Members will hear testimony on railroad shipper issues, focusing on captive shippers. Senator Hutchison will preside. Following is a tentative witness list (not necessarily in order of appearance):
Witness Panel 1
Mr. Randall Linville
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The Honorable Roger Nober
Good morning, Chairman Hutchison, Ranking Member Inouye, and Members of the Subcommittee. My name is Roger Nober, and I am Chairman of the Surface Transportation Board. I appreciate the opportunity to appear before this Subcommittee today to discuss the rate and service issues faced by railroad shippers in general and singly-served (otherwise known as “captive”) rail shippers in particular, and the provisions contained in S. 919, the Railroad Competition Act of 2003. This is my first appearance before this Subcommittee as Chairman of the STB. I appreciate the longstanding and deep interest that the Members have shown in the issues facing the railroad industry, which are vitally important to the financial health of the freight railroads, to the railroads’ customers and employees and to the nation’s freight transportation system as a whole. I commend the Subcommittee for holding this hearing and discussing these important issues. In my written testimony, I would first like to provide the Subcommittee with an overview of the Board and its responsibilities. Next, I will discuss steps the Board is taking to address issues faced by singly-served or captive shippers. Finally, I will discuss S. 919. Overview of the STB As all of you know, the Surface Transportation Board was created eight years ago by this Committee in the ICC Termination Act of 1995. The Board is an economic regulatory agency that Congress charged with the fundamental missions of resolving railroad rate and service disputes and reviewing railroad mergers, line sales, abandonments and new construction. Structurally, the Congress determined that the Board should be decisionally independent but administratively affiliated with the Department of Transportation. When it was created at the beginning of 1996, the Board had to accomplish its statutory missions with one-third fewer employees than had been performing those same functions at the ICC. Since 1996, the Board has met its statutory deadlines while functioning with nearly the same level of resources during that time. But as I will outline in my testimony, the Board will face new challenges in the coming year as it works to address the issues raised today and will need some modest additional resources to continue its important work. The Board serves as both an adjudicatory and a regulatory body. The Board has jurisdiction over railroad rate and service issues and rail restructuring transactions (mergers, line sales, line construction, and line abandonments); certain trucking company, moving van, and non-contiguous ocean shipping company rate matters; certain intercity passenger bus company structure, financial, and operational matters; and certain pipeline matters not regulated by the Federal Energy Regulatory Commission. In sum, when Congress eliminated the ICC in 1995, it created the Board to carry out two core functions – reviewing merger proposals and resolving disputes over rates and services provided by railroads. One of the main reasons the Board exists is to provide a regulatory backstop to assess the reasonableness of rates charged to captive shippers when those customers and their railroads are unable to successfully negotiate a contract for the transportation. The Board has created a number of mechanisms to help railroads and their customers resolve disputes before availing themselves of the Board’s formal processes. For example, the Office of Compliance and Enforcement operates the Rail Consumer Assistance Program. That program is intended to provide assistance to rail consumers in addressing those issues that have not been resolved through private negotiations. When informal processes like that one cannot produce a solution, however, the Board must be the regulatory backstop that Congress intended it to be. It is no secret that many captive shippers – the focus of today’s hearing – believe the Board has inadequately performed this core mission of ensuring that they have a forum for reaching a formal resolution of rate or service disputes. They feel that without a regulatory backstop, the transportation market for freight rail services does not properly function. Many of the issues they raise are legitimate, and I will next turn to the fundamental concerns raised by captive shippers and the steps the Board is taking to address them. Issues Faced by Captive Shippers 1. Unreasonable Rates Under the Interstate Commerce Act, the Board has exclusive jurisdiction to resolve rate disputes in those instances when railroads have market dominance – in other words, the railroad is charging a rate higher than the regulatory floor and the shipper has no effective transportation alternative. Under the Interstate Commerce Act, the Board must balance the often conflicting objectives of assisting railroads in attaining revenue adequacy, on the one hand, and ensuring that the rates that individual shippers pay are reasonable and fair, on the other. The balance, as we all know, is not an easy one. Rates that are too high can harm rail-dependent businesses, while rates that are held down too low will deprive railroads of revenues to pay for the infrastructure investments needed to give shippers the level and quality of service that they require. The Board is the forum of last resort if a captive shipper feels his rate is unreasonable, and the agency must do its best to carry out the law in a way that is fair to all when deciding railroad rate cases. The Board has one set of procedures for handling “large” rate cases and another for “small” cases. In recent years, the Board has experienced a significant increase in the number of large rail rate complaints filed with it. Whereas in past years the Board had two or three of these cases pending at any one time, today it has 13 large rail rate disputes pending (as well as two pipeline rate disputes and two water carrier rate disputes pending). The Board still has not had a single small rate case filed since it adopted its small case guidelines in 1996, but as I will discuss further, my top priority for the next year is to establish a meaningful process for quickly and surely deciding small rate cases. a. Large Rate Cases. Determining the reasonableness of a rate in a large rate case is a complicated inquiry. The Board’s governing statute requires it first to determine whether the railroad has monopoly power over its customer – in other words, whether the railroad is market dominant. Only if the railroad is market dominant does the Board have jurisdiction to review the rate. This is so because Congress has foreclosed rate regulation where there is effective competition. Once it has determined that it has jurisdiction to review the rate, the Board applies a court-approved methodology for rate review known as “constrained market pricing” (CMP). i. Market Dominance. The first step in a rate case is a two-part inquiry to determine whether the railroad has “market dominance” over the transportation to which the rate applies. The first part is to determine the “variable costs” of providing the service. The statute establishes a conclusive presumption that a railroad does not have market dominance over transportation if the rate that it charges produces revenues below 180% of the variable costs of providing the service, which means that this 180% revenue-to-variable cost (r/vc) percentage is the floor for regulatory scrutiny. If the rate the railroad charges exceeds the 180% r/vc threshold, the second part of a market dominance inquiry involves a qualitative assessment in which the Board must determine whether there are any feasible transportation alternatives that could be used for the traffic involved. The Board considers whether there is actual or potential direct competition – that is either competition from other railroads (intramodal competition) or from other modes of transportation such as trucks, pipelines, or barges (intermodal competition) for transporting the same traffic moving between the same points. If there are effective competitive alternatives for the transportation, then the Board does not have jurisdiction to regulate the rate, even if the rate charged yields an r/vc ratio greater than 180%. ii. Rate Reasonableness Standards. If the shipper can show that the railroad is market dominant, then the Board applies its CMP principles to assess whether the rate being charged that shipper is in fact unreasonable. CMP provides a framework for the Board to regulate rates while affording railroads the opportunity to cover their costs. It is premised on differential pricing, that is, pricing based on the demand for the service provided. CMP principles recognize that, in order for railroads to earn adequate revenues, they need the flexibility to charge different customers different prices based on each customer’s demand for rail service. But CMP principles also impose constraints on a railroad’s ability to price. Despite the complexity of CMP, the courts have held that it is the most desirable available approach to railroad rate review and that the Board must use it whenever it is feasible. Although complaining shippers can choose from three approaches, the most commonly used CMP constraint is the “stand-alone cost” (SAC) test. Under SAC, a railroad may not charge a shipper more than what a hypothetical new, optimally-efficient carrier would need to charge the complaining shipper if such a carrier were to design, build, and operate – with no legal or financial barriers to entry into or exit from the industry – a system to serve only that shipper and whatever group of traffic that shipper selects to be included in the traffic base. The ultimate objective of the SAC test is to ensure that the complaining shipper is not charged for carrier inefficiencies or for facilities or services from which the shipper derives no benefit. As with CMP in general, this assures the complaining shipper that it is not required to pay for inefficiencies or to unfairly subsidize other customers of the railroad. iii. The Board Is Working to Reform the Large Rate Case Process. Deciding large rate cases is time consuming and costly for both the parties involved and the Board. Although the Board by statute has 9 months after all evidence is filed to decide a large rate case, it can take more than twice that long after the shipper files its complaint for the parties to file all their evidence with the Board. Preparing that evidence and presenting it to the Board are very expensive – parties have testified that a SAC case can cost as much as $3 million to prosecute, $5 million to defend, and generate more than 700,000 pages of material. When I became Chairman, the Board intensified its search for ways to simplify and speed up this process, and as a result of this effort the Board recently adopted a number of changes to its rules. Last February the Board held a hearing in the rulemaking proceeding entitled Procedures to Expedite Resolution of Rail Rate Challenges To Be Considered Under the Stand-Alone Cost Methodology, STB Ex Parte No. 638, which was exceptionally productive. Based on the extensive testimony received from shippers and railroads, in April the Board revised its rules in ways that ought to both shorten the decisional process and limit the expense of bringing a case. The new rules’ most significant provisions include: (1) mandatory, non-binding mediation at the beginning of the case, under the Board's auspices, between the complaining shipper and the defendant railroad; (2) expedited procedures to resolve disputes, using Board staff, over what information the parties can be required to give to each other during “discovery”; (3) technical conferences to resolve, before the actual evidence is filed, certain factual disputes between the parties using the expertise of Board staff; and (4) requiring parties to submit versions of all filings with the Board that can be read by the opposing party and the public. These new rules have already been a success. A significant component of the new rules is to increase the involvement of Board staff in the process through technical conferences and regular meetings with the parties. The Board established technical conferences because the parties were spending time and attorney and consultant fees fighting about – and the Board was expending resources to resolve – technical matters over which there should be no dispute, such as the number of miles between a coal mine and a power plant. In the first technical conference (held in the “Otter Tail v. The Burlington Northern and Santa Fe Railway” case), disputes over 200 pieces of data were settled in just over an hour. In the past, these disputes would have led to protracted litigation that would have cost the parties thousands of dollars in fees and could have substantially slowed resolution of the case. Another major component of the new rules was the institution of a 60-day period of mediation at the start of any new case. All parties – railroads and shippers alike – who testified at our February hearing on Ex Parte No. 638 thought mediation would be a useful tool to help them to resolve their rate disputes privately. The first case since the Board adopted these new rules, “AEP Texas North v. The Burlington Northern and Santa Fe Railway”, was filed in August 2003, and I am pleased to say that I selected former Congressman John Thune to conduct the initial mediation. During his tenure on Capitol Hill, Congressman Thune served on the Committee on Transportation and Infrastructure, where he was actively involved in matters concerning railroads and their customers. He also served as the State Rail Commissioner in South Dakota. He understands the perspective of both railroads and shippers, and the involvement of a mediator in this matter will help the parties resolve the dispute. It is important that the process for resolving major rail rate disputes be open and fair, and every party must have an opportunity to make its case so that the Board will have a full grasp of the implications of any actions it takes. In that regard, on September 10, 2003, for the first time, the agency held an oral argument in an individual large rate case (“Duke Energy v. CSXT Transportation”). This session was a productive one both for the Board and for the parties, and we will continue to hold arguments, as appropriate, in future cases. One significant outgrowth of this focus on rate cases is that recently, as the Board was putting together a decision last week in “Duke Energy v. Norfolk Southern Railway,” we realized that we needed to ask the parties to supplement the record, which was incomplete in one critical respect. The same issue arises in two other similar cases. The Board issued an order addressing this situation and is taking additional evidence in all three cases over a 3-week period. A decision in the first case, Duke Energy v. NS, will be issued by November 6, 2003. In sum, while major litigation such as large rate cases is expensive and slow, the Board has made progress in helping to ensure that the rate cases before it proceed faster, cheaper and better. I will make it a priority to continue to make more improvements in this area, and more progress is possible. b. Small Rate Case Procedures Since I became Chairman, my top priority has been to provide shippers who have smaller rate disputes an effective forum for resolving such disputes. On April 22, 2003, the Board held an oral hearing on this matter where it received testimony from representatives of shippers, railroads, and unions. In sum, shippers raised the following concerns. First, shippers contend that the ambiguity of who would qualify to use the small rate case procedures is an insurmountable hurdle that has chilled them from bringing any cases before the Board. Shippers believe that the railroads would fight any shipper’s claim that it is entitled to use the expedited procedures, thus tying up the shipper in extensive, expensive threshold litigation. This uncertainty appears to be a major reason why no cases have been brought under the small-case process. The Board can address this concern and bring some level of certainty to this issue by constructing a test that looks at the size of the shipper and the value of the case. If a shipper or its shipment met that test, the shipper automatically would be eligible to use the small case process. Second, shippers asked the Board to ensure the expedited consideration of small rate cases and to constrain the discovery process. These shippers argued that protracted resolution of small rate case disputes under our current rules does then no good because the transportation marketplace for such shipments is so fluid. Many shippers have suggested arbitration as a way of resolving such disputes because of its speed and simplicity. Railroads oppose arbitration, since those proceedings are outside of the strictures of the Interstate Commerce Act – which requires a balance between shippers’ need for fair rates and railroads’ need to achieve revenue adequacy – and could produce inconsistent results. While mandating binding arbitration is beyond the Board’s statutory authority, I believe it is unnecessary because the small rate case process being developed should be able to accommodate each side’s concerns. The Board can streamline the discovery and resolution process by creating an administrative process that combines the speed and simplicity of arbitration while ensuring that such cases are decided under the framework of the Interstate Commerce Act. One way for the Board to accomplish these goals is to hire an Administrative Law Judge (ALJ) to hear and decide small rate cases in the first instance. The ALJ would have a prescribed time period for overseeing discovery and for issuing a decision. The ALJ’s decision could then be appealed to the full Board. This would allow cases to proceed with the speed and low cost of arbitration, but also ensure that these matters are decided under the principles of the Interstate Commerce Act. In fact, the Board is already working toward hiring an ALJ, and recently received approval to do so from the Office of Personnel Management. The hiring process will be completed once the Board’s revised small case regulations are final. The Board could also establish, resources permitting, a Special Counsel to assist small shippers in evaluating and bringing a small rate case. The Board could also utilize the discovery and technical conferences now being used in large rate cases in small cases as well. Finally, shippers and railroads alike have urged the Board to adopt a rate standard for small cases that is clear, unambiguous, fair, and of course, able to withstand legal challenge. The Board promulgated a standard in 1996, but that standard has been widely criticized and – despite having never been applied – was challenged in Court (although the court declined to hear the challenge before the standard is actually applied in a case). Identifying an appropriate standard for the resolution of these cases is our greatest challenge, and while I have asked the parties to provide suggestions to the Board on revising the small-case standard, none has yet done so. After the hearing, I assembled a team from within the agency to meet with other economic regulatory agencies to gather information on how they handle smaller disputes. Our team talked with other agencies, including the Federal Energy Regulatory Commission, the Federal Communications Commission, the Postal Rate Commission, and the Maryland Public Utilities Commission, in a “best practices” survey to gather information that might inform our ideas. Unfortunately, the Board has not been able to move forward on this initiative. I have made a judgment that a rulemaking to create a new process for resolving small rate cases is significant enough that I should not take such action as a single Board member, even though I have the power to act alone. Although it is uncertain exactly how the Board’s final proposal will look, I have outlined several key elements of the process and believe that these will form the core of meaningful reform. 2. Bringing Competition to Singly-Served Customers A common desire of singly-served rail customers is to gain service from a second, competing railroad. Singly-served rail customers who want to be served by a second railroad may work with that railroad to finance and apply for authority to construct a new rail line to the singly-served facility to gain rail competition. The Board’s experience over the past decade has shown that new line construction can bring competition while maintaining the private-sector characteristics of our rail system. The Board must take two regulatory steps before any such construction can occur. First, it must approve the addition to the rail network. Second, it must conduct any necessary environmental review of the project. The Board has worked hard to expedite consideration of requests to construct rail lines and to approve them when appropriate. The Board has recently been able to rule on two such proposals. First, the Board approved the construction by the Dakota, Minnesota and Eastern Railroad (DM&E) of a line into the Powder River Basin in Wyoming, which, if constructed, will provide enhanced rail transportation options for coal shippers, particularly in the Midwest. Second, the Board recently approved the construction of a line to provide BNSF access into the Bayport industrial area near Houston, which would provide competition to the large concentration of chemical companies located there. While build-ins can increase competition and provide many benefits, we have seen recently two examples that demonstrate that at times, the construction of new rail lines can be controversial in local areas. Indeed, both DM&E and Bayport Loop have generated extensive local opposition and spawned court challenges to the Board’s decisions in those cases by various citizen and other groups. In DM&E, the United States Court of Appeals for the Eighth Circuit reviewed the Board’s decision, and while the Court found the Board had done “a highly commendable and professional job,” it nonetheless remanded the matter to the agency for limited additional consideration of a few environmental issues. We are still studying the Court’s decision. The Bayport Loop case has produced litigation both in Federal court (where the Board’s environmental review process is being challenged) and in state court (where the City of Houston is resisting the railroad’s attempts to use state condemnation procedures to acquire property needed for the new line). Just last week, the state court in Texas delayed construction, but has yet to issue an opinion in the matter. Despite these two recent court decisions, the Board is confident that it will prevail in both of these cases. But notwithstanding the litigation that they can generate, construction projects represent the best way to balance the need for greater competition with the importance of preserving the private rail network. S. 919 Finally, I would like to address S. 919, the Railroad Competition Act of 2003. Taken as a whole, S. 919 would fundamentally change the economic model of the railroad industry and is unwise. Not a single one of our major railroads is revenue adequate, and if enacted, S. 919 would call into question the continued economic viability of our freight railroad system. While some shippers may realize a short-term gain from lower rates, in the long run this legislation, if passed, could significantly degrade our nation’s freight rail network, to the detriment of all of its users. Although the nation’s privately funded railroad system may have some problems, it is the best freight railroad system in the world, and the United States is the only country with a national freight rail network that does not need taxpayer subsidy. Most of the provisions of this legislation reflect unhappiness with the Board and certain of its regulatory doctrines. I have met with most of the supporters of this legislation, and they almost all agree that they would not be calling for this legislation if the Board had interpreted certain provisions of the Interstate Commerce Act differently. But the individual provisions in the bill are less significant than the underlying concerns that gave rise to the introduction of this legislation. Since I have become Chairman I have worked hard to understand the core concerns of captive shippers and the railroads that serve them. First, many shippers neither understand nor have confidence in the Board. My most important initiative as Chairman has been to win that confidence through openness and dialogue. During my nomination and confirmation process, there was a great deal of concern expressed about the lack of transparency at the STB. Since I have become Chairman I have taken several steps to change this perception, including restoring regular voting conferences on cases; holding hearings on significant matters such as large rate cases and small rate cases, and on individual cases pending before the Board such as the “Highline” case in New York and the “Kansas City Southern/Tex Mex” merger proposal; and most recently holding the Board’s first ever oral argument on a large rate case. This summer, the Board also held an open house for practitioners to introduce our staff to them and explain how our agency processes cases. I have an open door policy for meetings and have met with many shippers and railroads. I have traveled extensively in the past year to better understand rail transportation. While these may seem like small steps, they have gone a long way to help our agency’s stakeholders understand how and why the Board makes its decisions. Second, many disputes between shippers and railroads often take on a life of their own because of the way shippers feel they are treated by the railroads. Rail customers often conclude that while rates are high, the railroads’ service and attitude are bigger problems. Rail customers are primarily wholesale enterprises who are themselves industrial and manufacturing companies or producers of goods. Like railroads, these shippers are capital intensive and work on thin profit margins. They have customers who demand top-notch service and low prices, and they have suppliers from whom they demand the same. All operate in a brutally competitive global marketplace. These companies understand the financial pressures railroads are under, but they feel that they are not treated by the railroads the way they would treat their own customers. This has led some shippers to assume that railroads act this way because they are monopolies and to believe that legislation like S. 919 would introduce more competition into the rail network and force railroads to be more responsive to them. Railroads should work harder to operate in a more customer-friendly fashion, and I am working with all of our major rail carriers to impress upon them the importance of doing so. Railroads must be nimble competitors in the transportation marketplace to increase their business and grow their revenues. While the leadership of each of the major railroads understands this, that attitude does not always translate through their entire organizations. The good news is that in many circumstances railroads have worked with their customers to improve efficiency and take costs out of the supply chain to the benefit of both parties. But these examples are not common enough, and they must become the norm, not the exception. Helping railroads improve their operations to provide better service is one goal that carriers, shippers and policy makers all share. The Board has been instrumental in bringing the railroads, the city and the state together to improve operations and devise a capital plan for improving operations in the Chicago terminal area. Approximately one-third of all rail shipments go through Chicago at some point in their journey. Improving Chicago and other rail gateways will allow for faster, more reliable shipments, to the benefit of all. Third, a fundamental underpinning of S. 919 is that very few rail shippers feel the Board provides an effective regulatory forum in those instances when carriers and shippers cannot privately resolve their differences and the shipper has no effective recourse. Although the agency tries to help parties informally resolve their differences and improve relations between railroads and their customers, the Board has to be an effective regulatory backstop when a dispute over rates and services is formally brought before the Board. No cases have ever been brought under our small rate guidelines. This may be because there are no smaller rate disputes, or because there is something in the Board’s rules that discourage shippers from bringing such cases. If no small cases are brought, this means that in practice, only about 75 coal shippers have a meaningful opportunity to challenge rail rates. This is unacceptable. At the same time, we must recognize that the economic relationship between shippers and carriers is complex. In many cases, shippers have many facilities – both captive and competitively served – and ship to numerous destinations on several railroads. While the legislation seeks to simplify the shipper-carrier relationship, in reality the relationships between shippers and carriers are enormously complicated and not easily understood. Many shippers do have economic leverage with railroads when the totality of their relationship is considered, and the legislation takes no account of this reality. A more accessible process for bringing small rate cases can be achieved through procedural reform at the Board, rather than through an overhaul of the substantive regulation of railroads. Real reform is possible, and the Board is working to identify the steps in the process that are the problems and develop reforms to address those problems. Finally, certain areas of the country are disproportionately dependent on rail service in general, and on a single rail carrier in particular, for its economic health. Many who are from the upper Midwest feel that, because of the importance of producing bulk, commodity-based products to their states’ economies, their region’s economies are particularly dependent upon the business practices of a single railroad. The Board must pay close attention to the unique set of concerns of rail shippers in that part of the country. I recently traveled to North Dakota and met with a number of government officials, shippers and producers. I have spoken numerous times with the railroad that primarily serves that area about the issues raised there. The issues faced in that part of the country are complex, and not easily solved. However, attention – and not legislation – is the best way to resolve the issues faced there, and while attention may not solve every problem, significant progress is possible. Conclusion One of my goals as Chairman of the STB has been to ensure that the agency’s processes work as well as they can. The first step was to open up the Board. The Board has taken steps to streamline the process for large rate cases, steps which are already working. The Board will continue to reevaluate and refine how the parties and our staff work through the large rate cases. The next step is to improve the agency’s small rate case process. I believe that the Board can and will do a better job to address the concerns raised by captive shippers. The reforms outlined today – and not substantive changes to the statutory scheme– are the best way to address the concerns raised by captive shippers while maintaining a healthy freight rail network. It is a difficult balance, but one that can be achieved. I appreciate the opportunity to discuss these issues today, and look forward to any questions you might have.
Mr. Terry C. Whiteside
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Mr. Charles E. Platz
Madam Chair and Members of the Subcommittee, thank you for the opportunity to testify today on this important subject. My name is Charles E. Platz. I am President of Basell North America Inc., which is headquartered in Elkton, Maryland. Basell has manufacturing facilities in Texas, Louisiana and Tennessee, and markets products manufactured at a plant in Linden, New Jersey. We produce raw material plastic resin that our customers use in a variety of applications such as automobile components, textiles, packaging, medical products and numerous household goods. I appear today in support of S. 919, the Railroad Competition Act of 2003, as Co-Chair of Consumers United for Rail Equity and on behalf of the American Chemistry Council and my own company. Madam Chair, I approach this issue from the perspective of an executive responsible for successfully running a U.S.-based manufacturing business in an extremely competitive global market. I am very concerned not only that our company succeeds in this dynamic global economy, but also that important American manufacturing jobs remain in this country. If Congress does not take action enabling the market to fix this problem now, American jobs will be lost and taxpayers will be forced to pay the bill later. CAPTIVE RAIL CUSTOMERS Madam Chair, I want to make two initial points about captive rail customers. First, as businesses dependent on the railroad industry, we are vitally interested in the financial health of America’s railroads. We simply cannot operate successfully in this country without a financially viable railroad industry and a secure railroad infrastructure. Indeed, I believe that the ability of American manufacturers and producers to compete in today’s global market is highly dependent on the rail freight industry. Today, unfortunately, the rail freight industry impedes -- rather than enables -- our global competitiveness. Second, the captive rail customers that are petitioning Congress for action are not a “fringe group” – as some of our opponents would like you to think. Our coalition includes 14 major trade organizations representing the agriculture, pulp and paper, fertilizer, chemical and plastics industries and electric utilities that use coal. We are the largest commodity customers of the freight railroads, spending more than $18 billion a year on rail service, which represents about two thirds of U.S. rail shipments. Remarkably, our coalition represents more than half – approximately 55% – of the railroads’ total annual revenue. A very large number of American families depend on wages from our industries, which provide more than 2.4 million direct jobs. Commonly accepted economic multipliers put the indirect job impact at five times that number, or 12 million jobs. Our industries provide significant contributions to this country’s balance of trade and the GDP. But in the current highly competitive global business environment, captive rail customers are under increasing pressure in our own businesses. Today, American manufacturers and producers find it more and more difficult to remain competitive against manufacturers and producers outside the United States. In fact, the business of chemistry, of which I am a part, suffered its first trade deficit in history last year. BASELL NORTH AMERICA INC. Our rail transportation costs are a major factor in our ability to be competitive at home and abroad and in retaining and growing our employment base. For example, in Basell’s North American operations, rail transportation is our second highest cost -- trailing only feedstock -- and we overwhelmingly depend on rail shipping. One hundred percent of our finished product is loaded into rail hopper cars. To meet the needs of our customers, the vast majority of whom demand delivery by railcar, we have invested in a fleet of approximately 4,000 hopper cars with a replacement value exceeding $260 million; our railcars are not supplied by the railroads. The operation of the fleet is strictly at Basell’s expense. This investment coupled with the demands of our customers ties us, as it does many other industries among our coalition, firmly to rail transportation. At many of our facilities we are served by a single railroad for the movement of our product to our customers. Rail customers with facilities served by only one rail carrier are known as “captive rail customers.” Let me explain what captivity has meant to Basell. Although Basell is not captive at its facility in Lake Charles, Louisiana, one of the railroads at that location does have a monopoly on rail service at Basell’s Bayport, Texas facility. That railroad used its market dominance at Bayport to obtain leverage over our Lake Charles traffic. Within a short distance of our Bayport plant, a second major railroad intersects the line of the carrier that holds us captive. At this intersection point, our hopper cars could be moved to the second railroad where competition could be utilized for the remainder of the movement, thus spurring the rail carriers to provide better, more efficient service and more cost-effective transportation to our customers. Unfortunately, under current law, as interpreted by the Surface Transportation Board in 1996, our carrier is under no obligation to provide a rate for moving our cars to the second, competing carrier. This “bottleneck,” where one railroad controls portions of a route, allows a single rail carrier to dictate the terms of the entire movement of our hopper cars from origin to destination, even over that portion of a movement where rail competition physically exists. When the bottleneck carrier can serve the customer from origin to destination, that carrier has every incentive to block access to the competitive alternative and to retain the traffic itself for the entire movement. In Basell’s case, over time the incumbent carrier to which we are captive has charged us such an excessive rate on our movements from the Bayport plant that it has jeopardized the continued successful operation of that plant in a highly competitive plastics industry. When this occurred, we considered all of our options. One option might have been to file a rate complaint at the Surface Transportation Board, but rate cases are not a viable option for the chemical industry. The chairman of the STB has testified that rate cases are costly and long. We applaud him for recognizing this situation and speaking about it publicly. The STB has begun a process to review and revise the procedures for small rate cases and for seeking to bring about needed change. The recent provision on small rate cases that was included in the STB Reauthorization legislation reported from the Committee on July 17th is a step in the right direction. Captive rail customers note, however, that this is the second time since 1995 that Congress has directed the STB to correct this problem. Nevertheless, prospective effective alterations that may or may not occur can’t change the fact that today, just as when our situation in Bayport became critical, the only available remedy for achieving access to competition is pursuit of a build-out. Basell and three other shippers have joined with another railroad to create competition in Bayport, of which you are very familiar, Madam Chair. We have formed San Jacinto Rail Limited, an $80 million investment to provide competitively priced rail-service options. This is not an investment that is being made because we have more traffic than one railroad can handle. Rather, we’re building this redundant rail line simply to gain access to the existing competing railroad. Frankly, Madam Chair, I would much rather that Basell direct its efforts and resources toward developing new technology or upgrading our plant assets so that we could further improve our competitiveness and that of our customers. Unfortunately, the captive rates and poor service we endure at our Bayport plant threaten its very existence -- and the jobs it provides -- and breaking that captivity became paramount. I believe, Madam Chair, if a normal commercial relationship existed between the railroads and their captive rail customers, we would have been able to negotiate a mutually acceptable transportation agreement. In doing so, we would have avoided both disrupting the community and the unnecessary capital investment. And our current carrier may very well have retained our business. Unfortunately, current federal policy that grants virtually absolute power to the railroads over their captive customers removes major incentives for the railroads to achieve mutually beneficial commercial relationships with their captive customers. In 1980, when Congress voted to partially deregulate the railroad industry by enacting the Staggers Rail Act, Congress believed partial deregulation was the needed cure – and that economic regulation had outlived its usefulness; that railroads faced tough competition from trucks, barges, and pipelines, and that there were still a sufficient number of carriers to provide significant rail-to-rail competition. While the law did not deregulate the industry completely, Staggers freed the railroads from many regulatory burdens and allowed the rationalization of rail systems. In 1980, there were more than 40 major rail carriers. Today, however, just five major railroads handle 90% of the nation’s rail traffic. The damage to competition, to market-driven efficiencies, and to the quality and reliability of railroad freight services from consolidation has been enormous. WHY WE BELIEVE CONGRESS MUST ACT The power that the highly concentrated rail industry now wields in the United States can be the dominant factor in a company’s investment decision. In the Chair’s state, for example, Toyota only decided to invest $800 million in a new truck assembly plant in San Antonio after the creation of rail competition at the new plant. Toyota, a Basell customer, requires that at least two competing railroad companies have access to its manufacturing sites, which allows the company to keep its shipping costs down. We understand, by the way, that the incumbent rail carrier has, reluctantly, agreed to allow Toyota access to a second, competing railroad. It’s unfortunate that the same two railroads have not come to a similar agreement in response to the San Jacinto Rail Limited project in Bayport, Texas. Madam Chair, these transportation issues present serious problems for American businesses. The continued competitiveness of America’s manufacturing and producer industries demands that changes be made. That’s why I am deeply involved and committed to these issues. When I first became involved, it was out of great concern for the welfare of my company. However, as I learned more about these important issues, it became clear to me that much more is at stake – that these issues are critically important not only to our business but also, and more importantly, to the greater American economy and the jobs it provides. Over the course of the past year I have led a group of senior executives of U.S. manufacturing and production companies with facilities served by only one railroad carrier. Our group met with and pursued a dialogue with the CEO’s of the major U.S. railroads that serve captive customers. The dialogue has centered on two critical issues: (1) The financial health and viability of the railroads, including needed infrastructure improvements, and (2) The absence of a satisfactory, balanced commercial relationship between the captive rail customers and their rail freight carriers. These conversations began after John Snow, then Chair of the CSX Corporation, and I testified before the Senate Surface Transportation and Merchant Marine Subcommittee on the captive rail customer issue in July of 2002. Following our testimony, Senator John Breaux of Louisiana, then Chair of the Subcommittee, asked both Mr. Snow and me to enter into a dialogue on this issue and to involve other shipper and railroad CEOs in that dialogue. After the President nominated Mr. Snow to serve as Secretary of the Treasury, the dialogue continued with Matt Rose, the CEO of the Burlington Northern and Santa Fe Railway and current Chair of the Association of American Railroads, taking over Mr. Snow’s role in the dialogue. During this effort, we assembled representatives of many of the captive shippers and the railroads for one joint meeting. Since that group meeting, the dialogue has continued through a number of one-on-one meetings, telephone calls and correspondence. While engaged in the dialogue with the CEO’s and senior management of the railroads, representatives of rail freight customers examined their position and the need for a change in the status quo. With renewed focus, rail freight customers began coalescing around a few key principles aimed at enhancing competition and represented in the provisions of S. 919. That support has continually grown throughout the year, and, as I mentioned before, S. 919 now enjoys the support of 14 trade associations representing 2.4 million American jobs and more than half of the railroads’ total annual revenue. Since beginning the dialogue with rail executives at Senator Breaux’s request, I have engaged in many discussions and meetings about this issue. I am now convinced that the freight railroads will not budge from the status quo in which they have complete market dominance over their captive customers. The Staggers Act, the ICC Termination Act of 1995 and agency interpretation of those acts provided the market dominance railroads hold over their captive customers. While today’s railroad CEO’s may believe, or may be advised, that their fiduciary duties and corporate governance obligations require them to defend the status quo, that belief is misguided since it focuses only on the very short term. Indeed, I do not accept the status quo as a reasonable business model designed to propel the rail service business into the future. To the contrary, the current model will inevitably lead railroads to their financial brink, costing not only railroad shareholders, but also taxpayers and rail-dependent American enterprise. A FLAWED RAILROAD BUSINESS MODEL Madam Chair, based on my experience, I believe the major railroads in the nation are pursuing a flawed business model. Even the railroads agree that the gap between their annual income needs and their annual income is expanding, not shrinking. This is despite the fact that they have been allowed to consolidate to achieve cost synergies. These synergies should have allowed them to operate more efficiently and in a fashion that permits them to recover their cost of capital. They’ve also had the opportunity to transfer less profitable track to short line railroads and they have been able to increase the burden on captive rail customers. The result is simply that those customers with no alternative pay the most. Pursuing a strategy of continually loading more costs on captive rail customers does not appear to be a business model that will result in healthy American railroads in the long run. Captive rail customers will try to escape and the universe of captive rail customers is likely to be reduced over time. Some captive customers will construct rail line “build-outs” as we are. Some captive customers will shift their manufacturing activities to facilities that have transportation competition. Some captives will shift their manufacturing to foreign countries, exporting American jobs overseas. Some companies might be forced to close a U.S. plant or to forego an expansion without even having an offshore alternative. Under this business model, the industry will be required to load up even more costs on the remaining captives, thus accelerating the cycle. Let me be very clear: none of us seeks a return to the “bad old days” of the 1970’s when several of the major railroads were in bankruptcy and the industry lacked the capital necessary to maintain their systems. Unfortunately, after more than two decades since passage of the Staggers Act, the industry apparently continues to fall short of the revenue needed to provide a first class rail system for the nation. As described above, today’s rail executives will defend the status quo at all costs, and thus no solution to this problem can be negotiated among the relevant business interests. Unfortunately, captive rail customers likewise cannot expect regulatory relief from the Surface Transportation Board. While the STB has made several positive changes to its operating procedures since the arrival of Chairman Roger Nober, not everything at the railroad regulatory agency is up for review. In an interview published in the newsletter “Rail Business,” Chairman Nober, in response to a question about the reform sought by the captive rail customer coalition, stated, and I quote, “They have a lot of legitimate issues that they are raising. The core issues that they want to see done, though, are for the Congress.” End of quote. Madam Chair, this is a clear and definitive statement that the changes we urge today cannot be pursued anywhere but in Congress. S. 919 IS NOT RE-REGULATORY Madam Chair, there must be a better way for the railroad industry to achieve long-term financial viability while providing efficient service at prices that will allow American business to compete successfully in the global market. The time has come to move toward a partnership between government, the railroad industry and their customers -- a partnership that will ensure a national rail system that can meet the demands of our nation’s role in a global economy. We believe that balanced, fair legislation is needed to bring about a positive relationship between the railroads and the captive customers. Madam Chair, the railroad industry argues that S.919 is “re-regulatory”. Rail Industry documents cite two reasons. First, that S.919 allegedly caps rail rates. Second, that S.919 allegedly provides for “universal trackage rights”, a concept under which any railroad could run over any other railroad’s tracks. These allegations are simply not true. S.919 does not cap rates. In fact, S.919 does not address the rate regulatory process at all. S.919 does not change the current rate standards of the Surface Transportation Board. S.919 does not force the railroads to provide rates to a “special group of customers” at “lower than market rates.” S.919 does not reduce the minimum captive rail customers must prove they pay, which is 180% of the railroads’ variable costs, in order to seek rate relief at the STB. Notably, rail freight customers enjoying competition pay on average only 106% of the railroads’ variable costs, even though railroads state they must receive 150% of their variable costs in order to earn a sufficient return. S.919 does not shift any burden of proof in rate cases to the railroads; perhaps unique in American regulatory experience, all burdens of proof are on the rail customer. S.919 does not require the railroads to post tariffs or to obtain prior approval of the STB for any tariffs that they do post. Finally, S.919 does not even prescribe the rate that a railroad must quote across a bottleneck. Rather, S.919 simply requires the railroad to provide a rate across its bottleneck to the facilities of a competing railroad. Nor does S. 919 provide for “universal trackage rights” under which one railroad may operate over the tracks of another on demand. What S.919 does in the area of competition is over-rule three interpretations of the Staggers Rail Act by the Surface Transportation Board and its predecessor agency that we believe were not contemplated by Congress in 1980. S.919 over-rules the “bottleneck” decision of the STB in 1996 by requiring a railroad that has a customer captive behind a “bottleneck” to provide a rate across the bottleneck to the facilities of a competing carrier. It is important to recognize that the customer will remain captive for the bottleneck movement and that S.919 does not prescribe the rate to be charged. However, we believe strongly that a railroad should not have the right to make a customer captive artificially over that portion of a movement where a rail transportation alternative exists. S.919 also overturns a 1986 interpretation of the “terminal access” provision of the Staggers Rail Act. “Terminal access” governs how railroads interact with each other at various rail terminals where they exchange railcars for the purpose of moving freight across the nation and how freight moves from the bottleneck carrier to the competing railroad in the San Jacinto and Toyota examples. Since the 1986 interpretation, no captive rail customer has won a “terminal access” case at the STB or its predecessor agency. Finally, S.919 provides a mechanism by which “paper barriers” can be removed by the STB. The Staggers Act of 1980 allowed the major railroads to “rationalize” their systems. One way they did this was to sell their less profitable track to short line railroads. However, through provisions in their sales or leases of this track, all of which provisions were approved by the STB or its predecessor, the railroad retained control of the traffic over the short line by requiring it to come back to the major railroad for long distance movement, even when the short line could deliver the freight to a second major railroad. Thus, these “paper barriers” have prevented captive customer access to rail competition. S.919 outlaws these provisions in the future and allows the STB to remove existing provisions that have been in place 10 years, after making certain findings. We believe S.919 will enable the national rail system to evolve toward a more competitive system that serves the needs of our nation in a competitive global market. The Ocean Shipping Reform Act of 1998 is an example of how market forces can restore balance to commercial relationships. That act opened the door for large and small ocean shippers and ocean transportation intermediaries to put in place creative contracts that allow them to combine freight in multiple trade lanes and reduce shipping costs. CONCLUSION Madam Chair, we believe there is nothing in S.919 that is either re-regulatory or radical. Yes, if S.919 or its provisions were to be enacted, the railroads would have less opportunity to load up on at least some of their captive customers. There may be temporary difficulties as the railroads move to a new, modern business model. We understand the difficulties of the competitive environment. We operate in a competitive environment every day. However, we believe S.919 will force the railroad industry to move to more normal commercial relations and partnerships with their captive customers. We believe this will result in increased rail business as the competitiveness of their captive customers improves. This evolution is crucial to the health and viability of the railroad industry, to our nation and to our ability to compete in the global market place. Madam Chair, I am not here today to ask Congress to resolve issues that can be resolved by captive rail customers and the railroads working together, and with the STB, to benefit their own industries. We are in fact doing that. But what I have learned over the past year in immersing myself in this issue is that there is a basic impediment to affecting any meaningful move in rail competition and it cannot be resolved without the intervention of Congress. Finally, Madam Chair, captive rail customers are not the enemy of the railroads – we are their best customers. But, the fact is that the STB’s interpretation of the Staggers Act has given railroads a monopolistic advantage over captive shippers, which provides a major, steady stream of revenue for the railroads. Furthermore, the rail CEO’s view of their fiduciary responsibilities blinds them from considering any course of action other than to protect and exercise this monopoly advantage. Consequently, they will not give this advantage away through negotiations with their customers. If the railroads, our business and the economy are to prosper, our relationship must evolve from one of captivity with all of its negatives to one of partnerships where mutually beneficial transportation agreements can be developed. But, we cannot get to that point without your help. The railroads won’t willingly change and the STB has declared this issue is for Congress. Thus, Congress must address this situation before the current system creates more serious problems that will be very difficult and costly to correct. Thank you, Madam Chair, for this hearing, for your interest in this issue and for the opportunity to present our case to you and your colleagues.