Segment 2 Of 2 Previous Hearing Segment(1)
SPEAKERS CONTENTS INSERTS
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SHORT LINE RAIL INFRASTRUCTURE NEEDS
Tuesday, July 25, 2000
House of Representatives, Committee on Transportation and Infrastructure, Subcommittee on Ground Transportation, Washington, D.C.
The subcommittee met, pursuant to call, at 10:00 a.m. in room 2167, Rayburn House Office Building, Hon. Thomas Petri [chairman of the subcommittee] presiding.
Mr. PETRI. The subcommittee will come to order.
Today we'll have a hearing on the infrastructure needs of the Nation's short-line railroads. Since 1980, when the then Interstate Commerce Commission began to permit easier sale or lease of marginal lines by Class I railroads, there's been a boom in the formation of Class II and Class III railroads in the United States.
In many cases, the infrastructure inherited by these smaller railroads has been deteriorated and in need of expensive upgrades. In recent years, this problem has been compounded by the use of heavier, 286,000 rail cars by the Class I railroads, which has placed increased stress on the smaller railroads' already deteriorated infrastructure.
In the early 1990s, the Federal Railroad Administration produced a study estimating the unmet infrastructure needs of short-line railroads at about $450 million. Subsequent studies have indicated the needs are even higher.
This Committee recognizes the need for access to capital by the Nation's smaller railroads and included in TEA-21 a revised rail infrastructure loan program providing up to $3.5 billion in direct Federal loans and loan guarantees for railroad infrastructure, of which $1 billion is set aside for the primary benefit of Class II and Class III railroads. Sadly, it's been two years since TEA-21 was enacted, and the Administration just recently issued final regulations implementing the program.
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Not only have the Nation's railroads been needlessly denied the benefits of the program for two years, the final regulations contain restrictions such as the requirement for a denial from a commercial lender that have no basis whatsoever in the statute, and would gratuitously hamper this program. I'm eager to hear from Administrator Molitoris today on the thinking behind including this patently unauthorized provision in the regulations, as well as on the reported existence of a side agreement between the Department of Transportation and the Office of Management and Budget that places additional restrictions on the program.
TEA-21 also created a light density railroad infrastructure program, authorizing appropriations for grants to States to fund capital improvements for light density railroads. To date, no appropriations have been made to fund the program.
Today we will also receive testimony on H.R. 4746, the Emergency Rural and Small Railroad Preservation Act, which was introduced by Congressman Spencer Bachus of this Committee. This bill includes findings concerning the need for infrastructure funding for small railroads serving rural areas.
The bill also creates a railroad trust fund to be funded with the 4.3 cent deficit reduction fuel tax currently paid by the railroads, and authorizes grants to be made by the Secretary from the Railroad Trust Fund for infrastructure upgrades to Class II and III railroads.
There are many interesting issues to be explored at this hearing, and I look forward to hearing from the witnesses today. And with that, I yield to our ranking Democrat, Mr. Rahall.
Mr. RAHALL. Thank you, Mr. Chairman.
Mr. Chairman, in 1906, the work of a gentleman by the name of Ambrose Pierce was published as The Cynic's Word Book, now renamed The Devil's Dictionary. In that book, a railroad is defined as, and I quote, ''the chief of many mechanical devices enabling us to get away from where we are to where we are no better off.'' That definition, although tongue in cheek, has some relevancy to the subject of today's hearing, particularly the FRA's final rule on TEA-21's rail infrastructure loan program. In TEA-21, Congress sought to address the infrastructure needs of smaller railroads, short lines and innovative projects, like the Alameda Corridor, from where it was, in deficit.
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FRA's final rule on this provision, however, took us to a place where we may be no better off. I say this because the rule contains a requirement not envisioned by the statute which makes the loan program a last resort financing option. In effect, an applicant must be denied financing by a commercial lender before coming to the FRA.
One concern with this requirement is that this has the potential to poison the well among commercial lending institutions for large, multi-component infrastructure projects. I feel that this matter, coupled with the existence of a side agreement on this rule between two agencies of the Government, may significantly undermine what Congress intended to achieve with this loan program. In one sense, the final rule represents an FRA staff propelled projectile aimed at torpedoing the TEA-21 provision.
So I thank the Chairman for scheduling this timely hearing. And it's my hope that together we can continue to explore means to advance infrastructure needs of the short lines. And I as well as the rest of the Committee, I'm sure, look forward to hearing from our very capable Administrator, Jolene Molitoris, in today's hearing, as well as the rest of our witnesses. Thank you.
Mr. PETRI. Thank you. And statements by the Chairman of the Full Committee and the Ranking Member of the Committee, Mr. Oberstar, will be included in the record if submitted.
Are there other opening statements?
Mr. SWEENEY. Mr. Chairman, just briefly, I want to say thank you for conducting this hearing. I have two constituents who will be testifying as part of the third panel. I also have an 11:00 o'clock that I have to go to, so I'm afraid I might not be able to introduce them. But Ron Crowd is here, who is President and Founder of the Batten Kill Railroad Company, and Malcom Sanders, who is a trustee. They are important people in my Congressional District, the 22nd Congressional District in New York, a substantially rural district that depends on small railroads, as you mentioned, the Class II and III railroads bring some real flexibility to the system.
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And I look forward to their testimony as well as the testimony of others. And I'll submit for the record a further statement. Thank you.
Mr. PETRI. Thank you.
Mr. Blumenauer.
Mr. BLUMENAUER. I just wanted to extend my appreciation, Mr. Chairman, for your organizing here, and I will submit for the record a statement that underscores the importance of this in my State of Oregon, and we look forward to having productive conversations that will strengthen the role of these railroads.
Mr. PETRI. Thank you.
Yes, Mr. Rahall.
Mr. RAHALL. Thank you, Mr. Chairman, I appreciate your indulgence.
I have just one other issue. During a hearing of this Subcommittee last week, I asked Deputy FRA Administrator Jack Wells to deliver to this panel a copy of what was reported as a secret side agreement between DOT and Treasury on the final RRIF regulations. That document was delivered to my office yesterday, and it's also referenced in the prepared testimony of Administrator Molitoris today.
So I would note that this agreement, until the pressure poured on it, was indeed secret. And its provisions are not reflected in the rulemaking, public record or the final rule itself. I would also note that while it is not between DOT and Treasury, it is an agreement between DOT and OMB.
So Mr. Chairman, at this point, I would ask unanimous consent to submit this agreement, which is in the form of a memorandum, into the hearing record.
Mr. PETRI. Without objection, that will be made a part of the record.
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Our first witness is the Honorable Jolene Molitoris, Administrator of the Federal Rail Administration. Welcome.
TESTIMONY OF HON. JOLENE M. MOLITORIS, ADMINISTRATOR, FEDERAL RAILROAD ADMINISTRATION
Ms. MOLITORIS. Thank you so much, Mr. Chairman. Chairman Petri and Mr. Rahall, other members who are here today, it is really a pleasure to be here to testify about the infrastructure investment issues, especially as they relate to short line railroads.
The short line railroad industry and its issues are very important to the Administration, Secretary Slater and certainly to me. For those of you who don't know, earlier in my career as Deputy Director of the Ohio Department of Transportation, I had the privilege of working throughout the State of Ohio with communities who wanted to save lines that were being spun off in the 1980s. The 13 new short line railroads that we had the privilege to help begin I would like to report are still growing and profitable.
And so I think that you can understand why I'm excited about an opportunity to invest in this important sector. The Railroad Rehabilitation and Improvement Financing Program (RRIF) is a very important program. It's innovative, and that is the reason why it did precipitate a great deal of discussion in the clearance process. But we are now at a place where the final rule published on the 6th of July really gives us an environment that will produce a program that works.
This industry has needs that are well documented. There may be differences in the final amount of those needs, but we know they are in the several billions of dollars. The program itself, which was published as a final rule, and the administrative procedures memo that you reference, really provide an environment, I believe, that is flexible enough for us to administer a program that is both effective and efficient.
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In fact, Mr. Chairman, you should know that we rescheduled a preapplication meeting today with a potential applicant, because it would have conflicted with this hearing. My message to you today is that we are aggressively pursuing these opportunities. We look forward to an opportunity to sign the first of these loan opportunities for applicants. We think the Secretary will be there at the signing ceremony, and we hope you will, too.
We have extensive experience in our career ranks. In fact, our new Associate Administrator of Railroad Development, as well as his staff, have had many years of experience in administering this kind of program. We are repositioning our resources, so there will be no impediment to a smooth, seamless opportunity. In fact, if you go to our web site today, you will see not only the rule published, but a very simple user friendly step by step procedure for applying.
This program will be a top priority for me throughout the remainder of my tenure. It certainly is for all of us at FRA, and for Secretary Slater. I look forward to signing these agreements in the year 2000 and I look forward to your questions, Mr. Chairman. Thank you very much.
Mr. PETRI. Thank you.
Mr. Rahall.
Mr. RAHALL. Thank you, Mr. Chairman.
Administrator Molitoris, let me be frank with you. There was a loan program before TEA-21. With that law, however, we sought to improve upon it. And I think now perhaps we feel a bit undermined. It took two years for the final regulations to be promulgated. And there's a sense that the final rule, along with the side agreement, have actually made the program so restrictive that it is less responsive to the infrastructure needs than what existed before we amended the law in TEA-21.
We do not have time, of course, in five minutes, to cover all these issues. But let me ask you this first question. As I understand it, the RRIF final rule states that Federal guarantees cannot exceed 80 percent of the loan amount. Since the rule also requires that an applicant be turned down by at least one commercial lender prior to applying to the FRA, who would underwrite the other 20 percent of the loan amount?
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Ms. MOLITORIS. Mr. Rahall, first of all, the rule as it stands does ask for a rejection letter. But I can tell you based on our experience with the Local Rail Freight Assistance program, which is the program we used in Ohio previously to fund 13 new short line railroads, the short line rail industry cannot get small loans over long periods. And if you read carefully, the rule says, with the same terms as we are willing to give.
Also, I think the genius of this program, quite frankly, is that the refusal letter is what is required of a railroad. TEA-21, as well as ISTEA, as you well know, sir, encouraged intermodal activity and partnerships. I think that is exactly what we're seeing happening in the interests that are calling us about this program. There are teams being put together with railroads, communities, and other interest groups who will be applying to us, including State entities, and community entities. I personally do not believe that this rejection letter, which is required if a railroad is the primary applicant, will be an impediment at all.
Mr. RAHALL. I appreciate that partial response. You did respond to the part about an applicant having to be turned down. But the second part of my question is, who would underwrite the other 20 percent of the loan amount?
Ms. MOLITORIS. Well, we have seen, with regard to TIFIA and other innovative financing programs, that the team environment produced enough funding to make this happen. I think that possibly those who were discussing this with you are thinking of an individual railroad alone. At least the ones who are calling us are coming as part of teams. I believe the short line industry and the individual railroads will find a very smooth process that is workable for them.
If there are impediments, we will be happy to come back to the Committee with any issues that arise in the actual processing of applications and pursuing these loans.
Mr. RAHALL. So you're saying it's up to the applicant, then, to come to you with that 20 percent, and however they do it, and however, various sources or teams that they come up with?
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Ms. MOLITORIS. Well, as I mentioned, we actually rescheduled a preapplication meeting this morning because of the hearing. We are urging and encouraging anyone who is interested in this program to come and talk to us first. We have so much career experience, a real historical sense, a practical sense. And I think we can help make this happen, Mr. Rahall, in a way that works. If any of your constituents have any issues or problems, please pick up the phone and call me personally. Because I am personally involved. I want to see this be very successful in the year 2000.
Mr. RAHALL. Okay. Let me turn to the DOT-OMB communication. I'm all for minimizing risk to the Government, obviously. At the same time, you may have sought to minimize that risk to the point that very little can be accomplished under this program. That's my big fear, here.
Certainly an Alameda Corridor type project could not be accommodated under this program with the restrictions that had been administratively placed upon it. With that noted, I'd appreciate your explanation as to the correlation between the stipulation in that communication that no single RRIF loan can exceed 6 percent of the unused authorization and the stipulation that no loan can equal more than 10 percent of the dollar amount of all loans in an annual cohort.
Ms. MOLITORIS. Mr. Chairman, Mr. Rahall, I think that these elements in the memo, the administrative guidelines, will not be an impediment. Because a large project, say for example, a corridor project from here to--pick a city--Atlanta, wherever, would probably be looked at in some sort of parts, whether it be geographic, the jurisdictional issues, or by State or whatever it would be. There is no limit on the number of loans that can be invested in elements of a corridor project.
We think the flexibility is there. Those of us who have had a lot of experience in this area really feel a level of confidence. I can tell you that I'm very pragmatic. I just want to see the results. I do believe that we can get this program done effectively. I just look forward to going back to the office and scheduling those preapplication meetings and get moving, because nobody wanted it to be delayed to this point. But what I'm focusing on is getting it done now.
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Mr. RAHALL. Thank you, Mr. Chairman. I do have more questions on second round.
Mr. PETRI. Very good. Mr. Coble.
Mr. COBLE. Thank you, Mr. Chairman.
Ms. Molitoris, I want to extend on what the gentleman from West Virginia was sharing with you, in this what appears to be gratuitous limits to me. Now, the approach taken in your publicly issued regs to guaranteed loans, essentially the FRA position is that no more than 80 percent of a loan can be guaranteed, because OMB imposes that limit in its circular.
Let me refer you to the loan program statute, the Section 5018 of the 4R Act as amended by TEA-21. There the law, not OMB, defines a loan guarantee as encompassing any guarantee or insurance or other pledge with respect to all or part of the principal or interest on any debt obligation. Now, Ms. Molitoris, does not all mean all? FRA in fact repeated the statutory definition I just quoted, verbatim, in Section 260.3(m) of the final regs.
Now, it's pretty obvious to me that the statute permits the guarantee of all, that is, 100 percent of an obligation. How then does the 80 percent limit contained in the OMB circular enter the picture here?
Ms. MOLITORIS. Mr. Chairman and Mr. Coble, on direct loans, our loans to applicants, we can loan 100 percent. If we are guaranteeing somebody else's loan, that is when the 80 percent applies.
Mr. COBLE. Well, let me confer with staff just a minute.
The 80 percent I am told applies to loan guarantees.
Ms. MOLITORIS. That's right, of somebody else's loan.
Mr. COBLE. But were you not talking about direct loans?
Mr. MOLITORIS. Let me repeat. This OMB circular applies to everybody in the Government, not just to us, by the way. We agree on that, I hope. The 80 percent applies to the guarantee by the Government on somebody else's loan.
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On a direct loan from, or through FRA, to an applicant, we can loan 100 percent.
Mr. COBLE. Well, I'm not grasping this, but I'm not going to take a crash course here at the expense of you all. Mr. Chairman, I'm going to yield back and see if I can get a better handle on this.
Ms. MOLITORIS. Mr. Coble, may I respond in writing, give you just a one-pager?
Mr. COBLE. Sure.
Ms. MOLITORIS. Because I think it's pretty clear that the Government, guaranteeing somebody else's loan, is 80 percent. The FRA, responding and loaning directly to an applicant, we can loan 100 percent.
Mr. COBLE. Okay. If you could get that to me in writing, I would appreciate it.
Ms. MOLITORIS. Certainly, sir.
Mr. COBLE. I thank you, Mr. Chairman.
Mr. PETRI. And any legal authority for an OMB circular taking precedence over a statute of the Congress of the United States would be appreciated.
[The information received follows:]
[insert here]
Mr. PETRI.Mr. Clement.
Mr. CLEMENT. Thank you, Mr. Chairman.
Pleased to have you here today.
Ms. MOLITORIS. Thank you, Congressman.
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Mr. CLEMENT. Why has it taken your agency so long to issue the final rule for the implementation of the RRIF program?
Ms. MOLITORIS. Congressman, as you well know, the FRA career staff, as well as me personally and the Secretary, are very enthusiastic about this program. We are very successful with LRFA and we see this RRIF as sort of the 21st century evolution of that program. We pursued every avenue in the clearance process to enhance the timing, and none of us wanted it to go on this long.
As I mentioned in my testimony before your arrival, the uniqueness of the program did precipitate a great deal of vigorous discussion in the clearance process. I personally am very pleased that it is out, and I look forward to vigorously responding to applicants. We've tried to make it very user friendly, and we are committed to a seamless, customer-oriented, customer friendly process, so that we can have real signings and real awards in great number in the year 2000.
Mr. CLEMENT. My second question, we're also examining H.R. 4746, which would create a trust fund for small railroads out of the 4.3 cents deficit reduction tax. What are your views on this legislation, and could it be used to help pay the risk premiums under RRIF?
Ms. MOLITORIS. Congressman Clement, the Administration has no position on this particular bill. And of course, I think Mr. Lipinski also views these funds as a possible source for other infrastructure needs. So we are looking at these proposals and at this time, we do not have an official position.
Mr. CLEMENT. Will you have an official position later?
Ms. MOLITORIS. I presume so, but at this hearing, we do not have a position.
Mr. CLEMENT. Thank you.
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Mr. PETRI. Thank you.
Mr. Sweeney.
Mr. SWEENEY. Thank you, Mr. Chairman.
Let me welcome Ms. Molitoris. As you've probably picked up from a number of our questions, there are many of us who believe that, or are concerned that what we've established here sets some gratuitous limits or maybe even some instances, some insurmountable obstacles. And I, as you know from my opening statement, have some constituents who are directly affected by this.
So I have a couple of questions that I hope make the point, will help make the point that despite the fact that you've worked long and hard on this, and in some instances have not been able to get this done in as timely a fashion as you would have liked, would like you to consider some of the hardship that are going to be presented.
On page two of your testimony you state, we are confident that a short line railroad's application to any lender for a loan with a 25 year repayment will be rejected. Essentially, then, in your requirement of a letter of rejection, by that short line railroad, aren't you requiring an exercise in futility? Why the requirement for such a letter?
Ms. MOLITORIS. Congressman Sweeney, again, just referencing really a 20 year career of history in this particular area, I do not believe that you will find lending institutions who are willing to give those terms. So I don't think there's futility at all.
I can understand that people have concerns. I guess my belief—
Mr. SWEENEY. If I could reclaim my time, I think that is the model of futility, if you don't believe there is a market for such loans in the first instance, why require these small railroad operators to go through that process? Isn't that in direct disagreement with the underlying intent of Congress when we passed this legislation?
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Ms. MOLITORIS. Congressman Sweeney, I believe that it is a step in a process. I don't think it's difficult. I think it does provide guarantees that there will be no abuses of the program.
Mr. SWEENEY. Let's say we disagree on that, and I'll move on, if I could.
One of the provisions of the so-called side agreement between OMB and DOT is that DOT is supposed to require collateral for TEA-21 rail loans that covers 100 percent of the anticipated principal and accrued interest. I have two questions. First, since the credit risk premium already required in the statute is already calculated to cover the actuarial risk of default, why should any additional collateral be required?
Ms. MOLITORIS. These administrative procedures were put in place; they're the best judgment of the various parties and perspectives involved.
Clearly, these are administrative procedures, and if there are impediments that arise because of them, we will consider our experience in amending them.
Mr. SWEENEY. But let me just say, then, doesn't this full principal and accrual interest requirement make any loan impossible to obtain, much like, it is much like requiring a home loan to be secured not only by the value of the house, but enough additional collateral to cover 30 years of interest? And isn't that an impediment?
Ms. MOLITORIS. I do not think it will be an impediment. I can understand your point. And again, this is an administrative procedures memo. It's not a side agreement in any way. It's very normal for administrative procedures to be discussed and used in major programs. I guess what I'm looking forward to, Congressman, is doing the deals and coming back to you and showing you the kinds of progress we have made in six months.
Mr. SWEENEY. So it's not a side agreement, it was just a work in progress?
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Ms. MOLITORIS. No, it is administrative procedures. I don't know side to what. I mean, it is not secret, it is not side, it is right here. It is not unusual to have administrative procedures agreed to among parties in the Government.
Mr. SWEENEY. Well, let me just say that you are at least here forewarned that we, members of this panel, many of us, believe that this side agreement or administrative procedure is going to create great impediments to the people that we had hoped and intended to serve and help.
I yield back my time.
Mr. PETRI. Mr. Lipinski.
Mr. LIPINSKI. Thank you, Mr. Chairman.
Administrator, it's always a pleasure to see you. It's even a double pleasure when we're not going to talk about train whistles, at least not immediately.
[Laughter.]
Ms. MOLITORIS. Unless you ask me, of course, Mr. Congressman.
Mr. LIPINSKI. I won't go into it today, it's okay.
You mentioned teams coming to request a loan. What is your definition of a team? I'm a little lost on that.
Ms. MOLITORIS. A coalition, perhaps, of parties of interest. For example, going back to the LRFA program, the applicants usually involved a port authority, a city or several cities, and other related parties. Normally, the railroad wasn't a party because the railroads had invested by the land and cover the cost of operations and maintenance.
Mr. LIPINSKI. But in seeking a loan from you, this team would include a railroad?
Ms. MOLITORIS. Yes, that's a requirement.
Mr. LIPINSKI. And the railroad is the only one that has to have the letter of rejection from one loaning institution?
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Ms. MOLITORIS. Yes, if the railroad is the primary applicant.
Mr. LIPINSKI. What if somebody else is the primary applicant?
Ms. MOLITORIS. If it is not a railroad, then they do not have to have a rejection letter.
Mr. LIPINSKI. The railroad doesn't have to have it, or no one has to have it?
Ms. MOLITORIS. If the State or city is the primary applicant, or some other, you know, I don't know who potentially could be the applicant, they don't have that same requirement.
Mr. LIPINSKI. So only when it's a railroad? So if the short line railroad can tie up with almost any other entity that is willing to come forward as part of the team and be the principal, then we don't need any letter of rejection?
Ms. MOLITORIS. That's right.
Mr. LIPINSKI. Did you explain why a railroad needs the letter of rejection and not any other entity in the team?
Ms. MOLITORIS. Well, I think it probably goes back to the whole issue of some concerns about corporate welfare and making sure that anybody who could get a loan in the private sector do it. We know that short line railroads have a very difficult time getting the kinds of terms that they need for these loans, and that's why this program is so useful.
Mr. LIPINSKI. Now that you've said short lines have a tough time getting the loan, aren't you somewhat impeding this process by having them go through that step in the first place? I mean, if you already know they have a tough time getting loans, why don't you just let them come to you without going to a lending institution that you've already said is going to probably turn them down?
Ms. MOLITORIS. We have a lot of interests in any rule, and it is not my decision alone. So you make agreements just like you do in any collaborative process, like you do in legislation.
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Mr. LIPINSKI. And legislation is the art of the possible.
Ms. MOLITORIS. Correct.
Mr. LIPINSKI. All right, that's your answer and I'm stuck with it, so okay. Since we're friends, I shan't really pursue it any further than that. Perhaps somebody else might like to, but I won't.
I also wanted to try to get straight in my mind that if a loan is granted to this team by a private loaning institution, then the Federal Government will back it up to 80 percent, correct?
Ms. MOLITORIS. That's right.
Mr. LIPINSKI. But if the railroad gets their letter of rejection and comes to you with the other members of the team and asks for the loan, then the Government will give them 100 percent loan?
Ms. MOLITORIS. Yes.
Mr. LIPINSKI. Okay. I just wanted to get that straight in my mind.
Ms. MOLITORIS. That's correct. It is not difficult. Obviously, the caveat's that they meet the requirements in the statute.
Mr. LIPINSKI. Oh, certainly. Sure.
I would just like to also say that my good friend, Mr. Clement, over here, talked about a bill that he's involved in with the short line railroads, giving the 4.3 cents that now goes for deficit reduction to the short line railroads for infrastructure improvements, which is a very noble idea. But considering that 80 percent of this 4.3 cents that goes for deficit reduction comes from the major railroads, it would seem to me that a much better plan would be to use that 4.3 cents where it would benefit the infrastructure of all the railroads, such as the legislation I have introduced pertaining to improving grade crossings, so we wouldn't have to hear as many whistles as we're going to have to hear in the near future. And I thank you very much.
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Thank you, Mr. Chairman.
Mr. PETRI. Thank you.
Mr. Bachus, Mr. Spencer Bachus, any questions?
Mr. BACHUS. Administrator, what is your view on the present state of the short line railroads in America as far as their health and their viability?
Ms. MOLITORIS. Congressman Bachus, first of all, I think that the short line railroad industry is a key component of the overall rail industry. It's owning and maintaining about a third of the infrastructure in our country.
But the whole railroad industry is—
Mr. BACHUS. But I want to sort of restrict it. But go ahead, I'm sorry.
Ms. MOLITORIS. The whole railroad industry is struggling a bit right now. It is undervalued in the market. Coal movements have been certainly reduced. There are a number of issues about the whole evolution of the industry itself. So there are certainly a lot of challenges to short lines as a part of that whole context, and facing the 286,000 pound issue, the whole bridge and infrastructure issue is one that must be resolved. That's why this loan program is so critically important, not only to operations, but to the safety foundations of this crucial part of the industry.
And just let me say, this RRIF program, which is a top priority for me in our agency, is not the only way that we are supporting the short line industries. We are working closely with the Short Line and Regional Railroad Association in terms of training, in terms of outreach. We are committed to a healthy, viable, safe short line industry.
Mr. BACHUS. You said the whole industry is struggling, the whole industry is really the amount of profit, return on capital, is very, very low. Which obviously is a condition that will encourage more trucks and less cargo going by rail, would you agree?
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Ms. MOLITORIS. I certainly believe that the 21st century transportation system has to have a vigorous, healthy, profitable railroad industry. The whole focus of our efforts at DOT is to support and work with both, all classes of railroad, Class I, the big railroads, and the short lines.
Mr. BACHUS. As a Government spokesman, I mean, you would agree that we don't have a highly profitable, vigorous industry, wouldn't you?
Ms. MOLITORIS. Well, I know that they certainly need to increase what we see today. Over the past 12 to 18 months, it has been a difficult time for the industry.
Mr. BACHUS. I mean, do you feel passionately about the need for a better rail infrastructure? And the fact that the need is not there, and as a result it's having negative impacts on not only congestion on the highways, but also it's economically a disadvantage to our country?
Ms. MOLITORIS. It's been 22 years of my life, almost 24 hours a day, Mr. Congressman. I am convinced that the health of the rail industry is directly linked to economic viability in towns and communities all over our country. I think that the eight year economic boon that we have had during this Administration has been a good foundation for the railroads. But their evolution, some of the fallouts from some of the mergers, some of the issues that shippers are expressing are things that are being resolved. We see some improvements.
But we want to ensure that they get a full head of steam, if you will, and have a very strong foundation on which to move forward in this new century.
Mr. BACHUS. You realize that will take a tremendous amount of infrastructure spending?
Ms. MOLITORIS. I believe it is investment that is very well placed. I think that the Congress has been very supportive of an opportunity for the DOT to have the largest two years of budget that they've ever had, because the recognition that transportation as a system has to be strong.
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We all know, of course, that the opportunity for a trust fund, as such, is not the same with the railroads. The private railroads have invested billions of dollars in the infrastructure, I think a real credit to the industry. We think this RRIF program is a real step in the right direction. It certainly doesn't respond to all the needs. But it is a good foundation.
Mr. BACHUS. Let me tell you what I was hoping you'd say. And really, you and I are friends. But I'm really disappointed in your response. I tell you what I gave you an opportunity to say. And I thought you were starting. You said that the short lines represented a third of the rail in this country. They reach into many rural counties which have high unemployment. I know the Administration knows that.
The areas which desperately need new industry, areas which are fighting to preserve the industries they have. And the short lines are the only life line that those communities have to those industries. If those railroads fail, those communities have little or no prospect for really economic viability. You're talking about failures of whole communities, failures of whole rural counties.
In my State, there are probably a fourth of the counties that the only rail service into those counties, and they are the counties that are suffering from high unemployment, from lack of economic development, they're off the main lines. They're off the interstate. The only rail service is the short line railroads.
And I can tell you that they, the short line railroads in Alabama and throughout this country are struggling with infrastructure needs. They were struggling before the 286 cars. The 286 cars basically take them, because they don't have the infrastructure to handle them, they basically have reduced them even further down the line of being competitive, because they can't handle those cars. But you're not only talking about the short line railroads, you're talking about industries out there. You're talking about the basic industries which supply this country with almost every basic material that you can name. We're talking about chemical plants, paper plants, and on and on.
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There's an article, I wish I'd brought it, an article in the Mobile Press Register about three weeks ago, about a county in Alabama that got its first industry with over 100 employees in 10 years. And the reason it got that, it is on the Alabama Gulf Coast Railroad, which is a railroad that part of it was abandoned a few years ago. Without that railroad, that county would not have gotten one single new industry in the past 10 years.
And if we don't, if the Government continues to sleep through and be unpassionate about the emergency situation we have here, and really show leadership in solving these problems, you're going to—we're going to—lose about a third of our country as far as being able to compete in getting basic industry. And, Administrator, I would have hoped you would have said, the situation through a number of factors, too long to mention, is desperate for many of our short line railroads. Many of them are losing money, many of them are holding on by their fingernails.
And I mean, I don't know whether you know that and you just don't want to say that, or the Administration won't allow you to say that or whether you just don't know that.
Ms. MOLITORIS. May I respond?
Mr. BACHUS. Yes, and I don't know that you understand how important this segment of a larger industry, I'm glad that you said the whole industry is struggling. And I wish you had said that it had tremendous negative implications for this country, economically and socially, it had tremendous negative impact on our entire transportation system. It's clogging our airports, it's clogging our highways. It's making our skies and our highways unsafe. There's material that ought to be moving by rail.
We have dropped the ball as a country in preserving our rail infrastructure. We've allowed the airlines, we've allowed the highways, and they're good, we've allowed them to come time and time again and we've spent tremendous amount of sums on the infrastructure. But in doing so, we've driven the rails down further and further, to the point in their desperation that I think the short lines and the main lines are fighting over a smaller and smaller bit of the pie.
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I would love to have some innovative, out of the box proposals from the Government to save a third of this country from economic disaster.
Ms. MOLITORIS. Congressman, first of all, I don't see any real difference in what you just said and what I said. What I said clearly is that a 21st century transportation system cannot succeed without a vigorous, profitable rail industry of all sizes. I can tell you that since 1980, I have been pursuing that end. I think anyone who has known me since then, and our friendship began after that, can tell you that nobody appreciates the link to economic development more than I do. The programs that we developed in Ohio affected 40,000 employees and 200 companies.
I believe that what you have seen in the last eight years is an Administration that has been very focused on short lines. You can talk to Frank Turner or his predecessor about the kind of support we have provided, and the change in the regulatory environment. In fact, today they will tell you that they call us for help, instead of being afraid to have FRA come around.
At the very same time, I think you will see that the short line industry has new members, and an increased membership. There are success stories over the past eight years in the railroad industry that are many. What I emphasized is that there has been a difficult period in the last 12 to 18 months for a variety of reasons, which would take a lot of time to go over. I do not think there's ever been an administration more committed to supporting the rail industry than ours.
But I can tell you that until recently, at least in the major railroads area, the interest in having public funds has been limited. But it's recently that the CEOs have been talking to me about their understanding that there are ways that would be a win-win situation.
So I don't think you have any better partner. Ww have got a program here that I think can be very effective in responding to needs. I look forward to the opportunity to go back and get ready to sign agreements.
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Mr. PETRI. Mr. Nadler, do you have any questions?
Mr. NADLER. Yes, thank you.
Ms. Molitoris, first of all, what is the total revenues on an annual or five year or ten year basis, do you know, of the 4.3 cents a gallon tax on railroads fuel?
Ms. MOLITORIS. A hundred and seventy million.
Mr. NADLER. A hundred seventy million per year. So on a ten year basis, $1.7 billion. Which is not a lot in terms of our deficit to surpluses. Would the Administration have any opposition, and if so why, to making this $1.7 billion over a ten year period in a period when we are looking at on-budget surpluses of over $2 trillion, instead of this going to reducing the non-existent deficit or hiking the surplus, to dedicating this $1.7 billion to a railroad, to railroad uses the way gasoline taxes for cars and trucks are dedicated to highways?
Ms. MOLITORIS. The Administration doesn't have a position on the two bills that have some relevance to that.
Mr. NADLER. I'm not asking about the bills. I'm asking about the idea.
Ms. MOLITORIS. There is no administrative position on that at this time.
Mr. NADLER. Well, do you think that would be a good idea? Or can you not say?
Ms. MOLITORIS. As a spokesman for the Administration, I will wait until there is an Administration position.
Mr. NADLER. Okay, let me ask you a different question. Mr. Bachus is quite eloquently talking about the financial problems of the short lines, which I certainly recognize as severe. Unfortunately, the financial position of the Class Is are not terribly better, because of the fact that the STB has a habit of rolling over and approving all mergers, no matter how ill-conceived, at least until very recently.
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For example, the ConRail merger resulted in Norfolk Southern and CSX, their stock values plummeting by 50 percent, because they overpaid for the assets. So we've got a situation where some of our major Class I railroads are in bad shape. Both of those railroads are now struggling to pay for the cap, the infrastructure improvements that they have to make to be able to digest ConRail and to give decent service, as well as the short lines having problems.
I would certainly suggest that the Administration should give serious consideration at least, at the very least, to making this revenue, $170 million a year is tiny. It should be a lot more. We should find some other revenue source to rehabilitate the railroad system in this country.
I would not want to limit it only to short lines. And I would not want to limit it only for grade crossings. In some parts of the country, clearance restrictions, so you can get double stacks and various other things, and of course, upgrading tracks, not only in short lines, but on Class Is, upgrading tracks so you can take 286,000 pounds of cars are equally important.
Ms. MOLITORIS. Mr. Nadler, just in that vein, as you know, in TEA-21, the Administration aggressively pursued a flexibility policy, with the principle being that the needs of communities could include the needs of railroads, and should include the needs of railroads. So in principle, I think there's a connection there.
Mr. NADLER. I appreciate the Administration having aggressively pursued that flexibility during the negotiations that led up to the enactment of the TEA-21 bill. Unfortunately, the Congress was not as farsighted. And the TEA-21 bill did not include that kind of flexibility, so that local and State governments, for instance, can use certain kinds of funds for highways or for mass transit, but not for passenger, certainly not for rail freight, I'm not even sure about passenger rail. And I would hope that the next time we do, when we renew TEA-21, we will change that.
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And in the meantime, I hope the Administration will consider using some of our huge surpluses now to start addressing the very major problems that our railroads have. We're looking at reduction in some areas of assets. We've got railroads in New York that are thinking of tearing up switches and eliminating whole track lines because of the expense of maintaining their switches. And that sort of thing should not be happening anywhere in the country.
Ms. MOLITORIS. Mr. Nadler, I believe that by vigorously pursuing our RRIF Program we can show a track record at the time of the renewal of TEA-21. I have always been a proponent of the fact that LRFA gave the best return on investment of any program in Government. It was such a small Government program, but it was enormously successful. I think our RRIF can have the same track record and be a very eloquent record of why this kind of investment is good for the country.
Mr. NADLER. Well, I appreciate that, and I certainly appreciate your efforts. And I hope, as I said, you'll urge the Administration to expand its adequate but, its adequate efforts, but efforts that hopefully will go further. And maybe you can help persuade the Congress to go further than we have.
Ms. MOLITORIS. I will certainly work with you on that issue, Mr. Nadler. Thank you.
Mr. PETRI. Thank you.
Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you. I commend you and the Ranking Member for having this hearing. There perhaps is no more important transportation need in my home State than the issue of short line railroads, railroads in general and transportation. We are a very transportation dependent State. In fact, Kansas is the number one State in miles of short line trackage.
We have 14 short line railroads operating almost 2,500 miles of short line. and we have serious problems, some ways described by Mr. Bachus, of rural communities and the difficulties they face. I remember distinctly visiting a small town where one of their major employers was a brick manufacturing plant. The greatest concern the brick manufacturing plant had was whether or not they were going to have rail service. And without rail service, I don't know how you get the input in and the end product out.
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So these issues matter a lot. You add on to that grain hauling, and our railroad infrastructure is awfully important to us. As important as it is, it faces serious shortfalls in meeting its infrastructure needs.
And we've had a series of abandonments of short lines in our State. Last year, 154 miles were abandoned. This year, there's 133 other miles ready for abandonment or proposed for abandonment, it's estimated, in the works. We have another 233 miles over the next three years. And it has been this process by which we have rail service, and it slowly, perhaps not slowly enough, begins to disappear.
Our short lines have been surveyed, Department of Transportation, Kansas Department of Transportation indicates that only 37 percent of our short line railroad track infrastructure can safely handle the heavy axle load cars. About 50 percent of our bridges are unable to handle those cars. Fifty-five percent of our short line railroad siting and yard systems can't handle the heavy axle grain cards.
And unfortunately, the estimates of satisfying those needs are very expensive. It is estimated in Kansas alone it would cost us $173 million, I'm sorry, billion, in bridge costs, another $32 million in yard and siting costs, and another $11 million in yard and siting costs. So a tremendous amount of money.
And the end result of that need is that much of that need cannot be afforded to be met. And we will have additional miles abandoned.
And what is it that I as a member of Congress and you on behalf of the Administration should be doing to make certain that that scenario does not occur, that the abandonments are reduced, not increased, that the financial needs of the railroad in meeting their infrastructure can be satisfied? What should we as policy makers do today, tomorrow and the next day to protect the users of rail service across America, and particularly in rural areas of our country?
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Ms. MOLITORIS. Congressman Moran, part of our job is to act as a facilitator and an advocate for the constituents you are describing. I don't know the particular issues around the 154 miles and the 133 miles. But I do know that when I was directly responsible at a State level, we coordinated directly with DOT and FRA to explore every option that was open to us.
I would encourage you perhaps as a point person for your constituents to invite us all together, and let's talk it through. These issues are so overwhelming at a local level that may be there are some things we can bring to the table they don't know about. Unfortunately, some people still see the FRA as only a regulatory agency. We certainly pursue that responsibility and safety, the growth of safety with vigor. But at the very same time, we have I think an ability to advise and sort of be a personal consultant to crisis areas and come up with ideas and ways of dealing with them.
The private railroads are facing a number of issues and crises. I think there is also an opportunity, at the Government level, to coordinate with the Department of Agriculture, and other Government agencies, so that it's a confluence of all the interested parties. We have found that those kinds of partnerships can yield some innovative answers. I can't respond directly, because I don't know the particulars of the 133 miles that you say are in question at this time.
But I would look forward to the opportunity to work with you and lay out a strategy and see what we can do to help you there.
One more thing. I do want to say that I think the Congress can be a very wonderful partner in being an advocate for a transportation system that includes a very healthy and vigorous rail system. Because as you well know, so many other parts of our transportation system are at maximum handling capability . There's going to be tremendous demand growth in the next 20 years. We've got to be ready for it.
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We have to protect the environment, and railroads are very environmentally friendly. There are some congestion issues in large areas that railroads can help with. We can have partnerships with trucks that are very profitable for everybody.
Mr. MORAN. Administrator, thank you. I would welcome the opportunity of working with you to try to solve our problems.
Mr. Chairman, I'd ask your consent to place in the record a letter from the Kansas Department of Transportation Secretary dated July 20th.
Mr. PETRI. Without objection, it will be made a part of the record.
[The information received follows:]
[insert here]
Mr. PETRI. Mr. Blumenauer.
Mr. BLUMENAUER. Mr. Chairman, I would just like to get forward to hearing from Mr. Hamberger and Mr. Turner, and I'll just yield my time.
Mr. PETRI. Okay. Mr. Berry.
Mr. BERRY. Mr. Chairman, I would associate myself with Mr. Blumenauer's comments and also the need for a healthy, profitable and vigorous rail industry in this country. I think we simply cannot continue our economic progress and not improve the rail system in this country.
Mr. PETRI. Thank you.
I did have one area I thought might be worth going into. First of all, I'd like to thank you for providing that what was called a side agreement within the Administration to the Committee and the public. And just to comment that it at least raises some questions so far as compliance with the spirit of the Administrative Procedure Act, because it lays out procedures that people don't have a chance to comment on and might, but for the fact that you voluntarily released it, not even be aware of as they spend their hard-earned money to try to take advantage of some Government program. And that is not in keeping with the idea of open government and self government. And it raises those questions, just to say the least.
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The question I had, though, is, if that is a governing document so far as you're concerned, even if it's not enforceable legally and has no legal authority outside of the different sanctions that one Government department or Administration can impose on its departments, how is it really going to work? That is to say, are you going to announce what a cohort is in advance so people know what 10 percent of it is? Or are you going to have them apply for loans and then not get the money until the year is out, so you know how many different people?
I mean, it says you can't give more than 10 percent of a total cohort, whatever that is, in any one loan. Now, how is someone supposed to know how much to apply for and whether it's going to be granted? Just could you explain what the procedure is that you contemplate and how the public is supposed to operate under it?
Ms. MOLITORIS. Mr. Chairman, I think that it is really our issue to deal with. I don't think the public has to worry about that. What they need to do is step forward and apply. If you read the procedures, it says a cohort, which is a group of borrowers, will be considered closed after one year, or longer if necessary, so that no one loan will equal more than 10 percent of the dollar amount.
So it simply means that we have to manage it in a way, I mean, it says longer if necessary. Obviously that is a non-prescribed period of time. So I would say to you that we will be appropriate in our management of this issue and it will not impede applications.
Mr. PETRI. It may not impede applications, but it sure is going to impede making loans.
Ms. MOLITORIS. It will not impede making loans, Mr. Chairman.
Mr. PETRI. Well, that's a welcome assurance, but I would think, if I were applying for a loan, I'd like to know when the cohort was defined, so I could make my business plans based on the limit of 10 percent of that particular group within some undefined period of time. And I would just advise you, if you are going to do this, to try to make it as transparent a process as possible and notify people at the outset of any particular period how it's going to work, so that they can react in an intelligent way, rather than it looking very arbitrary and capricious in practice.
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Ms. MOLITORIS. Mr. Chairman—
Mr. PETRI. In other words, the purpose of the Administration Procedure Act is to provide some certainty and transparency. And here you're going to be, no time period, maybe a year, maybe longer, cohort, no one member will know who the other members are or whether in that cohort or not until that time is defined. And you're going to need to set up some sort of a practical rule of thumb or something, so people can make this thing work, if this is the way you intend to do it. Unless it's designed just to look like something's happening without really having a real program.
Ms. MOLITORIS. Mr. Chairman, I mean, first of all, you know me better than that. Secondly, I think the bottom line for any person desiring a loan is to get that loan. I think that with the issue of cohorts, there can be any number of cohorts. That is an administrative issue that we have to deal with. What the person wanting a loan desires is to get the loan. That is, they make the application, we have a pre-application meeting, and we make sure they have all the information they need. We assist them throughout the entire process to have a solid application. We make sure it's user friendly, and we award the worthy projects with loans.
They don't have to deal with the cohort issues. We do.
Mr. PETRI. All right, well, that's one issue that's going to affect us. Another guideline is that no loan can exceed 6 percent of the unused authorization amount. And of course, that 6 percent number will go down as loans are granted.
Ms. MOLITORIS. That's correct.
Mr. PETRI. So people can make an application with 6 percent being one limit, and by the time you get around to making the loan, it would be a different figure. So no one, I guess people would be advised certainly not to apply for the full 6 percent of the unused authorization amount, unless they knew what else was in the pipeline and how fast you were going to act and where they stood in the cohort or the group of loans.
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But what's the authorization? What's the reason for this and how is that again going to work in practice? Do you have some rule of thumb, make it 3 percent in practice so that people would know that if they applied for a certain amount, they would have some chance of getting it? Or do you have to have a flexible loan permit to come down and just apply for 6 percent of whatever it happens to be at the time they reach the front of the queue?
Ms. MOLITORIS. Mr. Chairman, I think what our staff will do in the preapplication meeting is to identify what the need of the applicant is, and figure out the best way, and the quickest way to do it. What I would like the opportunity to do is get the program moving and report to the Committee on a regular basis upon how we are doing, about any impediments that seem to be coming up.
I think obviously anybody looking at all of these can come up with worst case scenarios. We, on the other hand, from our experience, believe we can make it work well. We would like the opportunity to do that. We think we can respond to small needs and bigger needs. And I believe we have techniques to do it. If we don't, I will be the first to be at your door and to ask for help.
Mr. PETRI. Well, we hope we're surprised.
Mr. COBLE. Mr. Chairman, will the Chairman yield?
Mr. PETRI. Of course.
Mr. COBLE. Ms. Molitoris, I just came in late, I had to leave for another meeting. Did I understand you to say to the Chairman that the public doesn't need to be concerned about this? Did I pick up correctly on that?
Ms. MOLITORIS. Well, the Chairman was asking me about the issue of cohorts, the issue of the percentages of the total and so forth. What I responded to the Chairman is that the issue of the organizational structure and so forth is really the Administration's, the administration of the program's responsibility. What the people who need money for a worthy project need to do is come, present their case, and we will help them get that loan. It is that simple.
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Mr. COBLE. I think when you said the public doesn't need to be concerned about this, I think the public would be very much alarmed to be told that they don't need to be concerned. Or maybe I misunderstood what you said.
Ms. MOLITORIS. I meant about worrying about the percentages and the cohorts and all of those financial contextual issues. I believe what the public needs are focused on a loan for a purpose and getting that loan. We want to make it as simple and as transparent and as quick for them to do that as possible. We think we can do that. We'd like to have the opportunity to develop a record of success in this area.
Mr. COBLE. Well, all of the limits being discussed are in DOT, OMB memos, not in published notice and commerce rules.
Ms. MOLITORIS. That's right. That's correct. They're administrative procedures that have been agreed upon between the Assistant Secretary of Budget and Programs and OMB.
Mr. COBLE. Mr. Chairman, maybe it's my thickheadedness, but I'm having difficulty warmly embracing all this. But I'll try to do better, and I thank you for yielding.
Mr. PETRI. It's in the spirit of open government, openly arrived at, I think.
Well, we thank you, and appreciate your shedding some light on this. And I admire your determination to making this program work, and I hope that you're successful in that.
Mr. BACHUS. Mr. Chairman, could I ask—
Mr. PETRI. Of course.
Mr. BACHUS. Administrator, repeal of the 4.3 tax, 4.3 cent tax, you have testified here today that both the main line and the short line, the entire rail industry is in need of additional infrastructure. You testified to some of the problems. They are having trouble in return on capital and getting financing. Are you prepared to endorse the repeal of the 4.3 cent tax?
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Ms. MOLITORIS. Mr. Bachus, the Administration does not endorse that repeal.
Mr. BACHUS. Are you opposed to the repeal?
Ms. MOLITORIS. To date, they have opposed the repeal.
Mr. BACHUS. Have you communicated with them the plight of the railroad industry in the country?
Ms. MOLITORIS. Secretary Slater actually is a very vigorous advocate for the importance of the railroad industry. And—
Mr. BACHUS. Does he realize the need for infrastructure spending?
Ms. MOLITORIS. I believe he realizes it very clearly, and actually in detail. He is very informed, not just about the broad issues, but about quite a bit of the detail, sir.
Mr. BACHUS. He realizes the need for spending by the railroads?
Ms. MOLITORIS. In fact, of course, he was here talking to many of the members during TEA-21 about the importance of flexibility and giving States the opportunity to make railroad investments.
Mr. BACHUS. Yes, I'm not just talking about States. I'm talking about the national.
Ms. MOLITORIS. Well, the States on a national level. In other words, being able to invest in railroads as a priority.
Mr. BACHUS. Does he support the 4.3 cent tax on railroads?
Ms. MOLITORIS. The Administration has not supported the repeal of 4.3.
Mr. BACHUS. I would hope that the Secretary and yourself would be strong advocates for the rail industry. I know you've got to know about the needs. You've got to know that this tax is not fair. I mean, I can't emotionally, you've got to feel that it needs to be repealed. I would like to see the Administration, the Secretary of Transportation and yourself take an active role in advocating its repeal. The Ways and Means Committee has attached a repeal to the Railroad Retirement bill today, I believe.
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Ms. MOLITORIS. I certainly will—
Mr. BACHUS. I mean, you're either opposed to it or you're in favor of it. You either advocate its repeal—
Ms. MOLITORIS. As I mentioned, to date, the Administration has opposed the repeal. But I think certainly we'll report your comments to the Secretary himself in the report on this hearing. I just want to emphasize how vigorous the Secretary has been in supporting rail investment issues and rail issues overall.
Mr. PETRI. I reclaim my time. We have a number of other witnesses, Spencer.
Mr. BACHUS. Okay. The only other thing I would say is that when we, Chairman Petri and myself, Mr. Clement, tried to include a very small pilot program, grant program in the last two years, it's not been included by the Administration. It's not been included, we've had no support in advocating it here on the Hill. The Administration's been AWOL on the whole issue.
And the last thing, I'll sum with this. I hope, Administrator, that you'll look again at these needs, you'll consider what you've heard today and you'll come back with a grant component in this. Anything short of that is a failure, I think, to act on what I consider a national emergency.
Ms. MOLITORIS. Thank you, Congressman.
Mr. BACHUS. In a time, as you said, surplus.
Mr. PETRI. Thank you, Ms. Molitoris.
Ms. MOLITORIS. Thank you so much, Mr. Chairman and members of the Committee.
Mr. PETRI. The next panel is Mr. Ed Hamberger, another familiar face to the members of this Committee, who is President and Chief Executive of the Association of American Railroads. Mr. Hamberger.
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TESTIMONY OF EDWARD R. HAMBERGER, PRESIDENT AND CEO, ASSOCIATION OF AMERICAN RAILROADS
Mr. HAMBERGER. Good morning, Mr. Chairman and members of the Subcommittee. Thank you for the opportunity to appear here this morning.
And let me just say, it's an honor to appear following Jolene Molitoris, who's been an outstanding FRA Administrator in many ways.
Before I get into the focus of this morning's hearing, I'd like to thank this Subcommittee and the full Committee for its leadership in passing out last week H.R. 4844, the Railroad Retirement Improvement Act, which we hope may yet make it to the House Floor even this week.
Mr. Chairman, the most inequitable tax facing the rail industry today is the deficit reduction fuel tax. This tax, whose level has varied over time, now stands at 4.3 cents per gallon. Since its inception in 1990, freight railroads have paid nearly $1.7 billion in deficit reduction fuel taxes, including $170 million in 1999 alone.
The deficit reduction fuel tax does place our industry at a significant economic disadvantage compared to our main competitors, the trucking industry, all of whose taxes, since 1997, have gone into the Highway Trust Fund, which finances that industry's infrastructure. If Congress had taken similar action in 1997 to repeal the deficit reduction tax paid by railroads, the industry would have had an additional $445 million to spend on rail infrastructure leading service-related enhancements.
Unfortunately, the sting of the 4.3 cent tax is sharply magnified by today's rising fuel prices. Railroad diesel fuel prices averaged 84.1 cents per gallon during the first six months of 2000, up from an average of 55.47 cents for the entire year 1999. Stated differently, diesel fuel constituted 11.3 percent of Class I railroad operating expenses during the first half of 2000, compared to 7.4 percent in 1999.
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Turning to H.R. 4746, major railroads certainly recognize the substantial infrastructure needs of Class II and Class III railroads. In fact, the Railroad Industry Agreement entered into between AAR and the American Short Line and Regional Rail Association in August of 1998 specifically references the need to share revenue increases resulting from heavy axle load increases between the line haul carrier and the short line.
And I'd like to just take a second to emphasize that the relationship between the short lines and the Class Is has been remarkably consistent and remarkably good, both in the regulatory arena and the public policy arena, as well as out in the real world, where the railroads work closely together on a day to day basis. And I hope that this issue, the fact that we disagree over how to spend the 4.3 cents, does not cloud the fact that we are indeed one network and one industry.
However, it is important to note that Class I railroads also face significant infrastructure challenges. In order to satisfy the Nation's demand for safe and efficient transportation, large railroads must continue to find the capital funds needed to make critical infrastructure improvements.
According to the United States Census Bureau figures, no major industry dedicates more of its revenue to capital reinvestment than the railroad industry. In fact, in terms that this Committee often uses, if the money invested by the Class I railroads in 1999 for infrastructure were to be stated in terms of a tax per gallon of fuel used, it would be $2.06. In other words $2.06 per gallon is what the industry spent on infrastructure in 1999. During the 1990s, the Class I railroads have we've averaged about 16 percent of all revenues being reinvested back in the industry, compared with the manufacturing average in the country of about 3.5 percent.
In summary, AAR opposes H.R. 4746 for three reasons. First, we believe the legislation could undermine the industry efforts to repeal the 4.3 cent tax, the inequity of which Congress clearly recognizes.
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Second, the legislation would create a new Federal program funded by Class I fuel tax revenues, even though the tax's original purpose of reducing the Federal deficit has been achieved. Notwithstanding the laudable intentions of the sponsors of H.R. 4746, we do not believe Congress should use these tax revenues to support these or other endeavors unrelated to the tax's original purposes.
Third, major freight railroads have long opposed legislation calling for the establishment of a railroad trust fund. The railroad industry builds, maintains and pays taxes upon its own private transportation network. Class I railroads do not support plans calling for decisions about the necessity, priority and size of railroad capital investments to be made in Washington. As an alternative, we do urge members of the Subcommittee to support repeal of the unfair deficit reduction fuel tax, and at the same time, I would like to hold myself out to continue discussions that we've had with the American Short Line and Regional Rail Association to develop different funding solutions, different funding mechanisms that we can all support.
Thank you for the opportunity to appear this morning.
Mr. PETRI. Thank you. Mr. Rahall.
Mr. RAHALL. I have no questions, Mr. Chairman, I just want to get Ed out of here as quickly as possible.
[Laughter.]
Mr. PETRI. All right. Mr. Bachus.
Mr. BACHUS. I appreciate your testimony. I would first of all agree with you that the first step in acting on the needs of the railroad industry is a repeal of the 4.3 cent tax. The legislation that Mr. Clement and I had introduced presupposes, I hope incorrectly, that that tax stays around. Let's assume for a minute that it's repealed. Let's all be positive thinkers and think for the best. And the repeal of that tax would be, I think, what anyone on this Committee that appreciates the needs of the railroads, both large and small, would advocate, and advocate strongly. And I hope the Administration will join in that.
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Assuming, assuming that that is repealed, you've heard testimony of Administrator Molitoris, you've heard our comments here today. Do you realize the need of the short lines that have been created by this 28 program, and just years of underfunding and lack of infrastructure funding?
Mr. HAMBERGER. The needs are immense, absolutely. And I would suggest to you that if indeed the 4.3 cents is repealed, that as Congress addresses economic development issues perhaps it would be appropriate to provide for funding from general revenues. The thought had occurred to me earlier in the year, as the agricultural emergency supplemental legislation was going through the Congress, that perhaps that would be an area where, given the emergency need to keep many of the communities vibrant by providing rail service, that as an economic development issue, this would rise to the level of being an issue for Congress to take a look at in that emergency supplemental bill.
I hate to say it, but even though I had that thought, I did not come forward to Congress to propose it. But it seems to me that in the context of public policy for those economic development issues, that general revenues, and just picking up on Mr. Nadler's point, if $2 trillion is the on-budget surplus over the next 10 years, that this certainly would rise to the level, in my opinion, of something that Congress should look at out of the general revenue fund.
Mr. BACHUS. We obviously have a funding source for the highways, and we take 80 percent Federal money and we have a 20 percent match. I see no reason why it shouldn't be our national policy that with these short line needs, because of the critical importance to the communities and to the economies of the States, that we look at doing that. And within that 20 percent match, I hope the main line railroads will play a part on that, realizing that with the FRA and the Association of Railroads getting together and getting approval to 286, the short lines weren't ready for that.
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Mr. HAMBERGER. Your concept of an 80-20 program strikes me as being very sound. I cannot commit to you today whether or not the Class Is would agree to a percentage of that 20 percent. But let me just say by way of example that the Section 130 program also calls for a local match, and in many instances the railroads do come forward on a voluntary basis to help provide the local match.
I don't thonk that Class I's would like a situation where it would be a mandated match. But certainly there would be instances where it would be in the economic self-interest of the railroads to participate.
Mr. BACHUS. Thank you.
Mr. PETRI. Mr. Clement, any questions?
Mr. CLEMENT. Thank you, Mr. Chairman.
Good to have you here, Mr. Hamberger.
Mr. HAMBERGER. Glad to be here, Mr. Clement, thank you.
Mr. CLEMENT. If you were assured that the 4.3 cents per gallon fuel tax would never be repealed, would you still prefer to see the money go into the general fund than back into the railroad infrastructure?
Mr. HAMBERGER. Well, of course, I don't accept the basic underlying premise. I think that given the support of 36 of the 39 members of the Ways and Means Committee and the fact that it was in the tax bill that the President vetoed, I think we do have an opportunity to still get the tax repealed.
And so I guess I'd like not to speculate on what might happen if it would never be repealed. The reasons for repeal are there. The tax was imposed for a specific public policy purpose, to help reduce the deficit. That public policy has been achieved, and so the tax should now be repealed.
Mr. CLEMENT. Well, you opened Pandora's box when you said that. Because the Ways and Means Committee met at 10:00 o'clock this morning and repealed the 4.3 cents.
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Mr. HAMBERGER. Yes, sir, it did.
Mr. CLEMENT. And tied it to the Railroad Retirement Bill, which means also it tied it to the Social Security Bill. Now, where will the Class I railroads going to be now?
Mr. HAMBERGER. We will be for taking the 4.3 cent amendment off of that bill. We have an agreement with Labor that we negotiated over the past two and a half years, a finely balanced agreement. And we had asked that that amendment not be offered in markup as such we're now in a position where we're going to have to see if we can ask that it either be moved separately or added to a different piece of legislation, because H.R. 4844 needs to move on its own.
Mr. CLEMENT. You say that the railroad industry can handle its own finances. But Government has been intimately involved in industry almost from the outset. The land grants, the relief from passenger carrying responsibilities with the creation of Amtrak, the ConRail bailout, hardly a history of rugged independence.
Why is this really any different? Is the industry concerned that this is the start of larger, more comprehensive Government rail program?
Mr. HAMBERGER. Well, I think we need to distinguish between Class I needs and then Class II and Class III needs. I think in this particular instance, that I would be able to say that we could support legislation that would establish a funding mechanism out of general revenues to help non-Class Is, to help Class II and Class III railroads meet their infrastructure needs.
With respect to establishing a trust fund, that is really where we have a philosophical difference of opinion. And as I referenced earlier today, this bill would spend the 4.3 cents for a very laudable goal. Mr. Lipinski's bill would spend it for another very laudable goal, and pretty soon we would be at 8.6 cents. And so we would just prefer not to have the trust fund established. It is not the way the Class Is view the best way to fund their own infrastructure.
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Mr. CLEMENT. But have you ever really endorsed anything when it comes to helping the short line railroads? I know you, conceptually you say, well, I might do this, and I might do that. But the fact is, have you done it?
Mr. HAMBERGER. Well, I'm unaware of anything moving right now to do so. But if Congress were to be taking a look at some sort of a general revenue funding mechanism, I'm sure we would support it. Certainly, as I say, on a day to day basis, we work very closely with the Class IIs and Class IIIs in providing support and assistance on EPA regulations, FCC regulations, and safety regulations. And so there is a lot going on where we do work closely with our Class II and Class III partners.
Mr. CLEMENT. Now, the large Class I carriers have abandoned many small shippers and left new startup short lines with dilapidated infrastructure. Don't you have an obligation to help these railroads and shippers? And isn't it in your interest to do so as they provide much of your traffic?
Mr. HAMBERGER. Well, of course, in looking at the way that many of the short lines were formed, you are correct in stating they were spun off from the Class I railroads. Obviously, an economic decision was made at the time that the investment needed-the capital that would be needed to maintain that line-was not warranted given the traffic base there. And others came in and decided that perhaps they could make it work better. Class IIIs, of course, have a much different cost structure than the Class Is have and are able to give perhaps more personal service.
And so in many cases they've made it work, and in those areas where it makes sense, many Class I railroads are working in cooperation with the Class IIIs. And in some cases I'm told they have actually provided investment capital for the Class III railroads.
Mr. CLEMENT. And also my last question, I'll say it quickly, and Congressman Bachus, you're familiar with our legislation that we've introduced, H.R. 4746. Would you, the Class I railroads, work with us on a compromise to move some legislation?
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Mr. HAMBERGER. Absolutely. Again, the principle being that it would be a general revenue bill that was focused on helping the Class IIIs and Class IIs, yes, sir.
Mr. CLEMENT. Thank you.
Mr. PETRI. Mr. Oberstar, any questions?
Mr. Lipinski?
Thank you very much.
Mr. HAMBERGER. Thank you, Mr. Chairman.
Mr. PETRI. The final panel consists of Mr. Frank Turner, who's President of the American Short Line and Regional Railroad Association; Professor Allan Zarembski, President of Zeta-Tech Association; Mr. Ronald Crowd, President of the Batten Kill Railroad Company; Malcom Sanders, Trustee, Northeast Rail; Michael Ogborn, Managing Director of OmniTRAX, Inc.
Gentlemen, thank you for your patience, and we look forward to your testimony, beginning with Mr. Turner.
TESTIMONY OF FRANK K. TURNER, PRESIDENT, AMERICAN SHORT LINE AND REGIONAL RAILROAD ASSOCIATION; DR. ALLAN M. ZAREMBSKI, P.E., PRESIDENT, ZETA-TECH ASSOCIATES, INC.; RONALD E. CROWD, PRESIDENT, BATTEN KILL RAILROAD COMPANY, INC.; MALCOM SANDERS, TRUSTEE, NORTHEAST RAIL; AND MICHAEL J. OGBORN, MANAGING DIRECTOR, OMNITRAX, INC.
Mr. TURNER. Thank you, Chairman Petri and members of the Subcommittee.
I'm not as familiar a face as Mr. Hamberger has been, but I'm Frank Turner, President of the American Short Line and Regional Railroad Association. And I certainly appreciate this opportunity to testify about the infrastructure needs of small railroads on behalf of the American Short Line and Regional Railroad Association that represents more than 400 short line and regional railroads in this country.
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As has been mentioned, we are facing a largely invisible transportation crisis that centers on our members. A recent survey by the American Association of State Highway and Transportation Officials estimates that short line railroads have unmet capital spendings of some $10 billion over 10 years. You heard FRA Administrator Molitoris mention several million dollars.
Our Nation's short lines represent almost 30 percent of all the Nation's route miles and haul 13 percent of the rail tonnage. But we receive less than 10 percent of rail freight revenue. In other words, short lines have to do more with less when it comes to maintaining and improving our infrastructure.
The crisis stems from the fact that small railroad track structures are increasingly unable to handle new generations of the heavy axle load freight cars, as we've mentioned earlier today, the 286,000 pound capacity that have become the standard for our industry. These larger capacity cars allow heavier loads to be carried, compared to the previous standard car size of 263,000 pound capacity. However, they cause significantly more stress and wear on out tracks and bridges.
Consequently, light density lines need major upgrading. Failure to address this problem will disconnect regions of America, primarily rural regions, from the main line rail transportation system.
Well, we asked ourselves, how should Congress and how should we confront the problem. On June 26th, Congressmen Spencer Bachus and Bob Clement introduced H.R. 4746, the Emergency Rural and Small Railroad Preservation Act. The bill establishes a program to rehabilitate small railroad tracks and bridges in order to receive the new and heavier freight cars.
H.R. 4746 authorizes grants to State or small railroads to accommodate 286,000 pound rail cars at speeds of at least 25 miles per hour. Funds may be in the form of direct project grants or used to supplement and leverage loans under the $3.5 billion Federal Railroad Rehabilitation Improvement Funding Financing loan program, of which you have heard about today. H.R. 4746 establishes a rail trust fund.
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Amounts equivalent to the 4.3 gas tax paid by the railroad industry are reserved for the fund, but must be appropriated through the regular appropriations process. The program is funded through annual appropriations that are based on the level of diesel fuel taxes currently paid. Last year it was $170 million.
Utilization of this tax, as you have heard today, is controversial. Class Is favor repeal, and do not support 4746, as you just heard, because of the concerns that if this bill is enacted, it could take the momentum away from repeal efforts. The Short Line Association does support the repeal. In fact, in 1998 and 1999, we lobbied hard for this tax to be reduced, because it is inequitable.
However, given the opposition to repeal in Congress and in Committee, we are not optimistic that it's going to be repealed. Therefore, we're asking that these funds be put in our infrastructure until the tax is repealed.
The 286 problem was created largely by the large railroads. The generation of new heavier freight cars was designed in a cooperative research and development program between the Association of American Railroads and the FRA. Since 1997, it is my understanding, that both the FRA and AAR have spent well over $50 million to research the impact that these cars would have on our industry. And this time, no research was done to the effect of how these heavier cars on light density lines.
The economics of heavier cars make good sense. And this is a good thing for our industry. The primary thing, shippers like them. It means carrying larger capacity, which results in fewer cars, fewer crews and better locomotive utilization and crew savings, which primarily benefit the Class Is. However, very few if any of these savings occur to the short lines since then tend to move cars and carloads, not trainload lots. The short lines get the worst of both worlds, adding cost without the benefits.
Today almost all new cars being built are being built at 286 capacity. The only choice for small railroads and our shippers is to accept these cars or go out of the business. Short lines, you've heard it said earlier today, must be part of the national railroad network, and we must be able to handle these heavier cars. It's just not the small railroads that stand to benefit from the enactment of this bill. The large Class Is will also benefit. We originate and terminate a significant portion of carloads for the Class Is.
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State and local communities will also benefit from a healthy national rail network. Maintaining local rail service is good, and is necessary, as Congressman Bachus pointed out, for economic development.
Mr. PETRI. Thank you for your statement. We'll go into more of it in questions. Your full statement will be made a part of the record.
Mr. TURNER. I would just like to say that a rail infrastructure is a terrible thing to lose and to waste.
Mr. PETRI. Thank you.
Professor Zarembski.
Dr. ZAREMBSKI. Thank you, Mr. Chairman and members of the Committee.
I am pleased to have the opportunity to speak to you today. My name is Dr. Allan M. Zarembski, and I am President of Zeta-Tech Associates, Inc., a technical consulting and applied technology company specializing in the railway industry. I have over 25 years of professional experience, with expertise in the areas of railroad track performance and failure and specific expertise in the effect of increased loading on the track structure.
I have been an industry leader in the analysis of the effects of heavy axle loads on the track. And my firm has performed numerous studies in this area for major railways around the world.
The specific focus of my testimony is to give this Committee a summation of the short line industry needs assessment that Zeta-Tech performed. The study determined that the industry's approximately 550 short lien and regional railroads needs $6.86 billion to upgrade their physical plant to allow for safe and effective long-term operation under the new generation of heavy axle load equipment.
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With about 50,000 of the Nation's 170,000 railway miles, but with less than 10 percent of the industry's gross revenues, the short line industry has significantly less revenue per mile to maintain their track. This results in a track structure that is often well below the standards of the main lines of the major Class I freight railroads. Nevertheless, to provide service to thousands of local communities, their physical plant must be capable of handling the heaviest freight cars used in general freight service.
The new generation of 286,000 pound cars transports almost 10 percent more commodity than conventional 263,000 pounds cars. The result is that the same amount of freight can be carried in fewer cars and fewer trains. This results in savings in capital, fuel, crew and locomotive costs. However, one area in which costs do not decline is the maintenance and rehabilitation of track and bridges. These new freight cars impose heavier axle loads on the track, which means more frequent maintenance and shorter track component life. The same is true for bridges.
These increases in car weights have been attractive to Class I railroads, because the net savings in ownership and operating costs significantly offsets the increase in track costs. But while the economics of increased car weights are favorable for the bigger Class I railroads, the short lines incur the same higher maintenance and capital burden, but do not achieve the same magnitude of savings, since the length of their haul on their property is so short.
Foregoing this new heavier car is not a commercial option. Short lines fear refusal to handle 286,000 pound cars will cause them and their shippers business and future industrial developments. While the current condition of track instructors and short lines is generally adequate for traditional 263,000 pound cars, it is often inadequate and potentially unsafe for the new generation 286,000 pound cars. This increase in weight translates in the damage to the track structure that is as much as 20 percent higher than that caused by the standard 263,000 pound car. This has led to concerns about the ability of the short line infrastructure to effectively handle this new traffic.
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For this reason, the American Short Line and Regional Railroad Association asked Zeta-Tech to analyze the investment needed to safely handle heavier cars on a long term basis. The results was this engineering based study addressing track and bridge requirements to accommodate 286,000 pound cars. This study encompassed detailed collection of information from almost 10 percent of the short line population, together with an engineering analysis, to determine the amount of component replacement required to bring the industry to a desired standard of safe, long term operation.
Based on this detailed study, extensive commercial use of heavy axle load freight cars will require the following investment for short lines and regional railroads. Twenty-two percent of existing rail must be replaced. Forty-three percent of track miles will require some ties. Twenty-three percent of track miles will require some ballast and surfacing. Thirty-eight percent of switches and turnouts will require replacement or upgrades. And 22 percent of bridges will require replacement, with another 20 percent requiring some level of upgrades.
The total cost for these upgrades are summarized in the chart that you see on my left. And they have come to a total of $6.86 billion for just under 50,000 miles of track, at an average cost of $137,000 per mile. These results compare favorably with independent studies by the Kansas and Iowa Departments of Transportation.
To summarize, the results of the Zeta-Tech study showed that short line and regional railroads need approximately $6.86 billion to upgrade their physical plant to allow for safe, efficient and long term operation under the new generation of railroad equipment. These expenditures appear large, but it should be remembered that the rehabilitation of ConRail, with its 33,000 miles of track, cost about $5 billion in current dollars.
Thus, a capital requirement of $6.86 billion for nearly 50,000 miles of track appears to be consistent. The investment will help purchase and install about 10,000 miles of rail and about 20 million ties. The result, in my opinion, will be a railroad network safely able to accommodate heavier axle loads.
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Thank you.
Mr. PETRI. Thank you, sir.
Mr. Crowd.
Mr. CROWD. Gentlemen, thank you. I thank you for the opportunity to speak to the Committee today.
The Batten Kill Railroad Company is a 35 mile long short line, it's a Class III. We purchased and assumed the operation of our miles of track, which is former Delaware and Hudson, in rural Washington County in 1982. Our railroad provides a cost effective freight transportation to the dairy and paper manufacturing industries.
Agway, Inc. is our largest shipper with feed and fertilizer commodities. Caravel Fertilizer is our second largest shipper. And our remaining traffic consists of logs, wood pulp, hay and prepared animal feeds. We move about 500 carloads a year, as of 1999.
The ever-increasing use of 286,000 pound freight cars on the Class I carriers has created a competitive disadvantage to our shippers and the communities we serve. This disadvantage will ultimately result in a loss of business for our railroad, increase heavy trucks on our local highways and increased costs to our dairy farmers.
Our railroad was built in the 1800s. Most of our track consists of 80 pound and 90 pound rail, which was manufactured in the 1890s. This rail was designed for cars that weighed 80,000 pounds. Currently 263,000 pound cars that we handle, our modest 500 carloads of freight traffic results in dozens of cracked joints, broken rails, and connections every year. Of necessity, the rail joint maintenance and repair is a high priority maintenance burden for us.
Dramatically, it may be unachievable in the future with the 23,000-pound increase in weight. The increased maintenance cost associated with the current 263,000-pound cars has resulted in deferred maintenance, resultant slow operating speeds for our operation, we can only manage 10 miles an hour. Our crew takes an average of 12 hours to service the railroad, serve our customers. The result of this is increased overtime and crew fatigue.
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Our 35 miles of track, which is now owned by the Northeastern New York Railroad Preservation Group, contains 105,000 ties. Normal wear and tear and decay requires that we replace 2,600 ties per year, just to maintain current tie condition. The hardship for us is we have limited revenue to accomplish this.
Railroads, unlike transportation competitors, the trucks, use public highways and don't rely wholly on the Government agencies to repair and maintain the rights of way and bridges that we use. J.B. Hunt nor any other truck operator does not have to maintain a road repair crew, inspect and repair bridges. No trucking company has to plow roads or maintain traffic signals. These functions are an expected part of operating a railroad.
Fuel taxes paid by our truck competition is allocated to the repair and upgrading of the highways. Railroads, on the other hand, must pay the 4.3 cent fuel tax, which all goes to the general fund.
Short line railroads, like ours, comprise 29 percent of our Nation's railroads infrastructure. Shippers, jobs, and small communities throughout our Nation will not maintain competitiveness or visibility without direct local rail service. Rail service is the most efficient way to move bulk commodities on land. American railroads, on the average, move a ton of freight 200 miles for each gallon of fuel used.
As fuel costs increase, environmental problems increase and highways become more stressed. The world is embracing rail transportation as a mode of transportation of choice.
The passage of H.R. 4746 is crucial to the long term survival of our service and the American short line industry. Thank you.
Mr. PETRI. Thank you, sir.
Mr. Sanders.
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Mr. SANDERS. Thank you, gentlemen.
We appreciate the opportunity to come here and to hopefully put some dimensions onto the problem for upstate New York, particularly Washington County.
As indicated in my testimony, Northeast Rail is a not for profit corporation. We were chartered in 1993 by the Board of Regents of the Education Department of the State of New York. Therefore, we're a slightly different animal than most of the other short lines.
We have, as Ron indicated, about 35 miles of track in upstate New York, in Washington County, John Sweeney's district. And we've been in operation since 1994.
As Ron indicated, the track that was conveyed to Northeast Rail about six years ago is in operable condition, but it's designated as FRA accepted class, meaning it's only qualified for a limited freight operation at speeds under 10 miles an hour.
The State of New York has provided some funding to help us upgrade a small portion of the track to begin a scenic passenger operation in 1995. And in 1996, we were awarded an ISTEA grant, which helped us to also partially rehabilitate another five mile section of the track.
However, as Ron has also indicated, most of the rail that's in this track was rolled in the 1880s and 1890s, and right after the turn of the century. And I personally have inspected most of the track. When you get down and look at the rail, it says, rolled, Lackawanna 92-93. That's Lackawanna, New York, 1892-1893. That is the problem that we're facing.
And as Ron indicated, we are able to operate 263 cars. But the problem is that it requires a track inspection before you have each operation. It requires a very slow operation. And even under very controlled operations, there is still a great deal of cracked joints, split rails and other problems.
I looked at the Zeta-Tech analysis last week. And using the $137,000 per mile benchmark, estimated cost, for about 20 miles of our track, and even though we own 35 miles, the 263 and the 286 cars would go over about 20 miles of that. So 20 miles times $137,000 gives us about two and three-quarter million dollars, is what would be Northeast Rail's requirement to upgrade the track structure based on this benchmark, to accommodate 286 cars.
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One thing that we tried to do, as I indicated, was to put a personal face and a dimension on this. Last week, I spent the time to talk to Agway, which is a large marketer in the area of feed and fertilizer, and also another large fertilizer company. Combined, these two companies ship about 400 of the 500 or so cars a year that are on the Northeast Rail/Batten Kill system currently.
Also a couple of years ago, we took a look at what this means for John Sweeney's district in Washington County. And as I indicated in my prepared testimony, we came up with a benefit stream which is about $1.5 million a year in the benefits of local purchases, local payroll, in terms of the tourists that come into the area. Now, this may not seem a large area, but in rural Washington County is it very significant, particularly for the dairy farmers. And we focus very much on the dairy industry, because as we've indicated, most of the heavy cars move to support the dairy industry in John's district.
We estimated what the incremental savings are to the dairy farmers in Washington County. And there's about a $500,000 a year savings in using the rail, because the rail comes essentially right to the farm, almost, and it's local delivery from large feed mills in central Washington COUnty.
Then we asked the question of Agway and CaroVail what happens if the railroad didn't exist. And that, about two years ago, is about a $500,000 annual number, it would increase the costs to the dairy farmers in Central Washington County. And if we had the ability to move 286 cars in there, and presuming that the freight rates stay the same, that would mean another $100,000 worth of savings for the dairy farmers in Washington County.
And when you divide those two numbers by the savings, we're saving each farm in Washington County an average of about $2,000 per year, under the current 263. And incrementally, this would grow about another $100,000, or roughly about $200.
So what this really means, in trying to put an economic benefit, is roughly about $2,200 per year savings to the dairy farmers in central Washington County, versus not having the railroad there and having to truck much greater distances.
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Thank you.
Mr. PETRI. Thank you.
Mr. Ogborn.
Mr. OGBORN. Thank you, Chairman Petri and members of the COMmittee. My name is Mike Ogborn, I'm the managing director of OmniTrax. We're a Denver based holding company that has 12 railroads in 7 States and 3 provinces in Canada.
I have submitted my prepared testimony and I will not read that for the Committee this morning. But I do want to point out some of the points in that testimony as it relates to this bill and our support of it.
Our railroad in Kansas, and Representative Moran referenced this, constitutes about 1,000 miles in that State. So we're over half of the mileage of the short line railroads in the State of Kansas.
We bought those lines from the Union Pacific and the Burlington Northern Santa Fe approximately 10 years ago. Those were light density lines, consisting of very old rail and poor condition of the substructure and structure of the road bed.
We have over the years had to go through a number of abandonments. We reduced the size of the railroad from about 1,300 miles to 1,000 miles over that 10 years. We are one of the short line railroads in that State that has to look further at additional abandonments, unless we can find a way to preserve some of the rail lines in that rural State.
We also have similar problems to that in other States in which we operate, but I would say that Kansas is probably the most critical in terms of road bed structure and track that need to be looked at. We have some of our lines that were built in 1889, and the rail laid in that year. We have track that ranges in size from 70 pounds up to 132 pounds. So it's a wide range of types of track within the State. That which we inherited that was in poor condition and light density is of course the most endangered.
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Recently, we undertook a program with two of the shippers on a 70 mile line to institute a program where we could restore service to the line and make it safe for approximately two year by sharing of the costs under a contract where we guaranteed a level of service and they guaranteed a volume of freight. Unfortunately, that's only a short term solution.
In order to continue service on that line to a very vital area of the State of Kansas, which produces the highest protein wheat in the State, which goes to the mills for all of us to eat bread in this country, we need to have a program where we can restore and relay the structure and track and that cost, just to handle 263,000 pound cars, is $4 million.
In order to restore that line by a total relay program and total restructure built, we would have to have approximately $9 million. So that line in the current state of repair is sufficient to continue operations for two years. But it is not beyond that.
Moreover, it is not a line that will sustain a loan program. There simply is not enough volume of traffic on that line, even if the shippers on that line ship 100 percent of their freight. Although we're certainly willing to work with FRA and other agencies on the RRIF programs, on others of our lines, and certainly with Congressman Moran and the invitation from Ms. Molitoris on others of our line, we have at least four of the type that I've just described, which is the Osborne Line, that would be subject to grants only. And therefore, we are very much in support of this particular bill, because we see this as a way on the short term basis to provide fundings through grants for these light density grants to continue to service to rural Kansas.
And by way of example, the Kansas Department of Transportation has run a study that says essentially that it would cost one cent per bushel per mile to repair the highways, not to maintain them, but simply repair them, in the State of Kansas. So we're talking about a repetitive situation. And the one example I gave of the Osborne Line, of between $4 million and $5 a year, forever, to retain those highways in a repaired form, not to upgrade them or lay new highways.
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And the real danger is that a lot of those highways are county highways that are not subject to Federal and State funding. So the tax base really hits the county taxpayers who have not the tax base in those rural counties to support the system.
Thank you for your attention, and I submit my testimony.
Mr. PETRI. Thank you, sir.
Mr. Clement, any questions?
Mr. CLEMENT. Thank you, Mr. Chairman.
Mr. Turner, how do you respond to Mr. Hamberger's concern that this trust fund is the camel's nose under the tent?
Mr. TURNER. Well, I think that the time has come in our industry, and I'm speaking of the industry as a whole, but primarily for the Class I and Class III railroads that we have to look at things perhaps a bit differently. And I think the time has arrived where we really have to look at see if perhaps trust fund funding, Government funding, appropriations, whatever you want to call it, should be funneled to our segment of the industry. In fact, I think it's been pointed out very clearly today, if we don't get these types of funding, then we're going to see our national rail network shrink.
Mr. CLEMENT. Professor, what will happen if these investments are not made, and can the small railroads limp along and what are the safety ramifications?
Dr. ZAREMBSKI. Well, certainly the small railroads can limp along, it's probably a very good term. When you look at the actual distribution of that $6.86 billion, you'll see about half of it, actually a little bit more than half of it is due to rail. And as you heard from some of the other testimony, a lot of the short lines have this very small, very old rail.
As you increase your axle loads, the risk of that rail breaking under the train increases. So the primary risk with the heavier cars is you're actually going to break rail underneath the trains and derail or tear up the track structure further.
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So there's a real potential safety issue here. What the short lines would literally have to do is an extension of what they're doing now, which is carefully inspect before and after, and just go slow enough that if you break a rail under the train, you basically can pick it up and keep going, so that you don't do any great damage. But that may knock them down to 10 miles an hour, possibly even less than that.
So there is a real potential implication in the rail side. There are similar problems on the bridges side, again, with the marginal bridges, where the bridges will actually run the risk of having significant failure under the heavy axle loads.
Mr. CLEMENT. And for the entire panel, you know, we're moving toward globalization. More concentration of money, more concentration of power, larger corporations, rural areas, counties, drying up and not having the opportunities that many of the cities are having today. Is this what it's all about, what we're experiencing with the short line railroads, that you know, a lot of us, I know I represent a big city, but I also represent some rural areas as well. And I want my rural folks not to have to feel like they have to move to the city for economic development and economic opportunities. Is this what you all are talking about when you're saying to Congress that we need help and support for the short line railroads to provide the services that people are demanding and requesting today?
Mr. TURNER. Congressman, I would like very much to respond to that. I think that there is a niche, a particular niche for the Class II and Class III railroads in this country, and that is to serve that part of our society you just talked about. I think that if the Class Is, and I cannot speak for them, if they want to go to be the wholesale transportation mover in rail transportation, let them do that.
But let's preserve our network in the rural areas, where we can reach out and we can be the one that serves the rural network, and that you can still have economic development in that part of our society and in our country.
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Mr. CLEMENT. Anyone else want to comment on that?
Mr. OGBORN. Well, I would certainly concur with Mr. Turner's remarks. In our case, for example, in Kansas, we originate about 20 percent of the wheat that moves out of that State. And if we do not have the feeder networks to the Class I railroads, the producers are going to have to suffer a lot more, in my opinion. And those are the people who are already suffering a great deal.
Mr. TURNER. I would just echo that in terms of upstate New York. The dairy industry, or the agriculture industry and dairy is the key component, it is the largest business in upstate New York. People tend to think that upstate New York sort of stops, I guess, at the Tapanzee Bridge north of New York City. But there are a lot of people, there's a lot of agriculture in terms of that's the backbone of the economy, particularly in Washington County.
And we're talking about a situation of a half million dollars a year of additional costs be put on the dairy farmers that already are struggling because of the northeast dairy compact situation and other factors. I know this is of critical importance to Agway and also of critical importance to Caravel in terms of maintaining cost effective rail service directly to the farmer's door, almost. That's the way to keep the costs down, that's the way you save the farmers an average of $2,000 per year now.
So that's our message. And we need help. I was listening very, very closely to what the FRA Administrator was saying. And it sounds like a fine program, but it doesn't apply to us. We are not bankable, basically. We don't have the ability to meet the term requirements for the loans.
Unfortunately, we're in the situation of needing grants. Again, as I pointed out in our testimony, we are an organization of volunteers that first of all want to preserve what was there. This is about half the track that was torn up by a bankruptcy with the Delaware and Hudson about 20 years ago. So this is at the southern portion of that line, this is where the dairy farms are, this is what we're trying to keep. And we've done, I think, an excellent job in the last 20 years with virtually no capital.
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But we're at the point now of making some hard decisions with this rail that's over 100 years old, with regard to keeping it in service for the 263 cars. We'd love to be able to have the 286, Agway and CaroVail both want the 286 to pass on the economies to the farmers. But we're at a real crisis point right now in terms of trying to find sources for the capital that we need for these types of upgrades.
Mr. CROWD. May I add another comment there? We also have paper mills on our line. We have two mills that we service. And you're looking at 150 jobs that are affected there. These are high paying local jobs. And one of the biggest problems in our area is as paper manufacturing has moved away, a lot of your high paying jobs have also moved away. So you have people having to commute 100 miles for a decent job.
The two mills that we service depend on the rail service. I'm not saying they would go out of business if we weren't there. But their cost of operation would be significantly higher, and they'd have to do a lot more trucking. And it would be a greater impetus to move some place else, to do their manufacturing, because they have plants all over the world.
But the Greenwich facility is a choice facility. And the rail service is a very important part of that.
Mr. CLEMENT. Thank you, Mr. Chairman.
Mr. PETRI. Thank you. Mr. Bachus.
Mr. BACHUS. Mr. Crowd—let me follow up with Mr. Crowd. How many shippers do you currently serve?
Mr. CROWD. We have two fertilizer shippers, a large feed shipper. And we have one paper mill shipper. There are some smaller ones that ship logs and hay. We actually move hay from the west into the east for horse feed.
Mr. BACHUS. If you were able to upgrade the line, are there other potential shippers?
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Mr. CROWD. I believe so. The logging just started this past year, that's brand new business. So even with our situation, the car weight problem is not a problem with that commodity. It's purely competitiveness there, it's just cheaper to go by rail.
I believe if our service were faster and we were able to accomplish more, we definitely would be able to grow the business.
Mr. BACHUS. Okay. Mr. Turner, in Dr. Zarembski's testimony, which I've read, and I thought it was very compelling, Dr. Zarembski, in terms of the magnitude of the problem, are you going to be able to follow up on that and continue his study and get specific information on individual railroads in terms of vulnerability?
Mr. TURNER. Yes, sir, we are. And in fact, we've signed two more contracts with Zeta-Tech to further the study to get as much detail, not only the study of what lies ahead, but how I think Allan touched on it in his testimony and how we can handle what we have now in terms of rail fatigue and other rail maintenance issues.
But we are progressing this study and will continue to study and develop our program.
Mr. BACHUS. I'll address this question to both of you. There are 500 odd short lines?
Mr. TURNER. Correct.
Mr. BACHUS. Will you be able to get specific information about the condition of the rails and the bridges and so forth?
Mr. TURNER. Yes. I think as we go into funding, we'll obviously have to have that, both with the, you know, hopefully with the passage of this bill and also with the FRA loan fund. We'll have to get detailed as to the needs of each railroad.
Dr. ZAREMBSKI. To be more specific, in the study that we already did, we actually had received information from 4,700 miles of railroad already, which is about 10 percent of the sample. The additional follow-up work that Mr. Turner referred to, we're going to be going, dealing with individual properties and trying to get very specific numbers for all of their properties working with them, so that we can get a much better handle on the specific property by property needs to not only provide general numbers, but also provide numbers for them so they can determine what investments they need and also how to prioritize the investments so they know which ones to do first and how to phase it in.
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Mr. BACHUS. I think it would be helpful for us to put that on a map of the State with the counties and highlight which counties those are in, and the number of jobs at risk.
Mr. TURNER. We'll be glad to do that. I think that's doable and I think that's a great idea.
Mr. BACHUS. Also maybe maps showing, and Mr. Ogborn, I'll maybe ask you this, you had a map of Kansas. And you showed the short line railroads. How many counties in Kansas depend entirely on short line railroads for their rail needs?
Mr. OGBORN. I'd say approximately 15 to 20.
Mr. BACHUS. That's a significant number.
Mr. OGBORN. Yes.
Mr. BACHUS. You know, the AAR and the FRA spent about $50 million, I guess $25 million of taxpayer's money, developing the 286 plan. And one thing that money didn't do is it certainly didn't catalogue what that car would do to your line, or what that program would do to your railroad, which I think is a tremendous oversight on the Government's part, that they would spend $50 million, $25 million or so in taxpayer's dollars, and not address the concerns or the needs of a lot of those taxpayers which depend on those short line railroads to ship.
So I think the Government has a legitimate duty to not only assess those needs. They should have done that in the original plan. But they basically, I think, have an obligation to you now. And I appreciate, Mr. Ogborn, what you said about the grant program, that only grants would be of help on a large percentage of those rails in Kansas.
I don't have any further questions, other than, I would say, Mr. Turner, if there are further negotiations with the American Association of Railroads, as your testimony said that you had some discussions with them about how they could be of service to you, I think it would be informative to the Chairman and to Mr. Clement and I if you supplied us with any specifics of any impediments that they threw in your way.
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Mr. TURNER. We stand willing, ready and able to discuss with the AAR at any time to move forth on this issue and any other issue. And I will so keep you informed, Congressman Bachus.
Mr. BACHUS. I know of your concern, and I know had the made an offer that would have been beneficial to you, you would have embraced it with both arms. It obviously didn't get to that point. We'd like to say, maybe know the specifics of that. Because we take the AAR in good faith when they say they're ready to come back to the table and address your needs.
Mr. TURNER. I will keep you informed, sir.
Mr. BACHUS. Thank you.
Mr. PETRI. Any questions, Mr. Thune?
Mr. THUNE. Mr. Chairman, yes, just briefly, if I might. Thank you for holding this hearing and the panel for being here today.
In my State, transportation is a major issue, because we're a long ways from terminal markets. And we have, transportation is a big part of the cost, ultimately the net that ends up in the farmer's pocket. And so one of the things that I'm very interested in is making sure that we have good transportation alternatives, and that there is competition out there. And that's something that in States like mine, which are somewhat removed, we always have to be concerned about.
And I guess I'm curious, Mr. Turner, and others, if you care to speak to this, the relationship between the Class I railroads and the short lines, how would you characterize that as where there is exchange, where they hand off, or you might be handing off to a Class I railroad? How would you characterize that relationship and is it working?
And perhaps a follow-up to that question would be, what could be done better, what could be improved in terms of making sure that we have a seamless type rail system that allows our producers to access markets at a reasonable cost?
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Mr. BACHUS. Mr. Thune, in their answer, could they also address whether paper barrier exist?
Mr. TURNER. Yes, many paper barriers do exist. I would say that right now, I would describe our relationship as a bit strained. Primarily with the ConRail split, the service issues we had not only in the northeast, but these issues also were fed down to the southeast also. And prior to that, we had the SP-UP merger, and it was the same thing there. So service has really been an issue with our membership, consequently putting a strain there.
Now, locally, I think in many cases you'll find that the working relationship is very good on a ground level with the officers in the field. But to say that we haven't had some real problems, primarily around service, not limited solely to service, though, but there are rate issues, there are certainly paper barrier issues.
And I really feel very strongly that if we're going to have a seamless railroad network that paper barriers are going to have to come down. We have to find a fair and equitable way that they already move. But I believe very, very strongly, to get the type of rail service, and certainly the type of rail service that you're talking about, these barriers are going to have to come down.
Mr. THUNE. Is there right now, in terms of the infrastructure, and I should know the answer to this, but if you had a 286,000 pound hopper car, can you run those on FRA accepted or FRA Class I?
Mr. TURNER. Well, we're not trying to find another classification of track. But the answer is yes, you can. The problem is, how safely can you do it. If you have 90 pound rail and you have good ties, good ballast and all that under that rail, you can probably run a 286 car. You've got to run it very slowly.
Mr. THUNE. Right.
Mr. TURNER. And I think Mr. Crowd mentioned, in order to develop more, better economic base there, you'd have to have better track. But to have volumes and do it where we can be competitive, we just simply have to have a good, solid infrastructure.
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Mr. Thune. I don't know if you know the answers, but most of the short lines around the country, are most of them Class I, FRA Class I or thereabouts?
Mr. TURNER. Probably Class II, I would say between Class I and Class II. Probably the average, 25 miles per hour, would you say that, with OmniTrax, can you say that?
Mr. OGBORN. Yes.
Mr. TURNER. That would probably be average, from Class I to Class II. There's not much Class III or Class IV. There's some, but not a whole lot.
Mr. THUNE. I know we experience in our State, too, some Class I accepted track and everything else. I guess my main concern is that, and I'm sure this has been discussed a lot here today, but that we, if we're going to try and move toward where we've got a seamless network, an integrated system that will allow us to transport those goods at a reasonable cost, I think the short lines, at least in my State, are a big factor in that solution, in making sure that competition exists out there.
And I guess I would be interested in anything that we can do to better improve the outlook or the possibility of that being the reality in the marketplace. It certainly is a benefit to the producers, agriculture is the number one economy in our State, transportation just can't get away from it, the best way to haul bulk commodities is on rail.
Mr. TURNER. Exactly.
Mr. THUNE. And we need to make sure that we've got a good infrastructure in place.
So I personally am interested in anything that we can do to help assist in those efforts and make sure that the resources are in place to upgrade tracks and allow for the best possible, lowest possible cost to the producers to move their products.
Mr. TURNER. Well, I think if we're going to move forward with this, it's going to take what we have with the 4746, it's going to take what we have with the RRIF loan, State, local assistance and certainly input from our own capital resources.
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Mr. THUNE. I thank the panel, and thank you, Mr. Chairman.
Mr. PETRI. Thank you. I just have one or two questions of any of the panel members, really. You heard the testimony earlier that it really was just a minor technical detail that people who were in the railroad business had to have a loan turned down, a request turned down before they could apply for this loan guarantee program. Do you believe that that requirement really is inconsequential, or do you think it will create substantial delays in receiving necessary funds?
Mr. OGBORN. Well, yes, I think that although it's been said that it was simply a step in the process, I think it could be a very substantial step, and one that could take a lot of time. And from what I heard in the testimony, it sounds like it's an exercise in futility, as one of the members of the panel pointed out.
If indeed the view is that there is no bank out there or lending institution that would loan the money anyway, I don't know why they require us to go through that step. And secondly, it's a matter of credibility. In our company, if we go to a lending institution, it's to borrow the money, not to get a letter that says we cannot.
So I think it's not only an exercise in futility, but one that could take up a lot of time and effort, little of which we both have in our company.
Mr. PETRI. And it would require you to advertise yourself as not credit worthy. You'd think maybe that would be a requirement for a grant program, rather than a loan program. Because you don't want to be, if you're in business advertising yourself as not credit worthy, usually if you're expecting to get capital one way or another, from investors or lenders or someone else.
Mr. Turner, one other question. On the OMB side agreement that we've just learned the details of, I think in your testimony you mentioned the reports of a maximum limit on any one project. And according to the agreement, the individual limit is 6 percent of the remaining unused authorization amounts. As you know, this limit's not contained in the FRA final rule that was published earlier this month. And while your members may not have projects greater than 6 percent of a declining remainder, other entities may.
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Do you think it's fair or appropriate for the Administration to have placed such caps, such a cap on projects, or do you think that and the 10 percent limit on participation in a cohort is going to create confusion?
Mr. TURNER. I think it's going to create a great deal of confusion. I think it was mentioned, I mean, how much money do you know how to apply for when you don't know what the residue of the loan is?
I was just handed this memorandum just prior to convening the panel. And I do think it adds confusion. I would hope that we can, along with the loan that we just talked about, that we can work through this and perhaps have it eliminated from the loan process, because it will create confusion.
Mr. PETRI. Well, as you know, the industry probably has some thinking to do about, I think there's some sort of a 60 day deadline in challenging this whole thing in court. And that clock is ticking.
But in any event, we would invite you, while this is not officially part of the proposed rulemaking process and therefore you're not, I guess, under the normal procedure, allowed to comment on this, if you'd like to submit comments on this side agreement to the Committee at least, we'd appreciate receiving that. I think it would be enlightening for the administrators to have some idea of how to make this camel work.
Mr. TURNER. Right. Well, thank you very much, and I can assure you, you will get comments from our association.
Mr. PETRI. Thank you, and if there are no other questions—yes.
Mr. BACHUS. I don't know if anybody said this. Is this memo, I mean, you've got the Administrative Procedures Act, does this violate that Act?
Mr. PETRI. That would be the interpretation of almost anyone. But on the other hand, this is an internal agreement between U.S. Government departments. And so it doesn't have to be enforced in court, it can be enforced by the Government upon itself through other sanctions. It certainly violates the spirit, if it were entered into in some sort of a public way. It couldn't be enforced on anyone.
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I'm not a judge, but I would think that the fact that they are having these guidelines now that they're public, that had not been public, it certainly would have been much to the detriment and violation of the whole spirit of the law.
Mr. BACHUS. I'm not sure that the notice requirements were complied with at all.
Mr. PETRI. But I know our counsel is eager to render a legal opinion. If he'd like to put something in the record at this point.
Mr. BACHUS. Yes, would Mr. Scanlon like to comment?
Mr. SCANLON. Well, I would just agree with the Chairman, it's very suspect. Because you have the public regulations that were subject to notice and comment on the APA. And this is in effect a further limitation on loan applications that was never subjected to notice and comment. So if as the Chairman said, it were to be followed, as a restriction on the program, I would think the potential applicants may want to look at possible legal challenges to that.
Mr. BACHUS. Or to the Association Act.
Mr. TURNER. We will give you comments.
Mr. BACHUS. For the record, I would just like to raise that I as one Member am very skeptical about this sort of thing.
Mr. PETRI. Thank you. And again, thank you all for your participation and for your testimony.
The hearing is adjourned.
[Whereupon, at 12:35 p.m., the subcommittee was adjourned.]
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