Prospects for Rail Regulatory Reform: AS hipper Perspective

							THE RENAISSANCE IN CONTEXT:
RAIL CUSTOMERS & THE QUEST
FOR CONSTRUCTIVE DIALOGUE
     Midwest Association of Rail Shippers
                  Saint Charles, IL
                  January 16, 2008

              Robert G. Szabo
       Executive Director and Counsel

           Consumers United for Rail Equity (CURE)
      1050 Thomas Jefferson Street, N.W. • Seventh Floor
                   Washington, D.C. 20007
                (202) 298-1920 • rgs@vnf.com
                   What is CURE?
    CURE is an incorporated, non-profit organization
     whose mission is to advocate improved rail policy for
     rail customers and the nation.


    The CURE Campaign consists of CURE and other
     organizations that have united to advocate for
     legislation in the 110th Congress.


    CURE members are shippers dependent on the
     railroads for transportation.



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              What Do Rail Customers Want?
       Reliable rail service at reasonable prices
       Transportation choices, wherever possible
       Normal commercial relationship with their
        railroad carriers




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                          Our View of
                   the Evolution of Railroads
                     over the Last 25 Years




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                   What Congress Saw in 1980
         In 1980, Congress saw a railroad industry that was
          overbuilt, rigidly regulated, failing financially and
          unable to provide reliable service.
         Almost every railroad activity required prior approval
          from the Interstate Commerce Commission (ICC).
         No contractual arrangements were allowed between
          railroads and their customers.
         The rail system was poorly positioned to meet the
          needs of the nation in the late 20th Century.




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          What Congress Intended in 1980
         Access to competition would replace government regulation
          for most railroads/customers relationship
         Railroads and rail customers could enter into negotiated
          contracts for services.
         The railroads could more easily “rationalize” their systems.
         Those rail customers without access to competition would
          continue to be protected from railroad monopoly abuse.
         Through competition, the railroads would gain
          financial health.




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                   What Has Actually Happened
                    Over The Last 25 Years?




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        Thousands of miles of track abandoned; thousands of
         employees dismissed.
        Thousands of miles of track transferred to 400 + short
         lines, but most limited to doing business with only one
         major railroad.
        Traditional railroad capital costs pushed on to rail
         customers.
        The ICC, concerned about railroad financial health,
         adopted a passive stance in the early 1980s that has
         become even more passive under the STB.
        Less and less transparency regarding railroads, their
         finances, their rates and their practices.




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                    Monopoly Power
         Consolidation to 4 large major railroads handling
          over 90% of the nation’s traffic



                                                  Remainder of
                                                  American
                          Four Major              Railroads
                          Railroads




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        Fewer competitive choices for rail customers as the nation
         enters the 21st century


        ICC/STB decisions actually have allowed the railroads to
         deny their customers access to competition.


        STB rail customer protections have become increasingly
         complex and difficult to access; little relief at the STB for rail
         customers.


        Most recently – 2004 – demand exceeded capacity and the
         railroads achieved “pricing power” over their customers,
         which continues today.




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                        Bottom Line

           Rail customers believe that they have neither
            the access to competitive rail transportation
           promised by the Staggers Rail Act of 1980 nor
             access to workable regulatory protections
                 where competition does not exist.




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                        Wall Street Darlings
         Railroads are darlings of Wall Street; hedge funds have discovered railroad
          stock; railroads are buying back their stock, usually with cash; and
          investors are demanding that railroads double their prices in the next
          decade – never once even considering that the STB might constrain those
          price increases!




January 16, 2008                          12
                     October, 2006 GAO Report

         Lack of competition in the rail industry
          and STB not using its powers to ensure
          competition
         Rail customer protections at
          the STB are inaccessible
         The STB continues to under-
          estimate railroad revenues



        * Supplemented on August 15, 2007

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                      Rail Customer Reforms
         Rail customers want access to rail
          competition where physically available
               • Remove short line “tie in” agreements

               • Require RR to quote rate to point of access to another
                   railroad

               • Simplify reciprocal switching and terminal access
                   proceedings




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         Rail customers want a rate challenge process
          that works
               • Reasonable filing fees

               • Traditional cost of service plus reasonable rate of return
                   standard

               • Anyone paying more than 180% R/VC can challenge rate

               • Railroad with market power must justify the reasonableness
                   of the rate




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    Rail customers want an STB empowered to
     address service problems of those rail
     customers without access to competition
          • Make clear that the railroads have an obligation to serve

          • Empower the STB to ensure service

          • Empower the STB to fine railroads that fail to serve




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        Rail customers want a pro-active STB that is
         empowered to suspend and investigate
         unreasonable railroad practices
              • Fuel surcharge outcome unacceptable; should have been
                   prevented earlier

              • The passive posture of the early 1980s is no longer
                   appropriate for a consolidated industry that is exhibiting
                   pricing power and robust financial health




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                         Antitrust
         The railroad industry is largely exempt from
          the nation’s antitrust laws
         Rail customers want the railroads to be
          subject to the nation’s antitrust laws – just as
          are rail customers
         Mergers should be subject to the antitrust
          laws of the nation
         Anticompetitive conduct should be subject to
          the antitrust laws of the nation

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                   Rail Customer Legislation
         Railroad Competition and Service
          Improvement Act of 2007 (H.R.2125/S.953)
               • Growing bipartisan support in House and Senate Contains
                   rail customer reforms discussed above

               • Lead House sponsor: Chairman Jim Oberstar (D-MN), chair
                   of the House committee of jurisdiction




January 16, 2008                         19
         Railroad Antitrust Enforcement Act of 2007
          (S.772/H.R.1650)
               • Growing bipartisan support in House and Senate

               • Removes railroad exemptions from antitrust law

               • Lead sponsor in Senate: Senator Herb Kohl (D-WI),
                   chair of the Antitrust Subcommittee of the
                   Senate Judiciary Committee




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                   What These Bills Do Not Do
         Subject transactions to rate regulation that
          are not today subject to rate regulation
         Reduce the 180% R/VC minimum rate level
          for “captive” traffic
         Allow one railroad to operate on the tracks
          of another
         Apply retroactively




January 16, 2008              21
                            Legislative Update
         Antitrust Bill (S.722/H.R.1650)
               •   Ordered reported by Senate Judiciary Committee on September 25, 2007
               •   Bipartisan voice vote
               •   Report filed by Committee
               •   S. 772 placed on Senate calendar on December 19, 2007
         STB Reform Bill (S. 953/H.R.2125)
               •   House hearing on issue on September 25, 2007
               •   Senate hearing on issue on October 23, 2007
               •   Congressman Oberstar, Chairman of House Transportation and
                   Infrastructure Committee, and lead sponsors of H.R. 2125 promises
                   committee action in 2008
               •   Pressure increasing in Senate Commerce Committee for action in 2008



January 16, 2008                               22
    Proposed Investment Tax Credit for
         Railroad Infrastructure
         Rail customers could support if rail customers
          concerns are addressed and tax credit
          benefits more than imports and tax credits
          result in a pro-competitive national rail
          system.
         Rail customers will oppose this tax credit if
          their concerns are not addressed




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        For More Information on CURE or
         the Captive Rail Issue Contact…

                             Bob Szabo
                   Executive Director and Counsel
                   Consumers United for Rail Equity
                     Member, Van Ness Feldman
                           (202) 298 – 1920
                            rgs@vnf.com
                          www.railcure.org
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