluation process, and I hope that this subcommittee will be able to address some of the issues the STB has reauthorized last year.

    I want to thank the Chair and members of the committee for their indulgence.

    Mr. FRANKS. Thank you, Mr. Kucinich.

     I will ask if members of the committee have any questions of the Members. I will begin with Mr. Wise.

    Mr. WISE. No, Mr. Chairman. Simply to say that each of the Members has raised important questions that will be discussed today, particularly in dealing with the area of Federal preemption in the case of the Georgia situation and in the case of Mr. Kucinich. So it is a very timely topic, and I am glad you set the stage for it. Thank you.

    Mr. WISE. Mr. Nadler.

    Mr. NADLER. Thank you. I can't see, is Congressman Barr still here?
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    Mr. BEVIRT. He is not here anymore.

    Mr. NADLER. Let me ask a question of, I think, Mr. Bevirt.

    Mr. BEVIRT. Yes, Mr. Congressman.

    Mr. NADLER. Or any of the people who came with Congressman Barr from Georgia.

    Let me say I appreciate both the situation in the Cleveland area and the Lakewood area in Ohio, which is one problem, but I want to ask a question about the Atlanta area problem. Norfolk Southern wants to set up a 400-acre rail terminal yard to handle regional traffic, and I understand that CSX is interested in a 200-acre yard somewhere in the Atlanta area also.

    Obviously the railroads have powers to override local zoning and other things, powers which were granted probably 150 years ago for a lot of reasons, and I understand the problems of the local area. If we were to subject the railroads, as you suggest, to local authority over zoning, et cetera, no neighborhood, I presume, wants a 400-acre rail terminal in a suburban area.

    If the local communities had the authority to bar these massive facilities, but if you grant that they are necessary somewhere, how do you balance those two considerations? If we were to simply say the local community could borrow it, you might never have the rail terminals anywhere. On the other hand, right now you are saying the railroad has all its way and doesn't have to bother talking to you. How would you balance this? Do you have any recommendations as to how we can increase the leverage of the local community without, in effect, making it impossible for the railroads to have the facilities that are necessary if we are going to have a national rail transportation system?
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    Mr. BEVIRT. That's a good question, Congressman. In our case, what we see is, first of all, the railroad bought this property on the cheap. They got that from the Resolution Trust—you know.

    Mr. NADLER. The Resolution Trust Commission.

    Mr. BEVIRT. Right.

    We think because they have this property and have this law behind them, for them it is a good site, they have simply abandoned ever looking for another site. We have another site, another county, another area that is very interested in having them there, very interested in having them there. In fact, many of us think it would probably be a better site for them, closer to a lot of other transportation, highways and so forth, but they seem to be wedded to this area right here.

    I realize it is a sticky problem, but as long as they have this club over us, not just with the zoning, but with taking over roads and preempting all regulation, they are going to just do what they darn well please.

    Mr. NADLER. You are saying it is totally one-sided now. What you suggested was to give the local community the total control, which could arguably make it totally one-sided the other way, and you might never have any rail terminals anywhere. Can you suggest something more balanced?

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    Let me ask you differently. Would it be, perhaps, adequate, in your opinion, if we were to not subject them to all the local laws, but to say that they don't have the automatic right to do this as they do now, but they have to get approval from some regulatory body for which the local community has standing, let's say the STB, under some sort of standards that we might set up? Would that be an improvement, or would that be adequate?

    Mr. BEVIRT. It would be an improvement over what we are facing now, which is total defeat.

    Now, we do understand, and you can fill us in on this better, and we would like to know, we understand that the STB at some point does have to approve this yard. That is just what we hear. But from what others have said here, we don't know if that is just some automatic approval and this is just rubber stamped or what. We don't see that there is much control at the Federal level even over railroads much less at the local level.

    Mr. NADLER. I am not an expert on what control the STB has over that kind of thing either, but if the STB or perhaps some other agency, probably more the STB than some other agency, were given more effective control over that, and if some sort of environmental standards and other balancing tests were put into the law, and the local community had standing to intervene in this proceeding, that would be an approach that might be okay?

    Mr. BEVIRT. It would be, you know, preferable to what we have right now.

    I would just add, all those railroad crossings in his district that he is talking about, bear in mind if NS or CSX wanted to drag freight trains through there at 10 miles an hour and block that whole town, there is nothing those people can do about it. That is what we understand.
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    Mr. NADLER. Thank you.

    Mr. FRANKS. Thank you.

    Mr. Moran.

    Mr. MORAN. No questions, Mr. Chairman. Thank you.

    Mr. FRANKS. Mr. Sandlin.

    Mr. SANDLIN. No questions.

    Mr. FRANKS. Mr. Blumenauer.

    Mr. BLUMENAUER. One brief item for Mr. Kucinich.

    I was just curious, Representative Kucinich, in your testimony, you talk about the need for a more highly specialized evaluation process to determine if local communities need mitigation; and, second, that the STB should be compelled to mitigate where the SEA has determined it is needed. I wonder if you had any sense of what the criteria ought to be, if you had any specific thoughts.

    Mr. KUCINICH. I think it would be helpful if there was a closer contact with local communities, because the very fact we are here testifying about some concerns indicates that there needs to be more fuller involvement for local communities to have some impact because we don't want to be in a position of having districts we represent run over in a merger.
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    I also will say that this process challenges certainly the railroads to establish a dialogue with local communities where perhaps they otherwise wouldn't have an incentive to do it. In the Cleveland case, because we have been into this right from the start, and we got bipartisan support, we have encouraged this dialogue.

    I know there are issues all over the country, and I can't speak to the issues in Mr. Barr's district or Mr. Shays' district or anybody else's district, but I can say this: That communities have to have a way to have an input about their concerns, and I think that will make the whole process better. Now, how that is going to happen I leave up to the committee, but I did note that it is important for the way the SEA works to be looked at, and I would encourage you to do that.

    I would also want to note for the record the assistance that I received from Congressman LaTourette on this, whose district is also affected by this, and I really appreciate his help as well.

    But, again, Mr. Blumenauer raises a point, which is so important, Mr. Chairman, and that is that all of us try to represent the best interest of our districts, and we have communities whose quality of life can be adversely affected, except it is our job to stand up for them. That is why we are all here, but at the same time we have to make sure that there is better communication so that no community gets left out. Now, I filed in the case, I am part of the case, but you shouldn't have to be a part of the case to get the concerns of your community up front, and if we change the process a little bit, I think we have a chance to have more dialogue, and therefore more information is brought forward. I am really very grateful to the Chair for this opportunity to testify, and Mr. Wise. Thank you.
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    Mr. BLUMENAUER. Mr. Chairman, I think Congressman Kucinich raises an important policy issue. We have protected—in the version of ISTEA that this committee has advanced to conference, we have protected the right of local communities to be involved through the MPO planning process on the expenditure of huge sums of Federal dollars for transportation infrastructure for this largely road and transit-related issue. And it would seem to me that there is a model there that we could look to that might well institutionalize some of that same community input, the right for people to participate in how the planning process works. We run a real danger if infrastructure runs amuck. We have seen what has happened with some interstate freeway investments that didn't relate to local communities.

    I think it is entirely consistent for this subcommittee to think about those models that would guarantee people a place at the table and would encourage the collaborative effort to make sure that people are not disadvantaged as a result of how vital infrastructure evolves over time. And I would hope, perhaps, that we might consider that precedent in the Surface Transportation Act to apply to rail transport as well.

    Mr. KUCINICH. I would like to respond by saying, Mr. Chairman, that I wanted to note for the record that the railroads are in a dialogue now in our district, there is no question about it. But if it was institutionalized so the communities weren't going to be ignored or overlooked, I think it enables the railroads to more effectively participate, and it makes it less of an adversary relationship. Thank you.

    Mr. FRANKS. I would like to thank the witnesses very much. We need to move to the next panel. Thank you very much.
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    Mr. KUCINICH. Mr. Chairman, begging the indulgence of the Chair, the Honorable Mayor Sailors, I think he wanted to say something to the Chair.

    Mr. FRANKS. Mr. Sailors.

    Mr. SAILORS. Yes, I would like to address Congressman Nadler's comments there about alternative locations. I am in my 12th year as mayor of a town of 10,000 people, and as Mr. Bevirt stated, it is pretty much a residential community.

    Norfolk Southern carried a party out to somewhere in Kansas, Kansas City, to look at a yard, a state-of-the-art, but it is in the boondocks, and that is where it should be. They are willing to place this facility right in the heart of a residential community. And we don't want to be railroaded by this railroad, and that is what has happened.

    The Chamber of Commerce—I live in a county of 550,000 people. We are a good county. Our Chamber passed a resolution saying this is not in the best interest of our county. I serve on the Atlanta Regional Commission. The Atlanta Regional Commission passed a resolution saying this is not in the best interest of the State. The Georgia Municipal Association, all the cities in our State, they passed a resolution saying this is not in the best interest of the State.

    Folks, you have got to listen. The tax dollars that fund this hearing here today, where does it come from? It comes from the local people. You need to remember that.

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    I appreciate the opportunity to be here, Mr. Chairman. I appreciate my Congressman, Mr. Barr, extending the invitation, but, folks, Washington, D.C. is all about local government, and let's don't lose sight of that. Thank you for your time.

    Mr. FRANKS. Thank you, Mayor.

    We would like to hear now from the second panel, which will be in the person of Honorable Linda Morgan, Chairwoman of the Surface Transportation Board.

    Before we hear the testimony of the Chairperson Linda Morgan, I want to remind Members of a concern that was raised at our earlier resource and budget hearing concerning STB. It was noted then that members of the agency, which in this case obviously would include the Chair, are prohibited from discussing the merits of any pending case because that could constitute an improper ex parte communication and also might be taken as evidence of prejudgment of the issues by the decision-makers.

    Besides those legal hazards, I am reminded by the subcommittee staff that Members' questions on such matters might also be taken wrongly to constitute undue congressional influence on the adjudication. I am sure all members of the subcommittee want to avoid anything that even unintentionally might endanger legal integrity and validity of STB's decision-making process. I would therefore urge Members to structure their questions accordingly.


    Mr. FRANKS. Given that admonition, Madam Chair, welcome back. Thank you for appearing again before the subcommittee.
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    Ms. MORGAN. Thank you.

    Mr. Chairman and other members of the subcommittee, my name is Linda Joan Morgan, and I am Chairman of the Surface Transportation Board. I am appearing here on behalf of the Board at the request of the subcommittee to discuss the reauthorization of the Board, and to focus specifically on issues related to railroad intercarrier transactions, line constructions and abandonments.

    The subcommittee did hold a prior hearing on the reauthorization, focusing on funding and resource issues. I will not address those today. And I also understand next week there will be another hearing focusing on rail rate and service issues and competitive access, and I will be submitting testimony on those issues for next week's hearing.

    More specifically, my testimony describes in detail the law implemented by the Board, and past decisions and pending matters in the areas of rail mergers, line sales, line constructions, and line abandonments. As part of that discussion, I have included more detailed information regarding the rail service emergency in the West and labor and environmental matters related to those transactions. As I have only 5 minutes for my oral presentation, I will not go into more detail regarding my written testimony, and I simply ask that my entire 23-page statement, with one attachment and a summary, be included in full.

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    Mr. FRANKS. Without objection, so ordered.

    Ms. MORGAN. With the time I have remaining, I thought that I would just briefly review an action that the Board recently took which is relevant to this hearing and to next week's hearing regarding rail access and competition. And since this is my first appearance before the subcommittee after the Board actions in this regard, I thought that this would be an appropriate time just to mention it and to ask that the three decisions we have issued recently regarding rail access and competition be included in the record of today's hearing for today and for next week.

    These decisions are in response to hearings held by the board on April 2nd and 3rd at the request of Senators McCain and Hutchinson on rail access and competition. We accumulated volumes of written testimony, received oral testimony over a 15-hour period from larger railroads, smaller railroads, rail labor, Federal and State and local government interests, port and maritime representatives, and a broad spectrum of shippers.

    The Board concluded that the pleas we heard from rail-dependent shippers could not be ignored, and that while more drastic proposals for change in the current regulatory scheme could not be taken at this time without more careful study, the status quo was not acceptable, and that other changes must be pursued now. The decisions we have issued provide for certain regulatory activity that the Board can take now and direct certain other private sector activities that could lead to additional regulatory activity.

    These decisions address issues that will come up at next week's hearing. They also do address issues related to competition and inadequate service, the role of smaller railroads in today's competitive environment, and also improve dialogue between railroads, employees and shippers regarding rail service.
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    The issues addressed by the Board are important, and the resolution of these issues are critical to the future of rail transportation and its regulatory oversight. I believe that the Board's actions are responsive, comprehensive and appropriately measured and offer a balance of immediate government action and constructive private sector efforts. The Board is committed to pursuing all of those issues to their appropriate end, and at this time I would be happy to answer any questions that you might have.

    Mr. FRANKS. Madam Chair, thank you for your testimony, both oral and written.

    The last panel I think all of us were interested in because all of us can envision a circumstance whereby under a proposed merger and under the law as it is currently constructed, we could see a hardship worked upon our municipalities, and we all want to make certain we strike what Mr. Kucinich, I think, appropriately termed as the appropriate balance as we move through these issues.

    In order to present a bit more information for the subcommittee, I would ask you to use your very considerable expertise and walk us through a little bit of the history on these issues.

    The witnesses today have commented on what they see as the appropriate boundary line between State and Federal authority, and the prior panel thought that the line was tilted now too far toward the line of Federal authority. Could you give us a little historical context; that is, what caused the Congress to adopt a more preemptive approach in the Staggers Act than that which was contained in the law prior to 1980?
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    Ms. MORGAN. Certainly, Mr. Chairman. I think I heard from the previous panel two concerns, one relating to the broad issue of preemption, and the other relating to more specific issues as to how the environmental concerns at the State and local level are addressed, and I will attempt to deal with both of those in the context of your question.

    First of all, with respect to preemption in general, obviously Congress in dealing with this issue has determined that interstate commerce should not be impeded, and, therefore, we must be sure that actions taken to promote interstate commerce are not unnecessarily interfered with and frustrated in terms of their implementation. And so the preemption language that we are dealing with today and that Congress is dealing with is really a result of that policy; that is, we must ensure that interstate commerce can proceed. And the preemption language that we are now dealing with, pursuant to the ICCTA, is actually viewed as a more comprehensive preemptive scheme than what existed previously, or at least a clearer preemptive scheme than what existed previously. And my understanding of the genesis of that was the further need on the part of Congress to ensure that transactions in interstate commerce were allowed to go forward.

    Now, with respect to the environmental issues—and I do certainly understand the concerns that have been raised regarding environmental issues relative to transactions that the Board does approve, and I think that the Board does a tremendous amount of work in reaching out to the State and local communities through its environmental review process. As indicated in my testimony in more detail, whether it be a merger, an abandonment or a line construction, we are obligated at the Surface Transportation Board to review the environmental impacts of those transactions, and we are subject to the same environmental laws that other agencies are when they take similar Federal action.
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    We have a section of environmental analysis that is responsible for doing the environmental review. They do a significant amount of organized and focused outreach. As a matter of fact, there is a wall, if you will, between the Environmental Analysis Section and the Board members, because the Environmental Analysis Section is the one place at the Board where there is ongoing dialogue with the parties about environmental issues.

    As you know, the Board members themselves are constrained to discuss pending matters with parties under ex parte rules. The environmental staff, however, is not precluded, unless the Board decides otherwise, from talking to parties and affected communities. So there is a significant amount of communication and organized outreach.

    I would be happy to provide in more detail specific outreach that we have done in specific cases, but it is significant, and I feel that we do fulfill the responsibility that we have in that arena, and it is an important one, and we do not take it lightly.

    Mr. FRANKS. One quick follow-up. Under current law, the Environmental Section is not precluded from having discussions with the parties, you indicate, unless the Board instructs them not to have communications with the parties. What are the kinds of circumstances under which you would instruct the Environmental Section not to have communications with the parties?

    Ms. MORGAN. Well, if there were ongoing negotiations between local communities and parties that were going in a fruitful direction and perhaps involved issues that the Board ultimately might not be able to impose as part of its responsibilities, that would be an occasion where the Board would see that it would be in the public interest, if you will, to allow the parties themselves to negotiate.
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    Congressman Kucinich referred to the significant activity that is going on in the Cleveland area, and that has been very much between the parties. I think it, from what I can tell from what he has said, has been positive in that respect.

    Mr. FRANKS. So what you are—if the staff of the STB were talking to local parties about potential solutions but you found that those solutions that were being discussed were related to matters outside the span of control or jurisdiction of the STB, in that kind of case you might say, back off these negotiations because you are talking about something that is beyond our ability to control.

    Ms. MORGAN. I wouldn't suggest that they back off for that reason. As a matter of fact, this is not a regular thing. This has occurred recently in the pending case. As I said, it would be if I felt that the negotiations could proceed more efficiently in the private sector.

    But I think it is important to understand the levels of environmental conditions that we do impose.

    We are responsible for imposing conditions that are related to the transaction and are reasonable in the context of addressing effects that stem from the transaction. Then the parties can also negotiate mitigation and settlement which may or may not be imposed. That may involve community development issues which are not necessarily related to the pending transaction or to environmental issues associated with the transaction. But the parties may agree amongst themselves to agree on those things the Board might not be able to impose.
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    So it is that kind of variety of discussion that can be had in this type of circumstance.

    Mr. FRANKS. Thank you.

    Mr. Wise?

    Mr. WISE. Mr. Chairman, if I could follow up on that.

    I am curious, in the situations such as have been brought before the committee today by various parties, is this a situation—are these situations where the STB could, if it so chose, conduct local hearings?

    Ms. MORGAN. We do, as part of our outreach, conduct local town meetings and gatherings of that sort. We actually, when we are doing our environmental—when the C section of environmental analysis is doing its work, it actually organizes and schedules many meetings that are both large and small that are on the order of town meetings so that that is something that already does go on.

    Mr. WISE. Also, does that occur in the context of your review of a merger application that could be pending before you?

    Ms. MORGAN. Well——

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    Mr. WISE. Impact on a community?

    Ms. MORGAN. When I am looking at a transaction, I am looking at what the environmental staff has put together in terms of environmental analysis. And part of that, of course, is the documentation that they have gathered through their outreach. That is all in the record and is part of the record that is evaluated in a given transaction.

    Mr. WISE. I am talking about the STB itself, somewhere outside of Washington hearing firsthand——

    Ms. MORGAN. I might not be outside of Washington, but I have staff outside of Washington at these hearings.

    Mr. WISE. Let me note, I know your experience on the Hill. I never was able to get—my constituents never felt that that was quite the same in terms of having their point of view heard as opposed to having the representative, the member or the hearing officer or whatever, there directly.

    It just seems to me that we have got—there is a major issue that the STB has before it, whether it is the situation in Houston or whether it is the situation in Cleveland or whatever else may emerge that might be worth the STB itself being there.

    Ms. MORGAN. I certainly understand your interest and concern, as we discussed at the last hearing.

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    I am somewhat constrained by the budget that I have and the travel that I am allowed to take. I have tried to get out to different locations to meet with constituents on various issues and so forth.

    Mr. WISE. I think I have also gone on record as supporting what you can't ask for, which is an increased budget.

    Ms. MORGAN. Of course, we do have forums in Washington, which I know is not quite the same thing. But we have held, as you know, a number of hearings on the service in the west as well as the rail access and competition hearings and then the oral argument that is coming up in the pending merger.

    Mr. WISE. The UP-SP merger has presented a lot of challenges. I just wonder, and I notice that there are reports today, I believe I saw in one of the transportation publications that it seems to be unsnarling some in the Houston area and that the focus now is moving towards Nebraska. Does this—what the STB has experienced, does this give you some cause to reflect on how future mergers will be handled and what additional controls or monitoring might be necessary by the STB?

    Ms. MORGAN. Well, again, being careful about what we will do in the pending matter, I think with every experience hopefully everyone learns from that experience. I think the railroads certainly have learned. I think that the Board is always refining its process of monitoring and oversight and decisionmaking, and I am hopeful that we are always doing that.

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    So certainly there are lessons here that certainly should be noted and should be learned.

    Mr. WISE. You and I have talked about this before. In my opening statement, it may be that we have no choice on some of these mergers. We are seeing a consolidation taking place in this industry as we are seeing in a number of industries. Maybe there is no choice in these mergers.

    But it then seems to me that if there is no choice and we are going to get to an increased concentration of ownership, that there is a need then to have some rules of the road and also for the public to know that there is the ability for the kind of regulation to safeguard the public interest and to continue at least the same level, if not an improved level, of competition. That is an area that I think this committee needs to be thinking about; but, obviously, the experiences of the STB as we look—5 minutes does go quickly—as we move forward, I think it would be worthwhile to also have additional discussions on this topic.

    I appreciate the candor and forthcoming nature that you have always had with us. Thank you.

    Mr. FRANKS. Mr. Moran?

    Mr. MORAN. Mr. Chairman, thank you.

    Thank you for being here. Could you, without violating the rule that has been expressed numerous times this morning, tell me the status of the UP-SP merger and just the procedural issues that are out there and where you are headed procedurally, what the issues are?
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    Ms. MORGAN. With respect to UP-SP, we have two ongoing proceedings. One is, of course, the service emergency proceeding that we have had ongoing since October; and I think you know about that. We have discussed that in a previous hearing, I believe, and that we do have a service—an emergency service order that is still in place and runs through August 2nd. That, of course, has made some changes in how traffic is handled on the UP system.

    We also are accumulating a significant amount of weekly data that helps us to understand what the status and the state of the service is on that system, and then we have done some other things along the way involving agricultural commodities and the movement of them.

    The second proceeding that we have ongoing that relates to UP-SP is the oversight proceeding. When we approved the UP-SP merger, we imposed a 5-year oversight condition. We had done already the first year of oversight. We are now in the second year of oversight.

    And, really, we have two proceedings ongoing, one focusing specifically on Houston—and we will be receiving in early June proposals for how to adjust Houston service, if that is where we want to go in light of what we have seen in the Houston area.

    The other part of the proceedings is the more general oversight so that we will be monitoring the rest of the implementation of the UP-SP merger and the rest of the country as part of that proceeding.

    So that is the status of where we are relative to UP-SP.
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    Mr. MORAN. Are you of the opinion that you have all the legislative authority that you need in regard to mergers and acquisitions from Congress?

    Ms. MORGAN. Well, I think I have the authority that Congress intends me to have to make the decisions that I think they want me to make. I have that authority. I think Congress has to decide if it is where they want me to be and whether it is enough.

    But certainly, in terms of what we have decided to date, we have used the authority and we have implemented it as I feel we were supposed to.

    Mr. MORAN. Has the STB ever been accused of overextending its authority?

    Ms. MORGAN. Extending its authority?

    Mr. MORAN. Exceeding its authority.

    Ms. MORGAN. Most every one—almost every one of our decisions is appealed in court, so I guess there are a lot of people out there that feel we either have exceeded our authority or incorrectly used it.

    Mr. MORAN. What role in the merger do other Federal departments play?

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    I know that the Department of Justice, the Department of—I guess the Department of Justice, Department of Agriculture both weighed in on the merger of UP-SP. What role do those recommendations play in the process?

    Ms. MORGAN. Well, you are correct that government agencies do participate in the proceedings before the Board. They did participate in UP-SP, and they are participating in the pending matter, the Conrail matter before us. And we weigh those recommendations, those proposals, as we do with the other parties in the record.

    Mr. MORAN. In regard to the Department of Justice, how are the public interest provisions that you utilize in making decisions different than the antitrust provisions that the Department of Justice would apply outside of the railroad industry?

    Ms. MORGAN. Well, I think the Department of Justice is focused on the competitive issues associated with the transaction before them.

    Mr. MORAN. It is a different standard.

    Ms. MORGAN. We look at competition, and we go through an analysis, a market analysis that is, the kind of analysis that they go through.

    They have other guidelines, of course, that they apply. But we—our public interest standard is a weighing of public benefits and competitive harm, and then we have other criteria in the statute that we at least must look at—impact on employees, impact on other railroads and so forth.
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    So the statutory standard has more criteria in it, but competition is clearly one of the criteria that we must look at.

    Mr. MORAN. Thank you, Ms. Morgan.

    Mr. FRANKS. Mr. Blumenauer?

    Mr. BLUMENAUER. Thank you, Mr. Chairman.

    I have a request, a comment and three questions.

    The request is that I would like to have the information that you offered to the subcommittee in terms of the specifics of the outreach that take place. I am interested in more than just the process that we go through and the meetings, but I am particularly interested in the results in terms of what happens satisfying the concerns that communities and citizens have protecting their livability. If we could get a chance for some evaluation from you and your staff about how that is carried through, not just meetings per se but really what the results are in terms of achieving those objectives.

    My comment is that I am interested, Madam Chairman, in what we do statutorily to make sure that we do ensure the livability of communities as we are moving into yet another century and not imprisoned within a framework that dates back to the 19th century.

    For instance, one of the questions that I would like you to consider is any adjustment that needs to be made in your statutory authority. And I note in the regulations there is language that refers to the Board considering the impact of the transaction on the quality of the human environment, conservation of energy and whatnot. Should that language that is in the regulation be dropped into the statute, or do you need something else in the statute to enable you to consider the livability of the communities?
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    My other two questions that I would like some guidance on deal with the rails to trails.

    My understanding is that there is national policy that refers to the established rail rights-of-way for future reactivation of rail service, but that is national policy in administering the Rail Revitalization and Regulatory Reform Act of 1976. If it is, in fact, national policy to preserve this, why doesn't the Board encourage private interests like railroads to be more aggressively involved with rail banking in corridors, perhaps even ordering rail banking where it seems particularly appropriate to protect that resource rather than what appears to me to be just allowing that to be solely at the discretion of the railroads themselves, if, in fact, this is national policy.

    My last question refers to the information that we are getting here talking about some of the potential—what appears to be some potential abuse of the abandonment process on behalf of the railroad, some of the railroad interests.

    I am curious what the Board does or can do to deal with some of these activities that would convert rail rights-of-way trails through managers that are affiliated with the railroads and have actually tried, as I understand it, to sell the right of way back to adjacent landowners who are, in fact, already the actual owners of the right of way. This seems to me to be getting a little beyond the notion of protecting the conversion to trails and protecting the possibility of rail banking.

    I will submit to you the citations, but I am interested in what you might be able to do to protect potential abuses of rail banking, what you do to aggressively promote it, if it is in the national interest and what, if any, statutory language you need to have, the STB, to be able to protect the livability of communities.
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    My time is not long enough to even get my questions out. I hope that this is a conversation that we can have before we can conclude our activities here before the subcommittee.

    Ms. MORGAN. I would be happy in general to answer the questions, and then I can submit in more detail, and we can have further conversations. Would you like that?

    Mr. BLUMENAUER. As the Chairman wishes.

    Ms. MORGAN. I will try to be brief.

    Your first point regarding results in the environmental—from the environmental review process, I would be happy to give you more information on that.

    My testimony focuses in general on that; but, for example, in the pending Conrail matter, we are issuing a full environmental impact statement which reflects a lot of the results of the outreach and the study that has gone on. But, again, I would be happy to——

    Mr. BLUMENAUER. What I am focusing on is whether or not this environmental analysis actually preserves the livability and safety of the community, not just some of the—what I think at times passes for environmental analysis.

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    Ms. MORGAN. And what we do in our environmental review leads to mitigation conditions which I referenced with the Chairman a little earlier. In other words, after we do our environmental analysis of the various impacts of a transaction, then we impose mitigation on the transaction, whether it be safety mitigation, hazardous materials mitigation, emergency response mitigation, noise mitigation, et cetera. Which, again, I would be happy to give you in more detail. But there are results from the process that we do engage in.

    With respect to adjustments in the statute, to make sure that we achieve the results that people want us to achieve, I would be happy to submit in more detail on this; but, again, I think what I have described to you is an extensive process that does have results, and the statutory authority is there to do it.

    I think the important thing to remember is that our environmental analysis is tied to impacts from the transaction that we are approving. So if it is an environmental issue that is not related to the transaction that we are involved in, then our authority does not reach that. If Congress wants us to reach that, that is another matter.

    As far as our responsibility to address the transaction, we do have the authority to do that. And then, of course, parties can go beyond what we have imposed and negotiate settlements which could address some of these issues outside of the context of the particular transaction.

    I would be happy to spend more time with you on that and submit for the record.

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    Moving to rails to trails, I think, again, this is an area where Congress has made a decision about the role of the Board in this whole area; and we implement a ministerial role, in essence, under the Trails Act so that if a railroad and a trail user come together and agree to pursue a trail, then that begins the process.

    But, under the current law, our responsibility is not to go out and necessarily bring those parties together. Our role is a ministerial one, and I would be happy to elaborate more for the record. I think that is a decision that was made in terms of how the Board would be involved in this process.

    As far as the abuse of process, we have issued decisions where we have felt there has been an abuse of the process and have so decided and have gotten the particular transaction off the track that it was on. I would be happy to submit those particular cases to you for the record.

    I think that addressed all of your questions.

    Mr. FRANKS. Mr. Nadler?

    Mr. NADLER. Madam Chairman, I have two separate areas of questions; and I am going to try to be brief.

    Number one, in the consideration by the Board of the UP-SP merger, the Department of Justice recommended against the merger on the terms it was done on the basis of antitrust considerations; and the Department of Agriculture, as I recall, recommended against it on the basis of a certain commercial consideration and predicted some unfortunate consequences.
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    On what basis did the Surface Transportation Board differ with the two departments? And in light of the subsequent developments, do you think that was justified? And would you redo it the same way again?

    In other words, do you think that any of the unfortunate things that happened were a consequence of that transaction, especially in light of the predictions of the Department of Agriculture?

    Ms. MORGAN. Let me—I think there are several questions in there. Let me try to answer them.

    First of all, with respect to the decision that we did render in the UP-SP merger, we felt that based on the record, the total record that we had before us in weighing the benefits associated with the merger and also in looking at the harm, that the merger was in the public interest.

    One of the important considerations in making that determination was the concern, the very serious concern that the Board had that the Southern Pacific system was in very bad financial shape and that, if this merger did not occur, that the Southern Pacific system would not be able to function and the shippers affected by that system would not be served.

    As a matter of fact, in the record, we had support from employees and shippers in affected States because of their concern for the future of the SP system.

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    There were other benefits that we felt would also be derived from the merger. We also realized that there was competitive harm that would result if it was not ameliorated. So we did impose significant conditions to address the harm that we felt. In addressing the harm, we felt that the benefits that would be derived from the merger were important and so we ultimately decided that it was in the public interest.

    Now, in terms of what has happened since approval of the merger, we, as I indicated to Congressman Moran earlier, we do have an oversight proceeding going on, both in general and more specifically looking at Houston, to determine whether the service problems that we have seen were somehow related to the configuration of the merger. To date, we have indicated that there is not evidence as of yet in the record that an abuse of market power resulted in the service problems that we have seen.

    But, having said that, we have a responsibility to do oversight; and we are doing that.

    With respect to some of the operational—what I call the merger operational integration issues, I think that that is—obviously, those are issues that I think we all can learn from, the railroads and certainly the Board as it proceeds ahead with its responsibilities.

    Mr. NADLER. Thank you.

    Now let me turn to the other question. You state in your testimony, you were really paraphrasing section 11324 when you said that determining whether a merger is in the public interest, the Board must considerate at least effect of the merger on the adequacy of transportation to the public and the effect on the public interest of including or failing to include other rail carriers in the area involved in the proposed transaction. There is similar language elsewhere in the law.
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    Has the Board considered in the past and does it now consider that only the effect, the anticompetitive effect, the effect of reducing existing competition of a merger, or does it also consider or does it think it is permitted by statute or mandated by statute or prohibited by statute from considering in a merger the effect of the merger or the effect of actions that could be added to the merger but aren't contemplated in the proposal to create competition where competition does not exist?

    Ms. MORGAN. Let me try to answer that without getting into the pending matter, which clearly you are concerned about and you have weighed in on. And I understand the genesis of your question. I will try to answer it but be careful.

    Under the statute, we do look at competition and we specifically look at whether there is an adverse impact on competition. And what I have said in the past about that is that each merger is different. It has a different record. It has different issues. It has different other aspects to it. And so that responsibility to look at competition and to evaluate the adverse impact on competition can differ from merger to merger. So to say if we do it this way and only this way would not be reflective of where we are.

    However, I cannot—obviously, this is an issue in the pending matter, and so I cannot comment specifically on that.

    Mr. NADLER. I don't want you to comment specifically. But to the extent you can comment, I am trying to learn, does the Board consider or has it considered in the past that it is bound to look only at the potential adverse effect on existing competition or the potential impact on potential competition? Do you make that distinction? Do you think that is—just comment to the extent you can on that.
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    Ms. MORGAN. Again, I think that with each merger we have looked at that issue a little differently. There have been occasions when someone has asked for something additional which in evaluating what they were asking for in the context of the competitive balance, in the context of the benefits and efficiencies associated with a particular transaction, that that particular remedy was not granted.

    But there are other situations in which another circumstance can arise, and we can address it differently.

    Mr. NADLER. So you think you can look at that?

    Ms. MORGAN. I know that you want me to look at that. I am looking at it.

    Mr. NADLER. My next question was, should we change the law to permit—well, never mind. Thank you.

    Mr. FRANKS. Mr. Sandlin?

    Mr. SANDLIN. Thank you for coming today, Madam Chairwoman.

    I think we have beat the UP issue to death. That is one of the detriments of going last. You know how important it is to Texas. As you say, there are lessons to be learned, and I hope that those lessons will be beneficial in future mergers and transactions.
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    Moving to another matter, let me ask you about—I noticed in looking over the information here about a definition where it says a rail carrier, kind of paraphrasing, rail carriers are exempt from antitrust laws and from all other law including State, municipal laws necessary to let us, the rail carrier, carry out the transaction. A transaction would be a merger under the legal definition; is that correct?

    Ms. MORGAN. Yes.

    Mr. SANDLIN. Now, I noticed in my research, until 1983, that had never been used to abrogate a collective bargaining agreement; is that correct? Until about, I think, I believe it was 1983, from my research, that provision of the law had not been used to abrogate or to change or to do away with a collective bargaining agreement?

    Ms. MORGAN. I don't know whether that is right or wrong. I would be happy to check that for the record.

    Mr. SANDLIN. Has it been used at some time to abrogate a collective bargaining agreement?

    Ms. MORGAN. Yes. That—the Board believes that that law is self-executing and that the Supreme Court has so held that that provision in the law can operate to override portions of collective bargaining agreements if necessary to implement the transaction. That is the way we understand the statute to read, and it is self-executing, and the Supreme Court has so held.
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    Mr. SANDLIN. You understand the statute to say you have the right under statute to do that?

    Ms. MORGAN. Well, the statute is self-executing. In other words, the Board is not the one overriding. The law overrides, and then it starts an arbitration process.

    Mr. SANDLIN. It depends upon your definition of the law. You believe that that is what the law says, that you have the authority to do that; is that correct?

    Ms. MORGAN. I believe that that is the law. As I said, I believe that the law is self-executing. We do not actually take action to override. That happens by operation of law.

    Mr. SANDLIN. Self-executing merely means, though, that you execute your interpretation of the law.

    What I am asking is, do you feel like that you have the authority to do that under the law?

    Ms. MORGAN. The authority is in the law, yes.

    Mr. SANDLIN. Now, could you explain to me why you suddenly came to that conclusion after 63 years of it not being that way? What finally got you to the conclusion that you did have that authority?
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    Ms. MORGAN. Well, I personally can't speak to that. I was not there in 1983. I would be happy to research that in more detail. The Supreme Court case that I mentioned was 1991. We have been operating with that since then. I would be happy to get more information for you.

    Mr. SANDLIN. Well, let me put it this way. Then the law did not change, did it?

    Ms. MORGAN. Not that I know of, no.

    Mr. SANDLIN. Could you tell us other—could you list for me other contracts in which you—the Board intervened to change the terms of the contract other than collective bargaining agreements?

    Ms. MORGAN. Well, we do have this issue before us in the pending Conrail matter that is an issue regarding contracts between users of Conrail and Conrail and other parties, between other parties. That is an issue that we will have to decide. That is the only other time that I can remember it has been presented to me.

    Mr. SANDLIN. So there is only one other time——

    Ms. MORGAN. In my memory, yes.

    Mr. SANDLIN. ——of your intervening and trying to change the terms of a contract between those two entities?
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    Ms. MORGAN. That is the issue, whether we should or not. We have to make that decision. We have not made that decision.

    Mr. SANDLIN. Whether you should or not, do you think you have authority to do that?

    Ms. MORGAN. That is what we are looking at.

    Mr. SANDLIN. But you don't have to try to decide on the collective bargaining. You are pretty sure on that one?

    Ms. MORGAN. The Supreme Court has so held, yes.

    Mr. SANDLIN. Are you aware of other Federal agencies that intervene into contracts and change the terms of contracts between contracting parties?

    Ms. MORGAN. I am not aware one way or the other, but I would be happy to research that if you wish.

    Mr. SANDLIN. Okay. No further questions. Thank you for coming.

    Mr. FRANKS. Thank you.

    I ask unanimous consent that the hearing record be held open for 30 days to allow members to submit written questions to the witnesses and to receive written answers for inclusion in the record.
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    Without objection, so ordered.

    I ask unanimous consent that the opening statement of Mr. Shuster, the Chairman of the Transportation and Infrastructure Committee, be included in the hearing record at the appropriate point.

    Without objection, so ordered.

    [Mr. Shuster's prepared statement follows:]

    [Insert here.]

    Mr. FRANKS. This witness is so central to the discussion and the items of concern so apparent to the members that I am going to allot for another round of questioning for those members who would like to avail themselves of that opportunity. We appreciate the cooperation of the witness.

    Let me, if I may, I want to try to flesh out a little bit more about this, the environmental review that the STB conducts. Every Federal agency, as I understand it, when an action that they take relates to a license or permits a given activity, NEPA comes into play and requires you to do an environmental analysis.

    Does NEPA stipulate the component parts of the analysis that the STB is to undertake? Or does it merely set policy guidelines and the specifics of the implementation of the environmental analysis? Is it done by the commission in its—by the Board on the basis of its interpretation of what NEPA requires?
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    Ms. MORGAN. Well, we are—you are correct that, because we are a Federal agency and we do take Federal action, that we are subject to NEPA and related laws. And in analyzing the various issues that we are required to analyze under NEPA and those related laws, there are regulations in place either under NEPA and related laws or under our own regulatory authority; and those are the operative standards that we use in analyzing the various issues before us. I believe that is what you were asking.

    Mr. FRANKS. So it is a combination of NEPA and internal agency regulations which govern the environmental analysis process?

    Ms. MORGAN. The regulations, in essence, implement further our requirements under NEPA. We are required under NEPA to take a—what they call a hard look at the transactions. That is the standard. So the regulations that we apply are intended to implement that standard.

    Mr. FRANKS. Some of us have some level of familiarity with NEPA. I would suspect most of us don't have much familiarity with the agency-specific regulation that you have just talked about. Would you submit that to the committee for review?

    Ms. MORGAN. I would be happy to.

    Mr. FRANKS. Thank you very much.

    Mr. Wise?
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    Mr. WISE. Thank you.

    Madam Chair, I thought Mr. Moran asked an excellent question, and I want to keep following up on it. That is, he asked you, as I recall, whether or not there was—in effect, I think what he was asking was whether or not there was additional authority that you thought you needed. You responded quite ably you had all that Congress had intended you to have, which puts you—makes you my nominee for the State Department in some future administration.

    Ms. MORGAN. That sounds pretty good to me.

    Mr. WISE. I am afraid I may not have much to say about it, but——

    Ms. MORGAN. I will be back to visit you about that job.

    Mr. WISE. ——what I wanted to follow up on is that you pointed out that the Congress had evaluated this and done this. But the Congress is now coming back to you and the Congress, in the form of this subcommittee, is asking you for suggestions and recommendations and practical experience. Because the Congress—I think when the Staggers deregulation rail act was enacted, there were at least 40 Class I railroads operating. Today there are going to be seven, I presume, by year's end; and other mergers are now pending. So we are getting to a situation where the dynamics are much different.

    I believe that the STB's role is probably going to be different as well. I have got to come back to Mr. Moran's very excellent question, which is—and also let me add another factor in there.
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    The Staggers Act dealt with the ICC. The Congress changed that and, of course, as you well know, brought forth the STB and now reauthorization is before us. So we are asking you for your practical in-the-trenches advice that you have seen based on your experience. I would renew his question. Particularly in overseeing these mergers that are coming before you or perhaps that have been completed but yet you need to keep oversight over, is there additional authority that you need?

    Ms. MORGAN. With respect to oversight, I don't believe that we do need additional authority. I think we are—we have imposed oversight in the UP-SP merger, and we are exercising that oversight very seriously and will continue to do so.

    I cannot talk about the future decision so, with respect to oversight, I believe we have the authority that we need and we have exercised it and are committed to that.

    As I said earlier, I think as we go through each of these decisions we all learn something and, hopefully, the Board applies what it has learned in dealing with the next transaction.

    Mr. WISE. The second area, a couple of bones that this dog is not going to let go of here, is the area that Mr. Nadler was getting into on competition.

    My impression of STB policy is that when you are evaluating a merger, you are evaluating and your first criteria is—criterion—is to make sure that competition or to try to make sure that competition is not lessened from what it was. Is that a fair statement?
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    Ms. MORGAN. Certainly in past decisions the preservation of competition has been the criterion that we have applied.

    Mr. WISE. But, obviously, that makes a difference. It is a different situation if you are going from 40 railroads to seven or perhaps five in some distant—in some not-so-distant time. Then my question becomes, so if competition is good, does the STB feel that it is within its statutory authority as it exists to look at ways competition can be promoted at the level that it presently exists?

    Ms. MORGAN. Again, I have to be careful in answering this question, because this is the very question that is one of the very many questions that is before us in the pending Conrail matter. But I will try to answer it. Let me just maybe back up a little bit to what used to be the case and where we are today, because I think that puts it in a little bit of perspective.

    When the ICC used to deal with mergers, mergers were viewed by many parties as a way of restructuring a lot of things. They were viewed almost like Christmas trees. In other words, if you had a particular transportation interest and a merger was pending, you would bring your issue to the agency and then, hopefully, would get relief.

    The view was that that was really not the role of the government agency at that time. And so there was—there evolved this notion that we couldn't impose—we, the ICC at the time—couldn't impose every request that was brought to us.

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    Now, you rightfully have indicated that we must be aware of where we are today; and, as I said, I think that the Board has tried, as we have gone through these processes, to deal with the competitive world that we find ourselves in today. I mean, it is not—this sort of evolved over time to address a different set of problems.

    Mr. WISE. The problem that I face though, and I am very sensitive and I respect greatly your concern over any pending matter, the reality is, I think you are always going to have a pending matter. This Congress, this subcommittee needs for the purposes of this reauthorization to make a decision about what role and what policy it wants the STB to be implementing.

    Should the STB—if the STB feels that it cannot look at enhancing competition as a general matter, then that is something that this committee needs to know, because we will probably want to debate whether or not we ought to put another factor in there that you should consider. So I guess I would ask you, if you might think, if you would answer in that regard, I am sensitive to the existing matter before you, but that is not at issue.

    What is at issue is the STB's present role and whether it feels that it can look at going beyond the existing level of competition that exists when it considers a merger.

    Ms. MORGAN. We will make a decision on June 8 on this very issue as to whether the statute and our laws provide the kind of authority we need to address the kind of competitive balance that we think we need to address. Enhancing competition is part of that.
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    I am not trying to avoid your question, but it is absolutely the very question that I have to deal with. You will hear from me on the 8th of June.

    In terms of the current statutory authority, I am not asking right now for any additional authority to address competition, which is the second part of your question. Down the road I may feel, if decisions go in another direction, that I don't have the authority I need to deal with competition in the way I think I need to deal with it. Then I certainly will let you know. But at this point I do not feel that I need additional authority with respect to mergers to deal with competition in the way that I feel I am supposed to.

    Mr. WISE. I appreciate that answer. I assume—it looks like I am not going to hear any more until June 9. But I tell you, my one concern is, I have a Chairman here who is, who can run a fast-moving freight train when he wants to. I just want to make sure that we have an answer before we begin marking this bill up. He is——

    Ms. MORGAN. I understand. This is a bill that is important to me as well. I am not trying to avoid your question. But I just—I have to be careful.

    Mr. WISE. I do have to make one observation. I appreciate your statement about the ICC and the Christmas tree. I also know that you worked in the Senate. You have seen a Christmas tree or two in your time.

    Ms. MORGAN. I have indeed, yes. I might have been blamed for some of them, as a matter of fact.
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    Mr. FRANKS. Mr. Nadler?

    Mr. NADLER. I have only one question at this time. I will not further explore the area that the gentleman from West Virginia continued before I began. That is a very simple question. I thought the decision was June 23rd, not June 8.

    Ms. MORGAN. No, June 8 is the voting conference. There will be a vote on June 8th. The written decision will be issued on July 23.

    Mr. NADLER. It will be public on what that decision is.

    Ms. MORGAN. Yes. It is an open voting conference; and the decision will be public, yes.

    Mr. NADLER. Thank you.

    Mr. FRANKS. Mr. Moran?

    Mr. MORAN. Mr. Wise was so complimentary of my question. I think he really has hit upon a real concern, a real issue before us and one I hope that we can resolve.

    I think enhancing competition is clearly something that is awfully important. Deregulation, that environment succeeds well only when there are alternatives in a competitive way.
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    In that regard, a couple of things that—you may need to tell me that these are pending issues. One of the things that I would like to know, do you have control, approval authority over what appears to me to be the case where short lines are created, the principal carriers retain control of enough trackage that the short lines can never become competitors but only feeding operations for the principal carriers? Do you have control over the circumstances that cause that to arise, if my assumption that that arises is accurate?

    Ms. MORGAN. Well, let me answer two ways on that.

    First of all, there have been cases, and I would be happy to get them to you for the record, where this issue has been addressed. And if there is what we feel to be an imbalance, if you will, we do address it. So we do—we can deal with that.

    Mr. MORAN. Who would make that complaint, the shippers or the short line? Or both?

    Ms. MORGAN. Both. Either or both.

    But I think the more important point on this subject is that, as part of our decision that we issued following the rail access and competition hearings, we directed the smaller railroads and the larger railroads to report back to the Board by May 11 regarding issues such as this and ways that we could address those issues by private agreement or by regulation so as to ensure that the smaller railroads have a true competitive role in today's rail network. So that issue is very important and is very much in discussion and has the attention of the Board right now.
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    Mr. MORAN. So more to come in this regard as well?

    Ms. MORGAN. Yes, exactly.

    Mr. MORAN. As I understood the testimony of USDA in one of their—one of your recent hearings, they talked in their testimony about the line from Kansas City to Pueblo and trackage rights, the suggestion that it would be one that could be opened up similar to what you had ordered in Texas. Is that issue still pending or is the—that testimony—is that just more general on the state of the rail industry in the western United States or is that issue still out there?

    Ms. MORGAN. I may need to check the record to make sure I know which line. I remember vaguely testimony along those lines; and, obviously, any line on the UP-SP system is under the emergency service order. So we still have authority to deal with that.

    But if I recall correctly, there was also another issue associated with the UP-SP merger and a line out there. Let me just get back to you for the record on that.

    [The information follows:]

    No application has been filed or is pending before the Board for acquistion of lines between Kansas City and Pueblo as part of UP/SP oversight.

    Mr. MORAN. So the two issues on the merger that are still pending, the general oversight, will that result in orders being issued by the Board and that is separate from the other proceeding?
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    Ms. MORGAN. Well, the oversight proceeding, both general and more specific to Houston, could result in further orders, yes, that would affect the system for the long term.

    The emergency service order proceeding, which as I indicated we have an order in that through August 2nd, in any time during this proceeding we could amend our order in some way if we felt that we needed to address any emergencies that came up.

    So it is two separate, ongoing proceedings with potential for additional orders as appropriate.

    Mr. MORAN. As I indicated with the railroads, there will be another harvest in Kansas and the Midwest in 1998. It appears, based upon the statistics as well as just general observations, we are going to have another tremendous harvest in our State, and it appears to me that lots of problems still exist. We have got lots of grain in storage, and the price is low, and people are not moving grain now, and the harvest is a month and a half away.

    Ms. MORGAN. You may be aware that the Secretary of Agriculture and I have agreed on a—what we call an early warning system to put together data on the grain markets and data on rail capacity in hopes that at least that will help as we move into this harvest period.

    Mr. MORAN. I was pleased to see you do that.

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    I also should say that this is not just an agricultural issue. It affects a lot of businesses, particularly businesses in rural communities.

    Ms. MORGAN. Absolutely.

    Mr. FRANKS. Madam Chair, we thank you. We have benefited from your comments, and I suspect that there will be written questions submitted to you and the STB. We appreciate your attendance this morning. Once again, thank you.

    I would like to call forward Panel III: Mr. John F. Guinan, Director of Freight and Passenger Rail for the New York State Department of Transportation, who will be accompanied by Mr. Calvin Dowd; and also Mr. John J. Haley, Jr., Commissioner of the New Jersey Department of Transportation.

    Let me indicate to you that I expect a vote in the next few minutes. Hopefully get through one or both of your opening statements prior to taking a brief recess in order to go over and vote. I would like to thank both of you for coming.


    Mr. GUINAN. Thank you, Mr. Chairman, members of the subcommittee.
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    My name is John Guinan. I am Assistant Commissioner for the New York State Department of Transportation. On behalf of Governor George Pataki and the people of New York, I appreciate the opportunity to share our views regarding the future of the Surface Transportation Board.

    New York strongly endorses reauthorization of the STB. While we may have concerns regarding certain STB policies and regulatory standards, particularly in the area of railroad mergers and consolidations, we believe that a fully staffed and properly funded agency is needed to protect the interests of States shippers, ports and other public constituencies in the face of unprecedented industry consolidation and concentrations of rail market power.

    In the decades before 1970, pervasive regulatory intervention in virtually every aspect of the railroads affairs contributed to an inefficient, oversized and, ultimately, untenable industry.

    One consequence of railroad deregulation was increased industry consolidation. Simply put, there were too many carriers and too much associated inefficiency to be sustained by the railroads' potential traffic base.

    As a result of mergers and acquisitions, however, a Nation that 20 years ago counted over 30 Class I railroads today counts only seven. The consequences of these mega-mergers are troubling. The current and seemingly intractable western service problems have adversely affected the national economy for months. Likewise, shippers dependent on rail service fear rising rates as fewer and larger railroads look to recover multi-billion dollar acquisition premiums. In the east, CSX and Norfolk Southern now claim exclusive the right to decide whether and to what extent competition will be allowed to grow.
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    Today, we face an extremely concentrated industry in real need of effective and meaningful oversight.

    Regrettably, the trend of the STB's exercise of its oversight authority has been in the wrong direction. As the industry has become more concentrated, it appears that the STB increasingly is taking a laissez-faire approach to its regulatory role. Its public interest test supposedly balances efficiencies and cost-savings from a merger against the public interest of preserving and enhancing competition. These determinations are to be made based on careful scrutiny of the credible evidence.

    However, it seems that the STB accepts railroad claims of financial benefits and operating efficiencies without serious question, while limiting its consideration of competition to the few instances where a shipper is served by and only by both merging carriers. Under this model, merger approval is almost a foregone conclusion, and the public interest in promoting the expansion of competition wherever feasible is largely ignored.

    To truly serve the public interest, the STB cannot simply sit back and defer to the railroads themselves on the merits of railroad mergers, intervening only in response to the most blatant examples of anticompetitive conduct. The STB must become more proactive to seek out opportunities and use its conditioning power to create or enhance competition as it considers a proposed acquisition or consolidation.

    An increased sensitivity and willingness to address competitive opportunities with appropriate conditions need not lead to the end of consolidations or harm to the railroads' legitimate financial interests. The few major railroads remaining in this country, however, cannot be allowed to dictate where competition will or will not exist. Companies such as CSX and Norfolk Southern must be reminded that they are participants in an industry that is regulated in the public interest and operate under statutes that mandate consideration of and service to that interest. Where necessary, they must accept modifications to their negotiated transactions to better fulfill Congress's mandate that, to the maximum extent possible, competition should be the force determining the level of railroad rates and service. For its part, the STB has the duty to carry out this mandate in the first instance.
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    Properly implemented, a proactive, procompetitive railroad policy not only will protect and advance the interests of rail customers but will provide the railroads themselves with new opportunities for increased traffic through expanded markets powered by the innovations and efficiencies that naturally flow from a competitive marketplace. What is needed is a properly-motivated and fully-funded expert agency backed by Congress with a mandate for change.

    New York believes that the STB, through the statutory authority it already possesses, has the power to correct the shortcomings in its current rail consolidation oversight standards and advance the pro-competition agenda called for in today's concentrated rail market. However, it may lack the will to do so. Therefore, we urge this subcommittee and the Congress to provide support for the STB and direct it to use its authority to ensure that the future of the rail industry is marked by competition, innovation and efficiency for the benefit of railroads, their customers and our national economy as a whole.

    Once again, on behalf of Governor Pataki and the people of New York, I thank you for this opportunity to present our views.

    Mr. FRANKS. Thank you.

    Commissioner Haley.

    Mr. HALEY. Thank you, Mr. Chairman, members of the committee. It is a pleasure to be here to comment on this very important issue for New Jersey.

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    As you know, Mr. Chairman, the health of the railroads are key to New Jersey's economic well-being, both on the passenger side and the freight side; and it is a point that we have learned the proof of over the last several months throughout the rail merger.

    In looking forward towards the future and the reauthorization of the STB, we in New Jersey were faced with a similar situation. Many of our other States in the Northeast in the 1970s, as New Jersey, were served by some seven bankrupt carriers, none of whom were individually capable of attaining revenue to run the railroads adequately, a downward spiral.

    The passage by Congress of the Staggers Act in 1980, along with the Northeast Rail Services Act, which was customized to Conrail to provide the legislative leg-up that we needed to begin to return to the importance and have both thriving and passenger and freight railroads in New Jersey—we feel that with those two actions, sometime over a period of years, Conrail became generally profitable but attractive enough to command a private sector investment of over $11 billion.

    At the same time, through the support of yourself and the other members of the committee and Congress, along with a succession of governors in New Jersey, we invested some billion dollars in State funds to bring back the passenger railroads in New Jersey.

    We believe the merger of CSX and Norfolk Southern will strengthen the rail system in New Jersey. We also believe that we should examine where we go from here. This acquisition means, for all intents and purposes, that there will only be two Class I railroads serving the United States east of the Mississippi River; and, needless to say, any kind of mega-mergers like this will exercise incredible market power.
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    In New Jersey, we established a set of negotiating objectives as we weighed the merits of the merger on the State. We believe that we will benefit greatly because those objectives on both the freight and the passenger side have been achieved. At the same time, the presentation of the Conrail-shared asset operator, who will cover some 80 percent of our rail users in New Jersey, will provide an unprecedented level of rail competition for New Jersey. For the first time, both in the northern part of the State through the port of Newark and Elizabeth and in the greater New York-New Jersey region as well as in the south in Trenton and Camden, we will have both of our major ports served by two Class I railroads.

    So that is an important point for us in terms of being able to endorse the merger and because of the competitive position that it has placed New Jersey and the New Jersey businesses in.

    The market power that can be exerted by the two railroads also has to be held in check. We remain concerned about the long-term health of the shortline railroads, which grew up in New Jersey to serve areas of the State that were abandoned by Conrail throughout the 1980s, and we know that the Shortline Association has already testified to the committee to the need for the industry to address competitive access, routing, and rate-making issues, as well as the issue of car supply.

    We feel that the STB has to continue to monitor these issues and have sufficient tools at their disposal to assure compliance so that shortline railroads have a recourse if they are legitimately harmed.

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    Likewise, the STB needs to take a more direct approach to passenger-related impacts of rail mergers. In New Jersey, passenger railroads and the impact the merger had on passenger service consumed most of our time, and while we are satisfied, frankly, with the way this came out, we are a little bit disappointed that the STB appeared reluctant to take a more direct stand on passenger issues during the merger process.

    Because of the efforts of many of the members on this committee and States and cities throughout the United States, there has been a huge investment in transportation, as well as in freight, and they will continue to overlap, and we feel that as a joint operation, they need to continue to be seen closely by the committee.

    The solution to the shortline and transit issue should not be legislated. The industry itself has already begun the dialogue to address the concerns, and the best solution is one that is mutually agreed upon by all parties. In the end, New Jersey negotiated our differences concerning passenger rail operations with the two railroads and are supporting the merger.

    The overall premise of the Staggers Act is sound. We do not believe that there is a need for wholesale overhaul of the act; however, there is a need to assure that the reauthorized STB is put in place and that it has sufficient teeth in its enforcement powers to ensure that these issues are addressed, as well as providing sufficient monitoring of merger progress to avoid the service disruptions that are being experienced out West.

    Again, Mr. Chairman and members of the committee, we feel that the impending merger will benefit New Jersey both on the passenger and freight side and greatly appreciate the opportunity to present the picture for you today.
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    Mr. FRANKS. I want to thank you both for coming to testify today.

    Commissioner Haley, you referred in your statement to the need for a more direct approach to the passenger-related impacts of these major rail mergers. Are there specific types of policy corrections that you had in mind?

    Mr. HALEY. Mr. Chairman, throughout the morning, I have heard members of the committee raise issues about safety, impacts on the community. We see the trend in the future, particularly in the Northeast, of more and more coexistence of passenger and freight railroad. In New Jersey, which is, as you may have noticed, a densely populated State with many transportation challenges, it is also a corridor State to goods movement, and in this particular case I think not only does it affect the region, but it affects the national economy if we are unable to move goods up and down.

    I think the important message that we were able to get through to the passenger—excuse me, to the freight railroads was, number one, that passenger railroad was growing and here to stay in New Jersey, that we needed to preserve the ability to run safely and efficiently over the existing lines as well as to maintain the ability to expand, and at the same time we needed a commitment, which we got through our agreement, from the freight railroads to invest. And it wasn't enough for them to tell us that they heard us and they wanted to work with us jointly, but what we were able to get from them was a commitment in terms of dollars, dollars and policy and business mandates, that they would invest in the best single technology when they operated it on the passenger areas, those kinds of things. We were able to negotiate those.
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    I think everyone, including New Jersey, into the future would be advantaged by an acknowledgment of some fashion on the part of the Board that passenger and freight railroad have to be made to coexist. I think there are many means to do that, whether it is through negotiations or through introductions of technology. But everybody wins when these kinds of things are done effectively and efficiently, and we think that providing whether it is States, municipalities, authorities or locals with the ability to have the support of an engaged and willing STB to protect and help grow and acknowledge the importance of passenger railroad we think would be helpful.

    Mr. FRANKS. One last question. One of the STB's lesser known responsibilities which it inherited from the old ICC is to resolve disputes between freight railroads and Amtrak over access and compensation for the use of freight tracks by Amtrak trains, and in the Northeast corridor, similar to referee disputes between Amtrak as landlord and the freight commuters as tenants. Do you see any need for adjustments in the current law administered by the STB in these particular areas?

    Mr. HALEY. Frankly, no. We think that in the areas that you mentioned, that the appropriate enforcement powers are there, if necessary, and, again, we think that those—having the—sometimes in terms of our ability to negotiate with parties involved, and I am talking about State level now, whether it is with other railroads, Amtrak, or representing MPOs on behalf of local towns, we think the enforcement power is there, and simply having the spectrum of a powerful STB looming out there is sometimes enough to get people to want to have a negotiated deal. But from a legal perspective, we think the enforcement power is adequate.
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    Mr. FRANKS. Thank you.

    Mr. Nadler.

    Mr. NADLER. Thank you.

    Mr. Guinan, you stated in your testimony, quote, the STB must become more proactive and use its conditioning power to seek out opportunities to create or enhance competition as it considers the proposed acquisition or consolidation.

    So I take it, then, that you believe the STB has adequate statutory authority currently to do that?

    Mr. GUINAN. Yes, we do.

    Mr. NADLER. Thank you.

    If it is determined that it does not, would you think it a good idea for Congress to give it additional statutory authority?

    Mr. GUINAN. Absolutely.

    Mr. NADLER. Thank you.

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    Mr. Haley, I was interested in a couple things you said. First of all, you talked about the necessity for coexistence of passenger and freight railroads, and I certainly agree with that. As we look at the economics and the operational considerations surrounding this merger, this proposed merger, a number of things become evident, one of which is that Conrail has severely restricted the available trackage which freight can use. It is a severely restricted capacity, in my opinion, overly restricted capacity. And one of the things that has happened in New Jersey in particular is that with Conrail apparently being silent, a lot of the Northeast corridor, the various passenger agencies, the New Jersey Transit and I don't know who else, have built stations in such a way as to make it impossible for modern rail freight to pass those stations on those tracks. Are you aware of this problem, and, whether or not you are, do you think there is anything we can or should do to make that trackage available to freight by physically changing those stations?

    Mr. HALEY. Congressman, I guess if I understand the question, let me first say that over a period of time, say from the beginning of when Conrail ran passenger service in the 1970s, the relationship in the State of New Jersey with Conrail was extremely poor, and I think that existed for a long time.

    Mr. NADLER. I think that is true in New York also.

    Mr. HALEY. Yes, and I think that existed for a long time. If there is a benchmark or watershed moment when you can point to where perhaps things changed or began to change, it was with the passage of the Staggers Act, and the other act that Congress passed in terms of Conrail.

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    As Conrail began to abandon sections of railroad for economic reasons and became—and I am saying this is in a value-neutral sense—single-minded of purpose in terms of their focus on the bottom line in improving the freight side of it, two things happened in New Jersey. The shortline railroads grew up to deal with the freight issue to serve those businesses, and on the passengers side there really was a renaissance of rail in New Jersey. I mentioned the figure of about a billion over a period of 15 years that has been invested in the capitalization of the system, and there is probably, in the next 10 years, a figure three times that that may be proposed to renew the system and then to expand it in particular places. A lot of the places where it has to be expanded include areas that are now owned by Conrail and will be owned by the successor railroads.

    What we have been able to do, and there are two particular commuter rail lines now that have shared operation, we have been able to work with them using the information that has been submitted both to us and through the STB in terms of where the freight traffic will go to get agreements that we will get. We need to operate additional passenger trains, as well as look at opportunities to expand, whether it would be to build stations—you know, the reality that we have come to jointly with them, and I think it was frankly much harder for freight railroads, who for a long time had taken the position, hell, no, you are never going to see a coexistence, we need to have complete separation not only of time, but of trackage, I think for us these last several months of negotiating this agreement has brought us, both sides, if you will, to the reality that we are going to have to exist and coexist together.

    Mr. NADLER. I appreciate all that, but what I am really getting at is that Conrail has—by contract has had the exclusive right to freight usage on the Northeast corridor itself from Amtrak, which it basically hasn't used. It has not used the Northeast corridor except for with minor exceptions, as a result of which, I am informed, that especially in New Jersey, and it may be true other places, I don't know, there are a lot of places on the corridor, which, if Norfolk Southern wanted to do modern rail freight, they couldn't, because while Conrail wasn't paying attention because it didn't care, the commuter rail lines built the stations in such a way as to physically block modern rail freight equipment from coming through those tracks, even if there is no passenger train, you know, anywhere at 2 in the morning.
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    So my question was, is the Department aware of that particular problem, and does it think there is anything that can be done about it?

    Mr. HALEY. I appreciate the clarification on the question. I guess I don't see it as a huge problem, because, frankly, the issue that has got to be dealt with of how and when and how you put freight on the Northeast corridor and where it ultimately goes is an issue that is simply bigger than where you put stations, and I don't see any major issue with the fact that passenger service is going to continue to thrive on the Northeast corridor, regardless of both in New Jersey and, I believe, between Washington and Boston, as well as, you know, whatever happens to the rest of the system will be determined at another time. But I don't see that as a—in and of itself, the positioning of passenger stations on the Northeast corridor, in New Jersey, again, Congressman, as a problem that is a detriment to a successful coexistence of passenger freight.

    Mr. NADLER. Let me ask you one more question, if I may, with the indulgence of the Chair.

    The Norfolk Southern runs road railer equipment there, the Triple Crown service, they run road railer equipment, which is, of course, basically truck trailers with hydraulically retractable rear wheels that double as train cars. CSX does not. Now, with CSX inheriting Conrail's rights on the corridor, in part of the corridor, in Norfolk Southern inheriting its rights in the other part of the corridor, nobody has the rights to run the entire corridor.

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    Now, road railer equipment, which Norfolk Southern operates, can fit through the tunnels under the Hudson and the East Rivers, so you could run a road railer train physically among the entire corridor from Virginia to Massachusetts. A lot of people have said that if you did that, you would take a heck of a lot of traffic off of I-95, in particular in Connecticut and New Jersey.

    Is it your view that New Jersey would be helped if the institutional ranges were such that Norfolk Southern or CSX could run road railer equipment—could run a through train along the Northeast corridor through New Jersey and through the New York tunnels and up into New England, and would that take a lot of traffic off the turnpike and off I-95, and would you find that as something that would be desirable and useful?

    Mr. HALEY. It is our position that how much and when and if and to what extent freight should be run on the Northeast corridor needs to be part of a decision that looks at a broader approach that includes—we are also up and down New Jersey and through New Jersey, and how freight gets either through or around New Jersey, because, again, there needs to be a balance between passenger and freight. Passenger service is going to continue to exist on the Northeast corridor.

    I think that the deal that New Jersey has agreed to is the best possible match or mix, if you will, for both passenger and freight, and having competitive access in New Jersey through the operation of the Shared Assets area not only to both ports, but providing two Class I carriers to 80 percent of the businesses I think is a good deal for us in terms of the freight mix. But I think the regional or national, how you deal with freight on the Northeast corridor, is an issue that is going to have to be dealt with in terms of a number of other States and the committee.
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    Mr. NADLER. Thank you.

    Mr. FRANKS. I would like to thank our two witnesses very much for coming down to testify before the subcommittee today. We appreciate their input.

    A vote is now taking place on the House floor, and rather than try to convene the next panel with opening statements, we will take a break until we can get back from the floor from this vote, and we will see everybody as soon as we possibly can. Thank you.


    Mr. FRANKS. I would like to reconvene the hearing. I would at this point like to introduce panel four.

    First we have Karen Phillips, senior vice president for policy, legislation and communications department, Association of American Railroads. We also have with us Mr. Reilly McCarren, executive vice president and chief operating officer, Wisconsin Central Transportation Corporations, North American Rail Operating Properties, on behalf of the American Short Line and Regional Railroad Association.

    I would like to thank you both for your patience. I apologize for the delay in light of the votes on the floor.

    Mr. FRANKS. Ms. Phillips, why don't we begin with you.
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    Ms. PHILLIPS. Thank you very much. Thank you, Mr. Chairman, Congressman Bachus, Congressman Mica. The Association of American Railroads appreciates this opportunity to present the views of its members on intercarrier transactions, abandonments and build-outs. I am submitting my complete statement for the record. Please do note, however, that the Kansas City Southern Railway does not join in some parts of the AAR testimony today.

    The AAR supports existing regulations involving intercarrier transactions, which include mergers, trackage rights, interchanges and routing obligations. Trackage rights continue to be an important tool in preserving transportation options and enhancing efficiency. The industry continues to receive more than one-third of its revenues from freight that is voluntarily interchanged between railroads. However, because so much attention has been focused on mergers, much of my written statement does focus on that form of intercarrier transaction.

    Attention has been focussed on the decline in the number of Class I railroads since 1980. That decline has been exaggerated, however, as a result of a 1991 Interstate Commerce Commission decision to increase the threshold level for Class I status from $96.1 million in annual operating revenue to $250 million. Had that change not been made, there would be 14 Class I railroads today, rather than nine.
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    Most railroad mergers have been end-to-end mergers and have not reduced competition. The one proposed merger which included significant route overlap, that between the Santa Fe and the Southern Pacific, was rejected by regulators in 1986. In subsequent mergers, regulators and the railroads themselves have given competitive protection to those shippers who saw their competitive options reduced from two to one.

    Mergers have benefited both railroads and their customers. They have improved the financial strength of railroads, permitting them to sharply increase investment in the railroad infrastructure. Shippers have gained from the more efficient single-line routes opened by mergers and the increased market reach that has meant. Merger efficiencies are also partly responsible for the 56 percent reduction in average railroad rates on an inflation-adjusted basis since 1981.

    With respect to abandonments, the inability of railroads to abandon unprofitable lines was a major contributor to the industry's pre-Staggers financial problems. But railroads have not had free rein to abandon lines since Staggers. Shippers, communities, rail labor and other affected parties are able to protect their interests through participation in abandonment proceedings before the Surface Transportation Board. It is important to note, however, that many abandonments are unprotested.

    In many other cases, the STB does not have to rule because the affected parties reach an agreement to preserve the service through the sale of these marginal lines to local shippers, communities or shortline operators.

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    Since the Staggers Act was passed, Class I route mileage has decreased by 56,000 miles, but the majority of this, over 36,000 miles, was not abandoned at all. Instead, it was turned over to new operators who can offer shippers lower rates and more personalized service because of their lower cost structure. The ICC Termination Act encouraged line sales as an alternative to abandonments because it is a situation where everyone wins.

    Finally, let me briefly mention construction and build-outs. Railroads are investing more than at any time in the last half century in line expansion projects. CSX, for example, is investing some 220 million dollars to expand capacity on its line between Greenwich, Ohio and Chicago. Burlington Northern-Santa Fe is investing $35 million to eliminate a tunnel and add capacity in Wyoming. Union Pacific is investing $570 million in Texas and Louisiana over just the next 2 years. A regional railroad, the Dakota, Minnesota & Eastern has proposed building a 280-mile line extension so it can compete for Powder River Basin coal along with UP and BNSF.

    Shippers have also aggressively expanded their competitive options either by building or threatening to build rail spurs to connect with the second railroad or constructing facilities to unload barges or vessels. Numerous examples of this are included in my written testimony.

    Railroads take every threat of a build-out seriously. Actual and proposed construction of new rail spurs or barge facilities have become an effective competitive tool, increasingly used by shippers in rail rate negotiations.

    In conclusion, the track record of Staggers on mergers, abandonments and build-outs is sound. It has resulted in lower rates for rail customers, expanded market reach for rail customers, development of a sound and vibrant shortline and regional railroad industry, and a stronger and more efficient Class I railroad system.
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    Thank you again very much for this opportunity to testify, and I would be happy to answer any questions you might have at the appropriate time.

    Mr. FRANKS. Thank you.

    Mr. McCarren.

    Mr. MCCARREN. Thank you. As you mentioned, I am testifying on behalf of the American Short Line and Regional Railroad Association. We represent more than 550 shortline and regional railroads. These railroads operate and maintain 27 percent of American railroad industry route structure, although accounting for 9 percent of the rail industry's freight revenue and 11 percent of employment. More important than those numbers are the fact that much of that route structure was vulnerable while it was in the Class I system and would not be in service today if our members had not purchased it.

    I would like to make three points this morning. First, I urge the committee to resist any effort to change the labor protection provisions contained in the ICC Termination Act. Most of you were here when we went through the previous reduction of labor protection provisions, and we had a major legislative fight over something called the Whitfield amendment. There was an enormous amount of time and effort devoted to that battle, and obviously in the end, the House adopted the Whitfield amendment, although our association did not support it.

    It is now the position of our association, as it has been, that labor protection stands in the way of preserving light-density rail lines and should be completely eliminated for Class II and Class III transactions. However, Congress has spoken recently on this subject, and we believe that while not totally eliminating labor protection as we would have liked, Congress has established bright lines that show where and when labor protection will be applied. This has made for smoother transactions, particularly with regard to reducing the number of court cases that were the inevitable result of previous ambiguities in the law.
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    This is an issue that has strong and emotional support on both sides, and as we found in 1995, there is not a majority for a pure position on either side. No useful purpose would be served by fighting this battle all over again. We won't seek any changes to the Whitfield compromise, and we hope that you will not consider any during the consideration of STB reauthorization.

    In particular, we hope that you not include in this bill the concept considered last year in connection with Amtrak reauthorization. That concept was to substitute Railway Labor Act authority for STB authority and various transactions affecting our members. The RLA process would allow anyone who opposed a transaction to tie it up indefinitely. In our opinion, it is a back-door way of putting a stop to line sales and would bring us back to the days when marginal lines had to be abandoned because it was too cumbersome to sell them.

    My second point concerns the Rails to Trails Program. The stated goal of the Congress in enacting the 1983 Rails to Trails Act was to preserve abandoned rail corridors for future rail use. This so-called rail banking was in response to the huge number of abandonments that were occurring at the time and was strongly supported by the many communities that knew once rail line was abandoned, it would be gone forever.

    Since the passage of the Staggers Act, new and regional shortline railroad companies have in many cases shown it is possible to operate previously money-losing lines on an economically viable basis. We have had success buying branch lines due to the streamlined nature of the governmental process. Those processes don't apply to reinstituting service on a rail-banked line, and, in fact, the procedure to reinstitute service on a rail-banked line is essentially identical to the procedure to build a completely new rail line and the construction of it. It is very lengthy and expensive. We know this is part of STB reauthorization, and we know there are important environmental issues to be considered, but in the current framework, opponents of rail revitalization can use those environmental procedures to hamstring a shortline regional operator for trying to reopen former rail service.
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    Now, my last point is the relationship between small carriers and the Class I carriers, which I know is of intense interest to the committee. As I noted, a large majority of our members are the product of deregulation. The creation of our railroads played an important part in the process that allowed the rail industry to move from the brink of bankruptcy to one of economic viability. Those transactions were win-win situations, positive for shipping communities, rail lines, both large and small, and the Federal Government encouraged and facilitated them in the name of good transportation policy.

    Today, the railroad world has changed dramatically. More than 300 local railroads have been formed since then. At the same time, Class I's have consolidated to a handful of megacarriers.

    If small railroads are to be an integral part of today's national rail network, customers must be treated comparably to those on the connecting Class I systems with regard to rates, switching charges, competitive routing alternatives and car supply. Artificial paper barriers which arbitrarily restrict full interchange rights should be eliminated or modified to allow our shippers the full benefit of the national rail system. Supply of general service car types is being outstripped by demand, and we as an industry must develop alternative ways to maintain adequate car supply and investment, given the new parameters of the industry.

    Let me make it very clear, we don't favor reregulating the rail industry. We believe that needed changes can be accomplished by the private action of the industry. To that end, ASLRRA and the Class railroads have begun a series of CEO-level talks. In these meetings we are airing our views about barriers to competition and obstacles to quality service, and we discussed possible solutions in those talks. We hope to be able to return to you in a matter of months to report on concrete procompetitive initiatives voluntarily adopted by our industry.
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    There is one other item that was brought up earlier this morning, and that is that some would alter the current system of Federal preemption to allow State and local regulations of the Nation's rail system. However well intentioned, such a change would damage rail shippers generally and particularly those on our local railroads. The Founders' concepts of free interstate commerce are as valid and important today as they were 200 years ago.

    I appreciate the opportunity to appear before you today and would be pleased to answer any questions.

    Mr. FRANKS. I asked this question of a prior witness, and I would like to ask it again to round out the opportunity for folks to comment. What has been the effect on freight railroads from the broader State authority that existed prior to the adoption of the Staggers Act?

    Ms. PHILLIPS. Basically, it didn't work very well. As you are well aware, the railroad system is a nationwide system. It needs to be able to operate across the contiguous 48 States. What we had essentially was sort of a patchwork of regulatory systems throughout the United States. There was a standard of hindering commerce beyond which the States could not regulate, but that is a difficult standard to measure. Ultimately, there is some evidence that this cost shippers and the economy hundreds of millions of dollars in terms of useless regulatory costs.

    What the Staggers Act did then was to impose a system where States had to come to the Interstate Commerce Commission and certify they would regulate in accordance with the standards that applied nationally at the ICC. In ICCTA, Congress decided to streamline the process even further, and we have the current statutory standard where you don't even need to go through a certification process. It is simply a Federal standard, so it is more efficient and saves the economy millions of dollars.
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    Mr. FRANKS. So prior to Staggers, we had a real problem with States interfering with interstate commerce, and Congress, therefore, developed a new broader application?

    Ms. PHILLIPS. Yes, exactly.

    Mr. FRANKS. In your judgment, do local communities have adequate input into this process today?

    Ms. PHILLIPS. I believe they do. In the various types of transactions that are undertaken that go before the Surface Transportation Board, not only does STB conduct its own analyses, such as analyses for environmental issues, but they go out and hear testimony and hear comments from these various officials on abandonment proceedings, mergers, other types of transactions, and people can come in and file and be heard in the context of the various proceedings.

    I will also add that, railroads very frequently, as they are proposing to undertake transactions, also consult with people in the States and localities to try to address concerns before bringing something to the Board to file as a formal proceeding.

    Mr. FRANKS. Later in the hearing we will be hearing from another witness concerning the trails program. He indicates railroads are currently permitted to lay claim to and accept payment for property that doesn't actually belong to them. Do you have any reaction or comment to that observation?
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    Ms. PHILLIPS. I would have to research that. I would say in terms of the Trails Act, we have found in the railroad industry it has been a very effective way of setting aside land, railroad corridors that might potentially be used at some point in the future for rail use. There are about 123 or so corridors where this has taken place since enactment of the Trails Act. About five, I believe, of the corridors have been reinstated into rail service, so we have found it to be a good program. But by and large, the majority of track that is abandoned does not go into the Trails Act type of use.

    Mr. FRANKS. Thank you very much.

    Mr. Mica.

    Mr. MICA. Thank you, Mr. Chairman. A couple questions.

    I guess this is the first comprehensive review of the Surface Transportation Board since it was created a little over 2 years ago. Maybe I can ask a question. Are there any specific legislative changes that you think should be called to our attention in the area of intercarrier track construction or abandonments or any other areas that haven't been mentioned by you so far that we should look at?

    Ms. PHILLIPS. We are very pleased with the statute as it currently stands, and we would urge Congress to enact a clean reauthorization of the STB and leave the statute as it currently stands. Congress very thoroughly addressed a whole host of regulatory issues in looking at, developing and ultimately enacting the Interstate Commerce Commission Termination Act of 1995. We believe that is an excellent piece of legislation and is serving the country well, and that there is no need for substantive change in the legislation.
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    Mr. MICA. Mr. McCarren?

    Mr. MCCARREN. I think we would generally share that view, but we have noted in the shortline regional area, with respect to some of our customers, as the rail industry has consolidated, some of those customers have become disadvantaged compared to their own competitors located on Class I lines in ways that weren't originally anticipated. We are, as I mentioned, trying to work that out on a negotiated basis within the rail industry. We think that is by far the best way to do that. But we would reserve the right to revisit that if we are unable to answer the concerns that some of our customers have expressed to us.

    Mr. MICA. Mr. McCarren, you had a couple of criticisms in your testimony relating to, for example, reinstating rail service on a rail-banked corridor, that they must go through the same lengthy and expensive process as someone who is constructing a brand new line. Doesn't this essentially mean that once a corridor is converted into a recreational trail, the chances of it returning to active rail service in the future are almost nil?

    Mr. MCCARREN. They are certainly remote. Ms. Phillips mentioned there had been a few cases of successful reactivation. Our experience has been—my particular experience is that the political constituency behind trail lease is so strong that under the current legislation, it is very difficult for a shortline or regional railroad to overcome that and return a line to active use, particularly if that is going to be a light-density use serving perhaps a handful of customers.

    Mr. MICA. I think you also said in your testimony that labor reforms that were made in the Interstate Commerce Commission Termination Act that applied to line sales to Class II and Class III railroads have made line sale transactions smoother and less subject to litigation. Is it therefore safe to say that the reforms enacted in 1995 have led to increased preservation in rail service, since higher transaction and litigation cost would have caused more lines that could possibly be abandoned or sold for nonrail purposes?
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    Mr. MCCARREN. Yes, I think that is absolutely correct. And under the previous regime, no one would have wanted to endure the litigation, and there would now be transfers of operative properties because there is a clearly served path that applies to the transaction.

    Mr. MICA. A final question for Ms. Phillips. I am interested in your statement on page 11 of your testimony concerning the legal differences between a private railroad and a common carrier railroad. According to your statement, I believe, you said a private railroad does not need STB authority for a construction project. Does that mean if a shipper wants to construct a build-out, the shipper is not subject to STB review and any environmental and other requirements that go along with it; and if that is the case, would any build-out by a noncarrier fall completely outside of the STB jurisdiction as well?

    Ms. PHILLIPS. It is my understanding that if a shipper builds his own railroad, basically, to serve as a private carrier, that that is something outside of the Board's jurisdiction. It does not need STB authority. This is something where there is no common carrier obligation, there are none of the same types of responsibilities that apply to the regular common carrier, so shippers basically are able to run the railroad for their own use without having to jump through some of the regulatory hoops that a regular common carrier would have to.

    Mr. MICA. And you are satisfied with that?

    Ms. PHILLIPS. The build-outs generally have worked pretty well. Shippers are happy with the build-outs they have done, but there have been other build-outs where a shipper has just done a build-out to get access to another rail carrier, a regular common carrier. Build-outs have been very effective for shippers, in terms of real build-outs and threatened build-outs, in rate negotiations with the railroads, as they try to get those worked out to their satisfaction.
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    Mr. MICA. Thank you, Mr. Chairman.

    Mr. BACHUS [presiding.] Thank you, Mr. Mica.

    Let me pursue this testimony you gave about the build-outs. If a rail carrier wants to build to the factory, they have to comply with all the requirements and go through the STB?

    Ms. PHILLIPS. Yes.

    Mr. BACHUS. But if a shipper builds out to the rail line, actually it is the same line, but depending on who is building it, if it is a shipper, they don't go through the Board, but if it is a carrier, they do?

    Ms. PHILLIPS. I believe the only time a shipper would not need to go to the Board is if the shipper was, in fact, going to run its own railroad to connect to someone else.

    Mr. BACHUS. If it weren't going to run the railroad?

    Ms. PHILLIPS. I would be happy to supply a better answer for the record than what I am giving you right now, but I believe if the shipper does a build-out to connect to a common carrier, and that common carrier is going to run on that track, that you need to go through the regular approval and environmental—all the various regulatory processes.
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    Mr. BACHUS. If they are going to buy their own switching engine and——

    Ms. PHILLIPS. Then I don't believe they have to go through all the requirements, but I would be happy to research this and give you a more complete answer for the record.

    Mr. BACHUS. Is there a distinction whether they are building a new line or reactivating a branch line?

    Ms. PHILLIPS. I am not aware of the difference, but if I could give you a correct legal response, I would be happy to do that.

    Mr. BACHUS. It seems like there ought to be a level playing field between a carrier that wants to build into the factory and a shipper who wants to connect to the line. It seems to me, you know, there are environmental concerns that it wouldn't really matter who operated the line, which is something maybe you might want to take a look at.

    Mr. McCarren, you mentioned the reactivation of a rail service on the Rails to Trails, and I think in reading your testimony, you talked about Rumpelstiltskin, when the queen didn't want to give the baby back. That is the whole premise behind Rails to Trails is the rail-banking, this land for future rail use; that is the whole justification behind, you know, the Federal expenditure. Could you give us some proposal—and you may want to comment on it now, but later on, on a streamlined process for reopening rail service along these trails?
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    Mr. MCCARREN. We certainly will, and based particularly on my experience with Wisconsin Central, I think it would be something that would be very valuable for inclusion in the STB reauthorization.

    Mr. BACHUS. I would agree with you. When we create a trail, and then we create a whole route and then argue against the resumption of rail services, we are really defeating the purpose of the act, so I would ask you to give us something on that.

    The only other thing I would say, some of the Rails to Trails advocates have leveled some pretty serious charges against railroads. You all are creating groups out there to advocate a trail, and there are some surreptitious groups. And what is even more disturbing is the motivation behind that is fraudulent. I guess that is the only word I can use. I might ask you all to review that testimony and give us some response to that, any response.

    Mr. MCCARREN. We will certainly do that.

    I am unaware of any such activities in our part of the world, and speaking on behalf of my own company, we normally work very closely with State agencies in conversion of lines to trails when appropriate, but we will take a look at the testimony in response to it.

    Mr. BACHUS. I would call your attention to it because it is probably something that shouldn't go unanswered, in stating that part of the motivation is to obtain land that you have no right to.

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    I have no further questions, although I will say that there does need to be some streamlining process for the reactivation of a prior line, an abandoned line, and, also, that there ought to be some parity between building a build-out, whether or not it is going to be operated by the shipper or the carrier, and apparently there may be real advantages to shipping.

    Thank you very much.

    Mr. BACHUS. We will call the next panel to the table.

    First we will hear from Mr. David Cameron, senior communications coordinator of the International Brotherhood of Teamsters; Mr. Ed—is that Wytkind?

    Mr. WYTKIND. Yes.

    Mr. BACHUS. Executive director for Transportation Trades Division for the AFL–CIO, and I understand you are accompanied by your assistant general counsel, John Goodman.

    We welcome you to the Railroad Subcommittee.

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    Mr. CAMERON. If I stumble here a little bit, I just took a bite out of my tongue the size of Connecticut, and I am bleeding a little in the mouth.

    Mr. BACHUS. We can go to Mr. Wytkind.

    Mr. CAMERON. I think that is not going to help.

    Mr. Chairman and members of the subcommittee, my name is David Cameron, and I am with the International Brotherhood of Teamsters as a senior communications coordinator. On behalf of our 1.4 million members, I thank you for the opportunity to testify on the reauthorization of the Surface Transportation Board.

    As the Nation's largest transportation union, the Teamsters are deeply concerned about the rail industry. As all Americans, our members are impacted by how well the railroads serve our Nation's transportation and economic needs.

    The STB was created by Congress with a simple and narrow mandate: To oversee the railroad industry and rail mergers, to ensure the efficiency and fairness of rail operation, and to ensure that the public's interest would be served in the process. Unfortunately, the overwhelming evidence today indicates that the STB has failed miserably in its designated charter.

    Beginning with the biggest railroad merger in American history, between Union Pacific and Southern Pacific, the STB has sacrificed public interest for the special interests of the railroads. The results: the gravest railroad crisis in American history; a fundamental breakdown in basic railroad safety; a loss of billions of dollars to our economy; worker contracts summarily being abrogated; communities being left with the mitigation costs that the merger will impose; and companies being damaged, communities being damaged and workers being damaged.
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    In short, whether you are moving produce, grain, plastics, chemicals, coal, toys, or Christmas trees, if it is being moved by Union Pacific, you have been damaged. It is critical that this subcommittee and the Congress as a whole take a hard look at the operation of the STB.

    The Teamsters are committed to working with you in this process, particularly in reviewing how the STB has handled the UP-SP merger, both at the approval and subsequent oversight stages. We are in the process of completing a detailed report on the STB and Union Pacific that we will submit to this subcommittee on May 21st.

    Frank Wilner, former chief of staff for STB Commissioner Gus Owen, wrote in a recent opinion, the STB is more often used for private interests of the railroad industry, and, quote, railroads merge for two reasons they don't care to discuss: the ability to abrogate labor agreements and to eliminate the likelihood that origin and designation of rail competition will push freight rates lower, end quote.

    Clearly, the status quo for railroad mergers is not working. The STB, whether by statute or individual intent, insists on being powerless to protect hard-earned labor agreements, the shipping industry and the consumer public at large from the monopolistic interests of Union Pacific and other large railroads.

    The STB's mantra calls for free market solutions, yet the father of deregulation, Alfred Kahn, recently lectured the STB that deregulation works only when a market enjoys competition. There is no competition in much of Union Pacific's domain.
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    Senator Richard Lugar called the UP-SP situation intolerable, saying it raised questions about the consolidation of the rail industry.

    Members of the committee, the Union Pacific operational crisis casts a glaring spotlight on failed deregulation, and the STB has misplaced trust in market competition solutions, misplaced because in vast expanses of UP's market no competition exists. That is why this committee must seize this crisis as an opportunity to repair the damage that will only grow more insidious, if less conspicuous, in the future.

    If the STB is not compelled to use its regulatory teams to stop monopolies or to force reasonable rates in monopolized markets, or if its Commissioners are not held accountable for regulatory failure, then this Congress will have failed. America's agriculture, mineral and other important shippers depend on meaningful oversight.

    Over 100 years ago, Congress gave free Western land equivalent to the size of New England to the railroads to promote transportation in the United States. Recognizing the need to protect shippers from monopolies, Federal lawmakers of that day, who were hardly exponents of big government, established a regulatory agency to oversee those railroads.

    One hundred years later, the Union Pacific crisis gives Congress a chance to preserve some of those hard-learned lessons of the past, before the American economy becomes captive to those railroad monopolies forever.

    Because the STB has dealt so poorly with the UP-SP merger, this subcommittee should consider stripping the agency of its merger approval functions and transferring it to the Department of Justice. This should include revisiting the UP-SP merger and compelling UP to divest the parallel tracks where an anticompetitive environment exists.
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    I have two more sentences: Short of this, we recommend putting stricter constraints on the STB so that agency cannot approve mergers that have disastrous anticompetitive effects, such as the UP-SP merger.

    Mr. CAMERON. The STB must be compelled to end its insidious practice of abrogating collective bargaining agreements. We will outline these recommendations for you in greater detail in our upcoming report.

    It has been an honor to testify. If you have any questions, I am happy to answer them. Thank you.

    Mr. BACHUS. Mr. Wytkind?

        Mr. WYTKIND. Thank you, Mr. Bachus.

    I also want to thank Chairman Franks for providing us this opportunity to testify on behalf of the Transportation Trades Department's 30 affiliated unions who include all the railroad unions as well as the Teamsters who are with me, today.

    We have submitted a statement for the record. I will summarize our concerns briefly.

    It is no secret that the unions that have a stake at the STB believe that the performance of the agency leaves much to be desired for working people. Employees, shippers, communities and the general public all agree that the agency is ignoring their needs and its statutory mandate. To put it bluntly, and I try to be blunt once in awhile, we believe that if the rail industry does not present your case, the agency is sure to rule against you.
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    Frankly, I am uncertain how you correct the course of an agency already charged, by law, with protecting the public interest.

    I would note that, under a fire storm of criticism, the STB has recently taken certain steps designed to address a few shipper complaints that have intensified in the wake of the UP crisis in the West. But predictably, employee concerns continue to be ignored.

    We, like shippers and communities, have expressed outrage over ill-advised policies, but we see no change on the horizon that might bring much-needed relief to workers who suffer under the current regulatory rules.

    Some have proposed to eliminate the agency and parcel out its functions. We are studying this approach very carefully, and we have not ruled it out.

    Some House and Senate Members are offering statutory changes in the form of so-called competition proposals. We are evaluating those measures as well and are talking to all sides on that issue.

    Let me now focus on some of the core rail worker concerns that are directly related to STB reauthorization.

    When rail carriers seek to merge, the STB routinely gives them carte blanche permission to break private collective bargaining agreements. We have a process whereby very large private corporations propose to invalidate a labor agreement they negotiated and signed, and the STB gives them the green light. This insidious practice, which we believe is tantamount to Federal seizure of private contract rights, must be stopped by this Congress. I am mystified as to the policy justification for this type of intrusion into what is supposed to be a private agreement.
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    No other Federal agency that we are aware of is allowed to get away with this practice, yet, so far, the STB has trampled on workers' rights with impunity. For almost 50 years the STB's predecessor, the ICC, did not interfere with the collective bargaining process and instead focused on its duty to promulgate surface transportation policy. But, in 1983, all that changed. Without any new mandate from Congress, the ICC started an unprecedented intrusion into collective bargaining.

    Over the years, the ICC and unfortunately, now the STB, has expanded their assumed power to cancel out private employee agreements so that now almost any change to a contract sought by a carrier is being granted.

    For workers, contracts provide some level of protection and stability. If a contract promises certain wages or establishes certain work rules, employees can start a family, buy a home and know that the guarantees and protections in the agreement that their employer signed are going to be there. Not so in the rail industry, where multi-billion dollar corporations walk down K Street to the STB and ask if they can toss aside the terms of a contract.

    Unfortunately, the STB's answer is always the same. Yes, workers always lose.

    Let me cite one real example. In 1994, the ICC allowed the CSX to consolidate much of its train and engine service work in the mid-Atlantic States and to place all of the workers covered by separate agreements in a single seniority district under a single contract and, by surprise, chosen by the boss. These ICC-sanctioned changes required workers to travel hundreds of miles to varied work locations, often away from home for extended time periods. In a single stroke of the pen, these employees lost their contract rights, and their families were uprooted.
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    In this case the ICC allowed the carrier, CSX, to use a 3-decade-old decision to evade its current collective bargaining commitments to their employees.

    It is no coincidence that the CSX chose this course rather than the collective bargaining course. The carrier wisely headed to the ICC where it knew it didn't have to give but only take. This not only represents horrible public policy, but it violates longstanding intent by Congress to ensure that the law contains proper checks and balances to safeguard the public interests.

    Federal law must make it perfectly clear that the STB cannot emasculate labor law and cancel out or make wholesale changes to collective bargaining agreements based on some broad claim of necessity. Contracts should be sacred and only modified when the parties sit down and bargain under labor law.

    We are looking to Congress to create an environment where workers' rights and jobs are respected and their concerns are not cast aside by a Federal agency that we believe has been captive to the industry that it oversees for too long. We urge you to craft a bill that stops this practice, enhances safety for workers and communities, maintains very important motor carrier oversight requirements and, overall, restores some balance in a system that we think is heavily skewed in favor of powerful large railroads.

    We appreciate the chance to appear before you. We look forward to working with you, as we have with this committee for a number of years, to craft sensible legislation, and at this time we would be happy to answer your questions.
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    Mr. BACHUS. Thank you.

    Both you gentlemen have mentioned that rail mergers are treated differently from mergers in other industries in that the Department of Justice does not have jurisdiction, the Surface Transportation Board does. Are you advocating that rail mergers be treated just like mergers in any other industry?

    Mr. WYTKIND. If I may, last Congress a bipartisan amendment was attempted in the U.S. Senate to give the Justice Department more authority over mergers. And, unfortunately, because of a swarm of lobbyists on the industry side, that amendment failed.

    We supported that amendment. It is difficult for us to see any justification to continue to let big railroads operate in a system that is not only skewed in their favor but that they are obviously winning in every time. It is one thing to bat 500, but they are batting one thousand. So there is a question about whether it is even impartial anymore at all.

    Mr. BACHUS. Do you want full authority to go to the Department of Justice, instead of being retained by, say, the Surface Transportation Board?

    Mr. WYTKIND. We have said for a number of years that the Justice Department should oversee railroad mergers. And when the debate started years ago about how to handle the functions of the STB, we talked about whether or not the functions should be parceled out to various agencies. That includes the Justice and Labor Department.
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    There are environmental issues. There are different components you could parcel out. We have said for years that we would seriously take a look at that, but the proposal has never been real. The proposal has never really come to Congress with any capability of having a real debate about it.

    Mr. BACHUS. You all have said that rail mergers are treated differently. I am agreeing with you. They are in the Surface Transportation Board. But are you saying that they should be treated like all other mergers and they should all be in the Department of Justice?

    Mr. WYTKIND. We have said that in the last debate that occurred in the last Congress.

    Mr. BACHUS. How about the labor protections?

    Mr. WYTKIND. The labor protections, we said, if you are going to go the route of parceling out the functions of the agency, then the Labor Department should handle employee issues as they do in a lot of other sectors of the economy.

    Mr. BACHUS. But would you advocate doing away with the 6 years labor protection?

    Mr. WYTKIND. No. The question about who handles the administration of employee issues is what is on the table. We would say it should go to the Labor Department, if you are going to pick an agency with expertise.
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    Mr. BACHUS. Well, I think that is what you are doing with the Surface Transportation Board, aren't you? You are having an agency with expertise handle the rail merger. They have got more expertise in transportation than the Department of Justice.

    Mr. WYTKIND. Well, they don't have more experience in dealing with antitrust issues than the Justice Department. The question is, how do these antitrust issues get dealt with appropriately?

    Again, as I said in our statement, our general view of this has been fairly favorable. What we said in our statement, and we are going to stand by it, is we would seriously entertain that proposal this committee or the Senate seriously considers the STB status and whether its functions should be parceled out to other agencies.

    We are not making our top priority disbanding the agency. Our top priority is protecting the sanctity of collective bargaining agreements.

    Mr. BACHUS. Don't you think the 6 years labor protections, that is pretty unique to the rail industry? Doesn't that offer a tremendous amount of protection?

    Mr. WYTKIND. If you look at the minutia of how employee protections work, there are so many large loopholes you could drive a locomotive through it. A lot of employees never get the protections, and those who do get the protections have to wait far too long.

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    So 6 years is a convenient target for the railroads and for those who don't like labor protections, but the reality is that employee protections are not what they are cut out to be. All labor protections are, from our perspective, a necessary safeguard. They don't replace a good job. They don't replace people honoring collective bargaining agreements.

    Mr. BACHUS. I understand all that. But both of you have said we are treating the railroads differently. But the labor protections are quite different, too.

    Would you advocate giving all that up, the labor protections, and gaining by that the Department of Justice and not the Surface Transportation Board would have jurisdiction over the rail mergers? Or would you just say, let us do away with the labor protections, let us do away with the Surface Transportation Board handling this, let us put it all over in Justice?

    Mr. WYTKIND. No, we would not support that. We would strongly oppose it.

    The employees in this industry have seen more than half their jobs cut.

    Mr. BACHUS. I am not——

    Mr. WYTKIND. I do not take offense to your questions at all. What I want the record to show is that we not only oppose it but we think the record of this industry would compel this Congress not to do that based on what employees have been through.

    Mr. BACHUS. To cut out the special approach, as we have done.
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    Mr. WYTKIND. I think the approach that has been taken by this industry against employees has been insidious and protections——

    Mr. BACHUS. We have a statutory approach of having the Surface Transportation Board as opposed to the Justice Department and Department of Labor.

    Mr. CAMERON. Congressman, perhaps we are mixing two different elements. We are not having people come up here to testify, person after person, representing shippers or consumers or cities or districts saying, we have got a real problem with this labor agreement. What we have people doing is saying, we have got a real problem with this merger process.

    Mr. BACHUS. Not with—well, part of the process is the labor protection that it affords you. It is supposed to afford you quite a lot of protection.

    Mr. CAMERON. But we are not—as I say, people are not coming up here bringing that up. We have gone around the country, met with the mayor of Reno, met with the mayor of Wichita, the mayor of Sacramento, met with congressional members in Concord. You can go through that Union Pacific line and hear the same kind of complaints from all of these representatives.

    Mr. BACHUS. So the complaint is basically about that merger, not——

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    Mr. CAMERON. It is about the merger process. It is about the merger process that the Surface Transportation Board went through and——

    Mr. BACHUS. You are not advocating they be transferred to the Department of Justice?

    Mr. CAMERON. Yes.

    Mr. WYTKIND. Let me say two things.

    One is, like I have said, we would——

    Mr. BACHUS. If you are, would you agree that we would just—if the basis is that they are treated differently, then they ought to be treated like other industries, then we would do away with all the special protections and procedures, wouldn't we, just put it all over in Justice?

    Mr. WYTKIND. The argument is simply whether there is some sort of special treatment or procedures. The reality is that, from the rail unions and the Teamsters perspective, the STB has not given all parties a fair shake. There is a common theme here.

    Mr. BACHUS. You said rail mergers are not treated like mergers in all other industries. You don't have a beef against that?

    Mr. WYTKIND. Well, I have a beef when two railroads come before the STB to merge and get everything that they want.
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    Mr. BACHUS. The fact that it is treated different, you are not saying that is manifestly unfair?

    Mr. WYTKIND. The fact that they are treated differently. The fact that they bat one thousand before the STB is manifestly unfair.

    Mr. BACHUS. Well, the procedure is not fair. The fact that they are treated differently is not what you are concerned about?

    Mr. WYTKIND. What I am concerned about is that the railroads come before the——

    Mr. BACHUS. You are saying the decision of the Board is what you disagree with, not that it is treated differently from other industries?

    Mr. WYTKIND. No, we have problems with the fact that they treat them differently from other industries. We have also a problem with the fact that, again, the railroads come before the STB and put an operating plan before them. Then they don't have to live up to much in that operating plan, and again generally bat 1000 before the STB. That is the core of our focus.

    That is why these employees keep getting harmed. They lose their jobs. They lose their contract rights. They don't seem to have an ability to deal with their problems over there.
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    Mr. BACHUS. I notice you did say that the STB Board carte blanche breaks collective bargaining agreements and that they are allowed to do that.

    Mr. WYTKIND. Yes, they are.

    Mr. BACHUS. Aren't they only allowed to break those collective bargaining agreements if they find that it is necessary in implementing the merger? I think the law says only what is necessary to carry out the transaction.

    Mr. GRIFFIN. The law says necessary, but what that means in practice is there has never been a collective bargaining agreement term that the ICC before and now the Surface Transportation Board hasn't found necessary to override in the context of a merger.

    Mr. BACHUS. This is just a continuation of the way the ICC approached it?

    Mr. GRIFFIN. Yes, it is. It has probably gotten a bit more pernicious. Basically, this necessity standard is that there is some public transportation benefit out there that the carrier really doesn't have to identify and specifically never has to empirically prove. In other words, the argument is that we want to engage carriers as we want to engage in a certain operational change.

    Mr. BACHUS. Are they breaking all collective bargaining agreements? Are they doing away with all of them or just some of them?
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    Mr. GRIFFIN. What the carriers see is New York Dock, which is the labor protections imposed on mergers as an alternative to bargaining under the Railway Labor Act, if they can't bargain across the table in good faith with the unions and get resultsthat they want, they simply pack up and go to the Surface Transportation Board and try to get what they couldn't get at the table through New York Dock.

    Mr. BACHUS. New York Docks, that protection is unique with the rail industry though. Are there any other industries where they get—that 6 years of labor protection?

    Mr. GRIFFIN. Not that I know of.

    It is important, however, to emphasize that New York Dock and the whole scheme of statutory protections sort of arose out of a privately negotiated agreement between the carriers and the unions back in 1936 that is commonly referred to as the Washington Job Protection Agreement which applies, by its own terms, up to 5 years of protective benefits to adversely affected employees.

    Mr. BACHUS. But it is now part of Federal law. It is statutory.

    Mr. GRIFFIN. There is a Federal law, and the WJPA is still in effect.

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    Mr. BACHUS. The same Federal law that puts jurisdiction of mergers in the STB has the same title, doesn't it?

    Mr. GRIFFIN. The protections are statutorily mandated. That is correct.

    Mr. BACHUS. I mean, it is just not some bargaining agreement that they got on their own. It isn't anymore.

    Mr. GRIFFIN. That agreement still exists.

    Mr. BACHUS. If we repeal the Federal law, would they still have 6 years protection?

    Mr. GRIFFIN. No. The protections of the Washington Job Protection Agreement would still be in place for a majority of the employees of the Nation's railroads.

    Mr. BACHUS. So even if the law were—the Federal statute were repealed?

    Mr. GRIFFIN. That is correct.

    Mr. BACHUS. Okay. You mentioned fuel contracts, that they let the railroad get out of fuel contracts, or they don't——
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    Mr. WYTKIND. Fuel?

    Mr. BACHUS. You mentioned about the fuel contracts in your testimony. Do you remember that?

    Mr. CAMERON. I did not mention it.

    Mr. WYTKIND. I did not.

    Mr. BACHUS. I thought I read on page 3.

    Mr. WYTKIND. Of my testimony? I am sorry. Yes, it is the reference that they don't break contracts for any other entity before the Board. But they regularly break employees' contracts. That was the reference.

    Mr. BACHUS. But now the fuel suppliers don't have—they don't have any Federal statutory 6-year protection of their fuel contracts?

    Mr. WYTKIND. Well, with all due respect, that is really not what we are talking about here. What we are talking about is that the carriers, with the STB's approval, regularly run over contracts, and there is no other entity in our economy that regularly tramples on private agreements. That is the point of that statement.

    Mr. BACHUS. I got you. Okay.
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    Mr. Wise?

    Mr. WISE. Thank you.

    Just briefly pursuing this for a second. My sense is, and I just wanted to ask whether I perceived correctly, is in talking to the railroad employees where I live, A, most of them will never be able to take advantage of the 6-year protection; and, B, most of them don't want to. They would just as soon be working at their job. Is that a fair statement?

    Mr. WYTKIND. Yes, it is. The reality is that 6 years has been an unfair target. Workers in the rail industry have seen about 60 percent of their jobs cut since the Congress deregulated this industry. And a lot of these workers, that is all they want to do for a living—is they work on the railroads. So when you tell a guy who is 38 years old, with a family of four, that he is going to get some protections that are very, very unclear and not guaranteed or have to choose between that and having a good job, the latter will be his choice.

    So that is correct. If you talk to most railroad workers, as you do in your State and your district, you will know that to be the case.

    Mr. WISE. Mr. Wytkind, the act which governs railroad mergers states that, and I am quoting, a rail carrier is exempt from the antitrust laws and from all other law, including State municipal law, as necessary to let that rail carrier carry out the transaction.

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    That provision has been interpreted as allowing the STB to abrogate the collective bargaining agreements that you have freely negotiated with the railroads.

    Now, I am curious, do you see any limits to this authority? For instance, could the Board decide that your members had to take a 20 percent pay cut to, quote, carry out the transaction? Does the Board have the authority to do that the way the law is currently written?

    Mr. WYTKIND. The reality is that the STB process by which the carriers break our contracts is unlimited, and the envelope has been pushed to its extreme. So we already see a lot of harm to employees. We see no limits to the harm imposed unless Congress finally curbs this activity.

    Mr. WISE. So am I correct then that, in some ways, the sky is the limit in the merger? You can do pay cuts? You can do—I assume you could do—are you saying that you could do anything that is not statutorily covered, such as hours of service?

    Mr. GRIFFIN. If I could answer that question in the context of New York Dock. What the Board and the courts have said are preserved absolutely are what are identified as rights, privileges and benefits. That is a reference to Article I, section 2, of New York Dock.

    The only right, privilege or benefit that we know of that has been identified by the Board as not subject to change is your choice of hospitalization plan. That was an arbitration decision related to the UP-SP merger.

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    A number of the western roads have what are called hospital associations. Other railroads are part of a national group health insurance policy. And the Board held that employees who were subject to hospital association coverage were entitled to keep that protection, because that was a right, privilege or benefit.

    That is the only thing that we know of at this moment that is untouchable by the carriers through this process.

    Mr. WISE. Interesting question.

    Mr. Wytkind or Mr. Griffin, I am assuming that a company could enter into a contract with its employees saying that, in the event of any upcoming merger, we shall not seek to abrogate these provisions of this contract. But even that could be abrogated, couldn't it?

    Mr. GRIFFIN. Actually, that issue has come before the Board. There were a number—Mr. Wytkind related the arbitration involving CSX which is commonly referred to as the O'Brien Award and the fact that the Board permitted—I guess in this case it was actually the ICC—permitted CSX to abrogate collective bargaining agreements based on 30-year-old approval of the C&O-B&O merger.

    In that particular case and in a companion case, there had been prior implementing agreements where changes have been made to seniority districts and changes made to collective bargaining agreements, voluntary agreements, by the way, that included that type of zipper clause saying that all future changes will be made under the Railway Labor Act.

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    The ICC said, that language is mere boilerplate. There was no expressed intention. I don't know what plain language means, but I think that expresses an intention. They said there was no expressed intention that the carrier could not use New York Dock to come in and seek to change an implementing agreement that previously had been negotiated under protective conditions.

    So, in answer to your question, we have seen that happen; and the Board's answer is, the carriers can do that. So I don't think there is a zipper clause that you could negotiate that would necessarily withstand Board scrutiny at this point.

    Mr. WISE. Thank you.

    Mr. Cameron, one of the important impacts of mergers is on towns and cities where traffic volumes dramatically increase because mergers cause railroads to reroute their traffic.

    You talked about one city where this has happened being Reno, Nevada. I just wonder if you would describe what has happened in Reno and what the STB reaction has been?

    Mr. CAMERON. Well, we have been following that issue and spent a great deal of time in Reno. The section on environmental analysis, the SEA has spent time and held hearings out there. They had about 500 citizens come and testify about the adverse effects that running these trains——

    If you have ever been to Reno, you got the casinos on either side of the train track going through the middle of downtown. Of course, it is a casino entertainment area. The heart of the city is the casinos, so you have intense pedestrian traffic going through there as well as vehicular traffic.
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    The city held some demonstrations by which they showed if you had an emergency on the tracks how much it would slow down response time for emergency vehicles to get from one side of the city to the other side. They had people who testified from all around the Reno-Sparks area; and, as I say, about 500 people testified against this.

    The proposed solution was to depress the tracks below street grade so that the traffic could move unimpeded above the tracks and the trains could move unimpeded below. What the STB in its final mitigation plan asked to do, given that trains were going to be tripled—instead of 12 trains, 24, the city estimates maybe up to 40 trains a day—the STB's solution: Speed the trains up. That was their solution to the tripling of the numbers of trains in downtown Reno.

    Equivalent to, my son in kindergarten, the car is going by at 15 miles an hour; let us just get the traffic by faster; it would be safer for the kids.

    Mr. WISE. I assume that the city was not as ecstatic about that as they could have been.

    Mr. CAMERON. The city is not ecstatic. Both the mayor and Harry York, who is the President of the Chamber of Commerce in Reno, both, to paraphrase, felt that the STB, as was indicated jokingly earlier, but for these folks they felt it was true, the STB is Union Pacific's STB. It is not there as a watchdog for the public.

    Mr. WISE. Thank you, Mr. Chairman.
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    Mr. BACHUS. Mr. Blumenauer?

    Mr. BLUMENAUER. I wanted, if I could, to pursue the line of inquiry that Mr. Wise had raised.

    Based on your examination of what has happened in Wichita or Reno, I had earlier in the hearing posed to the STB what adjustments if any ought to be made in the statutory authority to make sure that the agency can, in fact, deal with livability and the impact on communities rather than, as you say, just having the trains run faster. Do you have any recommendations based on your analysis of what changes ought to be made statutorily to make sure that these protections are observed, that they have clear authority to protect the livability of communities?

    Mr. CAMERON. Well, I think—as I said in my testimony, I think that the STB needs to—I think it has got the statutory authority that it needs now. It needs to be compelled to use it. And, as I say, we are in the process of putting together a report. It will be ready towards the end of this month, and we are going to be delivering it to the committee on the 21st.

    Mr. BLUMENAUER. Super. Thank you.

    Mr. Wytkind, if I could, our subcommittee is in the process of looking at rail safety legislation. Under the provisions that you talked about in the act right now where certain other statutory provisions are suspended, would it be within the realm of possibility that we would hear from the public, from the industry, from the workers about safety provisions that need to be adjusted? That we could, in fact, enact such new safety provisions under the auspices of this subcommittee and then have, in the interest of facilitating a rail merger, have those safety provisions suspended, given the way that this—the system is working now?
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    Mr. WYTKIND. There are actually two points to make in response to your question.

    First, yes, it is possible that a consequence in the context of a merger, safety could suffer. There is already an effort by the Administration, as you know, to force stronger safety requirements on railroads as a condition of mergers. We strongly support that.

    The problem is the way that laws have been trampled on for so long by the agency, efforts by the FRA could and may collide with the precedent that has been established for far too long in the overriding of other laws.

    Mr. BLUMENAUER. Thank you.

    Mr. BACHUS. Appreciate your testimony.

    One thing that I would maybe ask you to do, you talked about the fact that most of your members, what they really want is to continue to work for the railroad and that the 6-year protection really isn't a protection for a lot of them. Could you identify an alternative proposal? Has there been any real discussion of another arrangement that might be more beneficial to both parties?

    Mr. WYTKIND. We have not put forth an alternative labor protection proposal. It has never come up. All I hear from other industry witnesses, like we heard earlier, is that labor protections are a bad thing but that Federal regulations are good when it is convenient for the railroads. So it depends who you talk to. But we hear more about how bad labor protections are and how evil they are.
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    Mr. BACHUS. What I mean is, maybe a proposal that would be more beneficial for the rail workers as a whole as opposed to no benefits to some and of great benefit to others.

    Mr. WYTKIND. It has never come up in the context of any discussions I have had with the employer community over my lifetime. I don't want to foreclose any discussions on anything, but the reality is that the other side generally tries to repeal or water down those kinds of protections. So it is kind of hard——

    Mr. BACHUS. Do you understand what I am saying?

    Mr. WYTKIND. Yes.

    Mr. BACHUS. Look at something. Say, here is a different proposal, maybe a proposal that is better for both parties.

    I would invite you to make suggestions.

    Thank you very much for your testimony.

    Mr. Wise, do you have any further questions?

    Thank you.

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    Mr. BACHUS. This panel is dismissed, and our next panel will be dealing with rails to trails, Panel VI. Three parties will be testifying: Mr. Nels Ackerson, The Ackerson Group; Mr. David Burwell, President of Rails-to-Trails Conservancy; and Ray Paolello on behalf of the National League of Cities.


    Mr. BACHUS. Mr. Ackerson, we will go from my left to right. We are ready for your opening statement.

    Mr. ACKERSON. Thank you, Mr. Chairman.

    I am Nels Ackerson. It is a privilege to participate in our Nation's legislative process. I appreciate the committee's invitation for me to testify today. I hope my suggestions will help this committee to correct some long-ignored injustices in the railroad abandonment process.

    I have submitted testimony that is about 16 pages long, which I would ask the committee to accept; and if that is possible I will give an abbreviated version within your time limits.

    I have the privilege of representing thousands of citizens who have had their land threatened or taken from them unfairly. They are the people next to the railroad tracks in large part, owners of often modest homes, families, farmers, ranchers, retirees, small businesses, both rural and urban, and even units of State and local government all across our Nation.
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    My clients are the kind of people you would be proud to call your constituents. They are good people.

    These good people stand alone among all others whose interests have been presented before this committee. They stand alone because they own the land on which railroads once operated trains and upon which trails are now operating or proposed. They are not just adjacent landowners. They are the landowners. They own the land where trains once ran next to their yards or through their farms every bit as much as any other homeowner owns a backyard or a deck.

    I was invited here today to speak for the legitimate owners of the land on which both our railroad system and our growing trail system are built. I ask on their behalf for nothing more than simple justice and fair play. My message is not complicated and can be stated as three simple rules:

    One, don't take something without asking first.

    Two, if you take something that doesn't belong to you, be fair and pay for it.

    Three, if you let others take things that are not theirs, make them play by the same rules.

    Several things distinguish the people I represent from all others whose interests are being heard by this subcommittee today.
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    One, they own the most valuable asset in the national railroad system.

    Two, they alone have their land taken involuntarily for a public purpose while others, who do not own their land, are being paid for it.

    Three, they alone are given no notice in the abandonment process, even though they have the most to lose. Now, that is unless you consider notice in the Federal Register with a short time period and a small publication in a legal publication to be adequate notice for retirees, homeowners, and others who probably don't read those publications and don't know the significance of them. All others whose rights are at issuereceive personal notice; only landowners do not.

    These people alone must give but gain nothing in return. Uncompensated, ignored, unthanked and abused, these landowners deserve to be heard.

    Tragically, the backbone of the rails to trails system, of which so many are proud and justifiably, in many cases, so, the backbone of that system is land taken from my clients and thousands of others like them.

    That is not to say that individual landowners own all of the corridors—apparently, just most of them. Railroads own some of the land, but they get personal and real notice, they have options. There is no excuse for denying those same rights to all the other landowners.

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    Countless small landowners from coast to coast are the silent benefactors of the land for trails. Rarely discussed and intentionally ignored is the fact that the core of the entire railroad abandonment and rails to trails process has become a vast program for the quiet confiscation of land.

    A cruel irony is that the primary beneficiaries of this confiscation are not the public, although noble purposes are held out for recreational trails and preservation of corridors, but the real beneficiaries are opportunistic railroad companies and their salvage and utility company allies and consultants. Railroads, not landowners, are paid for the landowners' property. Utilities and others who are sold licenses by the railroads or trail sponsors to use the property and they get bargain prices.

    Like buying a watch from the sleazy lining of a trench coat, it is cheaper to buy something from one who does not own it. Meanwhile, the true landowners receive nothing, not even a notice or a thank you.

    Everyone in the process, except the landowners, seem to have options during the abandonment process. According to the STB, a railroad has an absolute right either to negotiate a trail use or to refuse to do so. Likewise, a trail sponsor may choose to negotiate a transfer from a railroad or not.

    However, if a railroad reaches agreement to transfer a corridor to a trail sponsor, then the STB has determined that virtually no one can stop it. Certainly, the landowner cannot. Of those most directly affected, only the landowner has no choice in the matter. The landowner may not even know that the transaction has occurred because the landowner will have received no real notice.
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    Finally, under the STB's decisions, the trail sponsor does not even have to intend to operate a trail or show that it has the financial or management capability of doing so. Indeed, railroads can and have converted their own affiliates to so-called trail sponsors in order to control the land, mine and exploit its resources and sell rights in it for nonrail and nontrail purposes.

    The STB has claimed that its role is only ministerial and that it cannot even consider whether such abuses are occurring. The courts have held that where trail conversions result in a taking of private property, the government must pay. This is a process over which Congress under the present procedure has no control. Thus, under the Trails Act, the STB has created a blank check drawable from the accounts of the United States Treasury and payable to private companies and individuals who have the power to make decisions costing the taxpayers potentially hundreds of millions of dollars or more.

    Despite the decisions that the government must pay, it is true that very few landowners are in a position to take advantage of that law. They cannot afford to hire lawyers to come to Washington to file claims in the Court of Claims process, perhaps for a $15,000 or $20,000 loss, paying $100,000 or so for attorney's fees and coming to Washington and waiting several years. That process simply does not work.

    When the true landowners express disapproval to this entire process, their concerns are often met and have been met in the past with a kind of pious condescension. They are criticized for presuming that they have rights at all. Those who wish to deny the landowners' basic rights even resort to using a pejorative term ''adjacents'' to refer to the true landowners, as if they were merely meddlesome neighbors.
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    But the use of a slur cannot change who they are, nor can it justify ignoring their rights in the name of a higher public benefit in the belief that all that the landowners really need is some education.

    The homeowners, farmers and other landowners who own the land are not ignorant. They do not need to be educated by persons in Washington or elsewhere about the public benefit to which others wish to put their land. They know the benefits of corridor preservation and of trails; and many may support those objectives.

    That is not the point. They seek only respect for their rights and simple justice.

    The STB has done nothing to stop this entire seamy process but is a willing participant and sometimes a shameless supporter of it. That should stop, and this subcommittee should help to stop it.

    Part of the greatness of this country is that any person, regardless of wealth or position, can bring a message of fairness to Congress. Here individuals who live by the railroad tracks have as much right to speak as the Nation's most powerful railroads and interest groups. The real test however, is will their government listen? When such individuals ask not for privileges but for just simple justice, will their small bright lights of concern for fairness be seen in the glare of popular support for a national trails system? Will anyone listen to those who are compelled to give the most but gain little or nothing in return?

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    Mr. BACHUS. Thank you.

     At this time, Mr. Moran, do you want to introduce something for the record?

    Mr. MORAN. Mr. Chairman, I would like to add something to the record; and I have handed it to the Clerk today.

    Mr. BACHUS. Thank you.

    [The information follows:]

    [Insert here.]

    Mr. BACHUS. At this time, we are going to recess for about 30 minutes. Do either of you all have a plane to catch?

    Okay. We will recess somewhere between 20 and 30 minutes.


    Mr. FRANKS [presiding.] I apologize for the interruptions on the House floor.

    We have already heard from Mr. Ackerson from The Ackerson Group. Now we would like to hear from Mr. David Burwell, President of the Rails-to-Trails Conservancy.
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    Mr. BURWELL. Thank you, Mr. Chairman.

    I also would like to summarize my testimony and ask that the complete testimony be submitted for the record.

    Mr. FRANKS. Without objection, so ordered.

    Mr. BURWELL. I also would like to make a clarification to Mr. Ackerson's previous testimony.

    I am in fact a ''true'' landowner, I own land right next to an adjacent soil corridor. I do not feel abused in any way by the rail-banking law. My property has, as a result of the trail being there, increased in value by a factor of at least five.

    So I want to make it clear that Mr. Ackerson does not represent me as a true landowner. I think there are many adjacent landowners within our 80,000 members of Rails-to-Trails Conservancy who support the rail-banking process.

    As this committee well knows, a key strategy in the restoration of our national rail system to health was the liberalization of abandonment procedures in the Staggers Act of 1980. More than 50 percent of the entire built rail system of the United States has been abandoned or removed from active rail service as a result of earlier abandonments and the Staggers Act.

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    However, with downsizing came hardship, both to shippers and to the communities who lost rail service. Captive markets increased, as did anticompetitive practices by railroads. Shippers and communities throughout America called on Congress to act, if not to preserve active rail service, then to at least preserve the corridors intact for possible future rail use.

    Congress responded by enacting the Rail Banking Act of 1983. This act supplements the inherent power of the STB under the Interstate Commerce Act to preserve corridors intact after termination of active rail service. ISTEA also directs State and local governments to preserve rail corridors.

    The Rail-Banking Act has worked, to a point. According to our internal research, at least 122 corridors have been rail-banked since 1983, representing more than 3,200 miles of rail line.

    Mr. BURWELL. Sadly, in the same time frame, more than 35,000 miles have been abandoned without rail-banking, thus causing these corridors to disintegrate.

    The Rail-Banking Act is now needed more than ever due to merger-related abandonments, increasing anticompetitive practices within the railroad industry, and the increased likelihood many corridors will be needed for renewed rail service in the future. However, two major impediments remain to the creation of a truly successful rail-banking policy.

    First, the rail-banking law has been interpreted by courts to be voluntary with respect to participation by the railroads. Therefore, if a railroad chooses to chop up an unused rail corridor for any reason, or for no other reason than it simply wants to prevent another railroad from getting hold of a corridor, it can do so. This is not good national policy.
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    Second, the downsizing of railroads has spawned a flurry of interest by lawyers and railroads seeking to make a buck by claiming to own rail-banked corridors outright and demanding payment. Advocating simple fairness, both railroads and lawyers purporting to represent landowners' interests are trying to extract enormous payments from the public treasury to implement the rail-banking law. These demands threaten to defeat the national interest in rail corridor preservation.

    However, two sets of facts reveal that these demands for cash are neither simple nor fair. First, the railroads and the landowner/lawyers completely overlook the fact that the public has a direct property interest in rail corridors at least as significant as their own. This includes more than 30,000 miles of direct right of way grants over Federal and State land, the award of police powers such as the right of eminent domain to railroads in all 50 States to assemble the corridors, loan guarantees and actual cash payments to railroads for corridor acquisition and development. Both the railroads' and landowners' interests conveniently ignore this enormous public investment in corridor development and, in effect, demand that the public pay twice.

    Second, many courts, both State and Federal, have held that rail-banking is consistent with continued rail use, since corridors are preserved for potential future reactivation. Since the STB can allow discontinuance of rail service without abandonment, it can authorize rail-banking without abandonment as well. It is as simple as that.

    Finally, I would like to bring to the committee's attention a new threat to the national rail-banking policy, this in the form of an amendment inserted in the Senate version of BESTEA by Senator Brownback from Kansas. The full text of his amendment is in my testimony, but the intent is to give local governments for the first time the power to force lines to be abandoned, rather than preserve them for reuse in interstate commerce. This is a bad idea. The U.S. Supreme Court has repeatedly stated that Congress, not local governments, have plenary authority over regulation of interstate commerce. This amendment would turn this principal on its head.
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    Rail-banking does nothing to impede the power of local governments to regulate how a corridor is preserved, such as requirements for fencing, weed control, crossing regulation and the like. However, the Brownback amendment goes further, giving local veto to the crucial issue of whether a corridor is preserved at all. This goes too far. It invades Congress's authority over interstate commerce.

    The House version of BESTEA very wisely does not fiddle with the rail-banking law. We ask that this committee work hard to assure the Brownback language is eliminated from the final version of BESTEA.

    In conclusion, our national policy in favor of railroad corridor preservation is being implemented, at best, in a haphazard fashion. In practice, it fails when some private interest, such as a railroad, objects. The Brownback amendment adds the additional roadblock of local government objection, a provision that threatens to trivialize the national rail corridor preservation policy to extinction.

    If Congress truly wants to preserve this important transportation infrastructure, it needs to strengthen rail-banking, not to weaken it.

    Thank you. I would be glad to answer any questions.

    Mr. FRANKS. Thank you.

    Mr. Paolello.
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    Mr. PAOLELLO. Mr. Chairman and members of the subcommittee, the National League of Cities is pleased to present our views on the issue of reauthorization of the Surface Transportation Board.

    My name is Ray Paolello. I am the city attorney for the city of Yakima in the State of Washington, and today I would like to talk about four things. One is preemption. Two is the Surface Transportation Board merger approval process. Three are some specific examples of problems we have had in Yakima, Washington, in working through the process with the Surface Transportation Board. Fourth is the lack of accountability we have found in the Surface Transportation Board to the public.

    As to preemption, the Surface Transportation Board, of course, claims that the ICC Termination Act of 1995 terminates all local laws and regulations dealing with public health and safety, and we are obviously very concerned about that. Congress surely did not intend to grant such absolute power to an unelected Federal agency to simply override all State and local public health and safety laws.

    Such a view would essentially amount to an unfunded mandate imposed on local government to absorb any and all costs associated with the process, the approval process, that the Surface Transportation Board is engaged in. And in the case of the city of Yakima, that could amount to upwards of $80 million for a city of 64,000 residents.

    Let me give you some specific examples from Yakima, Washington, in our dealings with Surface Transportation Board. As a result of a merger approved by the STB, BNSF reopened the Stampede Pass line, it is some 200 miles or so, crossing a very large portion of the State of Washington on both sides of the Cascade Mountain range, and I believe the BNSF railroad spent $125 million or more in improvements and construction on that Stampede Pass route.
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    In the city of Yakima, we are observing somewhere between four and six trains a day, and some recent indications from BNSF are that that is projected to go up to 26 trains a day, which could amount to 5 to 6 hours or more of gridlock in downtown Yakima.

    Like many other cities across the country with railroads going through them, the downtown core of the city of Yakima is bisected by the railroad. There is the major police station headquarters, the headquarters for the fire department on one side of the tracks, and areas they serve on the other side of the tracks. There are other emergency services that are separated by the railroad. The only hospitals in the city of Yakima are on one side of the railroad tracks, and a lot of areas are served on the other side of the railroad tracks, and obviously delays in emergency vehicle response could be critical or even fatal for some citizens.

    I want to talk about an issue that nobody else has talked about before, and that is air quality as it relates to the city's need to comply with regulations promulgated by the EPA. The city of Yakima has found itself in a completely untenable position, in a crossfire, if you will, between the STB and the EPA. We have air quality challenges like many other cities across the country, and we have worked to address them, and the EPA has required us to adopt certain control measures to reduce air pollution. But now we have the Surface Transportation Board approving railroad service that is causing hundreds and hundreds of cars to back up at major street intersections in the city of Yakima, increasing air pollution, and there has been no analysis specifically to the city of Yakima by the STB.

    So we are being required by EPA on the one hand to comply with regulations, and we have the Surface Transportation Board on the other hand worsening the situation, and we are at cross purposes, and what is the city of Yakima to do in a situation where two agencies are in conflict?
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    We have talked to the EPA about this. We have talked to STB about it. They both tell us to go to the other agency. The Surface Transportation Board told us EPA told them it wasn't necessary to study air pollution specifically in Yakima, and the EPA says they never said that, so again we don't know what to do.

    Let me quickly finish up by talking about the process that we faced and the merger approval in the State of Washington. We found that the STB did not provide an adequate response time on the environmental analysis. They gave us about 18 calendar days to respond, exclusive of mailing time, and that is just simply not enough time to analyze and particularly get people with expertise to review the situation and provide comments to the STB.

    There were no local meetings. There was no public hearing. We asked for a public hearing. Congresswoman Dunn asked the STB for a public hearing, and they said no. The city manager of Yakima asked for a public hearing through a letter to Ms. Morgan, and there was no response to the letter. The city manager came back to Washington, D.C., and asked the Surface Transportation Board for a public hearing to consider railroad impacts on Yakima, and what he was told by Mr. Armstrong is that the STB, quote, we don't do public hearings, closed quote, and went on to say they don't have the resources to do it and that they accept written comments only. An STB attorney was quoted in the newspaper saying, where they got the idea that they were going to get a hearing, I don't know; we never schedule public hearings.

    And so we are frustrated there. And wouldn't you know it, now that we are in some litigation with the Surface Transportation Board, their position now is that they did hold a public hearing, that it was a public hearing by virtue of written submission, and I think we all know what a public hearing is. That is what we are having today. But that is the kind of frustration we have faced.
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    We haven't received any adequate mitigation of the issues in the city of Yakima caused by the STB approval. There has been no environmental impact statement, in spite of many significant environmental impacts.

    So I guess I will conclude by saying that there is an accountability issue that concerns Yakima and other cities across the country. There is a nonelected Board that doesn't necessarily respond to citizen concerns, doesn't respond to correspondence, doesn't have public meetings, doesn't have public hearings. In a recent example, when the National League of Cities asked the STB to come to the NLC legislative conference here in Washington, the STB declined.

    So I would close by saying that we would urge the Congress to clarify that preemption does not apply to local public health and safety laws that are essential to people and citizens throughout this country; that there be some effort to open up the process to have dialogue and give meaningful consideration to comments, that the STB would undertake to do that; and that there be some mechanism to encourage the STB or require the STB to provide reasonable mitigation measures for communities that are effected in a very significant way by the merger approval process so that this doesn't become a major unfunded mandate on local communities.

    I am happy to answer any questions the committee may have. Thank you.

    Mr. FRANKS. I want to thank the members of the panel for excellent testimony.

    Mr. Burwell, in reading your testimony, I was looking to see if I could find any common ground with Mr. Ackerson's testimony, and I want to explore one opportunity here. It seemed that you believe that one flaw in the current trails program is a determination of whether a corridor is actually rail-banked, is left entirely in the hands of the railroads. That obviously would mean that there is no government review as to whether the corridors being rail-banked actually represent a legitimate possibility of reactivation of active rail service, which is the stated purpose of the Trails Act itself.
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    Would you support a change to the current law that would allow for an assessment of the possibility of reactivation to rail service before a corridor is rail-banked?

    Mr. BURWELL. An equally big problem is figuring out what the stock market is going to be tomorrow or what the value of a soil corridor is going to be tomorrow, so it is very difficult to identify the factual predicate for being able to determine if a corridor is going to be economically feasible for rail service in the future. That is what is wrong with that idea; the difficulty of that kind of assessment. Congress knew that when it said, ''O.K., if somebody is willing to manage the corridor and take it over, we want to preserve as many corridors as possible; all corridors, if somebody is willing to do that. The problem is that the courts then said, ''Only if the railroad wants to do so.'' We feel that railroad sector should not be allowed.

    I agree with Mr. Ackerson that the railroads have at times used their ability to say no to try to extort or extract very high payments from trail managers, as well as adjacent property owners, by trying to bid up the cost of a corridor. So we think that it should be mandatory with the railroads as long as somebody is willing to take over the carrying costs for servicing that line. But assessment on an individual basis is extremely difficult. There is no basis in fact to make such an assessment.

    Mr. FRANKS. Thank you.

    Mr. Paolello, talk to me about when NEPA comes into play, which is the environmental statute under which the STB is required to operate. What is the level of participation of local governments?
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    Mr. PAOLELLO. The challenge that we have faced is there is such a short time frame and such a limited opportunity to have comment. In our case, in Yakima, there may have been a publication of the Federal Register that we don't read every day, and we had—I'm sorry to say—and we had a very short time—we are on the west coast—a very short time period to respond.

    So I think local governments want to be involved, want to be more involved, want to have more dialogue and work with the STB, but the process has not allowed for meaningful input, meaningful comment, meaningful access to the decision-makers at the Surface Transportation Board, when request after request, we can't even have a public hearing held to have our issues discussed like we are here today. I think there is a shortcoming in the process, so there is a problem there.

    Mr. FRANKS. You represent the National League of Cities today?

    Mr. PAOLELLO. Yes, sir.

    Mr. FRANKS. One point that came out in our resources hearing with the STB, our first in a series of hearings about this agency, we discovered that the travel budget is truly a minimal allocation, and it basically pays for transportation to and from court appearances, just sort of a mandated expense, and somebody has to pick up that travel.

    Understanding the legitimacy of a local government putting its concerns before the Surface Transportation Board prior to an important decision being rendered, is it practicable for the Congress to require a public hearing in every instance where a municipal official might benefit politically from being able to produce the Surface Transportation Board at a hearing anywhere around the country?
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    Mr. PAOLELLO. I am not sure whether it would be practical in all instances or not. I think there are some ways to compensate for that. We can increase the time periods and other mechanisms for comment so that in the event there are not public hearings, there is an ability to have the dialogue and the information presented to the Surface Transportation Board. But I recognize there are limitations in the travel budgets. We all have those.

    Mr. FRANKS. I think we are all charged to find the right way to ensure meaningful public input while it is, in fact, able to be categorized as meaningful, but I was just wondering as to how to strike the appropriate balance there.

    Mr. Blumenauer.

    Mr. BLUMENAUER. Thank you, Mr. Chairman.

    Mr. Burwell, I was curious if you had any—I mean, I strongly support your assessment in terms of trying to preserve the rail corridors. I have seen in my own experience how much of a difference it makes to a community, how the public support is overwhelming once they see what it is. But I was curious if you had some specific recommendations for ways that you can have more aggressive implementation. You called for it, but I wondered if you had some specific examples that this committee ought to consider in order to make sure that the objective of preserving these rail corridors is, in fact, obtained?

    Mr. BURWELL. Yes, we do have a few recommendations, and I do want to say that I think the Spring Water Trail in your jurisdiction is rail-banked, and it is a marvelous amenity to your community, as well as being potentially a future rail line. The main improvement is to provide an element of fairness relating to achievement of the national policy of preserving built-rail corridors and requiring railroads to negotiate with trail managers if somebody is ready, willing and able to take over that corridor.
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    Right now, when a rail line is proposed for abandonment, if another rail line steps forward and makes what is called an offer of financial assistance, a bona fide offer to run it as railroad, the STB can force transfer for that public use because of the public policy in favor of continuing rail service.

    That policy has not been applied under the Rail-Banking Act, even though we believe very strongly that Congress did anticipate a similar provision in enacting the Rail-Banking Act. The STB and its predecessor, the ICC, determined that, if a railroad doesn't want to negotiate, if it just wants to sell a corridor off, chop it up, make more money somewhere else, or just prevent another railroad from getting it, it can do that. We think that is a very deep defect in the Rail-Banking Act. There should at least—another public use, such as rail-banking, should have equal importance as an offer of financial assistance.

    Mr. BLUMENAUER. Do you want to elaborate on the reversal of this process, where it comes from, from a trail that has been rail-banked to where it is put back in service?

    Mr. BURWELL. It is a very simple process. There has been testimony previously it is very difficult. In fact, the procedure is simply for a railroad to go back into the ICC—excuse me, the STB, and ask that the rail-banking order be vacated. That is all that happens. And once railbanking vacated, the corridor is reactivated. There are no other procedures required. They don't have to get a new certificate of public convenience. And those are all laid out in the four or five cases where this has, in fact, happened, and we would be glad to submit to the committee, if you want, those STB decisions that lay out this process.
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    [The information follows:]

    Norfolk and Western Railway Co.—Abandonment Between St. Mary's and Minster in Auglaize County, Ohio, Dkt. 9 I.C.C. 2d 1015 (1993); Missouri Pacific R.R. Co.—Abandonment Exemption—in St. Louis County, MO., Dkt. No. AB–3 (Sub-No. 98X), (STB, decided April 18, 1997); Iowa Power—Const. Exempt.—Council Bluffs, IA, 8 I.C.C. 2d 858 (1990).

    Mr. BLUMENAUER. Finally, are there any provisions, in your judgment, that would be warranted to avoid having a situation where it is not used for rail purposes, it is not rail-banked, per se, but there are people who are gaming the system a little bit to be able to perhaps extract payment from either adjacent property owners to get what should revert to them if it is not going to be used for these purposes; are there protective mechanisms you think could be considered?

    Mr. BURWELL. Yes. In fact, that is often the situation, and we abhor that situation. In one case, the most egregious one, a salvage company has undertaken to establish two subsidiaries, one a railroad subsidiary and another one a trail group subsidiary. Then, although purporting to be committed to—continuing rail service, the subsidiary salvages it, rail-banks the coorridor with itself, and then goes around extorting a high price from whomever they can get it from, a trail manager, local community or the adjacent property owners.

    We are working very closely with Congressman Dooley of this committee because this situation has occurred in his district, and we are trying to find a way of preventing salvage companies from using the Rail-Banking Act to game the system. Some qualification as a bona fide railroad would be one possible solution.
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    Mr. BLUMENAUER. Thank you very much.

    Thank you, Mr. Chairman.

    I, as I mentioned from the outset, am a very strong believer that these rail corridors that were established at tremendous cost to the public over time ought to be preserved, but as we move down the line, I am keenly interested in being able to work to find ways to provide the adequate protections, and if they aren't to be used for this purpose, that there is a way that it goes to the adjacent property owners and not somehow be put into limbo where people profit from it who shouldn't.

    Mr. FRANKS. Thank you.

    Mr. Bachus.

    Mr. BACHUS. Thank you.

    Mr. Ackerson, on page 3 of your testimony, you state that railroads can and have converted their own affiliates into so-called trail sponsors in order to control the land, mine or export its resources and sell rights in it for nonrail and nontrail purposes?

    Mr. ACKERSON. Yes.

    Mr. BACHUS. Do you know of specific examples? I don't want to ask you to give them, but do you know specific examples of that happening?
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    Mr. ACKERSON. Yes, I do, and I am happy to name names and give examples.

    Mr. BACHUS. Would you do this, if you do have specifics? And that would be a fraudulent act, I would think. Would you submit those for the record?

    Mr. ACKERSON. I will be happy to. I suspect one of those instances is the same one that Mr. Burwell was just speaking about. I know of two very specific instances where that happened, precisely as described in the testimony, and an additional one where ISTEA funds were extracted for the purpose of paying for it.

    Mr. BACHUS. If you will just be as specific as you can and give as many details as you can.

    [The information follows:]

    [Insert here.]

    Mr. BACHUS. Paolello, did I say it right that time?

    We engage in a lot of discussions about grade crossings on this committee and, you know, who benefits from them and who ought to be responsible for making improvements. And there is always a discussion over whether the railroad was there first or the road or the city or whatever. In this case, how long has the railroad been in Yakima? Isn't it a railroad town, I mean——
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    Mr. PAOLELLO. That is right. In fact, it was started by the railroad company.

    Mr. BACHUS. So they built a railroad through there, and then the town sprung up?

    Mr. PAOLELLO. They, in fact, were there before the city was, yes. But having said that, I still think there is impacts to the community, to the citizens. After a period of nonuse of the railroad track, there were expectations developed on the part of the citizens. Business investment expectations were developed and——

    Mr. BACHUS. How many people were there, say, 10 years ago?

    Mr. PAOLELLO. In Yakima?

    Mr. BACHUS. I mean, Yakima would have grown whether the railroad started back or not. Are you saying if people had known the railroad would open——

    Mr. PAOLELLO. People had an assumption the railroad operations had ended forever, and hotels were built right near the railroad track.

    Mr. BACHUS. What was?

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    Mr. PAOLELLO. Hotels were built right next to the railroad track, and now people are coming to the city council saying that because of the train whistles, they can't sleep.

    Mr. BACHUS. I think that is valid.

    Mr. PAOLELLO. People won't stay at the hotel anymore, and they are facing bankruptcy.

    Mr. BACHUS. Let me ask you this: Building a grade crossing isn't going to stop people from staying at that hotel, is it? How can we remedy that situation without just not having the rail line put back in?

    Mr. PAOLELLO. We are not here to advocate for not having the rail line, we are here to advocate for some reasonable amount of mitigation and process that provides for mitigation.

    Mr. BACHUS. How would you mitigate the hotel being there?

    Mr. PAOLELLO. In our particular situation, if there were grade separations or a depressed trainway or an elevated trainway, if there weren't grade separations, presumably there wouldn't be the need to whistle for safety.

    Mr. BACHUS. So the whistle is one of the big deals?

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    Mr. PAOLELLO. That is one of the big deals. We have had hotel owners saying they are facing bankruptcy.

    Mr. BACHUS. Let me ask you this: The people that would benefit from the whistle not blowing would be the people that own the hotel and the people around the tracks?

    Mr. PAOLELLO. Yes.

    Mr. BACHUS. It is my understanding, I mean, they have some responsibility in this; do you agree?

    Mr. PAOLELLO. The hotel owners?

    Mr. BACHUS. Yes.

    Mr. PAOLELLO. Well, certainly I think reasonable people could think there could be some mix of——

    Mr. BACHUS. I guess I just don't understand when somebody builds a hotel, and there is a rail line there that the railroad company owns, how they could ever rely on the fact that they wouldn't put that rail line back to use? I mean, the hope is that they will, the expectation, and the fact that they hold onto that rail line, isn't there an expectation that if at some later point——

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    Mr. PAOLELLO. I understand your question.

    Mr. BACHUS. I mean, that is almost America. We want commerce.

    Mr. PAOLELLO. All I can tell you is for whatever reasons, they developed an expectation that the railroad operations had been essentially curtailed forever.

    Mr. BACHUS. But don't you think there is no legal basis for that expectation?

    Mr. PAOLELLO. Well, there may not be.

    Mr. BACHUS. I mean, people might build a farm, and then you build an interstate a half a mile from the farm, and they built it to be in a secluded location, but, you know.

    Let me ask you this: Is the rail line good for Washington?

    Mr. PAOLELLO. There are some net benefits to the State.

    Mr. BACHUS. Net benefits?

    Mr. PAOLELLO. That is true. There are some problems, and there are some benefits.

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    Mr. BACHUS. It is my understanding, I was invited to go out to the Port of Seattle and Tacoma, and I toured them, and the ports say that without that rail line, they aren't going to be able to grow. I mean, do you understand that is what they say?

    Mr. PAOLELLO. I understand that. I don't have much involvement with Seattle.

    Mr. BACHUS. Seattle and Tacoma supported opening that rail line, and I guess they are members of the National League of Cities.

    Mr. PAOLELLO. The cities of Seattle and Tacoma?

    Mr. BACHUS. Yes.

    Mr. PAOLELLO. They do not have the direct impacts that other cities along the——

    Mr. BACHUS. If you closed the rail line, they would have a direct impact, though, wouldn't they?

    Mr. PAOLELLO. They may. I can't speak to how they would be affected.

    Mr. BACHUS. They have submitted a statement to this committee saying they have actually spent $900 million in connection with increasing commerce and having—this rail line reopened is a vital key to that investment. They have invested $900 million.
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    Mr. PAOLELLO. As I say, the issue is not being here to talk about whether or not the railroad operates, the issue is——

    Mr. BACHUS. But you are talking about the hotel, is the example you have given me, and, I mean, if the hotel is there, you wouldn't say the Surface Transportation Board ought to say, buy the hotel, move the hotel, don't run the trains because somebody built that hotel.

    Mr. PAOLELLO. We are not necessarily saying that. I think what we are saying is there should be some process for arriving at some reasonable mitigation. There should be some greater dialogue with the Surface Transportation Board. There should be greater opportunity for public involvement.

    Nobody has all the exact answers off the top of their head on all these matters, but there must be some ability to work with the cities to deal with the negative impacts; not to talk about whether the railroad is operating or not, but to deal with the impacts from the operation.

    Mr. BACHUS. Have you looked at the testimony that the Port of Seattle and Tacoma introduced?

    [The information follows:]

    [Insert here.]
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    Mr. PAOLELLO. I don't believe I have a copy of that.

    Mr. BACHUS. I would like you to maybe look at it and maybe write this committee back and maybe just comment on it.

    Mr. PAOLELLO. Sure, I would be happy to.

    Mr. BACHUS. And one thing they say is that the Port of Seattle and the Port of Tacoma agree with the local communities, that is you, affected by increased rail traffic that road-rail conflicts are of concern, they need to be addressed, and they are being addressed in the Puget Sound area by a unique coalition comprised of 11 local communities, three ports, two main-line railroads, three counties, the State of Washington DOT and the Puget Sound Regional Council, which is a local metropolitan planning organization.

    These entities formed the Freight Action Strategy to improve port access to rail and resolve road-rail crossing conflicts. They have identified and ranked 15 projects of immediate priority, costing a total of $354 million. And then they say there is going to be an initiative on the ballot, and the people of Washington will decide to spend $2.4 billion to help mitigate these problems. Are you aware of that?

    Mr. PAOLELLO. I am aware of that initiative process.

    Mr. BACHUS. Do you support that?

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    Mr. PAOLELLO. I don't know that that has been certified yet, so it is not clear to me that it has been decided to be on the ballot yet.

    Mr. BACHUS. Are you all pushing for that?

    Mr. PAOLELLO. My city has not taken an official position on that yet.

    Mr. BACHUS. You mean on trying to resolve these problems?

    Mr. PAOLELLO. What I think you are referring to is the motor vehicle excise tax initiative.

    Mr. BACHUS. We deal with these problems all the time. People complain to us about blowing the whistle or the horn, you know, that disturbs people, but we actually require the rail companies to do that, you know, or the States do. I am sure the State of Washington has that. I mean, you realize it is not just the railroad that has a responsibility here, but the city and the State and the Washington DOT?

    Mr. PAOLELLO. Yes. Clearly, there should be a joint process for resolving the impact.

    Mr. BACHUS. I have pushed for more funds from the Congress for grade crossing closures and separations. And I would urge you to go back to the National League of Cities and ask them to get behind that. I think that would be most beneficial for all parties.
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    Mr. PAOLELLO. Yes, and grade separations are one of the things that we feel would be the most valuable to address a lot of these issues.

    Mr. BACHUS. Fine. Okay. Thank you very much.

    Mr. BURWELL. Mr. Bachus, can I make a related point, and that is simply that if that corridor had not been rail-banked, there would be no corridor left to reactivate.

    Mr. BACHUS. And I will say there are literally—and I am not asking you to put these people ahead of the people of Yakima, but there are literally millions of farmers on the plains whose, you know, farming operations will be improved by having access to these ports. And I know at least on one occasion last year, there was a storm, and this was the only rail line open to the Pacific Northwest, which would have cost this country billions of dollars had it not been—had that rail line not been in place.

    And, you know, you mentioned in your statement traditional powers, or have the traditional rights. The traditional right to ensure the free movement of commerce has always been with the Congress and really not with the cities to be able to halt that commerce. So, I mean, I think in a way you are arguing some nontraditional remedies.

    Mr. FRANKS. Mr. Nadler.

    Mr. NADLER. Thank you, Mr. Chairman.
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    Mr. Paolello, I apologize. I came in in the middle of your testimony, so I may have gotten it wrong, but did you say that you thought that where a rail line had not been used for a long time, and people had built a hotel or houses nearby in the expectation rail service would not be resumed, that they had some sort of a right to have that expectation?

    Mr. PAOLELLO. No, I did not. I was not speaking in a legalistic sense. I was indicating that some of the private business owners in the city that I reside in had developed an expectation, factually, that the railroad operations would not continue, and that may or may not have been a realistic expectation, but that was an expectation.

    Mr. NADLER. But do you think the government should do anything to meet that expectation; do we have any duty to them?

    Mr. PAOLELLO. It seems that there is a definite impact as a result of the government's approval of the merger and the operations, and that there should be some process for working together jointly to mitigate the issues. That is our view. The difficulty——

    Mr. NADLER. Let me ask you a different question. I have in my district an abandoned rail yard between the Hudson River—it is in Manhattan—the Hudson River on one side and a housing project that has been there for 30 years on the other. It is a 28-story building, it has about 4,000 apartments, and people have had the expectation for 30 years of a wonderful view of the Hudson and the New Jersey shore.

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    Somebody buys the rail yard and now wants to put up 50-story apartment buildings completely blocking their view, on the basis of which people paid a couple hundred thousand dollars for their condos or co-ops.

    Do you think we owe the people any duty to save their view by saying that the landowner cannot build over this old rail yard?

    Mr. PAOLELLO. From a legal perspective?

    Mr. NADLER. No, from an equitable perspective?

    Mr. PAOLELLO. I don't know whether you would or not. I think that if there is an impact on citizens, I think what the citizens would like is the process to have input to the government, to have mitigation considered, to have all parties available to see whether, in working together, there could be some answers to the issues and the concerns that are raised by the approval process.

    Mr. NADLER. Let me just say I appreciate your view. Let me just say it would be nice, and there should be a process of consultation, but if the economics would benefit the region, I hope that that process of consultation would not stop the resumption of rail traffic.

    I have also in my district two large apartment buildings built on the air rights over a rail line, so the trains, if there were any, would go right through the basements of these buildings with a thousand apartments in them. And nobody has run trains on this line in 25, 30 years. And after I was elected to Congress, I went to meetings of these apartment buildings, and I told them that I hoped to make that a major operating rail line again. And they said, my God, that will have lots of trains running through our basements. And I said, I certainly hope so. And they said, but that is terrible. And I said, listen, when you move into a building built on the air rights over a rail line, you should have the expectation that maybe someday somebody will run trains through them, and I think you are entitled, if the trains running through the buildings—if we get them running again and we revive the rail yard, if they run through there and if the vibrations undermine the foundations of your building, I think then you are entitled to some help from government, but you are not entitled to any help in the way of not having trains run there.
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    Anyway, that was my view, and I told it to my constituents, and they weren't too happy about it, and we will get trains resuming there, I hope, pretty soon.

    Thank you, Mr. Chairman.

    Mr. FRANKS. I want to thank the members of this panel. Your contributions to our deliberations have been very important. We thank you for traveling here and visiting with us.

    This concludes today's hearing.

    [Whereupon, at 4:19 p.m., the subcommittee was adjourned.]

    [Insert here.]




U.S. House of Representatives,

Subcommittee on Railroads,
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Committee on Transportation and Infrastructure,

Washington, DC.

    The subcommittee met, pursuant to call, at 10 a.m., in Room 2167, Rayburn House Office Building, Hon. Bob Franks (chairman of the subcommittee) presiding.

    Mr. FRANKS. Good morning. I would like to call the hearing to order. Today's hearing will focus on components of the Staggers Act regulatory regime in anticipation of the reorganization of the Surface Transportation Board which is due at the end of this fiscal year. Specifically, we will be addressing today rate and access issues.

    This is the fourth and final hearing in the scheduled series of hearings on the Surface Transportation Board. The first hearing dealt with the STB's budget and resource needs; the second addressed the state of the railroad industry; and last week's hearing focused on intercarrier transactions, construction and abandonments. In my judgment, this has been an extraordinarily informative process.

    I would like to begin this morning by thanking the dozens of witnesses who have contributed to establishing a thorough record on the critical issues with which these hearings have dealt.

    The regulatory regime for rates established by the Staggers Act has largely allowed carriers and shippers to negotiate prices according to demand. The Staggers Act permitted for the first time the use of contract rates which for the most part are outside the regulatory jurisdiction of the STB.
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    Today the majority of railroad traffic moves under contract that is not subject to regulation. Importantly, this traffic is subject to antitrust laws, and most disputes are handled just like other private sector commercial disputes. However, railroads continue to operate under their common carrier obligations, meaning that they must quote rates and provide service upon request. Common carrier traffic falls under STB jurisdiction.

    Although the Interstate Commerce Commission termination Act eliminated the requirement for railroads to file tariffs, it did not remove the obligation to quote rates which today may be accomplished through a variety of means, including electronic transmission. The theory behind the rate regulation in the Staggers Act was to protect captive shippers from abuses of market power while allowing railroads the flexibility to earn adequate revenues.

    Under the rate reasonableness standards for common carrier rates, the STB may only adjust rates if a carrier is determined to be market dominant. I am interested to hear from witnesses today on how this standard is functioning, whether it does, in fact, provide adequate protection for captive shippers, and whether any changes to the standard would leave the railroads with sufficient revenues to attract capital to make needed infrastructure investments.

    The other issue we will be addressing today principally is access. The U.S. rail network is based on private ownership of right-of-way, meaning there is no general obligation of one carrier to allow another carrier to operate on its track. The STB does have the authority in certain limited circumstances to require one carrier to provide access to another carrier.

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    Today, we will hear from witnesses who would like to expand that authority, and from opponents of that idea who feel any expansion would reduce the railroads' incentive and ability to make capital investments. I hope this hearing will help to shed light on this critical issue so that the subcommittee is able to make informed decisions as we move to the drafting stage of the STB reauthorization legislation.

    I would like to thank today's witnesses for appearing today. And I would now like to recognize the distinguished ranking member of the subcommittee, Mr. Wise of West Virginia.

    Mr. WISE. Thank you, Mr. Chairman, and thank you for scheduling this very, very important hearing. To be honest, I have looked forward to this one for a long time. It is kind of like Saturday night tuning in to cable WWF, World Wrestling Federation, live from the Omni, two out of three falls, when we get the shippers and the railroads all in the same room, and of course the STB which has to be wear the striped suit and referee this match of titans.

    But I also happen to think it is one of the most important hearings we are going to hold, because as this committee moves towards STB reauthorization, it also has to deal and grapple with these very, very complicated issues. I note that since the Staggers Act, deregulation rail act passed, this country has gone from something like 43 class one railroads to five or seven, and perhaps dropping more in the next couple of years.

    So the question then becomes, how do you guarantee adequate competition, or is competition a figment, particularly if you are in rural West Virginia either as a coal shipper or, as was the case presented to me just a few days ago, a chemical shipper served by only one railroad, and you have just had to lay off 170 people, and one of the three reasons is because of the high rail rates and the apparent reluctance, at least stated reluctance of the carrier to engage in negotiations around that issue.
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    So how do you get any relief? And is it indeed the case that you have competition if, besides the captive being served by the railroad, there is also the possibility of truck traffic? I am not sure that a road simply running by a coal mine or a chemical plant indicates that that is a suitable form of competition. Perhaps it is, and I look forward to hearing more about it today.

    I do have to observe that the STB rate regulation process is a bit Byzantine, a bit complex, certainly expensive. It is a two-stage process, where you first have to show that the railroad is market dominant and then that the railroad's rate is unreasonable, and each of these steps can be fairly complex in and of itself. Whether you are talking about intramodal competition, intermodal competition, product competition, geographic competition, it all adds up to pretty big legal bills.

    Then there is the requirement that to show a rate is unreasonable requires that you construct a hypothetical stand-alone railroad and to demonstrate what the cost of this railroad would be. The only problem, of course, is that by virtue of having performed the mergers, most railroads by then have economies of scale. And so you are not starting—you are not having to run each operation as though it is the only operation and totally all costs are based strictly on that.

    The coal shippers occasionally have won cases in front of the ICC, now the STB. But I believe the record will show, and I would be happy to be corrected, that not many others have or no one has since the Staggers Act was passed 18 years ago. For grain shippers and chemical shippers, this can be quite an insurmountable burden.
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    I also look forward to hearing today about access, the Chairman mentioned the access issue, so that shippers can get access to a second railroad to provide competitive service, whether you are talking about alternative through routes, reciprocal switching or terminal access.

    Then there should be discussion about carrier practices and whether or not there is abuse of market power, whether it is grain car minimums or demurrage charges or intermodal marketing minimums or Carmack rates. The railroads, there seems to be some unilateral action taken by railroads without consulting with customers.

    I am going to get back to my central point that I tried to make throughout these hearings, and that is that there is a responsibility among everyone in this room, that if the direction that we are going is to see larger concentrations of power in a few Class I railroads, then at some point there have to be some rules of road that have to provide true competition. I don't see how you go from 43 to 5 and say that there is still the same level of competition.

    I understand that, yes, you may have trucks, you may have barges, but in many areas a captive is captive to the railroad essentially. And so that is the real issue that I think has to be addressed here, and what role should the STB have.

    I welcome again Chairwoman Morgan. It is good to have you back. I am going to continue pressing you, Madam Chair, because this committee not only needs to know what the practice has been, but as it performs its reauthorization function, it needs recommendations about what practices should be in the future. I note with interest that—well, I did note with interest. Where did the press release go? I noted with interest that yesterday the STB proposed rules to provide expedited relief for service and adequacy.
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    So it seems to be that the STB is recognizing that it is a changing world, a changing climate, and that it is trying to adjust. I applaud you for that, but this Congress needs to do the same thing, and so we need some solid recommendations from your very, very extensive experience on what those could be, because this is a new world, a newer, and let me back up and say a fast-evolving world that we are all entering.

    So, Mr. Chairman, I look forward to this hearing, and to a full, as they say in the State Department, a full and frank airing of the views by all. Thank you very much.

    Mr. FRANKS. Thank you, Mr. Wise, for your opening statements.

    Mr. Quinn?

    Mr. QUINN. Thank you, Mr. Chairman, and thank you for continuing our discussion, and thank the Chair for being with us again today. I do have an opening statement, and we will be here for different parts of this, because not only is this a concern of all of yours nationally, but as many of us on the subcommittee and the full committee, there are some concerns that I have about the area I represent back in Buffalo and western New York, and would like my full statement to be included in the record.

    But also I want to underscore a couple of points, if I may, Mr. Chairman. Over the past year, I and others have repeatedly voiced our concerns about the Norfolk Southern-CSX acquisition and its impact around the country and where I represent, western New York. From my personal experience, competition is a key issue in any proposed rail merger or accession, but it is doubly so in any acquisitions and any activities or transactions that involve Conrail.
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    If you look at the national rail map, Conrail for most of the northern United States has been the only game in town. I think this accounts for some of the initial enthusiasm, in principle, of much of the Northeast when it became known that the Conrail route system would be acquired by two healthy railroads, CSX and NS. But as usual, we all know that the devil is in the details, and this is where I expect most of the focus to be as the Surface Transportation Board moves toward a final decision on the transaction later this year.

    I also know, Madam Chair, that we are here not necessarily to talk just about this merger or just about a situation that this Member of Congress happens to have in his Congressional district, but I think that it is timely to be at least thinking about this when we talk about reauthorization. The applicants have already reached some tentative agreements on access or traffic rights with at least one of the Canadian railroads seeking to expand its territory, but I think personally that more voluntary accommodations are needed.

    In our part of New York State, out in western New York, a tricounty coalition comprised of both public and private entities have joined forces to make access and therefore lower shipping costs part of the merger. In fact, they were all here in Washington about 2 or 3 weeks ago to make sure that we keep their voices in the forefront. It is called the Erie-Niagara-Chautauqua, those are the three counties, Rail Steering Committee, and they filed a request aimed at a discussion about the cost of doing business.

    Conrail has had a pretty good deal in western New York. Prices provided by that deal have driven traffic away from railroads and made western New York essentially noncompetitive. Just one example, if I may: Until a recent accommodation by CSX, reciprocal shipping charges averaged about $450 in western New York. That is three times the national average, three times the rest of the national average.
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    General Mills, a national company in my district, it cost them more to ship from Buffalo to Philadelphia than it cost for the same amount from Kansas City to Philadelphia. They submitted to the steering committee a document over two inches thick to the STB detailing concerns and possible solutions.

    Mr. Chairman, as I said, my full statement will become part of the record but I only wanted to underscore those concerns. We stand ready to work with the Chair and the Board as we continue these discussions over these next few months.

    Thank you, Mr. Chairman.

    Mr. FRANKS. Thank you Mr. Quinn.

    Mr. Clement.

    Mr. CLEMENT. Thank you, Mr. Chairman. I do think this hearing is critically important concerning the Surface Transportation Board, and particularly rate and access that I know is a great concern to the shippers as well as the customers.

    Prior to being a U.S. Congressman, my first elected office back in the 1970s was when I was elected to the Tennessee Public Service Commission, where I served as chairman. I spent untold hours on the issue as to what is a fair, just and reasonable return on investment. I realize much has changed now, and we have deregulation, and I have supported deregulation. As a matter of fact I was a sponsor of legislation for deregulation, so I am not opposed to it. I realize that we live in a changing time.
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    But, you know, when you see companies making extraordinary profits, and yet the rates are very high and there is a real concern about access, and then you have the Surface Transportation Board, a new Board after the Interstate Commerce Commission's demise, it is critically important for the Surface Transportation Board to show a lot of courage, a lot of vision, a lot of creativity and to be fair to all parties, to the various industries that provide a service as well as those customers that badly need to utilize the railroads to haul their product. There has got to be some fairness, some balance there; if not, we are sure going to have to revisit some tough issues from the past.

    That is why I am very pleased about these hearings, and I am looking forward to hearing the testimony.

    Mr. FRANKS. Mrs. Fowler.

    Mrs. FOWLER. Thank you, Mr. Chairman, and I want to welcome the Chairwoman. We look forward to her testimony this morning.

    I think all of us serve on this subcommittee because we share an interest in maintaining and preserving a healthy railroad system in this country, and sometimes there might be differences of opinion on how we get there, but I think we all have the same goal in mind. I think what we are dealing with today on the rates, the access, the remedies are critical issues to the system.

    We have got to remember back when we were headed toward nationalization and we went to deregulation in the early 1980s, the problem before that deregulation was that the regulatory scheme was really based on the government, not the marketplace, and that the government was setting the prices, not the marketplace. And because the government controlled all the rail operations and the allocation of assets, then the industry couldn't realize the most efficient use of the those assets.
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    I think we have to be very careful today as we go through marking up a bill that we strike the balance that we need to reach between making sure that we are not headed back to some of the problems we had before deregulation as we try to address some of them that we have had since. Sometimes it is an interesting balancing act.

    The good news is that we developed, I think, a pretty healthy system, due to the fact that the productivity has increased, that the railroads have certainly been plowing a lot of investment into both infrastructure and equipment, I think more than $100 billion over the past decade, and they are very capital intensive, and we have to keep that in mind.

    So as we work on increasing safety, we have got to, I think, balance these facts together as we look at the reforms, because if we start ending up with lower capital investments, then we are going to end up impacting on our safety in the long run. So we have an interesting situation before us here.

    I understand the concerns of my colleague on the situation he has in his area. I am a supporter of CSX and Norfolk Southern taking over Conrail, because I think that is what is needed to keep the system healthy. We just have to make sure it proceeds in the right manner, but I think both companies are working this out, and I think we can continue to work with them on that.

    So I just say I am looking forward to the testimony before us today, and I am looking forward to working with the Chairwoman and the other members to see if we can come up with the right structure this year.
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    Thank you very much.

    Mr. FRANKS. Thank you.

    Mr. Blumenauer?


    Mr. WISE. Mr. Chairman, can I make a request for the record? I will, because of the committee meeting taking place in this building, and there will be votes, I will have to be absent for short periods of time. I just wanted to explain that. Thank you.

    Mr. FRANKS. Thank you.

    Mr. Fox?

    Mr. FOX. Thank you, Mr. Chairman.

    Mr. Chairman, I have appreciated the series of hearings on the pending reauthorization of the Surface Transportation Board, and I am particularly pleased with the quality of the testimony provided by the witnesses who have appeared before our subcommittee.

    I believe there many challenges faced in this Congress as we grapple with the future of the rail industry in the United States. Surely it is in the best interest of the country to maintain strong and vital railroads, and I am optimistic that our Nation's railroads will continue to play important roles in the Nation's commerce. The recent developments in the industry, I believe, have given us both cause for optimism and concern.
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    I am appreciative of the focus of this hearing, as I am sure we will hear valuable testimony on the concerns that shippers have of the future of competition in the industry. I am also interested to hear the views of the railroads. And I am always pleased to hear the insights of Chairman Morgan.

    Thank you very much. I yield back.

    Mr. FRANKS. Thank you. I ask unanimous consent that the hearing record be held open for 30 days to allow members to submit written questions to the witnesses and to receive written answers for their inclusion in the record. Without objection, so ordered.

    I ask unanimous consent that the opening statement of Mr. Shuster, the Chairman of the Transportation and Infrastructure Committee, be included in the hearing record at the appropriate point. Without objection, so ordered.

    [The prepared statement of Mr. Shuster follows:]

    [Insert here.]

    Mr. FRANKS.And on a related matter concerning supplemental materials for the hearing record, the STB has requested the usual 30-day period for submitting such materials from our May 6th hearing be extended to June 15th, because the present 30-day period expires virtually on the eve of the voting conference to deal with proposed acquisition of Conrail. Therefore, I ask unanimous consent that the period for submitting written questions and the answers and additional materials for the record for the subcommittee's May 6th hearing be extended through June 15th, 1998.
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    Mr. WISE. Reserving the right to object, can we first see whether or not we agree with the opinion before we agree?

    I will withdraw that objection.

    Ms. MORGAN. Somehow I knew you were going to say that.

    Mr. FRANKS. Without objection, so ordered.

    On that note, let me, before I introduce the Chairwoman, let me note, as I have in every hearing, I have tried to issue in a variety of ways an admonition to the members of the subcommittee to be cognizant of the Chairwoman's prohibition on ex parte communications, and therefore to not engage in questions that might compromise the integrity of the process that this Congress has established.

    So I will say it in less judicious language in this case. Actually I know the Chairwoman would love to give us a detailed explanation of each and every one of the issues before us; then she would have to kill us. So I would urge us all to refrain.

    On that note, I would like to welcome back Linda J. Morgan, the Chairwoman of the Surface Transportation Board. Madam Chair, thank you for coming back before us. Today's hearing is perhaps the most important, if not at least the most controversial. We are delighted to see you as the leadoff witness and look forward to your testimony.

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    Ms. MORGAN. Thank you very much. And I will not introduce myself again, since I am well-known now to the subcommittee. I am here today to discuss reauthorization of the Board and, in particular, issues related to rail rates, access and remedies. The issues discussed at the prior hearings will not be the subject of my testimony today.

    More specifically, my testimony describes in detail the law implemented by the Board and past decisions and pending matters in the areas of maximum rate regulation, competitive access, service complaints and disputes between Amtrak and the freight railroads over its use of their tracks.

    My testimony also reviews the Board decisions following up on its recent hearings on rail access and competition. As I have 5 minutes for my oral presentation, I will not go into more detail regarding my written statement, and ask that my entire 16-page testimony with three attachments and summary be included in the record in full.

    Last week,I briefly discussed in my oral presentation the decisions that the Board had issued following up on its hearings on rail access and competition. As I discussed last week, the April 17th decision of the Board covers a broad range of issues that are relevant to today's hearing, providing for Board action administratively now in certain areas and directing private sector negotiations first in other areas, which could lead to additional regulatory activity. These issues include revenue adequacy, rate reasonableness determinations, competitive access, the role of small railroads, and improved dialogue among carriers, shippers and employees.
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    The board's April 29th decision initiates a rulemaking eliminating product and geographic competition from the market dominance determination and rate reasonableness cases. The May 4th decision responds to specific issues raised by the shippers about the April 17th order.

    As was mentioned earlier, yesterday the Board issued a decision initiating a proceeding to provide relief by way of access to another carrier when the serving carrier is not providing adequate service. The Board had committed to initiating this proceeding in its April 17th decision. I ask at this point that the text of our decision of yesterday be included in the record.

    The issues addressed by the Board in these various decisions are important and the resolution of these issues is critical to the future of rail transportation and its regulatory oversight. I believe that the Board's actions in response to its hearings on rail access and competition are responsive, comprehensive and appropriately measured, and offer a balance of immediate government action and constructive private sector efforts.

    The Board is committed to pursuing all of these issues to their appropriate end. In general, since its inception, I believe that the Board, pursuant to congressional directive in eliminating the ICC, has been a model of doing more with less, of putting its limited resources to the most efficient use and handling its case load expeditiously and resolving matters before it in an effective and responsive manner in accordance with the ICCTA.

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    I also believe that the Board has approached its work with fairness, balancing the many varied and often conflicting interests under the statute in reaching its decisions on the record. While not everyone agrees with all of the decisions rendered by the Board since its creation, I believe that nevertheless the Board has compiled an impressive record of tackling complex issues and moving matters before it to resolution.

    I know that some concerns have been raised as to whether the Board actions have done enough to more actively promote competition in short haul service at reasonable rates or provide appropriate access to the regulatory process for relief. I can only respond by saying that the ICCTA reaffirmed the statutory tenancy of the Staggers Act directing the Board to continue the regulatory approach that has been followed in implementing that law.

    This, I believe, the Board has done. Nevertheless, as its April 17th decision and the decisions that have followed demonstrate, the Board does respond as appropriate to the legitimate needs and concerns of shippers and other interested parties, and it does whatever it can to address and advance those needs in implementing the statute.

    The balance and care with which the Board approaches its responsibilities are intended to ensure that the decisions it reaches can produce a system in which rail carriers will be able to provide at reasonable rates service that meets shippers' needs. In this regard, I would be remiss if before closing I did not once again recognize the competence, dedication and professionalism of the Board staff in achieving these objectives. Congress and the public are fortunate to have them, and so am I.

    At this time I would be happy to answer any questions that you might have.
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    Mr. FRANKS. Okay, Madam Chair, thank you very much.

    On pages 13 and 14 of your prepared statement you outline the STB's recent order initiating discussions to reevaluate the existing revenue adequacy standard for all rail carriers. Could you briefly describe how, if at all, the revenue adequacy factor enters into the STB's determination of whether a particular rail rate is unreasonably high?

    Ms. MORGAN. Certainly. Revenue adequacy, though a significant concept in the law, is not a determinative factor in analyzing rate cases. As a general matter, a carrier that is revenue adequate can also be found to have charged an unreasonably high rate, and a carrier found revenue inadequate can also be found to have charged an unreasonably high rate.

    More specifically, under our procedures, when we look at a large rail rate case, we apply what we call constrained market pricing, which you, Congressman Wise, referenced in terms of your description of the stand-alone cost methodology that we apply to those cases. The stand-alone cost methodology does not look at the revenue adequacy of the defendant carrier. It is a method by which we develop a hypothetically efficient carrier that would conduct the business that is at issue in the case. And that is the way we have handled large rail rate cases.

    With respect to smaller rail rate cases, we do have guidelines. We have three criteria that would be applied in a smaller rail rate case. Revenue adequacy is an issue that we look at, but it is not the only issue and it is balanced with other issues. So I think in conclusion I would say that it is clearly a concept that is there, but it is not a determinative concept.
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    Mr. FRANKS. A good deal of testimony that has been submitted today by a variety of parties equates a rail rate that exceeds 180 percent of variable costs with captivity for the shipper.

    Could you briefly explain the actual role of the 180 percent threshold under the Staggers Act, as well as the differences between fixed and variable costs?

    Ms. MORGAN. Well, in terms of the Staggers Act and what was intended with respect to the 180 percent revenue to variable cost ratio, it was determined that anything below 180 percent variable cost could be a captive movement. So 180 percent was picked as the threshold and then in addition, as was mentioned earlier, there is the second level of proof which is whether a particular shipper is market dominant.

    And then there is an analysis of that, and then if it is above 180 percent and there is market dominance, then we look at the reasonableness of the rate. The suggestion I believe that has been made is that we eliminate the market dominance analysis, that we use 180 percent as a threshold without any other criteria. I don't know if that is actually what you are referencing, but clearly that would be a change from the tenancy of the Staggers Act.

    Mr. FRANKS. There has been considerable discussion recently of the impending year 2000 or Y2K computer problem, and I know that the STB as an agency and the railroad industry generally are increasingly dependent on electronic data. In fact, the ICC Termination Act specifically authorized replacement of old paper tariffs with electronically quoted common carrier rates.
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    What is your assessment as to whether the Y2K issue poses a problem either for the STB or the railroad industry?

    Ms. MORGAN. Well, with respect to the STB, we are well on our way, if not already there, to resolve our 2000 problem with respect to our computer programs and the information that we collect. I would be happy to provide it for the record specifically, where we have this issue and what we have done about it, but as a chairman I am very comfortable with where we are.

    Now, as far as what the industry itself is doing in the private sector, I really can't speak to that directly. I know that they obviously are challenged with that, as is everyone else in society, but I haven't myself specifically sought out any kind of status report in that regard. I focused primarily on the Board itself and where we are in that respect.

    Mr. FRANKS. Could you please forward the materials to the committee for the record——

    Ms. MORGAN. Absolutely.

    Mr. FRANKS. ——in terms of progress? We would appreciate it.

    Mr. Wise?

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    Mr. WISE. Madam Chair, returning to your statements about revenue adequacy, I believe what I heard was that revenue adequacy is not always a test for whether or not rates are too high. I guess my question would be in light of that. As I recall, last year Vice Chair Owen announced publicly that he thought that the revenue adequacy determination that the statute requires the Board to make was a waste of time and he encouraged the Congress to drop this requirement. Your statement suggests that revenue adequacy is not always the determinant that perhaps some thought it was.

    My question would be whether the requirement of revenue adequacy is a waste of time, and in the reauthorizing language, should it be dropped?

    Ms. MORGAN. Well, I think—let me answer that two ways. I think in terms of the notion of whether the rail industry is recovering sufficient profits and revenues as a general matter, I think that clearly is something we all have to be concerned about, whether we are in Congress or in the regulatory body. As a matter of fact, one of the discussions that we did have in our rail access and competition hearings was the notion that a body that regulates an industry must have some way of determining whether the flow of revenues is adequate to make sure that we meet the public interest that we are trying to meet.

    So as a general matter we need to have some notion of whether the industry is bringing in the money that it needs. That is sort of the general concept. But then we have the specific discussion of whether the particular determination of revenue adequacy that the Board has made that is required by statute, and the annual determination that we make, whether that determination is based on the appropriate standard.

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    In our April 17th decision, as you probably know, we did direct—originally we had directed the picking of a disinterested panel of three experts to review revenue adequacy and, if appropriate, come up with a different standard. The shippers requested that we put that directly to the shippers on the railroads, so we did issue an order amending our earlier order. So the two parties will be meeting to discuss the specific determination of revenue adequacy.

    Mr. WISE. Do you know when that meeting might take place and when they may make some decision?

    Ms. MORGAN. These meetings are occurring now under the auspices of an Administrative Law Judge. They have already had some meetings and they will have continue to have more. The outside deadline that we have put on the railroads and shippers reporting back is August the 3rd, but we have also indicated that interim reports would be welcome, and that if the group wanted to go back to the original proposal, which was a disinterested panel of experts, that they could also do that as well.

    Mr. WISE. Okay, thank you. A little later on, one of the shippers' groups will testify that once their members demonstrate that their rates are more than 180 percent of variable costs, they almost always succeed in eventually showing that the railroad is market dominant. Is that true as a factual matter?

    Ms. MORGAN. Well, certainly in the cases that—and you did mention the cases that we had decided upon, and we have had two coal rate cases where obviously we decided that it was over 180 percent and there was market dominance and the rate was unreasonable. We had a pipeline case where we made a similar determination, and we had a grain case where we did not find the rate unreasonably high and another coal case where we did not find the rate unreasonably high. That is really the only basis upon which I can give you—confirm what is being said there.
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    Mr. WISE. To your knowledge, have there been any chemical shipping cases brought to you raising these same issues?

    Ms. MORGAN. Not to my knowledge, no. We do have some pending coal cases, four, I believe, large coal cases, but I don't know of any chemical cases. We do have another case involving Shell Oil and several defendants, and that case is in the early stage of discovery, but no chemical cases have been decided.

    Mr. WISE. Okay. I thank the Chair.

    Mr. Chairman, I would ask if you might consider, following the end of the round, to see whether members may have some other questions that come up in light of the questions that have been asked the first time. Thank you.

    Mr. FRANKS. We intend to be flexible.

    Mr. Quinn?

    Mr. QUINN. Thank you, Mr. Chairman.

    Chairwoman Morgan, to get back to your statement, you report that the Board has begun a rulemaking process, this is on page 13, to consider repeal of the product and geographic competition standards which are used to determine whether a rail carrier is market dominant in rate reasonableness cases. Can you talk for a minute or two just about that product and geographic competition standard? And the reason for my question is, just before we talk about repealing it altogether, are you as a Board certain that we have looked at it enough to see that what we have works or doesn't work?
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    Ms. MORGAN. Well, as a general matter, as I think I mentioned earlier, once you have determined a rate is over 180 percent of variable costs, then you look at whether there is market dominance, and there are currently four tests as it relates to market dominance: Is there intermodal competition? Is there intramodal competition? Is there product competition? And is there geographic competition?

    And of course product competition is, can there be a substitute product found somewhere else? Geographic competition is, is there another place where a similar product could come from? At our hearings that we held on rail access and competition several weeks ago, many of the shippers raised concern about the difficulty in pursuing rate reasonableness relief at the Board, and one of the things they raised was the difficulty in dealing with the product or geographic competition standards.

    In that regard, recently the Board issued a decision in which we indicated that we felt that the railroad in this particular case had been bogging down the discovery process through using product and geographic competition. So in our April 17th decision, we have put out for comment the notion of eliminating product or geographic competition based on the concerns raised about the difficulty in dealing with it and whether it is indeed preventing appropriate access for relief.

    Mr. QUINN. You can guess, maybe, from my opening statement about geographic situations in my part of the world up in western New York as it relates to this whole question, my concern is about the geographic situation. When you put out for comment the notion that you may eliminate geographic and product competition, what is your timetable for all of that? Do you know offhand? I mean——
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    Ms. MORGAN. Well, we have a 30-day comment period, the decision was issued I believe April the 29th, if I recall correctly. Thirty days from that comments will come in. Then we have a rebuttal process 30 days after that.

    Mr. QUINN. Okay.

    Ms. MORGAN. And, again, we are seeking comment on whether or not to do it.

    Mr. QUINN. Okay.

    Ms. MORGAN. Now, the ICC originally did not look at product and geographic competition and then later on decided to include that, so we are in essence resurfacing the issue.

    Mr. QUINN. Thank you. Thank you, Mr. Chairman.

    Mr. FRANKS. Mr. Clement?

    Mr. CLEMENT. Madam Chairman, the ICC established a process by which shippers could protest rates which they thought were unreasonable. Has any shipper, other than a coal shipper, ever succeeded in getting any rate relief by protesting a rate?

    Ms. MORGAN. No. There has been one grain case filed. The grain shippers did not get relief in that case. We did find market dominance but found that the rate was not unreasonably high. That is the McCarty Farms case. Other than that, we have had coal cases that we have decided. And as I indicated earlier, two coal cases, we found in favor of the shipper, the ICC found one not in favor of the shipper, and then we found a pipeline case, rate case, in favor of the shipper.
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    Mr. CLEMENT. Don't you think that is highly unusual?

    Ms. MORGAN. I think we take the cases that come to us, and we make the decision based on the record before us, and we call the cases as we see them. I don't know that that is——

    Mr. CLEMENT. Wouldn't you also believe that has a lot to do with why the shippers are so upset and so dissatisfied with your Board, because they don't feel like you are being responsive, and you are not hearing what they are saying and dismissing it without any real consideration?

    Ms. MORGAN. Well, I do understand that the shippers have expressed concern, yes. I feel that the Board has been fair. We have applied the law as we see it to the cases before us. I don't think we have been biased against the shippers. Having said that, as I indicated in my comments earlier, we did hold hearings on rail access and competition. Thirteen hours of the 15 hours were with shippers who had concerns.

    We 2 weeks later followed up with an April 17th decision that I discussed a little earlier that touches many of the concerns, and we have initiated subsequently two proceedings, one on product and geographic competition and the other on additional relief where there is inadequate service. So I believe that we have heard the concerns and are trying to move in a direction to try to respond to those concerns.

    Mr. CLEMENT. But what are the coal shippers doing that the others are not doing to plead their case before your Board to be heard?
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    Ms. MORGAN. Well, again, I think first of all it is a question of who files a case. We have dealt with the cases that have been filed and they have been mostly coal cases, and we have some coal cases currently pending. So you take the cases that are brought to you.

    In terms of how one wins and how one loses, it is like every other case that we have. There is a statute that has to be applied and a record that has to be developed based on the statute, and then the Board looks at the record that is been compiled and makes a decision based on the record, and each case is different in that respect.

    Mr. CLEMENT. Do you think you have the authority to do your job as a member of the Board and as chairman? Do you need more legal authority to get the job done or——

    Ms. MORGAN. Well, again I think I get back to that diplomatic answer that I gave at the last hearing. I am looking at Congressman Wise because he offered me a job at the State Department, I believe, after I answered that question, which I almost took.

    But I believe that the Board has been implementing the law with the authority that the Congress has given it in a way that Congress intended it to be. If the Congress wants to change the authority, then that is what we are here about. That is what we are here to discuss, and that is what the hearings were about that the Board held. But in terms of managing the rate cases in a way that Congress intended, I think we have the authority, we have used the authority and been fair in our decisionmaking.
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    Mr. CLEMENT. All right, thank you.

    Ms. MORGAN. Was that diplomatic?

    Mr. WISE. It is so good I want to warn you they may put you on the India desk.

    Mr. FRANKS. Mrs. Fowler?

    Ms. MORGAN. I have been offered more other jobs in these last couple of hearings, I am getting a message, I think.

    Mrs. FOWLER. Thank you, Mr. Chairman. They need your clone in several different places around here.

    Ms. MORGAN. I don't know.

    Mrs. FOWLER. I just want to follow up. I think this has been partially asked but I wasn't clear on it.

    You know, back in 1996, as I understand it, the STB adopted these simplified rate guidelines as required by the ICC termination act. But in reading through the testimony it appeared to me, if I read it correctly, that not a single shipper has even filed a complaint during the 2 years since the simplified rate guideline procedures were put in effect.
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    Am I correct or not, and if this is correct, then have you drawn any conclusions as to why they haven't been used?

    Ms. MORGAN. You are correct, there have been no cases filed since we issued the guidelines.

    My second answer would only be speculation. I am not sure why no cases have been filed. It could be because it is on appeal in court, as are most of our decisions. It could be because there is a feeling that perhaps there would be a legislative avenue that might provide a little bit different approach to the small rate cases. It could be a perception that they don't want to deal with these standards right now. I really don't know. This is only my speculation.

    Mrs. FOWLER. Okay. So while we are hearing complaints, they are not using the system that you put in place 2 years ago, though, to try to deal with it?

    Ms. MORGAN. No cases have been filed since we issued the guidelines, yes.

    Mrs. FOWLER. Thank you. Thank you, Mr. Chairman.

    Mr. FRANKS. Mr. Blumenauer?

    Mr. BLUMENAUER. Thank you, Mr. Chairman.
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    Is it possible that part of what we are seeing is a reaction to the time and complexity that is involved for what appear to be, at least to an amateur looking from the sideline, relatively minor adjustments? While they are critical for, perhaps, an individual company that is involved or a market sector, they don't rise to the level of complexity of something like a railroad merger, which somehow you are able to flog through in less than a year, while a rate case takes 16 months, lots of time and money. I mean, is part of what we are seeing a reflection of a process that seems to be disproportionate to what comes out the other end?

    Ms. MORGAN. You could be correct. And I would like to make a couple of comments.

    Mr. BLUMENAUER. Just before you make it, isn't there just a little bit of, I mean, dichotomy between being able to take a major merger in less than a year versus 16 months for a rate case, plus all of the hoops and time and energy? I mean, isn't there something just on its face that would seem to discourage people from, particularly some of the smaller entities, trying to crawl their way through that?

    Ms. MORGAN. Well, I understand the concern that you are raising. I think the challenge for the Board continues to be, in the rate area in particular, how do you facilitate a case that really involves some very, very complex and very technical concepts? And a rail rate case is a very complex process, both for the parties and for the Board, and if you want to continue to balance a lot of the interests that are in the statute, that is a complex balancing. Now, one of the particular——

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    Mr. BLUMENAUER. More complex, I'm sorry to interrupt, but more complex than a major rail merger?

    Ms. MORGAN. Well, again, the mergers that we have done have been on different timetables, and the merger that we are involved in now is on a longer timetable than the earlier mergers that we dealt with. I don't know whether one is more or less complex than the other. They are different and the process by which the record is accumulated is different.

    A rate case record is very, very technical and very focused on economic analysis, accounting analyses and so forth. It is just a different record altogether from a record in a merger case.

    But my second answer was going to be the real challenge, and it gets back to what was discussed here earlier, is the smaller shipper and how a small shipper has access to a process such as the Board's in a way that is affordable. And that I think is a challenge for any government entity, and certainly for society in general, is how does the littler guy get heard and have access?

    That is a difficult issue in our simplified rate guidelines that were discussed earlier. We tried to simplify the rate process for the smaller case. But having said that, there are still complex notions of how rates are set and how rates affect the revenues coming into the rail system. So I understand the concerns, and I understand the concerns of the shippers in terms of access to the system, and that is why we are trying to pursue some different avenues, as I mentioned earlier.

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    Mr. BLUMENAUER. Thank you.

    Mr. FRANKS. Madam Chair, my opening question was concerning the 180 percent of variable costs, and I asked you to explain the difference between fixed and variable costs.

    Ms. MORGAN. Oh, I'm sorry, I forgot to.

    Mr. FRANKS. Let me be more illustrative and ask you to comment. Given the extraordinarily high fixed costs of railroads, is it possible that a rate at greater than 180 percent of variable costs would still not be adequate to provide the transportation, given the high fixed rate that that railroad needs to operate? Can you talk about the juxtaposition and the interrelationship between fixed and variable? Because we have all been talking around it.

    Ms. MORGAN. Certainly. Well—and I'm sorry I didn't answer that question earlier, I forgot that that was the second part of your question.

    Just quickly, fixed costs are the constant costs of the system and the variable costs are the costs associated with a particular activity. So, for example, labor would be a variable cost, whereas a bridge that is already been constructed is a fixed cost. So that is an answer I believe to your first question.

    The second part of your question really goes to the challenge I think that we all face with respect to regulation of the rail industry, and that is how do you keep rates reasonable at the same time you allow the industry to cover all of its costs, fixed and variable, attributable and unattributable, in such a way that there is enough revenue coming into the system to then be invested back into the infrastructure?
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    That is the overall challenge in the Staggers Act and the challenge to the Board and to Congress as we try to balance these interests. And it is—the rail industry prices based on the notion of differential pricing, which means that more competitive traffic may pay less—a lower percentage of unattributable costs then captive traffic, more captive traffic would. The key for us is to make sure that captive traffic is not paying more than its share of those overall costs.

    If the whole rate structure comes down too far, then in the short term everyone may be getting lower rates but the concern is, over the long term will there be enough revenues coming back into the system to make sure that all of the shippers that want to be served can be served? I think that is an answer to your question.

    Mr. FRANKS. I thank you.

    Mr. Wise.

    Ms. MORGAN. If I could, too, just amend the record for a minute, I believe someone asked if there had been other than coal cases filed. I did forget that we do have one pending case now that does involve minerals. So I just wanted to correct the record in that respect.

    Mr. WISE. Thank you, Madam Chair.

    I am trying to sort through your response to Mr. Franks. I would be interested—I am not sure where this came from. I suspect it came from a shipping group. But I am holding up a chart. I don't expect you to be able to read it. I can't read it.
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    Ms. MORGAN. I can't even see the print.

    Mr. WISE. I am much closer, and I can't read it. It is supposedly a flow chart showing how you get rate relief from the Interstate Commerce Act. The reason I think it has a bit of an editorial comment is because all the spots in green are supposedly where you can hire a lawyer, which makes me think that I did get out of the profession too early.

    At any rate, it sort of reminds me of Senator Specter's chart on health care a few years ago that got so much attention. It might just be worthwhile—we would be happy to provide you with a copy if you would look at it at some point and see whether it is indeed valid. Because if it is, then I think it does present a lot of problems.

    Could you discuss a bit the issue of other types of competition and how you measure that? For instance, whether it is a coal—or shipper or captive shipper where it is served by a rail line, yes. But the argument then is, well, you have other forms of competition. You have trucking. You may be able to truck 10 miles to a barge.

    That is question number one. In that I might add, do you also look to see who is providing the other form of competition and whether or not that that sometimes may be a subsidiary of the railroad that is serving it as well?

    Ms. MORGAN. I think this was a discussion you and I had a while back in one of our meetings.
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    We do look at other forms of competition. It really depends upon the record that we accumulate. Obviously, in any of these cases, the parties bring to us the evidence to prove or disprove whatever the issue is before us. And in accumulating a record regarding competition, obviously the parties bring to us what their evidence is on those various points. So from one case to another, it could vary.

    In some cases, you might have a truck competition. In other cases, you might not. It just depends on the particular facts in the situation.

    In terms of your second question, that would be part of the record presumably that would be brought to us, is this really effective competition? The standard in the law is whether there is effective competition. That, of course, is something that we would have to look at in the context of whether it was effective or not.

    Mr. WISE. Indeed existed, in fact. The ICC in its 1986 Mid-Tech decision established a process by which shippers could seek additional railroad competitors through alternative through routes, through reciprocal switching or terminal trackage rights. To your knowledge, has any shipper succeeded in getting additional competitive rail service through the procedures established by the ICC and continued by the STB?

    Ms. MORGAN. There are six cases that have involved the notion of access. Four of them, the shippers did not get relief. In two of them, they did. I would be happy to provide that to you for the record in more elaboration.

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    But the Mid-Tech decision is certainly one that is under serious scrutiny as part of our April 17 decision. In the decision that we issued yesterday regarding inadequate service and additional relief associated with that, a part of that decision is focusing on using terminal trackage rights, through routes, reciprocal switching when you have a situation of inadequate service. That is part of the decision that we issued. So we are taking the concerns that we have heard about the Mid-Tech rules and trying to look at them a little differently.

    Mr. WISE. Following taking the concerns, and I know you have spelled some of this out in your testimony, but I am struck. There is a thread that seems to be running through a lot of your testimony, both written and spoken, which is that the STB has instituted some processes to deal with some of the questions being raised here today and that will be coming up in a reauthorization. I just wondered if you would quickly run through those to make sure I have the full list.

    The April 17 proceeding, what are the issues specifically that are pending before you right now that some decision will be coming at some point in the near future?

    Ms. MORGAN. I will try to go through that again.

    We dealt with several issues in our April 17 decision. I mentioned the issue of revenue adequacy and originally sending that to a panel, but now that is between the railroads and the shippers with an outside date of August 3. If the railroads and shippers or whatever entity comes to us with a different standard for revenue adequacy, then we will put that out for comment as we must do.

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    I mentioned market dominance. As I mentioned I think to Congressman Quinn earlier, we do have a proceeding ongoing there which we have already begun. That was the April 29 decision where we are proposing to eliminate product and geographic competition. I described the comment period associated with that.

    Then with respect to competitive access, we have two different activities going on. The decision that we issued yesterday focuses on access opportunities when a serving carrier is performing inadequate service. We pulled out service and put that sort of in a separate decision.

    Then with respect to the general issue of competitive access and when access should be provided in the public interest, that is initially between the railroads and the shippers under the auspices of an administrative law judge with a reporting date of August 3.

    Now, some have said, ''Well, if this is about your Mid-Tech rules, then why don't you open up the proceeding yourself on this? You've done it on service. Why not do it on the rest of the arena?''

    What the board has indicated in response to that is that, if we began a process today on the more general issue of competitive access, what we would have would be, I believe, polarized positions on either end which then we would proceed to litigate through for a period of time.

    I am not sure that would get us where we might want to be. I would prefer for the parties to see if there is some common ground amongst themselves, whether it is a definition of terminal trackage rights, a different way of looking at reciprocal switching, a different way of looking at compensation, whatever it might be, to allow that private-sector discussion to go on and see where that takes us, and then the board will take it from there.
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    Mr. WISE. Thank you.

    Mr. FRANKS. Mr. Moran or Mr. Blumenauer, any follow-up questions? None?

    Madam Chair, thank you very, very much for your testimony. We appreciate it.

    Ms. MORGAN. Thank you.

    Mr. FRANKS. I would like to call the second panel. It will be composed of three individuals: Mr. Lonnie E. Blaydes, Jr., Vice President, Commuter Rail and Railroad Management, Dallas Area Rapid Transit, on behalf of the American Public Transit Association; Mr. William E. Loftus, President, American Short Line and Regional Railroad Association; and Ms. Karen B. Phillips, Senior Vice President, Policy, Legislation and Communications Department of the Association of American Railroads.

    I would like to thank our witnesses for appearing, in most cases, once again before us. We appreciate your attendance.

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    Mr. FRANKS. Mr. Blaydes, would you like to begin?

    Mr. BLAYDES. Thank you very much, Mr. Chairman. Thank you very much for the opportunity to testify at the subcommittee.

    Again, my name is Lonnie Blaydes. I am the Chairman of APTA's commuter rail effort. I am also the Vice President for Commuter Rail for Dallas Area Rapid Transit. We have implemented the Nation's newest commuter rail service in partnership with our fellow transit authority to the west of Dallas in Fort Worth.

    I would urge you to say hello to Congressman Granger when you see her again and wish her well.

    We come to you today with a relatively simple request for consideration. The hearing today really is on rates, access and remedy. The Nation's railroads, passenger railroads, really are currently without a remedy for a problem that we are facing more and more. That problem is when local, State or regional governments wish to implement commuter rail or other passenger rail service involving the Nation's railroads, we do not have a forum to go to to get redress of any grievance we may have with the freight railroads.

    Let me be more specific. When Congress allowed the passenger railroads to go out of business basically in the 1970s, they created a forum for Amtrak to seek access to the Nation's freight railroads by going to the STB—formerly the ICC, now the STB. Really a hole in that scenario is local, State and regional railroads have no forum.
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    When we go to the STB and request, as we did at their access hearing, the STB hears any dispute we possibly would have with a freight railroad on access. The STB looks at the statute, and not conceding anything, but it is a reasonable reading of that statute that that really speaks to access for Amtrak, the intercity system across the country. It doesn't speak to access for local, State or regional systems.

    So the STB has said, as you heard Chairman Morgan say today, they try to implement the law as they think Congress intended it; and they think Congress did not intend the current law to give STB any jurisdiction to rule on access issues for regional, State or local passenger railroad systems.

    The normal way a regional, State or local system would get access to property, of course, is through State eminent domain proceedings. Unfortunately, in this case, for local, State and regional systems, State condemnation will not work on a freight railroad because, quite properly, the State says that is an issue for the Federal Government. That is an issue that the Federal preemption has clearly stated that that is a matter that only the STB can rule on what happens on condemnation or seeking any rights to any piece of property the freight railroad operates on. So, right now, with the resurgence of commuter rail and other light rail systems across the country, we have no forum to go address our grievances at.

    We think that, rather simply, we are asking the Congress to amend—when they reauthorize STB, the statute, to amend the statute to allow local, State and Federal passenger railroads, people wanting to carry passengers on the train, on rail lines, access to the same venue that Amtrak has.
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    The reason why there has been a resurgence of passenger transportation in the country are many, of course—the price of gas, the economy; and, most importantly for reasons of the economy, there has been a real resurgence in the amount of people wanting to use passenger rail lines. But, most importantly, we find that the safest way to carry people in the transit industry is on rail lines. That is the reason why more and more we are moving to passenger rail options.

    I will yield the rest of my time for any questions, if you have any questions of me.

    Mr. FRANKS. Thank you.

    Ms. Phillips.

    Ms. PHILLIPS. Thank you, Mr. Chairman and members of the subcommittee.

    The Association of American Railroads appreciates this opportunity to present the views of its members on competition, rate reasonableness review, and access. I am submitting my complete statement for the record.

    As noted in our prior testimony, the industry knows it is under intense scrutiny as a result of service problems in portions of the western United States. Our highest priority is to resolve these problems quickly, and the industry is making the additional investment needed to do that.
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    The difficulties are not the result of the current regulatory system. Re-regulation would not improve service. It would take us back to the dark days of bankrupt railroads and standing derailments.

    Let me now address the three areas that are the focus of today's hearing.

    First is competition. The transportation industry is awash in competition. Trucks today carry 46 percent of intercity freight tonnage and command 78 percent of intercity freight revenue. Trucks are a significant market force even in the movements of bulk commodities, moving large volumes of coal to tipples served by competing railroads and grain to elevators served by different railroads.

    Barges likewise provide effective competition for the bulk commodities that move by rail. Rail-to-rail competition which was discouraged prior to the Staggers Act because of collective rate making, the inability for railroads to contract and a lack of incentives to compete, now also is an important competitive factor.

    These forms of competition, combined with product and geographic competition, have forced rail rates down since deregulation. In fact, between 1981 and 1996, average rail rates have declined 56 percent on an inflation-adjusted basis.

    With respect to rate reasonableness review, in those instances where fewer transportation alternatives exist, Congress has provided, and the STB has implemented, effective remedies to protect shippers from unreasonable rates.
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    The STB is empowered to determine the reasonableness of rail rates if there is no effective competition. When it finds rates unreasonably high, the board is empowered to order reparations, and it has done so. Some critics have charged that the procedures are too time-consuming and costly, especially for small shippers, so the Board on December 9, 1996, adopted simplified procedures for these cases.

    The STB has taken other actions to address shipper concerns. It has curbed discovery by railroads in rate reasonableness cases. It has accepted a shipper proposal to take a fresh look at revenue adequacy standards. At the recommendation of the Railroad-Shipper Transportation Advisory Council, it has established new voluntary arbitration procedures. It has also begun a proceeding to develop standards for access remedies in cases of service failure. And when it decided the so-called Bottleneck cases, the board made clear it was also receptive to the filing of competitive access complaints.

    On the issue of access, those promoting forced access schemes are really attacking the pricing system that has allowed railroads to sharply increase their investment in track, equipment and technology which is basically demand pricing. Forced access might lower rail rates for some segment of shippers in the short run, but it would also recreate the proliferation of uneconomic routes and inefficient services that was the hallmark of the pre-Staggers railroad industry. This would simultaneously create the need for increased unnecessary capital investment and deprive railroads of the revenues needed to make those investments.

    In the longer run, the inability to make investment would worsen service and drive rates up. Forced access would also substantially increase the role of regulators as they would be called upon to determine access fees and conditions and to resolve operating problems.
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    In conclusion, there is no need to overhaul the statutes providing for the economic regulation of the railroad industry. The Board has sufficient tools and discretion under the existing system to deal with any abuses of market power or service problems.

    Most recently, the Board has embarked upon an examination of its existing regulatory remedies to make them more effective as warranted in the STB Ex Parte No. 575 proceeding and related proceedings. Additional regulation would drain the resources of both railroads and shippers at a time when those energies and resources should be devoted to solving today's service problems and investing in a safer and more efficient rail system for the future. Railroads are committed to working with customers to address these concerns and are making massive investments to make continued infrastructure improvements.

    Destroying the current regulatory system, which has benefited railroads, their customers and consumers will not solve existing problems. Working closely with our customers will. AAR urges this committee not to take action that would negate the many benefits that have accrued as a result of deregulation.

    Thank you very much again for this opportunity to testify. I would be happy to answer any questions that you might have at the appropriate time.

    Mr. FRANKS. Thank you.

     Mr. Loftus.

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    Mr. LOFTUS. Thank you, Mr. Chairman. This is the fourth time our association has had the opportunity to appear before you. We just want you to know how much we appreciate the time that you and your colleagues are spending really exploring in depth critical issues affecting our industry both on economic issues and safety issues.

    Today the subject, rates, access and remedies, are the issues that the small railroads that I represent are confronting in a series of discussions with Class I railroads. I want to take this opportunity to discuss what we are trying to accomplish and why we think it will benefit not only our industry, but the shipping public.

    First let me emphasize again that we have no desire to reregulate the railroad industry. We believe those who do were either not in the industry or have forgotten how close the entire railroad system came to collapse in the 1970s because of inefficient and costly government regulation.

    Yes, today the railroad world has changed dramatically. Since the Staggers Act, small railroads have grown by more than 300 companies, while the Class Is have merged into a handful of megacarriers. The Class Is that helped create our companies in the 1980s and early 1990s are not the Class Is of today, nor is the rail system of today the same as it was then. So it is appropriate that railroads of today give serious attention to how they interrelate and to consider making changes that better address the reality of a greatly changed railroad landscape.

    If small railroads are to be an integral part of today's national rail network, their customers must be treated comparably to those on the connecting Class I systems with regard to rates, switching charges, competitive routing alternatives and car supply. Artificial paper barriers which arbitrarily restrict full interchange rates should be discouraged and minimized. Gateways, through routes and joint rates should be preserved or allowed to be reestablished if previously eliminated as long as they are economically feasible. Supply of general service car types is being outstripped by demand. We as an industry must develop alternative ways to maintain adequate car supply and investment.
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    Each of these issues is being addressed in our discussions with the Class I railroads, and we are putting specific proposals on the table that we believe address them in a responsible and effective manner. Let me assure the committee, these are not easy issues, particularly as they relate to the commercial relationship between large and small carriers. Yet we believe they are issues that relate directly to the ability of this newly configured national rail network to provide competitive and efficient transportation to the Nation's shippers. We also believe that opening up the system to increased competition will not harm the Class I carriers, but will increase overall traffic coming onto their systems as well as our own. Again, we strongly believe that the industry itself can achieve a more competitive network based on economic efficiency than can be gained through legislative or regulatory mandates.

    The Surface Transportation Board took note of these discussions between the large and small railroads and asked us to report back to the board by May 11. The Class I representatives and ourselves have engaged in serious and substantive discussions. We have not been able to arrive at final solutions. Therefore, we have asked the STB to allow us to continue these discussions with the goal of reaching agreement by May 29. We have attached our letter. We intend to report back to the Board and will advise the committee, also, at the same time.

    Again, we appreciate the opportunity to appear before the committee as well as your interest in the full exploration of the issues affecting our industry.

    Mr. FRANKS. Thank you.

     Mr. Loftus, you stated on page 2 of your testimony that artificial paper barriers restrict full interchange rates, and those should be discouraged and minimized. What do you mean by artificial paper barriers, and what can be done to discourage and minimize them?
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    Mr. LOFTUS. In a system where the large railroads began selling a great many of their low-density lines, the economic interest of the larger railroad was to preserve the traffic that was on that line and flowing towards the parent carrier, so to speak. So a great many of the contracts, sales contracts, were such that there were barriers put in to prevent either through an economic cost process or to limit the amount of line being sold, so you would not reach another competitive carrier.

    Short term, I could understand the economic benefit to the large railroad in that respect. Of course, we were anxious to buy the railroad. But now when you are looking at the system we have today, and our shippers are saying, why can't I get to that other carrier, particularly where there are service issues involved. We are saying to our large railroad colleagues, we have to rethink this. We have to be the ones, ourselves, our industry, to make sure that we shape a competitive, interactive industry to the extent it makes economic sense. That is the issue that we have brought before the large railroads in our discussions that are ongoing.

    Mr. FRANKS. Thank you.

    Mr. Blaydes, you pointed out on page 3 of your statement that partly due to increased traffic levels on the freight rail network, commuter railroads are finding it difficult to negotiate what you consider satisfactory access arrangements. As I understand your solution, it is to mandate access for commuter railroads on basically the same terms that Amtrak has now.

    My question is, if we are dealing with what amounts essentially to a capacity crunch, doesn't it make more sense for Federal policy to concentrate on increasing the capacity through infrastructure improvements than to force the division of inadequate capacity between unwilling partners?
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    Mr. BLAYDES. Thank you, Chairman Franks. I think the thrust of what happens of the requestee is to give us a forum to go discuss and resolve those issues. One of the most difficult issues is capacity issues. When a commuter railroad or any rail authority tries to put additional trains on an already overburdened system, APTA understands there has to be capacity improvements, and part of those negotiations would be the determination by the STB, could be that capacity improvements have to be made prior to having access for the commuter systems.

    Right now if we reach an impasse like that, the railroad can simply say no, and does say no, for a good reason, a bad reason or no reason at all. That is what we are trying to address is when we have no reason at all or a bad reason, to have some forum to go to and say, we are not seeking access to an overutilized line, we are seeking access to a branch line that only has three trains a day on it. Let's have a very reasonable mechanism where we can get access to that line. If it is a heavily used line, we understand that capacity improvements have to be made prior to access by the carriers.

    Mr. FRANKS. Thank you.

    Ms. Phillips, I am going to ask the same question of you that I asked of Chairwoman Morgan. There has been a great deal of media publicity over the last year or two about the year 2000 computer problem. Chairwoman Morgan indicated to me that the STB is out in front on that issue and is confident that we are going to avoid any significant problem. With the increasing technology being put to use by America's railroads, what is the scope of this year 2000 problem potentially, and what is your assessment in terms of how the industry is handling it?

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    Ms. PHILLIPS. As Chairman Morgan said about the STB, we certainly hope with respect to the railroad industry itself that we are indeed out front on this issue as well. Certainly as you point out, with the ever-increasing complexity in terms of information sharing, technology sharing and the use of computers in the railroad system, this is a major issue.

    The AAR and its member carriers are committed to becoming year 2K-compliant by the end of this year. The idea would be that we would have all of 1999 to do testing, to make sure that all the systems are working, that everything is, in fact, in place. It is my understanding that all of these efforts are well under way.

    Mr. FRANKS. Thank you.

    Mr. Wise.

    Mr. WISE. Thank you.

    Ms. Phillips, I am going to ask you some of the same questions that I asked the Chair, too.

    Let me just note to Mr. Loftus, it has been at least four appearances. I noticed some of the familiar faces here. The bards will sing of your endurance for generations to come.

    I asked the Chair of the STB about the fact, which I believe she confirmed, was that the only successful rate cases seemingly have been brought by coal shippers. There was a grain case that was denied; there may be one—there was a mineral case pending, I believe. I guess my concern is why is it that chemicals and grains—is there not a problem there in your mind, and do they not face the same pressures as the coal shippers?
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    Ms. PHILLIPS. The railroad industry would argue that the Board's remedies are accessible to all, and it is really a matter of which companies decide to ultimately file the cases at the Surface Transportation Board. We certainly try to work things out with our shippers as much as we possibly can. You would have to ask the companies why they choose not to file. But the Board and the ICC before it are only able to act on the cases that the companies actually bring before them.

    Mr. WISE. I will be asking when they come forward. I would think that one reason and one explanation that has been given to me is, particularly in the case of chemicals, which I have a fair amount of in my area, in the case of chemicals that you are dealing with a product unlike coal, it is something that you are moving all the time, it is the same product you are moving all the time in large amounts. Chemicals you are moving, it is more of a custom-made or tailor-made product, and you don't necessarily have the same supply, not supplying the same product all the time in the same manner.

    But continuing along, one of the proposals that is going to be made later by one of the shippers is to have a form of binding arbitration. I just wonder what your organization—how it would feel about that.

    Ms. PHILLIPS. We are working right now with the National Grain and Feed Association on a proposal that they have on arbitration, and those discussions are ongoing. We have not come to any final decision, but we are talking about the concept of arbitration.

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    Rather than taking positions on specific proposals, what we are looking forward to in the rail industry, however, is the series of dialogues that we are going to be undertaking with shippers coming out of the Ex Parte 575 proceeding at the Surface Transportation Board. In fact, the AAR just filed with the Board on Monday our proposal that we will now be getting out to the shipping community in terms of a set of dialogues that we plan to establish on the formal basis that the Board asked us to do.

    These would be two different types of meetings. One would be on a commodity-by-commodity basis—for instance agricultural, coal groups, chemicals—separate sessions where you would have the railroad industry people involved in these types of transportation and the shippers actually affected in this type of transportation. The second would be meetings with cross-cutting shipper trade associations to talk with them about cross-cutting operational, service and other concerns. We are in the process now of getting those meetings started. I would envision in the process of those meetings that a number of different proposals, perhaps even arbitration, will be discussed.

    Mr. WISE. Do you see the proceedings that the STB has initiated as being new or blazing new ground? Is it truly opening up new dialogues between shippers and the railroads, or ultimately will Congress have to get involved in this, which I know you look forward to with great anticipation?

    Ms. PHILLIPS. We are very hopeful that by working with our shippers, and working more with our shippers, that we will be able to forestall any need for Congress to get involved in that. Ultimately the best way to solve these problems is for the railroads to work with their customers. The way the Board has constructed this by asking us to set up these formalized dialogues and report back on our progress, we feel that will be very beneficial and that we will achieve results.
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    Mr. WISE. I guess, and I should have stated it better, from a historical sense, is this a new process, or has the STB or its predecessor, the ICC, asked the industry and the shippers to go through this before?

    Ms. PHILLIPS. There have been times, back in the early 1980s when shippers and the carriers got together to work on competitive access rules and other matters like that. But in terms of this type of formalized dialogue, I am not aware of anything quite like this.

    There have been a couple of forums established. The ICC established the National Grain Car Council, where shippers and carriers get together in that forum, and that has been a very good forum, but it has been agriculture-specific, grain-specific. There also is the RSTAC, the Railroad-Shipper Transportation Advisory Council, that Congress created in ICCTA, where large and small shippers and carriers are able to discuss matters as well, but both of those are perhaps narrower in scope. They don't envision quite the broad-scale discussions that are envisioned in the current Board order.

    Mr. WISE. Thank you.

    Mr. FRANKS. Mr. Quinn.

    Mr. QUINN. Thank you, Mr. Chairman. Just as a tail end of that question, Ms. Phillips, I think you are right that these kind of formalized discussions are very, very helpful. I think that is a good direction to come from the STB and hope that that continues. I think that that is very helpful, before we necessarily have to get involved.
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    I do have a question. I took the Chairman's warning, because I didn't want to be killed, before November at least, to avoid any confusion back home, so I didn't ask these questions of Ms. Morgan. But he didn't warn me about asking questions to you people, and she is still in the room, so I don't know if that is a good idea.

    I am hoping, I guess, Ms. Phillips, I will start with you, and it gets back to the situation that I have up in my section of the world, up there in western New York State. We have talked about shared asset areas. We know that some competing metropolitan areas, such as Detroit, south New Jersey, Philadelphia, northern New Jersey, have been chosen to be the shared asset areas, and Buffalo, New York, has not. That is a fact. Nothing can happen to me for just stating the fact, Mr. Chairman. We are just having a difficult time without asking the STB to share information they are not supposed to share, which I understand. But from your perspective, could you take a minute or two and enlighten me a little bit as to your view of how those decisions might be made, what criteria is used? It is certainly not one of these formalized dialogues that we just talked about a few minutes ago.

    I guess I am just looking for some help as to what you might know about that, or even observe about it, because you are not in a position to be at the table that makes these decisions, I understand that. I guess I am just looking for a little help if you are able to do that.

    Ms. PHILLIPS. I hate to sound unresponsive, and I sure hope I don't get killed now, but the AAR for better or for worse does not get into the specific details of any rail mergers, consolidations, or transactions of this type. I am afraid on this specific issue I really can't be helpful, except to say that this is something that the carriers themselves, as they are putting together their plans for approval by the STB, they look very carefully at how they believe this transaction should be constructed. Beyond that, I am afraid I really can't say.
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    Mr. QUINN. Good answer.

    How about Mr. Blaydes or Mr. Loftus, can you add anything to that? Misery loves company, guys.

    Mr. LOFTUS. You are just not going to give up.

    Two thoughts hit me. The shared assets, of course, is a structural proposal that the acquisition carriers have decided for the northeast section, New York-New Jersey, and we will have small railroads that are in that shared assets area, and they will be affected by it. We are looking at it very closely.

    I think the question really is these are issues already before the Commission in terms of these types of service areas, in Buffalo, Cleveland and other places, and I am sure they will come up in the voting conference. Long term, though, I would say that one of the issues that we asked for and which we hope the Board will consider is that there are a lot of unknowns as the eastern railroad merger-acquisition unfolds, and that the Board would have a reasonable oversight, and we would be able to raise those issues, particularly if there are service issues involved, as they become better known. I would think the process is there without necessarily being able to discuss the specific issues that may happen in Buffalo or other places affected by the merger.

    Mr. QUINN. Thank you, Mr. Loftus.

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    Let me say, too, if I may, just to respond, and both of your responses are a little helpful, I am not certain that the situation I have in Buffalo needs to have the determination of shared asset area and still get accomplished what we want accomplished. I am just concerned that after decisions are made, the door is shut. If there is a way for us to try to satisfy those concerns without the technical naming of it, I am obviously open to those possibilities.

    I don't want to leave you out, Mr. Blaydes. Do you have anything to add?

    Mr. BLAYDES. Actually, Mr. Quinn, before I went to DART, I was with the Interstate Commerce Commission working on rail mergers and rail construction cases, including the rail construction case to serve the Somerset coal-fired plant.

    Mr. QUINN. Up north of us. See, and you are still alive. Go ahead.

    Mr. BLAYDES. I spent a long time in Lockport. The problem with that case is that the lake route to Somerset was abandoned during the Conrail creation. If that route had remained open, there would not be the dispute of how to serve Somerset.

    Mr. QUINN. And exactly in my earlier discussion when we opened the round and the Chairman asked for opening statements, I have a little history in what I presented because it goes back to the Conrail situation, that there is some history to all of this. We just want to make certain that if we are going to talk about competition, that when this is all over, that this area is not one that is hurt competitively; certainly not helped, but could be hurt.
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    So it is a double-edged sword for us here, that we are not going to get any help like some of these other places, Detroit, New Jersey, Philadelphia, but more than that it doesn't just stay even, we are going to take it in the shorts here, and that concerns some of us.

    My time is up. Thank you all. I appreciate it. Mr. Chairman, thanks.

    Mr. FRANKS. Mr. Quinn, thank you very much.

    Mr. Moran.

    Mr. MORAN. Thank you, Mr. Chairman. Mr. Loftus, I am interested in this topic of what you call artificial paper barriers, which I assume are agreements that were reached between the Class I and shortlines in regard—those agreements occurred at the time that the sale or transfer of the assets was resulting; is that correct?

    Mr. LOFTUS. That is correct.

    Mr. MORAN. And they were negotiated?

    Mr. LOFTUS. They were negotiated.

    Mr. MORAN. Did the STB pay attention to—I think this is an important issue as far as competition and rates is access of shortlines to providing their shippers with greater access to other destinations. I think it matters to shippers. My curiosity at this hearing is did STB pay any attention to those provisions in those agreements back when they were negotiated? Was there any red flag or warning or heartburn about this kind of agreement?
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    Mr. LOFTUS. There was. Of course, it was the ICC in those days. There was a case, a line sale in the Southeast, where there was a protest by the other Class I carrier where the line sale was limited to the extent it did not get to the other Class I carrier, and the Class I carrier protested in the ICC proceeding. However, the ICC at that time had decided that that was not a relevant issue and did not consider the protest. Again, short-term economics you could understand it, but long-term, particularly now, we are looking at a different structure of industry.

    Our first presentation in the STB's 575 proceeding used that case as an example of why the STB in looking at cases prospectively, or line sales prospectively, should examine the interactive competitive nature. Is there anything negative or not there in the process.

    Mr. MORAN. In the overall scheme of that issue, of competitiveness, is this a significant issue?

    Mr. LOFTUS. It is significant, of course, for a smaller railroad in a smaller community. I would have to say that it certainly is not a widespread, national issue happening everywhere. A lot the small railroads have competitive access. But where you are now reexamining the structure of the system, these will pop up. As shippers took a very close look at you, us being the industry, they are raising these issues.

    I think that is a signal to us that we also have to reexamine our structure and as an industry open them up. Changing agreements may be the way we have to do it. There is compensation issues on the table, also. Our main, fundamental argument, Mr. Moran, is that if someone tells us we have a problem or we see a problem, we should solve that problem before we have to ask the Board to do it or, even worse than that, legislation.
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    Mr. MORAN. So the alternative is for you and the Class I carriers to reach an agreement, and where you say there are compensation issues, the reason that a Class I carrier might be willing to reach agreement with the shortline is because of compensation?

    Mr. LOFTUS. They are raising the issue of compensation.

    Mr. MORAN. I can't see why a principal carrier would cooperate with you in trying to reach an agreement on this issue.

    Mr. LOFTUS. Well, there are two areas we are discussing. One is service-driven, where we would present the argument that the limited access or the controls on the access is such that it is a service problem; where the larger carrier has a service problem that allowing better access or more competitive access by the smaller carrier would defuse some of those service issues. In that respect we think there is a much different compensation argument than a small railroad coming in and saying, ''I want to improve my franchise as well as the national interactive rail system by opening up this agreement.'' I would think our large railroad colleague would say, ''Well, let's talk,'' but there is going to be a different number on the table.

    Mr. MORAN. What role do you see the STB playing? Nothing, I assume, now, while you are attempting to negotiate changes in those agreements. Ultimately does the STB have something to say about this?

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    Mr. LOFTUS. They would certainly have the ability, if we are unable to agree, to look at administrative action. In fact, their order on April 17 said that they would consider administrative proceedings on this issue.

    I want to add, also, that in the negotiations small railroad-large railroad, we are talking about closure through a voluntary arbitration procedure so that you wouldn't have just the ability of saying no. Both of us are talking about that kind of closure.

    Mr. MORAN. Mr. Loftus, my time has expired. I had two questions. I asked my friendly one. I had my less friendly one for you, but unfortunately that red light appeared before I got to ask it. Thank you.

    Mr. LOFTUS. I am dying to hear what it is.

    Mr. MORAN. I will catch up with you.

    Thank you, Mr. Chairman.

    Mr. FRANKS. Mr. Moran, thank you.

    Ladies and gentlemen, thank you very much for appearing on our panel this afternoon. We appreciate it very much.

    I would like to call Panel III: Ms. Diane C. Duff, Executive Director, Alliance for Rail Competition; Mr. Robert G. Szabo, Executive Director and Counsel, Consumers United for Rail Equity; and Mr. Robert A. Voltmann, Executive Director and CEO, Transportation Intermediaries Association. Let me thank you all for coming.
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    Mr. FRANKS. Ms. Duff, would you like to lead off?


    Ms. DUFF. Sure. Thank you, Mr. Chairman. Thank you for the opportunity to testify before you today.

    My name is Diane Duff, I am the executive director of the Alliance for Rail Competition. The Alliance for Rail Competition is a diverse coalition of rail-dependent shippers representing a broad range of industries, including agriculture, coal, utilities, chemicals, petrochemicals, minerals and consumer and industrial products, as well as some industrial development and port authorities.

    ARC was formally organized in March of last year in response to growing concerns about deteriorating rail service and increasing rates resulting from drastic rail consolidations. Throughout this debate, the railroads have been painting a rosy picture of increasing efficiencies that have been passed along to shippers, but the fact remains that only those shippers still fortunate enough to be able to access competitive service despite the tremendous market consolidation have benefited. A growing number of shippers can access only one railroad, leaving them subject to monopolistic practices that drive up rates and diminish the quality of service.
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    In my written statement, I discuss the shipping community's support for the improvements in the rail industry that have occurred since the Staggers Act was passed in 1980. However, while there have been improvements, efforts to replace regulation with competition have been unsuccessful. No one wants to reregulate the rail industry. We are already living with a seriously flawed regulatory environment that fails to protect shippers. Instead shippers are urging Congress to reaffirm its commitment to real competition as the primary regulatory force.

    Returning competition to an industry that holds a virtual monopoly will not happen overnight. It will require a thoughtful and deliberate approach that gradually reintroduces competitive forces and allows the railroads to adjust. This committee can begin that process this year by making some changes that will begin to factor competitive forces back into the rail market.

    ARC has developed a six-point plan that we urge this committee to consider. Our six-point plan recommends that Congress, first, grant shippers the right to reciprocal switching and terminal trackage rights within an established distance on interchanges; second, overturn the STB's bottleneck decision whereby carriers would be required to quote a rate from the origin of a shipment to the point at which a second carrier can be accessed; third, in determining reasonable rates in cases where effective competition does not exist, require that significant weight be given to the level of rates produced in the presence of rail-to-rail competition; fourth, require the STB, in evaluating and overseeing rail merger transactions, to adopt conditions that would encourage rail-to-rail competition; fifth, eliminate current time period limitations on directed rail service orders and protect shippers' rights to effective service during periods when directed rail service orders are in effect. ARC also recommended that Congress grant shippers the option of seeking redress for ineffective rail service before either the STB or the courts at the shipper's election. Finally, prohibit Class I carriers from restricting shortline carriers from interchanging with other carriers. Each of these recommendations is explained in detail in my written statement.
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    I would like to conclude my testimony by reading an excerpt from Illinois Central Railroad Company Chairman Hunter Harrison's remarks at an American Association of Railroads legislative conference that took place in November of 1996. According to Mr. Harrison, ''Staggers was a great piece of legislation, but it wasn't perfect. For it to have been perfect, the framers of the act would have been able to predict the extraordinary degree of consolidation that has occurred since. The environment has changed. In a changing environment, we can do one of two things. We can preserve the rules and slavishly adhere to the precedent, or we can preserve the intent. I vote we preserve the intent of real competition and of meaningful government oversight.''

    Mr. Harrison continued: ''May I propose a general principle around which we can begin to focus this debate? The general principle is this. Real competition exists where railroads quote reasonable rates over efficient routes through efficient gateways. If a railroad effectively shuts out an efficient alternative route, for example, by refusing to quote a rate, then there is no competition. Where there were 40 Class Is and more than half a dozen different ways to get from Kansas City to Memphis, closing off one of those competitive alternatives wouldn't significantly alter the competitive balance. However, where there are only five or four or two major players, closing off a competitive alternative closes off competition. The Illinois Central's position is no different than that of the shipping community and demonstrates that there is plenty of room for improvements. Competition will not harm the railroad industry.''

    On behalf of the Alliance for Rail Competition and the shipping community in general, I urge you to take Mr. Harrison's remarks to heart and act affirmatively to preserve the intent of real competition and of meaningful government oversight by supporting the shipping community's proposals for change. Thank you.
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    Mr. FRANKS. Thank you.

     Mr. Voltmann.

    Mr. VOLTMANN. Thank you, Mr. Chairman.

    TIA is the only organization representing transportation intermediaries of all types. Our members are fiercely independent businessmen that support deregulation and competitive markets.

    The partial deregulation of the rail industry has been very successful. An industry that was once on the verge of bankruptcy is now profitable. It is now time to finish the job and further deregulate the industry. The subcommittee has an historic opportunity to review the Nation's rail policies and breathe new life into them by fostering increased rail-to-rail competition.

    As you have heard over the past 4 days of hearings, at a time when shippers are facing increased competition that requires immediate access to competitive rates and alternatives, the rail industry has reduced service and competitive alternatives. It should be clear from these hearings that it is only the rail industry that is happy with the current state of affairs. For the past 18 years, the Interstate Commerce Commission and now the Surface Transportation Board have interpreted the national rail policy as being that of only protecting the economic health of railroads. Those goals have been met. It is now time to move beyond the period of partial regulation and Federal protection and to move to a competitive rail-to-rail market.
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    Congress needs to emphasize that our national policy is based on rail-to-rail competition and not merely protecting railroads. It is time for us to take the next step in deregulating the industry, steps that the Congress has taken with similar industries, telephones, gas pipelines, in which we rely on competition to regulate the marketplace and not a Federal agency. That is deregulation, not reregulation.

    With regard to access, the concentration of the industry, the protection from antitrust laws and the anticompetitive policies adopted by the ICC and now the STB have allowed the railroads to limit competitive routing freedoms, lessen competition, and eliminate access to the rail network itself. The ICC and now the STB have approved policies that have eliminated shippers' abilities to route freight over a competing railroad. Even where competition could be brought to bear, the agency recently adopted policies that eliminate the ability to effectively challenge bottleneck rates. As Business Week stated, ''The Board has been no champion of the consumer.''

    Earlier this year, one of the two western railroads decided it was working with too many intermodal marketing companies. The BNSF unilaterally raised the contract minimum from $500,000 to $5 million, forcing many small and mid-size IMCs to form consortiums to stay in business. Many may not survive. This was not a consumer or a marketplace decision. This was a decision of a supplier of a service. Such an action couldn't occur if the market was intramodally competitive.

    From all that you have heard from these hearings, it should be clear that the railroads object to meaningful rail-to-rail competition. They view their market as static instead of dynamic. It is almost as if they view their market as having to build a fence around it to protect it. Instead of working with their shippers and their customers to build their businesses, they want to protect what they have got at any cost. Again, this can only happen because the industry is not intramodally competitive.
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    We have talked today about the remedies offered by the agency. These remedies are time-consuming and expensive, and they don't offer meaningful remedies to shippers whose market is right now, not 2 years from now, not 10 years from now. Continuing to rely on regulation is not the answer. We need to move to a system in which the marketplace regulates the industry. The latest actions by the STB to improve their procedures are a step in the right direction, but I fear that they are the desperate actions of an agency trying to preserve itself and an industry trying to prevent meaningful change. To ensure that this is not the case, participation in the agency's procedures needs to be expanded to all users of the rail system, and Congress must monitor the process and the outcome.

    We applaud the subcommittee for examining this issue. Over the past 18 years, the United States has turned transportation from a liability to an asset. We must now begin making the changes necessary to meet the challenges of the future. We need Congress to finish the job of rail deregulation. For our economy to continue to grow, we need to move more freight more efficiently. Railroads must play an increasing role in this transportation process. To do so, however, will take a paradigm shift on their part. Such a shift will only occur when there is true rail-to-rail competition, and that shift will only come when Congress gets involved.

    Mr. FRANKS. Thank you.

    Mr. Szabo.

    Mr. SZABO. Mr. Chairman and members of the subcommittee, my name is Bob Szabo. I am the Executive Director and Counsel for Consumers United for Rail Equity, a captive shipper rail group. A list of our members is attached to our testimony. We appreciate the opportunity to testify today.
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    We obviously support the reauthorization of the STB. We think Congress needs to give them more resources. But we also think when you act, you need to make some changes in the current law and policy that has been adopted by the STB and its predecessor, the ICC.

    We support legislation pending in the Senate, S. 1429 that was introduced by Senators Rockefeller, Burns and Dorgan, which has also been cosponsored now by Senators Pat Roberts and John Breaux. This is deregulatory legislation. It is legislation that will improve the process at the Surface Transportation Board. It holds true to the principles of the Staggers Act. We think it is necessary legislation.

    We think what you do here is very important, because the policies you adopt and the policies the STB adopts create the framework within which shippers and railroads negotiate their business arrangements. In a perfect world, no one would ever go to the STB. Rather, the framework would be such that an arm's length and satisfactory negotiation would occur.

    Before I go into what the Rockefeller bill does, and obviously we are going to try to get that bill introduced on this side of the Congress and hope that it will be considered, let me quickly say that CURE members support the principles of the Staggers Act. We accept differential pricing as a necessary aspect of the current legal system. We are not trying to change the system. We want healthy railroads. The only thing worse for a captive shipper is no railroad. But we think you can improve this system in a way that will, in fact, improve the health of the railroads while you improve the situation of shippers.

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    We are not in this legislation attempting to change every basic prinicple of the regulatory scheme. What we are trying to do is make access to the regulatory scheme more easy, and we are trying to have more relationships worked out between shippers and railroads directly without going to the STB.

    Let me tell you briefly what the legislation does. It does five things. I am only going to mention three, because those are the most important things in the bill, we think.

    The first thing the bill does, is get rid of the revenue adequacy test at the STB. Why do we support this? We say that because even the revenue adequacy test must be removed, one of the commissioners of the STB says it is flawed, that it is not accurate. Nobody on Wall Street or in a bank looks at the STB revenue adequacy determination when they are trying to decide whether to give either equity or debt capital to the railroads. The test does not have anything to do with the regulatory system that we can find. Therefore, it is just a test that hangs out there annually, aggravates shippers, probably frustrates the commission, may even frustrate the railroads when they are participating in big mergers, having no trouble raising capital and yet turning up as revenue inadequate under the STB test.

    So we say get rid of it. Where it is necessary to inquire into the revenue adequacy or financial health of the railroad, the Board can do that. They can look to the same kind of indicia that a banker would look to when he is trying to decide whether to make a loan or an investor looks to when he is trying to decide whether to buy a stock. So that is item number one.

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    The Board has begun to move in that direction. They are trying to come up with a new test. We say no test is needed, it doesn't serve a purpose, so get rid of it. That is not to say that we don't think the health of the railroads is an important item that should be in the minds of the STB.

    Item number two, the Board is also working on. The market dominance test says whether or not, if you are paying a rate that yields over 180 percent, revenue to variable cost ratio, you can get into the Board to contest your rate. The market dominance test doesn't tell you whether you are going to win or not, it just tells you whether you can get before the Board commission. With competitive rates down at 106 percent revenue to variable cost ratio and the only jurisdictional rates being above 180 percent, with the STB unable to adjust a rate below 180 percent, so that if you go to the STB you are probably in the 250 range at least, we wonder how probative looking at product and geographic competition is in the market dominance analysis.

    We are pleased that the STB seems to be moving in the direction of removing this aspect of the test. We would ask you to remove it in law so there can be no backsliding in the future, if in fact the STB removes this function in the near future.

    I want to focus on the most important thing in the bill that we support, and I ask you, if you will, to look at the back of our testimony. There is a schematic there of the bottleneck situation. What we are asking you to do in law is remove the ability of the railroads to prevent competition. That is the first step you can take in making sure that, as Ms. Phillips says, railroads and shippers work things out together. Her words were ''working with our customers.''

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    You can't work with your customer very well, your customer can't work with you, if you are blocking their access to competition and you will not quote them a rate. If you look at the schematics, the red railroad serves a shipper and it also serves a customer, but let's say a couple of hundred miles down the way the shipper could get access to the blue railroad that would provide a competitive option for a large part of the movement.

    Today, the red railroad will only give the shipper a rate between the shipper and the customer. It will not give the shipper a rate that will take the customer down to the point where competition is involved. I know of no instance, and I ask you to research this, where Congress has deregulated a regulated industry and allowed them to control their bottlenecks. Look at the telecommunications deregulation legislation. Look at the deregulation of the natural gas pipelines. Look at what is happening in the electric utility industry.

    In fact, the one industry that has perfect access has tried to create bottlenecks, the airline industry, by creating hubs and dominating slots at airports. What we are asking you to take away from the railroads is the right to control bottlenecks so that they can prevent competition between railroads.

    This Congress, I believe, believes in deregulation. We believe that in deregulation a first fundemental step is to allow competition to exist where it in fact physically exists, so we ask you to take that step. Opening Bottlenecks is not running tracks on somebody else's lines. It is merely allowing competition where competition exists.

    Thank you very much.

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    Mr. FRANKS. Thank you. Let me pose a question that I would invite all three of you to comment upon. We heard testimony earlier from Chairwoman Morgan that despite having an enacted back in '96 some simplified and expedited procedures for complaints in terms of rates, we have had very little participation in that new mechanism. I would like to ask each and every one of you to feel free to comment on your explanation as to why shippers, particularly smaller shippers for whom that expedited simplified procedure was developed, have not accessed that procedure.

    Mr. SZABO. Mr. Chairman, I will take the first cut at that. I represent mostly large coal shippers. Being utilities, they traditionally had 20-year contracts, 10-year contracts, 15-year contracts. I don't think that is going to be the future as we into the deregulation of electricity. In the past, utilities have had time to take on a case. If a case takes 2 or 3 years, you can take it on under a long-term cost supply contract. If you are a smaller shipper moving product into a short-term project that might be open for 90 days, 120 days, you can't go to the commission and fight out a case.

    Let me point out something else. You can't go to the Board unless your rate exceeds 180 percent. The railroad doesn't say, ''Hey, your rate is over 180.'' The railroad says your rate is so much dollars to move your transportation. You first have to find a consultant, pay them $5,000 or $10,000 to figure out what your revenue to variable cost ratio is. That itself is a barrier that is going to stop most people from getting into the commission.

    Ms. DUFF. I would just add to that that Chairwoman Morgan referred to three factors that the Board looks at when determining the maximum rate for small shippers. And small shippers, there are three reasons why small shippers are really having a problem with this.
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    First, the Board's decision with regards to establishing the three criteria has never said how those factors will be weighted or how they will be used, so there is not a clear understanding of what is going into the three factors.

    Second, there has never been a decision by the Board about what case would qualify as a small case. So looking at the prospect of filing a case, a shipper doesn't even really know if they qualify as a small shipper.

    And then, finally, one of the three factors that has been outlined depends upon access to the confidential waybill sample data, and you can't get access to that data to analyze what the prospects of your case are unless you go ahead and file a complaint.

    So the way that the criteria are laid out really does not provide a shipper with any kind of reasonable ability to determine what the prospects are of taking on a case like this. And as Mr. Szabo indicated, the smallest of shippers are operating in a very limited time frame, and these things take a long time.

    Mr. VOLTMANN. Echoing what they said, if we are going to rely on a regulatory approach such as the agency, it needs to be almost an automatic approach in which you just plug your variables in, that should be very simple to develop. Shippers, noncoal shippers that aren't shipping from a fixed facility to a fixed market, the majority of shippers don't have the luxury or the time to pay all of these consultants to develop all of this and then analyze all of the markets in which they ship. They need competitive alternatives and they need it immediately.
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    Mr. FRANKS. Mr. Szabo, you talked Senate bill 1429. I know this won't come as a stunning surprise to you, but AAR has testified that it would cause a loss to the Nation's railroads in excess of $2.4 billion, meaning that over the longer haul railroads would not have sufficient capital to make the necessary infrastructure improvements. They also claim that 1249 would lead to inefficient routing decisions and cause the need for an intrusive regulatory oversight to manage infrastructure investment issues.

    A comment on that?

    Mr. SZABO. Let me comment on the second one first. At the beginning of the deregulation system under Staggers there were about 40 railroads. One of the important things at that time was to let the railroads rationalize their own systems. They have rationalized their own systems down to what is about 5 major railroads. There are less options now for routing.

    It is inconceivable that a shipper is interested in inefficient routing when he is, in fact, trying to get the lowest shipping cost he can get to compete. In every case shippers are competing in a competitive market, except electricity is still regulated at the State level in most States. So we don't think it is going to create inefficiency. In fact, we think it is going to create efficiencies.

    As to the first one, the railroads always cry that any change that helps shippers is going to bankrupt them, they are not going to have any money. I have no idea where they come up with $2.4 billion. But I would say this, I don't think when the Staggers Act was passed to deregulate the industry, Congress intended for railroads to have the right to create captive shippers, keep them captive and wring every dollar out of them that they could. If the Congress did intend that, it is an outrage and needs to be changed.
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    So I would just turn it, and I would also say that is $2.4 billion out of the shippers of this country who are competing in a competitive marketplace. I have heard a lot of discussion today about what a capital-intensive industry railroads are. I would ask you what industry is more capital-intensive than utilities and chemical companies. There are a lot of capital-intensive industries in this Nation that are competing for equity and debt capital in a free market, and we invite the railroads into that same market.

    Mr. FRANKS. Thank you.

    Mr. Wise?

    Mr. WISE. Ms. Duff, I believe I heard you respond to the chairman's, the central question that I have been asking—or addressing the question that I have been asking, which is, why is it that coal shippers have had a couple of successful rate cases but chemical and grain either have not? Or, as was pointed out by one of the industry spokespersons, they are not bringing the cases. Why would that be?

    Ms. DUFF. Yes. I think that, as I explained before, that shippers, noncoal shippers really don't have any means of assessing the likelihood that they could even possibly win a case. As I noted, it is not clear how the STB is weighing their factors that they have identified, the three criteria that Ms. Morgan indicated earlier. Small shippers don't know how small they have to be in order to qualify to be a small shipper case.

    And until they file a complaint, they have no access to the data to really analyze what the prospects of their case could be. So I do think that that leaves them in the dark pretty much for what their prospects are, and it is a real barrier to making them want to enter into the courts.
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    Mr. WISE. Mr. Szabo, let me pose a question using your schematic. I am looking at the bottleneck between the shipper and the switching point. And my question to you would be, I am thinking of the rural areas that I represent, particularly in coal, that that bottleneck might be one of the most expensive areas to maintain for the railroad.

    So why is it that they ought not to be able to charge the rate they need to maintain that, when the competitive rate area that you are talking about where the two railroads compete may actually be the cream for both of them? This is the expensive one. Why should this one have to give a preferential rate?

    Mr. SZABO. It doesn't have to give a preferential rate, it just has to give a rate. There is nothing in the Rockefeller bill that says what the rate has to be. It can be a very high rate. The rate would be subject to the rate regulatory system at the STB which any rate is subject to today. So there is nothing in the Rockefeller bill that says they can't, frankly, scalp shippers on that piece of line. We are just trying to get commerce going between the shipper and the railroads. So we are not saying the railroad can't quote as high as rate as it wants to in that bottleneck area.

    Mr. WISE. Is it realistic——

    Mr. SZABO. Just that it has to quote a rate, that is


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    Mr. WISE. Is it realistic to say in the free market that the blue line here, if it thinks this is such—if it can work something out with the shipper, it can run its own access line to the shipper?

    Mr. SZABO. Well, today any shipper frankly can go to the STB, and if he has enough money, the STB will generally let you build a line out to a competing railroad. So we have an anomalous situation. If you are rich enough and your pockets are deep enough, you can break through the bottleneck. If your pockets aren't deep enough, you are stuck in the bottleneck.

    So I don't see anything wrong with people, if they want to spend the money, to build a 100-mile track out to a competing railroad. Some people, in fact, and some coal basins are thinking of doing just that. But generally those who don't have that kind of money don't get the benefit of competition.

    Mr. WISE. And so also from your standpoint it doesn't matter really whether this point between the shipper and the switching point is 5 miles long or 500 miles long?

    Mr. SZABO. It doesn't matter.

    Mr. WISE. It can tie you up the same; is that correct?

    Mr. SZABO. Correct.

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    Mr. WISE. The ICC's Midtec decision requires a shipper to show competitive abuse before the Board requires a competitive rail service be provided. Are there any other reasons that you can think of why it is difficult for shippers to demonstrate that competitive abuse?

    Ms. DUFF. Sure. The competitive abuse standard is kind of a shorthand way of describing a whole series of tests that the Board has promulgated. First, it is essentially an antitrust type inquiry where you have to prove a full panoply of antitrust harm and remedies. Second, you have to prove a lack of intramodal, intermodal and geographic competition. Third, you have to inquire about rates and costs in order to determine the efficiency of the routes. And then finally, even if you prove that the rate is above stand-alone cost, you may not qualify under the competitive abuse test.

    No one really knows what the threshold is. So you wind up going through this tremendously complicated, very costly, very time-consuming process and, again, you have no real means of knowing what the final threshold is.

    Mr. WISE. Thank you. I know my eyes are getting bad, I can't even see the lights any more. Am I out? Thank you very much.

    Mr. FRANKS. Mr. Bachus?

    Mr. BACHUS. Thank you, Mr. Chairman.

    It is my understanding that—well, let me ask you this: You all think the rates are too high, right?
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    Mr. SZABO. Sometimes, but not all rates.

    Mr. BACHUS. Is that a yes or no? Maybe?

    Mr. SZABO. It depends. If you are a captive shipper, the rates are too high. If you are a competitive shipper, they are not too high.

    Mr. BACHUS. Okay. Do you all think the rates are too high?

    Ms. DUFF. I would concur with Mr. Szabo's answer. If you are a captive shipper, you are generally probably paying too much.

    Mr. BACHUS. Do you agree?

    Mr. VOLTMANN. The same.

    Mr. BACHUS. If the rates are too high, the way you want the rates brought down, first of all, is to have more access, have someone else come in and—how do you want that?

    Mr. SZABO. That is not the Rockefeller bill. The Rockefeller bill just simply says the railroad has to quote shippers rates across bottlenecks.

    Mr. BACHUS. Have to what? Give them what?
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    Mr. SZABO. Give a rate, quote a rate. If a shipper asks a railroad for a rate between points A and B, quote them a rate. The Rockefeller bill doesn't say what it has to be. It doesn't say it has to be reasonable. It says quote a rate, a very tiny first step.

    Mr. BACHUS. What is a bottleneck?

    Mr. SZABO. If you look at the back of my testimony, if you look at the schematic, there is a red railroad here where the shipper is on the red railroad and the customer he is shipping to is on the red railroad, but somewhere along the way the shipper could get access to a railroad that provides competition, this blue railroad. The bottleneck is that portion between the switching point and the shipper where, frankly, the red railroad will not quote a rate to get you to the switching point, so therefore you as a shipper can't get access to competition.

    Mr. BACHUS. So we would have to require them to give that, to allow them to run over that line?

    Mr. SZABO. That is what you have done with telecommunications.

    Mr. BACHUS. I am just saying that is what we have to do.

    Mr. SZABO. Absolutely. The only thing different, in most of the other deregulations Congress has said what the rate has to be. We don't ask you to say what the rate has to be. We just ask you to say there has to be a rate.
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    Mr. BACHUS. But is there a rate now?

    Mr. SZABO. No, they won't quote a rate now. The railroads will only quote a rate——

    Mr. BACHUS. They won't quote a rate to run over somebody else's line?

    Mr. SZABO. No, they won't quote you a rate to get access to another person's line. There is nothing in the Rockefeller bill about running people's railroads on other people's lines. That is not what this is about.

    Mr. BACHUS. Let's just say that the rates are too high in certain cases. You know you all say the rates are too high. What do you base that on? Why are they too high? I mean—that they can be lower? I mean, who judges whether they are too high or not?

    Mr. SZABO. Well, there is a business judgment about whether you think the rates are too high, and then if there is an official judgment made by the Surface Transportation Board, if you are in that protected area where they have jurisdiction, if you choose to go to——

    Mr. BACHUS. I guess what I am saying, you say the rates are too high. Now you all said the rates are too high. Do we have a right to judge whether they are? I mean, what makes them too high?
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    Ms. DUFF. I would like to jump in here, Bob, if you don't mind. I think that what the Alliance for Rail Competition is talking about is not whether or not the rates are too high. What we are talking about is shippers should have a right to access competition. The shippers should have a choice. Virtually every customer——

    Mr. BACHUS. But that is what I am saying. You know, sometimes—I have been reading all of this, and sometimes you say the rates are too high, do something about the rates, sometimes you are saying we want additional capacity, we want additional access, that is what we want.

    Ms. DUFF. Well, I think that what ARC has been saying very consistently is that shippers should have the option of accessing competition. In other words, as Bob was talking about the bottleneck, for a shipper that is captive, they should be able to get a rate quoted to them so that they can access a competitive option. That is how a shipper would be able to control his or her rates.

    Mr. BACHUS. How would we implement that?

    Mr. SZABO. All you have to do is say that the railroad has to give rates to shippers between two points on a system when requested by the shipper.

    Mr. BACHUS. The STB—what if they didn't have the yard capacity to do that or if they didn't have the line capacity to do that?

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    Mr. SZABO. Well, they could do one of two things. They can say ''We don't want to serve you, period. Go let somebody else serve you,'' and I don't think they can do that if you are a captive shipper because they have a common carrier obligation. Or they can quote a very high rate, saying they don't——

    Mr. BACHUS. Wouldn't they have to change their day-to-day operations?

    Mr. SZABO. I don't think so. They are there to serve shippers, that is their purpose, and if they don't want to serve shippers, they ought to get out of the business.

    Mr. BACHUS. I guess I keep saying, why should we do this? I mean, is it——

    Mr. SZABO. Why shouldn't you do this?

    Mr. BACHUS. Why should we?

    Mr. SZABO. Because you deregulated long distance telephone lines.

    Mr. BACHUS. What I am saying——

    Mr. SZABO. Why wouldn't you do this?
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    Mr. BACHUS. If you are saying the rates are too high, now if you can say the rates are too high—but you are not even willing to say that.

    Mr. SZABO. The rates are too high sometimes. If you are a captive shipper, they are too high. If you are a captive shipper and you can't make a sale because of the railroad rates, it is too high.

    Mr. BACHUS. You can't make a sale?

    Mr. SZABO. Or you make a sale at no profit to yourself.

    Mr. BACHUS. There you go, that is what I am talking about. You say the rates are too high because they are too high to either make a sale or to make a profit.

    Mr. SZABO. Right.

    Mr. BACHUS. Your industries have a higher rate of profit than the rail industries, about three times as high. You are three times more profitable.

    Mr. SZABO. I don't know where you get that. That is not correct.

    Mr. BACHUS. What do you think the chemical industry's return on investment?
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    Mr. SZABO. I have no idea what the return on investment is.

    Mr. BACHUS. I will tell you it is three times higher.

    Mr. SZABO. They are getting that in a competitive marketplace. The concern here, shippers wouldn't be here if they were not in a—if they were in a competitive marketplace. We are asking you for this competition.

    Mr. BACHUS. They are more profitable. They are—I was looking at the chemical industry, they invest—the railroad industry invests four times as much percentagewise in capital and improving their capital than the chemical industry, and it is not as profitable. And yet you are saying the rail industry ought to have lower rates which are going to bring down their profit, and their profit is already below your profit.

    Mr. SZABO. Do you take the position, Congressman, that whatever rate a railroad wants to serve a shipper is okay? Is that your position?

    Mr. BACHUS. Well——

    Mr. SZABO. Because they, quote, need the money?

    Mr. BACHUS. With the chemical companies we don't take a position that—we don't set your rate.

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    Mr. SZABO. Because we are in the free market. We are in the marketplace.

    Mr. BACHUS. Isn't—this is a free market.

    Mr. SZABO. It is not a free market, that is what we are here to tell you. If you want to open it to a free market, we will not complain any more.

    Mr. BACHUS. Can you not ship by truck or barge?

    Mr. SZABO. These are situations where you can't ship by truck or by barge. There is only a short distance—if you are talking about coal, there is only usually about 50 miles that you can ship coal by truck profitably. So this is——

    Mr. BACHUS. You are dealing with the utilities?

    Mr. SZABO. Say again?

    Mr. BACHUS. We are dealing with the utilities when we are talking about coal.

    Ms. DUFF. Mr. Congressman, I think what we are talking about here is we have a monopoly situation with the railroads. There are many shippers——

    Mr. BACHUS. How about the utilities?
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    Ms. DUFF. There are many shippers that cannot access any other forms of transportation. For example, grain shippers have to move their commodity by rail. Most of them do not have access to barge. You have to have access at both the origin and destination if you are going to move something by barge. You can't move that kind of volume by truck. We are talking about bulk commodities that really don't have any options.

    What we are seeing is, because of the drastic consolidation of the rail market, that the railroads are holding a virtual monopoly over a good chunk of the shipper community. And what we are suggesting is that Congress in its wisdom, with other highly capitalized industries that have these kinds of situations when they deregulate them, they provide options for competitive access for the customers of those industries. That is what we are suggesting happen to the railroads.

    Mr. BACHUS. If we order them to do all of these things, would you all agree that the railroads are near capacity on hauling freight?

    Ms. DUFF. I think that probably what we are facing is that if the railroads were moving into a competitive environment, that they would be able to work out many of those situations. The railroads are continuing to say ''We are at capacity, we are not going to be able to continue to invest.'' What they are talking about is a very static environment. If they are moved into a competitive environment, that is not going to be static. It is going to be dynamic and they are going to be able to make businesswise decisions that are going to be able to allow them flexibility to address those kinds of concerns.

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    Mr. BACHUS. Well, I guess do you all dispute the fact that they are having to—that they are spending about 15 percent of their revenues on capital and on capital improvements, and that the Wall Street people are saying that they need to increase that, and yet their profits are very low right now? How do they do that if their rates come down? If their rates come down, wouldn't there being less money available to reinvest?

    Ms. DUFF. Again, I think that we are talking about different things here. The Alliance for Rail Competition did a study to take a look at the captive shipper problem. We looked at the confidential waybill sample data. We did some analysis. Basically what we found was that railroads, in order to meet their infrastructure needs, they need to have an average of 140 percent revenue to variable costs—not 180 percent, not 250 percent, but an average of 140 percent revenue to variable.

    Mr. BACHUS. We don't put that on your end.

    Ms. DUFF. That assumes 17 percent return, so we are talking about a very, very generous assessment here. So when you talk about moving them into a competitive environment, what we are talking about is balancing shippers' rates. I mean, they are going to be able to access competition, which means that they will be able to balance out what is currently a wide discrepancy in what people are paying.

    Mr. BACHUS. Are any of your industries limited to 140 percent of variable costs?

    Ms. DUFF. We are not suggesting that there be limitations at all. I am simply indicating that in order for railroads to maintain their cost of capital that they need an average of 140 percent. We are suggesting that the market be able to determine what those rates ought to be.
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    Mr. BACHUS. Let me ask you this: The market, let's take coal and put it over to the side——

    Mr. SZABO. Take what, coal?

    Mr. BACHUS. Take coal and put it over here. On everything else, can you not ship by truck? In fact, aren't some of these captive shippers, aren't their competition shipping?

    Mr. SZABO. Some chemicals, by law, you can't ship by truck. You have to ship them by rail. So there are a variety of reasons that you can't ship some things by rail. They are oversized pieces of equipment that can only go by rail because they can't pass under highway bridges when transported by truck.

    Mr. BACHUS. What if the profit you are making on that is greater than the profit the railroads are making on shipping it? Why should the railroads lower their rates when they are actually making less of a profit on shipping these items than you on selling them?

    Mr. VOLTMANN. Mr. Bachus, I think what we are all saying here is that we are asking to end the protective status of railroads. Railroads were not completely deregulated in 1980 as they would have you believe. It was a partial deregulation. Rates only were deregulated. Access was not deregulated. It is a very closed system. We are talking about putting them under the same market pressures that every other industry in the United States operates under.
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    Mr. BACHUS. You know, I don't know how we can order this without ordering them to change their day-to-day operations, to change their yard usage.

    Mr. VOLTMANN. Mr. Bachus, you did that with telephones. You have done it with cable television. You have done it with gas pipelines. You did it with motor carriers. You did it with airlines. You have done it with every other industry in the United States, and you have brought about market forces that have unleashed this economy that we celebrate.

    Mr. SZABO. Mr. Bachus, if this red railroad is willing to take this movement of traffic from the shipper all the way to the customer, how does it change its operations to drop it off here at the switching point? Why is that a hardship for the railroad?

    Mr. BACHUS. I don't know.

    Mr. SZABO. That is all we are asking for, give us a rate that gets us to competition. Just a simple concept.

    Mr. BACHUS. Give us what?

    Mr. SZABO. A rate that gets us to this point of competition. What is wrong with that?

    Mr. BACHUS. You would be requiring them to ship it for that.
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    Mr. SZABO. That is right. They would charge us whatever they want. They can charge us whatever they want for that shipment.

    Mr. BACHUS. What I am saying is, we would be requiring them to make that shipment.

    Mr. SZABO. They are already making the shipment past that point, all the way down here to the customer. We are just asking them to take it to where there is competition for a rate which they will dictate to us.

    Mr. BACHUS. But there would have to be a switching operation at that point, wouldn't there?

    Mr. SZABO. That is right.

    Mr. BACHUS. So we are requiring them to make a switching operation.

    Mr. SZABO. What the Rockefeller bill says is you have to take them where there is already a switching point. We are not saying you have to establish a switching point.

    Mr. BACHUS. But you are saying we do not—that you are not asking us to fix any rate on that?
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    Mr. SZABO. No. They can change whatever rate they want.

    Mr. BACHUS. All right.

    Mr. FRANKS. Thank you.

    Mr. Wise?

    Mr. WISE. I just want to follow-up on the gentleman's questions. The present pending STB deliberations, to what extent can they meet your concerns? Indeed, would it be your recommendation that this Congress, this committee, wait until they are concluded in August before acting?

    Mr. SZABO. Well, certainly we don't want you to wait until August, so let me quickly say we want you to act before that. Our group doesn't think that a revenue adequacy test is needed. The STB interprets the current statute to require a test and an annual determination, so you would have to act to do what we would like to have happen.

    The STB is addressing the market dominance test. They seem to be going in the direction we would like. We fear future backsliding, so we would like you to legislate where they are going. And the STB is not addressing the ''quote a rate'' issue or the reversal of the bottleneck case, so that is the major thing we want. They are not addressing that.

    Ms. DUFF. I would just add in that, we are very encouraged by what the STB has been doing as a result of this decision, but we do view this as a multifaceted process. The STB has the ability to make some adjustments in the areas that they are looking at, but with the exception of competitive access. I think that the Congress is really going to have to be the one to step in to address competitive access concerns. As Bob noted, the bottleneck decision is certainly not something that the STB really has the ability to do within its current authorization. And I think that Congress needs to look seriously at those issues.
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    Mr. WISE. So that I fully understand, are you saying that in the situation you are trying to address, Mr. Szabo, that the STB does not have the authority to deal with that and then there is present legislation?

    Mr. SZABO. Well, I think if there weren't a lot of precedents in the way, you could interpret their common carrier obligation to require this. The Board doesn't think that, I don't believe, and there would certainly be litigation over it. So to do what we think needs to be done, we would say that legislation is required.

    If Ms. Morgan and Mr. Owen can interpret the law differently under their current statutes, that would be wonderful. But first of all, I am not sure they agree with us; and number two, I am not sure they could get there if they do agree with us.

    Mr. WISE. And third is if they can determine it and it can eventually be undetermined.

    Mr. SZABO. We always have that fear. We would like to lock in improvements.

    Mr. WISE. You would rather have it codified. I see.

    Thank you, Mr. Chairman.

    Mr. FRANKS. I thank very much the members of the panel.
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    Mr. SZABO. Thank you.

    Mr. FRANKS. For our fourth and concluding panel, I would like to call forward Mr. Michael Donnelly, chairman, National Grain & Feed Association; Mr. Edward M. Emmett, president, National Industrial Transportation League; Mr. Mark W. Schwirtz, manager, Environmental and Fuel Resources, Arizona Electric Power Cooperative, on behalf of The Western Coal Traffic League; and Mr. Robert J. Theurer, manager, Logistics Industry Affairs, Amoco Chemical Company, on behalf of the Chemical Manufacturers Association.

    Gentlemen, I welcome you and thank you very much for coming forward and testifying this afternoon. I guess I will take them in the order I called them off.

    Mr. Donnelly?


    Mr. DONNELLY. Chairman Franks, members of the subcommittee, I am Mike Donnelly. I am president of R.F. Cunningham & Company, Smithtown, New York. Our company is headquartered on Long Island. It has been in the grain merchandising business for over 50 years. We originate midwestern grains and rail service and for feeders and millers in the East and the Southeast and Northeast. We have additional offices in Lancaster, Pennsylvania and Auburn, New York.
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    I testify today as chairman of the National Grain & Feed Association, whose members consist of nearly 1,000 grain feed and processing firms that handle more than two-thirds of all the grain and oil seeds. Mr. Chairman, the NGFA appreciates your leadership on transportation policy. Predictable, reliable rail transportation service is absolutely essential to U.S. agriculture, particularly in the new deregulated environment brought about by the Federal Agriculture Improvement and Reform Act enacted in 1996.

    Whether this Freedom to Farm law achieves a more profitable market-based agriculture will depend greatly upon the performance of the U.S. rail sector, which hauls about 50 percent of all commercial grain. While considerable attention has been focused on the importance of rail service to the agriculture in the West, it is also vitally important in the East. In our region, rail carriers are the lifelines that supply vast quantities of midwestern produced grains to maintain operations of our expanding grain processing, milling and feed industries which are vital to the economy and employment of many States.

    This year the East will confront the same test our western affiliates confronted last year, a merger that absorbs the Class I rail lines of one carrier into the operations of two carriers. Let's hope the outcome is better.

    It is important to stress why U.S. agriculture is unique compared to other industries that use rail to haul bulk commodities, such as coal. First, agricultural shippers and receivers are decentralized. We originate grain from where it is produced and grown. Second, our facilities tend to be smaller in size, operation and shipping volumes. Third, U.S. agriculture's need for transportation service is market-driven, making it less conducive to operating a highly scheduled transportation service.
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    This means it is necessary—it may be necessary for Congress to consider rail solutions that specifically address U.S. agriculture's unique characteristics and circumstances. Given U.S. agriculture's need for predictable, reliable rail service, the status quo is unacceptable. The National Grain and Feed Association is willing to support the reauthorization of the STB for up to 2 years with one major condition: Substantive changes have got to be achieved.

    Congress must urge the agency to better balance the needs of rail users and carriers and stay involved in overseeing the STB's performance. In devising solutions to address the severe rail service problems confronting U.S. agriculture, the NGFA's goal has been to rely on market-based solutions and a desire to depend less, not more on government to resolve disputes between railroads and agricultural issues.

    We have entered into a substantiative ongoing discussion with rail carriers to determine if there is a way to reach agreement outside of the legislative arena. The results of our first two meetings have been very encouraging. A final meeting is set right now for May 28th, at which time the NGFA will consider which of its concerns still warrant legislative action.

    Here is what we are seeking: First, we seek a form of mandatory binding private sector arbitration of certain types of rail-shipper disputes involving agricultural commodities and products. While this proposal does not address all of our concerns, we believe it will foster direct business-to-business communication and problem resolution. Second, we seek to better define the common carrier obligation of rail carriers to provide service. Third, we favor changes that would provide shippers and receivers of grain and grain products more access to markets.
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    One proposal would enable a shipper located on the line of a single carrier to gain access to switching points where a competing carrier exists. Another would change the STB so-called bottleneck rate decision by requiring railroads to provide captive shippers with a rate to an interchange point.

    Fourth, we seek to simplify the current law's market dominance test that governs maximum rate cases so that both rail users and carriers can resolve such disputes in a cost effective and timely manner. Fifth, we have developed proposals to address the potential incidence of rate discrimination, including cases in which carriers assess higher rates for a shorter movement than rates charged on a competing shipper that is transporting a like kind and quantity for a longer distance over the same lines.

    And, sixth, we have developed a proposal that would prevent rail carriers from making an agricultural facility noncompetitive by assessing exorbitant land lease rates or one-sided terms that create excessive, unjustified liability risks.

    It is important to stress that we have partnered with our farm customers in developing our proposals, and we will be continuing our ongoing collaborative discussions with U.S. farm and commodity organizations throughout this process. At this stage we are hopeful, and we are also greatly appreciative of the active interest of Congress which has created an environment that is conducive to our ongoing discussions with the railroads. We have now got their attention.

    We will keep this committee and Congress apprised of the progress of our discussions with the rail lines, and should be able to determine which of our proposals may still need to be addressed legislatively by the end of May.
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    Thank you, and I will do my best to respond to any questions you might have.

    Mr. FRANKS. Thank you, Mr. Donnelly. I would like to indicate that a vote is taking place in the House floor. We will be recessing for a few minutes until the members can get to the House floor and return. We will be back as soon as we can.


    Mr. BACHUS. [Presiding.] I will call the subcommittee back to order, and I am not sure who had completed their testimony, who—Mr. Donnelly, you had finished your testimony?

    Mr. DONNELLY. I am done.

    Mr. BACHUS. That is right. And Mr. Emmett?

    Mr. EMMETT. Yes, sir.

    Mr. BACHUS. You will proceed, and we welcome all of you back to the subcommittee and look forward to hearing your testimony.

    Mr. EMMETT. Thank you very much, Mr. Chairman. My name is Ed Emmett. I appear today representing the National Industrial Transportation League, which represents shippers of all kinds, all sizes, using all modes of transportation, including rail.
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    It is a little bit ironic that we are here today. The National Industrial Transportation League was formed in 1907 specifically to represent shippers in their dealings before the Interstate Commerce Commission with railroads. Of course, since that time trucks have come in, airplanes have come in, ocean shipping has come in, so we cover all modes now, but we did start as purely a rail shipper organization.

    You have my written testimony, and rather than go through that in any form or fashion, particularly at this late time when you have heard about revenue adequacy and market dominance and all the other subjects ad nauseam, I would like to make just a few observations.

    If nothing else is remembered from today, we need to understand that the railroad industry—and my background, by the way, as a member of the Texas House of Representatives and as a 3-year member commissioner at the Interstate Commerce Commission has always been very deregulatory—but everybody has to understand that the railroad industry is fundamentally different, in that most shippers facilities that are served by rail, are served by only one railroad. Now, that leads some people to talk about how do we get more access. That is not what we are about. What we are about is, under the current Staggers Act, how do we make it work better for shippers? How do we make it better for railroads?

    I believe in recent weeks the Surface Transportation Board has taken an excellent step. Different people have said different things about why they did it. That is of no importance to us. They told the railroads and the shippers to get together, to have discussions, to try and find out what they agree on and what they disagree on. We support that process. We think that is good. We think it recognizes that there are problems in the railroad industry.
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    Now, being very candid, I doubt if we would have any of the hearings that we have been having at the STB or in the Senate or perhaps even here in the House if it weren't for the service meltdown of the Union Pacific in the West. That got everybody's attention, because what it pointed out was that shippers didn't have an alternative in many, many cases. So once the attention has been gotten, where do we go from here?

    Another observation: The Staggers Act has been good for the railroad industry. The Staggers Act has been good for shippers. However, as has been pointed out, since 1980 the railroad industry has changed a lot, particularly in two ways. There has been a dramatic decline in the number of Class I railroads, from over 40 to what can now be called a handful, 5 to 10. The other change that has occurred that you touched on a little bit, Mr. Bachus, in terms of competition, is that in 1980, a lot of the traffic was carried in boxcars. It was general freight traffic.

    Something else happened in 1980, in addition to Staggers, and that was the Motor Carrier Act, which deregulated the motor carrier industry. The motor carrier industry very effectively went in and took the traffic away from the railroads, leaving a larger percentage of the rail traffic now to what, while it may not be legally captive shippers, is shipments of products that cannot effectively move by truck. It is things like chemicals and coal and grain. So that has changed the general attitude, I think, and some of the comments that you get from shippers.

    We have, I think, the remainder of this year, ''we'' being the shippers and the railroads and the Surface Transportation Board, to come together and try and solve some of the problems that are plaguing the industry. Our suggestion today would be that the Congress do an extension of the STB reauthorization for a relatively short period of time. You have heard all day about the various conversations that are going on about the complex issues. Let's give that process a chance to work, and then everybody will be on notice that come January with a new Congress, if we can't solve some of these problems and decide they are irreconcilable, then we will be back to see you and we will discuss all of these various issues in much greater detail at that time.
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    One other thing that I would like to mention in closing is that there has been some discussion as to why shippers haven't participated more in some of the process. The answer quite simply is fear. No matter how big you are, if you are a shipper served by a single railroad, you are loathe to take that railroad to court or to the STB unless it is truly, truly a drastic situation.

    So with that, I will close and look forward to answering your questions.

    Mr. BACHUS. Thank you.

    Mr. THEURER. Mr. Chairman, my name is Robert Theurer, and I am manager of Logistics and Industry Affairs for Amoco Chemical Company, which is a subsidiary of Amoco Corporation. I appear today before the subcommittee on behalf of the Chemical Manufacturers Association, whose membership consists of 191 companies that account for more than 90 percent of the productive capacity for basic industrial chemicals in the United States. The focus of my testimony is on rail service, freight rates and competitive access.

    My company and many CMA members depend heavily on rail transportation to serve our customers. Last year, Amoco shipped over 4.5 million tons of chemicals by rail, involving more than 50,000 carloads. In 1996, the last year for which data was available to CMA, the railroads carried 138 million tons of chemicals and allied products and received almost $4.7 billion in freight revenues.

    For many chemical companies rail is the only practical mode of transportation. In a few cases water transportation may be an option for transporting large quantities where water access is available throughout the year. Truck service is generally more expensive than rail, especially for distances exceeding 300 miles. We must also remember it requires five trucks to move the equivalent of one rail car. With the current shortage of drivers and equipment, these are significant factors to consider, as well as the safety risk of putting more trucks on an already congested highway system.
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    In the chemical industry it is the shippers, not the carriers, that provide the majority of the rail cars. For example, CMA members own or lease approximately 150,000 tank cars valued at several billion dollars. Amoco's investment in our 6,800 cars totals nearly half a billion dollars, thus making modal switching very difficult and costly.

    With our heavy dependency on railroads, we consistently find that the poorest rail service and highest rail rates occur where a shipper is captive to a single rail carrier. And by ''captive'' I mean a shipper's freight can be transported by only one carrier, either at origin, destination or both.

    In 1996 Amoco commissioned Fieldston Company to assess the competitiveness of our rail traffic. They found that 90 percent of our rail moves, 4 million tons of product, moved captively, and in many cases the cost was 25 to 40 percent higher than where competitive alternatives existed.

    Further disadvantaging captive shippers is the lack of access to alternative rail service. For example, the severe service disruptions on the Union Pacific since last summer have already cost CMA members hundreds of millions of dollars. Time and again we are unable to obtain a steady supply of cars in and out of our plants.

    We as captive shippers could, in general, not obtain service by another railroad even where it was permitted by the emergency order of the Surface Transportation Board. According to a CMA survey, chemical companies lost sales, shut plants, curtailed production, temporarily laid off workers and incurred substantial additional distribution expenses.
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    Since the passage of the Staggers Rail Act of 1980, a significant portion of chemical rail traffic is carried under contract. However, this does not necessarily equate to competitive traffic. Amoco and other captive shippers sign contracts for self preservation to protect us from charges which would have even been higher without a contract.

    It has been my experience also that seldom, if ever, will railroads commit contractually to improved or consistent rail service even at a premium rate. The railroad's market power often results in terms that include cost escalation factors that do not reflect current expenses or productivity improvements; a refusal to quote rates for their segment of the movement; and exorbitant handling charges that effectively eliminate access to other railroads.

    Petitions for rate relief from the Surface Transportation Board are very costly, with litigation expenditures running hundreds of thousands of dollars. It can take years to establish that the only rail carrier has market dominance. Facing these barriers to regulatory relief, a captive shipper is effectively at the mercy of the railroad in any contract negotiation.

    CMA and the Society of Plastics Industry developed five principles of rail competition. These are based upon the premise that competitive rail transportation in the United States is essential to providing efficient, low cost delivery of products to the consumer and for U.S. companies to effectively compete in the global markets.

    Shippers must be able to choose between completely independent competitive routes from origin to destination. This can be accomplished by implementing meaningful access for captive shippers to a second rail carrier, with resulting competition driving service improvements and lower rates. CMA respectfully urges Congress to amend the statute to reflect the SPI/CMA principles for competitive rail transportation.
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    Thank you for providing me the opportunity to testify on behalf of the CMA and its member companies.

    Mr. BACHUS. Thank you.

    Mr. SCHWIRTZ. Good afternoon, Mr. Chairman. My name is Mark Schwirtz. I am the environmental and fuels resource manager for Arizona Electric Power Cooperative, or AEPCO, located in Benson, Arizona. My testimony is submitted on behalf of AEPCO and the Western Coal Traffic League, or WCTL, of which AEPCO is a member. WCTL is an association of electric utilities who are amongst our Nation's largest shippers and consumers of coal.

    Let me state at the outset that WCTL supports STB reauthorization for a 2-year period. The STB is the only forum that exists to protect captive rail shippers from pricing and service abuses. That forum needs to be retained at least until Congress devises a better solution to the captive shipper problem.

    Since it was created in 1996, the STB has taken actions that benefit captive coal shippers. These actions include granting relief in two major coal rate cases. The STB has also approved the construction of several rail lines that permit once captive utilities to obtain the benefit of two-carrier service competition.

    While the STB has helped some captive coal shippers, the Board has not done enough to protect existing rail competition or promote increased competition. Of particular concern to WCTL is the Board's approval of the UP-SB merger. That merger was anticompetitive and WCTL opposed it. The UP-SB merger has also resulted in disastrous service failures in the West which have adversely impacted the BN, Burlington Northern, standard phase operations as well. The western rail service crisis has cost WCTL members millions of dollars and has seriously disrupted our members' utility operations.
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    Besides the approval of anticompetitive railroad consolidation, the STB also has denied all shipper requests for competitive access relief, and it ruled against rail shippers in its bottleneck case decision. Due to the STB's anticompetitive actions and decisions, WCTL urges Congress to use the STB reauthorization process to make changes to the law that will increase rail competition.

    To this end, we support Senate bill 1429, the Railroad Shipper Protection Act. This bill will reverse the STB's bottleneck decision. We also support legislative changes to the competitive access provisions in the law that will overrule several of the STB's anti-access precedents and increase the Board's power to grant procompetitive access relief on a case-by-case basis. I have appended one such proposal to my written testimony.

    WCTL is not wedded to any particular access proposal. We will support any and all reasonable changes to the law that will assist captive shippers to become uncaptive through the introduction of competition. However, Congress must make clear that promoting competition, not protecting rail monopolies, is the Board's principal obligation under the law.

    Let me close with some observations about AEPCO's rail transportation situation. AEPCO is a small electric cooperative serving a more rural population of Arizona. We generate electricity at our Apache station which receives approximately 1.2 million tons of coal annually. The UP is the only rail carrier that serves the Apache station. The nearest second carrier alternative is 150 miles away. We have no dual operation. In order to reduce our transportation costs, we engaged in a series of maximum rate cases against UP's predecessor, the Southern Pacific, and ultimately settled our litigation to our benefit.
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    While maximum rate relief has helped us, our transportation rate levels are very high when compared with other utilities that enjoy intermodal rail competition. This causes us great concern, particularly as deregulation moves forward in the electric utility industry. The cost of fuel is AEPCO's largest single expense in the generation of power. Where captive generators like AEPCO must compete with generators enjoying rail competition in deregulated markets, our prospects are bleak unless competitive transportation service can be accessed.

    Despite the attacks that have been made by the railroad industry on the impacts of increased competition, competition will not destroy the industry. Instead, increased competition will simply make railroads compete rather than allowing them to continue to exploit captive shippers.

    On behalf of AEPCO and WCTL, thank you for this opportunity to testify.

    Mr. BACHUS. Thank you very much. My first question is, we have talked about captive shippers, if a shipper can use a trucking company, do you consider them still captive to the railroad if they can haul by truck?

    Mr. SCHWIRTZ. We can't use trucking companies for shipping coal to our facilities. It is over 500 miles away.

    Mr. THEURER. Nor can we, over 300 miles away. In many cases our customers use such high volumes of product that it is just not practical to ship all those trucks to people on rail cars.
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    Mr. BACHUS. You could ship it over 300 miles, though, right? It would just cost more.

    Mr. THEURER. I am sorry, I did not understand the question sir.

    Mr. BACHUS. You could ship it over 300 miles. It would just cost more.

    Mr. THEURER. We could. It would cost more, and the other factor is that because of the number of trucks you would need and the driver shortages that are out there today and the equipment shortages, it would be tough to commit to a trucking move except on a sustained long-term basis, when we have so much invested in rail cars because of the rail dependency. So with the huge captive investment we have in rail cars, it is not that easy to just skip from rails to truck, except for a long sustained basis.

    Mr. DONNELLY. Concerning grain, it would be next to impossible to ship grain out of Michigan by truck down to Arkansas or Georgia or any of the end users that we have down there.

    Mr. BACHUS. You heard panel three. They said that they are not asking for certain rates, they are not trying to limit rates, they just want a rate quoted. I looked at the legislation during the break and, in fact, the legislation does help set a rate. Is that your understanding, that it goes beyond just saying they must quote a rate and actually restricts the rate that they can charge?
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    Mr. SCHWIRTZ. Well, I think the proposal is that they would quote a rate at any segment of a route, a complete route from A to B, from origin to destination.

    Mr. BACHUS. But there would be limitations on the amount that rate could be, right?

    Mr. SCHWIRTZ. Yes, the STB could set that rate. That rate could be challenged. The railroad could set the rate, and then the rate could be challenged through the STB process.

    Mr. EMMETT. Mr. Bachus, if I could weigh in on that, it would be subject, it is my understanding, to the same regulation as any other rate. All rates are still regulated to an extent. That is why there is this myth that the railroad industry has been deregulated. It hasn't, and the reason it hasn't is because of the fundamental nature of rail shipments.

    As for the example you just gave about those who can use trucks, those people aren't here. Those people you don't hear from, because for the most part they are using trucks. The people you hear from are folks like the chemical types, and when they get concerned is if they cannot access another railroad.

    I don't know of very many people who are talking about one railroad going over another railroad's tracks. They are just asking, ''How can we get from our facility, which is served by only one railroad, to another railroad.'' In the case of the western United States, you basically have the two big ones: How can I get from UPSP to BNSF or vice versa.
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    Those rates would still be subject to all the same regulation that the current rates are. That is my understanding of that piece of legislation.

    Mr. BACHUS. Now, the railroads are already required to accept cars from other railroad lines. So, I mean, they already—they must accept—say if you ship your car on one railroad, other railroads are required to accept those cars, are they not?

    Mr. EMMETT. Yes, but they are not required to give up your car to another railroad at a certain point. They are required to accept it but they are not required to give it up. And that is what is being talked about in the bottleneck case, ''How can you get your originating railroad to give you a rate to the nearest exchange point, but still run the same operation they have always run?''

    Mr. BACHUS. I understand that. This legislation actually says that not only do they have to quote a rate, but it restricts the rate they can charge.

    Mr. SCHWIRTZ. I don't believe that is true. I think the legislation isn't any different than what—currently what they are asking for is a rate.

    Mr. BACHUS. Why would you want new legislation if it doesn't make any changes?

    Mr. SCHWIRTZ. I am saying as far as the rate is concerned. What the legislation is asking for is that a rate be quoted for any segment of a railroad's line, but that would still be regulated or is regulated through the STB.
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    Mr. BACHUS. I guess what I am saying is, if that were the case, why wouldn't you just come down and end the legislation really after, on section 6, end it about halfway down section 6? Just ''Upon the request of a shipper, a rail carrier shall establish a rate for transportation requested by the shipper between any two points on the system of that rail carrier where traffic originates, terminates or may be interchanged.'' Just stop the legislation there.

    Mr. SCHWIRTZ. I am not familiar with what it says after that.

    Mr. BACHUS. It actually talks about a reasonable rate in the next section.

    Mr. SCHWIRTZ. The reasonableness of that rate could be challenged under the current rules.

    Mr. BACHUS. Do you disagree that the railroad should have—if we are going to require them to do this, that they should be guaranteed a reasonable rate of return?

    Mr. SCHWIRTZ. Depending on how that is calculated.

    Mr. BACHUS. The utilities, you are guaranteed a rate——

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    Mr. SCHWIRTZ. As of today we are, but beginning in 1999 we will be starting, in Arizona at least, being deregulated on a certain portion of our system.

    Mr. BACHUS. I know Alabama Power in my State is guaranteed a certain rate of return, and it is higher than that of any of the railroads that operate within the State.

    Mr. SCHWIRTZ. That is the way the current rate structure is for utilities. What will happen after utilities are deregulated, the only place that will be guaranteed a rate of return or at least for the cost of capital is the actual lines themselves. What is being deregulated is the electric generation, so that anybody can move across those lines, anybody with a power plant can transmit energy across those lines.

    Mr. BACHUS. Of course, you are talking about what the utilities—you are opposing a lot of that, aren't you?

    Mr. SCHWIRTZ. No, we are actually embracing. It has done a lot of things for our industry.

    Mr. BACHUS. Do you believe that the utilities ought to be guaranteed a certain rate of return?

    Mr. SCHWIRTZ. I think you need to cover the costs of the lines themselves, as far as there should be no guaranteed rate of return on the generation of that electricity.
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    Mr. BACHUS. But they ought to be able to recover the stranded costs?

    Mr. SCHWIRTZ. Depending on what those stranded costs


    Mr. BACHUS. Do you think the railroads ought to be allowed to recover their total costs of operating the total system and that ought to be considered in these rates?

    Mr. SCHWIRTZ. What are you referring to, the total line system, the total——

    Mr. BACHUS. The total cost of the operation.

    Mr. SCHWIRTZ. ——infrastructure? We want to make sure the railroad is here, as we have discussed here in this panel, that it is important that we move coal by rail or large commodities by rail. Bulk commodities, that is our only real option.

    Mr. BACHUS. I mentioned to the third panel that we were told that the railroads were presently reinvesting over 15 percent of their revenue in infrastructure. And they need to do more, but there is—it is if their rates are reduced, they are not going to have—they are not even going to be able to reinvest that amount.
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    Mr. THEURER. Sir, we are heavily capital intensive also, the chemical industry, we pour a lot of our money into our plants and so forth and we pour a lot of our money into our rail fleets. We have $500 million tied up in our fleets, so that is investment such as the rail structure, too.

    We are not opposed to rates that come across to us in a competitive environment. We think that they should be allowed to earn whatever they can in a competitive, free marketplace, just as we have to complete for our capital and for our investment in a free marketplace.

    I am saying that the railroads obviously in a competitive marketplace would raise their rates to a level that they need to survive, and we would understand that. But what is hard to accept is when it is a noncompetitive marketplace, and those of us that are competitive are paying more than people we are competing with that have competitive options, and that really makes the playing field unlevel for us.

    It makes it difficult for us to compete because we are competing with raw materials, with labor, with utilities on a level playing field. And then all of a sudden the transportation issue comes into play, and suddenly our competitor has a leg up because he has competition and we don't, and that is where we suffer.

    Mr. BACHUS. Do you realize that if we—if there is some consideration given to captive shippers, that that might mean that rates for noncaptive shippers would have to go up to take care of the loss of revenue from the captive shippers?
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    Mr. THEURER. I believe that could happen, because it would be a competitive marketplace and everybody would be on the same level playing field, and the rates might have to go up for everyone, which to me would be tolerable if the playing field were level.

    Mr. BACHUS. If that happened, then many noncaptive shippers can choose trucking companies. And if those rates—if they increase their rates there, they may lose market share and would reduce their revenues.

    Mr. THEURER. Yes, sir, I heard that also. I believe that is the risk we would have to take. If some of their people had options left, fine. But if we had options with rail, perhaps our rate would be still be lower than the situation that prevails now.

    Mr. EMMETT. Mr. Bachus, if I can make an observation about that, the competition with trucking has been mentioned throughout the morning. As I mentioned, the Motor Carrier Act which deregulated trucking at the same time resulted in truckers offering services that were so much more efficient—I mean, we are in a just-in-time delivery system in this country. As such, shippers and receivers want their products and supplies in a matter of hours.

    The railroads unfortunately still talk in a matter of days, and in the case of when the service breaks down, sometimes it is a matter of weeks. So the competition between trucking and rail has already been decided.

    What is interesting now is that so many of the truckers are actually putting their trailers on piggybacks and we are having intermodal moves. So, in fact, if the railroads do their job properly and they compete with each other, they will be capturing back that traffic from the trucks even though the trucks are still hauling it, if that makes any sense.
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    Mr. BACHUS. It does. You saw that little map that we were given where you were asking this committee to require that a bottleneck—us to dictate to this railroad that they haul the goods to this point.

    Mr. EMMETT. Well, that is not exactly what is being asked for; what is being asked for is a rate—they are already hauling the goods to that point.

    Mr. BACHUS. They are hauling it all the way down.

    Mr. EMMETT. Right. What is being asked for is that the railroad quote a rate to that point. That was with your first question. Right now they won't even give a rate to the shipper. They are saying, ''No, we will only give you a rate the whole distance.'' Magically what happens, because there is no competition, if they do quote a rate to the first exchange point, it happens to be just enough to offset any savings that the shipper might gain from switching to the other railroad.

    On balance, sir, I think what would happen if the bottleneck were to be switched, some railroads would lose what they get from bottlenecks but they would gain it in another situation where they would be that second carrier, and it would all balance out.

    Mr. BACHUS. But could you ship it by truck to this point and then load it on?

    Mr. EMMETT. It depends on the product. If that is possible, it is very likely already being done.
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    Mr. BACHUS. With coal we are talking about utilities in most cases, are we not?

    Mr. SCHWIRTZ. Yes.

    Mr. BACHUS. What if one of the provisions in this legislation would be that the railroads would at least be guaranteed a rate of return or a profit equal to that of the utility whose product they were hauling?

    Mr. SCHWIRTZ. I guess I don't believe that is an issue anymore with the utilities being deregulated.

    Mr. BACHUS. You mean profit is not?

    Mr. SCHWIRTZ. Right. We will not be guaranteed a rate of return on the generation.

    Mr. BACHUS. I am talking about the actual rate of return, say over the past 3 years or something.

    Mr. SCHWIRTZ. That the utilities are guaranteed that rate of return?

    Mr. BACHUS. Yes. For instance, we have got a utility that wants to haul coal from—needs to haul coal from point A to point B, and we have a railroad that can haul that, and there is no alternative other than using that railroad. Let's just assume that is the case, and the question is what is a reasonable profit to the utility and to the railroad, if the railroad cannot have a total rate of return equal to that of the utility. What if we just said that?
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    Mr. SCHWIRTZ. I think the railroads might call that deregulation. If I understand you correctly, you are asking that there would be a certain rate that could be charged.

    Mr. BACHUS. We are not requiring, when we deregulate utilities, we are not going to set the rates for them.

    Mr. SCHWIRTZ. That is correct. For the generation of the utility. The rates will be set for the transmission and distribution of the electricity, but not for the generation, which is where the coal is used.

    Mr. DONNELLY. We in the grain industry would love somebody to guarantee us a rate of return. We have no guarantee, yet the railroad does.

    Mr. BACHUS. Also, utilities and grain shippers would be two different——

    Mr. DONNELLY. Pardon me, sir?

    Mr. BACHUS. That would be two different——

    Mr. DONNELLY. I realize that, but the railroad is getting a guarantee.

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    Mr. BACHUS. A lot of grain is shipped by truck, is it not?

    Mr. DONNELLY. In some localities, yes.

    Mr. BACHUS. I mean, in fact, over the majority of—isn't the majority of grain shipped by truck?

    Mr. DONNELLY. No.

    Mr. BACHUS. It is not?

    Mr. DONNELLY. No, I would say rail takes precedents, especially in the eastern sector of the United States.

    Mr. BACHUS. Okay. But, I mean, an alternative would be to ship by truck to a different rail line.

    Mr. DONNELLY. Then you have the cost of handling a product more than once.

    Mr. BACHUS. Which would bring down your profit, right?

    Mr. DONNELLY. Well, it would not only bring down your profit, it would make it economically infeasible because you have a shrink—you have a handling problem. Grain, normally you want to load it as few a times as possible or handle it as few a times as possible.
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    Mr. BACHUS. I notice the legislation says that it wants to void the requirement that the railroads receive at least 180 percent of their variable costs, I think. What is that? Are you all aware of that? Is there a variable cost?

    Mr. DONNELLY. I don't think we have—do you want to take it?

    Mr. EMMETT. I was just going to say, on behalf of the NIT League, we have not endorsed that legislation, so I don't want there to be any misunderstanding. We think there are some things in the legislation that would be good for shippers. But as I said in my five-minute observations, we are looking for all of the—pieces that can be put together to benefit not only shippers, but also railroads, so that we can go forward.

    Bottom line of that legislation or any other is, we would like to get the service to the quality level needed. We would like there to be some recognition of the fact that railroads are fundamentally different. But the bottom line is, shippers and railroads would both like to get back to their business of moving freight and get out of the business of arguing with each other as customer to supplier.

    The question you asked about the 180 percent revenue to variable costs, whether those figures mean anything or do anything, frankly, I will go back on my ICC days and say that it was never very clear to me that it was good, bad or indifferent. Because if you look at the revenue adequate measure, for example, one of the other things that has gotten people's attention, railroads that are deemed revenue inadequate in this country can spend hundreds of millions or billions of dollars buying each other, but meanwhile they are considered revenue inadequate, and that causes everybody to kind of scratch their head. So all of those specific issues I think do need to be addressed in a cooperative sort of fashion.
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    Mr. BACHUS. I guess we have a shipper here and a customer here, now presently the shipper's only option. Let's just assume this is true. His only option is to ship on this railroad, his only viable option. Now when he does that, his profit, the profit margin of the shipper, his return on investment is in many cases with the utilities, return on investment is greater than the railroad line that is shipping these goods presently. If we do something to reduce this rate, then it will be more profitable for the shipper and less profitable for the railroad, when the shipper is already more profitable than the railroad.

    Mr. EMMETT. Let me take a crack at that. You are leaving out one of the actors, and that is the second railroad that is willing to take the haul from the exchange point down. The second railroad would have to make a determination that they could make a handsome profit hauling that traffic.

    Mr. BACHUS. I understand that.

    Mr. EMMETT. So, therefore, the profit wouldn't be just lost to the first railroad.

    Mr. BACHUS. But the second railroad has not invested in building a line up here.

    Mr. EMMETT. The first railroad would still get whatever profit it wants from that first segment.

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    Mr. BACHUS. Do you understand what I am saying? I am saying you have a shipper and a customer——

    Mr. EMMETT. Right.

    Mr. BACHUS. ——and this panel and the last panel said the cost of shipping from the shipper to the customer when you have one rail line and that is your viable option, that the cost is too high and the cost needs to be reduced, we need to reduce the costs. But under the present environment, the railroad which is shipping it under the present arrangement is making less money than the shipper on their total cost of—on their total operation.

    Yet you are asking us to pass legislation that will reduce their return on investment or reduce their profits and will increase the profits of the shipper, who in most cases is already higher—and the profitability of the shippers is already higher than the railroads.

    Mr. EMMETT. Let me give you an example from another mode of transportation.

    Mr. BACHUS. First of all, would you agree or disagree on that in most cases, and should we look at that? Should we, in determining fairness, should we look at profitability?

    Mr. EMMETT. No, and let me give you an example.
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    Mr. BACHUS. Or cost of manufacturing and delivering? I mean, the cost of manufacturing and of delivering is a part of the total cost.

    Mr. EMMETT. Let me give you two examples, then. First, in the trucking industry in the State of Texas, when we were trying to deregulate intrastate, Central Freight Lines had a monopoly between one city and another and they could always show that their operating ratio, their profit was less than the manufacturer. But it was still good for the economy to deregulate so that that manufacturer could move the product more efficiently, and what happened was other trucking companies came in, ran it more efficiently, made more profit than that first one did and everybody benefitted, including the economy.

    What you have in the bottleneck case is a situation that stifles the economy. The other example I would give you is, if you wanted to examine any industry or any product, you might look at a grocery store and say, well, the grocery store margin of profit is only this, maybe we ought to be sure that the grocery store gets this much profit since that is how much the food supplier gets. I think in a free market economy you don't want to go down that road.

    Mr. BACHUS. Well, we want to reduce the total costs of shipping goods and also manufacturing of goods. It is good to bring down the cost of shipping this product from here to here, but the vast majority of—I mean, the shippers are making a great deal of percentage off the operation, more than the rail line.

    Mr. SCHWIRTZ. I think if we were——
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    Mr. BACHUS. If the way to bring down the cost would be for the shippers to make less profits——

    Mr. EMMETT. I think President Nixon tried price controls once and they didn't work very well.

    Mr. BACHUS. But aren't you asking us to put price controls on the railroads?

    Mr. EMMETT. No, sir. We are asking——

    Mr. BACHUS. They sell transportation, they sell——

    Mr. EMMETT. To a customer that has no choice, in that example you have given. What we are asking is to allow other railroads, some of those other big railroads that are out there, to compete for that traffic where they can, and you are not talking about a large number of situations. I think the bottleneck situations are very limited, but there is such a glaring example that it is why we spend so much time talking about this.

    Mr. BACHUS. Yes. And I agree with you, that, you know, that there are captive shippers and their costs are high, but if we bring down these costs, how do we bring down their cost of transportation without affecting the revenues of the railroads, which at present are at or below what is necessary for them to keep the railroad transportation system in this country running smoothly, which is in all of our best interests?
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    We don't want to do anything which would result in our railroad system not having sufficient investment, not having sufficient infrastructure. In fact, what we see with UP is a lack of capacity and as you have—and backed up traffic. That is actually what is costing, I would think, the vast majority of shippers in the economy, is the lack of infrastructure presently in place. Yet this legislation would reduce the amount of revenue necessary to maintain and improve what is a system that is at or above capacity today.

    Mr. EMMETT. Well, again, I would point out it would restrict the revenue——

    Mr. BACHUS. And what it would do, it would make the profits of the shippers greater, it would raise your profitability. But at the same time, it would reduce the amount of revenue going to the railroads, which would have to ——and their rate of reinvestment is very high at the present time.

    Mr. EMMETT. Except keep in mind that the second railroad would be making a profit that it doesn't make now, and it would make that decision in a free market way. If the second railroad decided it was worth taking that traffic, then that second railroad would be able to use that profit to build its infrastructure, and that way it would all shake out in the end.

    Mr. BACHUS. But it would be a reduction, a total reduction in rates, because if it didn't reduce the rates, then it would have been of no value to the shippers.
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    Mr. EMMETT. But what happened in every other industry is that the efficiencies got built into the system and the overall investment blossomed.

    I will give you a local example. When Southwest Airlines starting serving BWI, USAir had a pretty good lock on that market. The very next year, traffic went up from something like 600,000 passengers a year to 1 million a year. Those extra 400,000 didn't just go to Southwest, they went to all the airlines. Even though Southwest drove the prices down, all of those airlines were able to invest.

    Mr. BACHUS. You don't think the railroads are purposely trying to limit the amount of traffic that they haul, do they, that they are purposely setting their rates high enough to discourage people from using them?

    Mr. EMMETT. No, but that is the effect in many cases.

    Mr. BACHUS. Well, now, is that not a decision that you are making for the railroads that they ought to in some cases lower and in other cases raise their rates?

    Mr. EMMETT. The same thing happened in the trucking industry before deregulation——

    Mr. BACHUS. But now we are in deregulation.

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    Mr. EMMETT. Not in the railroad industry, no, sir. That is a myth.

    Mr. BACHUS. As I say, we asked them to accept, they still have to accept other—if presently we are requiring a railroad, when your customer ships something, we are requiring every railroad out there to accept that carload and haul it on their system.

    Mr. EMMETT. That was true before the Staggers Act. Nothing changed about that.

    Mr. DONNELLY. Congressman, in agriculture, I mean, this is not just an issue of rates. We need a viable rail system. This is kind of an issue of reliable and predictable service. Also——

    Mr. BACHUS. I agree.

    Mr. DONNELLY. ——in cases where the system breaks down, what we are asking for is the timely and affordable alternative. Right now I don't have one. We saw what happened at harvest time last year out in the West.

    Mr. BACHUS. And I believe it is good for you to have alternatives, as long as we don't affect the viability and the revenue stream of the railroads, which at present is perhaps insufficient to maintain the rail system or to certainly expand it, which we all agree we need to expand rail capacity.

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    Mr. SCHWIRTZ. I don't know if we agree we need to expand. I think what we are saying is one of the problems that we saw in the West was a result of the UP-SB merger, and it may not just be because there is not enough infrastructure, but the management of that merger and how it worked together that caused the problem, the bottleneck problems that they had in Texas, and then which created a problem all throughout the West, because we had problems receiving shipments as well because of that problem.

    Mr. BACHUS. Now, if we pass this legislation, there would be more switching going on?

    Mr. SCHWIRTZ. Yes.

    Mr. BACHUS. And we would have to expand our yard capacities.

    Mr. SCHWIRTZ. And as a competitive world develops——

    Mr. BACHUS. This switching point, which may be presently there, you certainly I think would all agree, if you are at all familiar with the operation of railroads, that there would have to have additional infrastructure investments made at that switching point if there is more switching, if there are more cars switched at that point. And there would be greater costs to the costs of switching, but certainly it would have to more—that yard would have to have a greater capacity for every switch that is made.

    Mr. SCHWIRTZ. In our case we move 1.2 million tons of coal a year. That wouldn't change in a deregulated environment.
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    Mr. BACHUS. No, but if this law went into effect, a good number—if you were to receive that, a good number of those cars would have to be switched.

    Mr. SCHWIRTZ. They are switched today at that same interchange point. In fact, today the crews have to switch, which causes further delays in that process because we have to switch crews from that system. One crew leaves, the next crew has to come in. So there are actually efficiencies in hand.

    Mr. BACHUS. You are saying they are already switched. They are not switched today. If they were switched today, then what you are asking them to do is bring them down here, switch them and bring them down here. We are talking about shipments that presently are going here and you are asking them to divert them here, and at that point we would be increasing the activity here, and you cannot do that without——

    Mr. SCHWIRTZ. In your example, that is correct. In our example, we have a dual railroad movement that as far as——

    Mr. BACHUS. I am using the example of what this committee is being asked to require, you see.

    Mr. EMMETT. Mr. Bachus, if the second railroad did not think that it was profitable to make those investments and to make those switches, they would not compete for the traffic. If they make the choice to compete for the traffic, then they will make their economic decision. If they say it is worth that, then there will be a switch charge.
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    Mr. BACHUS. It takes two to make a switch. It takes both railroads' cooperation.

    Mr. EMMETT. And there is a switch charge. But the one that would actually be running the yard would be the one that would be making that decision.

    Mr. BACHUS. I appreciate your testimony.

    Mr. SCHWIRTZ. Thank you for letting us speak.

    Mr. EMMETT. Thank you.

    Mr. BACHUS. I am told this concludes our hearing.

    [Whereupon, at 1:54 p.m., the committee was adjourned.]

    [Insert here.]