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TESTIMONY OF MR. JOHN B. FICKER PRESIDENT THE NATIONAL INDUSTRIAL TRANSPORTATION LEAGUE OVERSIGHT HEARING ON THE SURFACE TRANSPORTATION BOARD AND REGULATIONS RELATED TO RAILROADS BEFORE THE Committee on Commerce, Science, and Transportation Subcommittee on Surface Transportation and Merchant Marine OCTOBER 23, 2007
TESTIMONY OF MR. JOHN B. FICKER PRESIDENT, THE NATIONAL INDUSTRIAL TRANSPORTATION LEAGUE The National Industrial Transportation League is pleased to have been invited to present testimony on the Surface Transportation Board (STB) and regulation related to railroads. The League is the nation's oldest and largest association of companies interested in transportation. We recently celebrated our 100th anniversary. Its 600-plus members range from some of the largest companies in the nation to much smaller enterprises. Many members of the League ship via rail, and are vitally interested in the capacity, service, and competitiveness of the nation's rail industry. But League members also substantially ship via other modes, both domestically and internationally, and the problems of capacity must also be looked at in this broader context, as many modes are facing capacity constraints. Throughout its history, the League has been active in rail matters before Congress, the Interstate Commerce Commission, its successor agency the Surface Transportation Board, as well as in private sector discussions and negotiations with railroads both individually and collectively. The League has always supported a strong and viable rail network to provide the essential transportation services in support of both the defense of the United States and the economic vitality of our country. As Committee members know well, the Staggers Rail Act changed the regulatory landscape of the rail industry from one that was heavily controlled by government regulators to one that emphasized competitive markets as the primary and most efficient arbiter of the relationship between shippers and carriers, and where regulation was confined to those instances where there was a lack of effective competition. The framers of the Staggers Act had two primary goals, to restore financial health to the rail industry, which at the time was facing major financial challenges; and to make competition, not regulation, the guiding force in the rail transportation market. Since the passage of the Staggers Act much has changed. A once-tenuous rail industry financial environment has morphed into a positive one. Today, the rail industry is recognized by Wall Street as financially successful and one to be considered by today’s investors. Nothing could provide more evidence of this change than the recent investment by one of America’s most respected investors, Warren Buffett, who has taken a major stake in BNSF. Additionally, major investment houses such as JP Morgan Chase, Morgan Stanley, Bear Stearns and Credit Suisse all have indicated that the rail industry has become an attractive investment opportunity – a further indication of the financial health of the industry. Finally, the fact that many railroads have begun stock buyback programs is an indication of their internal confidence in their financial strength and stability. This past week, America’s largest railroad, the Union Pacific announced a 27% increase in 3rd quarter profits on 34% increase in operating revenue. This is clear evidence of the achievement of one of the major goals of the Staggers Act. Since the implementation of the Staggers Act many other factors have changed the transportation environment. Mergers have consolidated the industry from over 40 Class I carriers to just seven. At the same time, there has been major growth in the number of short line railroads. The U.S. economy has undergone significant changes as well, which have in turn caused major changes in the rail industry. Massive growth in imported consumer products has led to significant growth in intermodal movements. Increase in the movement of unit trains of coal, grain and other products have strained a system that had for years been reducing capacity. A combination of traffic growth; change in traffic mix; driver shortages in the motor carrier industry; and reductions in rail capacity through abandonments, have all led from a system once characterized by excess capacity across all modes, to a situation in which there are across-the-board capacity shortages, not only in rail transportation, but in trucking as well. This period also saw an enormous increase in fuel costs. These factors have strained the transportation system, causing congestion at key points both in truck, rail and ports. To meet the ever-growing demand, rail carriers encouraged rail shippers to acquire additional equipment, which put further pressure on an already-strained system. Service levels deteriorated as evidenced with the peak season problems encountered in 2004. All of these forces have created a rail industry far different from the ones the framers of the Staggers Act worked to correct. The capacity constraints caused rail carriers to shift their focus away from seeking additional volumes and instead to try to restrict the volume of traffic handled. A new word entered the rail transportation lexicon: “de-marketing.” With rapidly increasing demand, railroads found themselves in the enviable situation of being able to significantly increase prices charged to shippers well beyond the increase in costs incurred. The mark for “whatever the market would bear” increased substantially. While many League member companies are in commodity businesses that deal with price fluctuations based on supply and demand, they now found a situation of rapidly increasing rail transportation costs. The Staggers Act provided carriers and shippers the opportunity to enter into contracts to allow predictable costs for shippers and predictable volumes for carriers. The introduction of capacity constraints has allowed carriers to discontinue offering contracts to many shippers and to shift to public pricing. This approach permits rail carriers to adjust prices more rapidly, thus impacting shippers’ ability to plan their transportation costs. In many cases shippers had little recourse when carriers increased prices since there were few or no competitive alternatives to rail transportation. The League actively participated in the General Accountability Office (GAO) study which is in part the subject of this hearing. League staff and several League members met with GAO staff to discuss rail issues, and provided information to assist GAO in its study. Much of the League’s discussion with GAO centered on the problem of the rail industry’s capacity constraints. In March of last year, the League and several of its members appeared before a panel organized by the GAO to consider the current state of the rail industry and to advise GAO on its study. As the GAO study points out, the needs of the rail industry and its market place have changed dramatically and these changes require a new approach. There must be an increased emphasis on value provided by the rail industry to shippers and to the economy as a whole. Creative and collaborative approaches must be the new mindset. Carriers must have the opportunity to realize a fair return on their investment while providing shippers with quality service. Carriers and shippers must be increasingly flexible to deal with rapidly changing circumstances. The most significant challenge the rail industry and its customers face is the need to expand existing rail capacity to meet with growing demand. The Association of American Railroads (AAR) released a study, National Rail Freight Infrastructure Capacity and Investment Study, in September indicating that projected growth in rail volumes will require major investments. The report was done by Cambridge Systematics in cooperation with the railroads themselves points out that in the next 28 years an investment of $148 billion to meet the projected demand. The American Association of State Highway and Transportation Officials (AASHTO) has released a study in May called America’s Freight Challenge indicating rail freight demand will increase by 69% based on tons and 84% based on ton-miles by 2035. According to the U.S. Chamber of Commerce, by 2020, even with modest economic growth, the total domestic tonnage carried by the U.S. freight system will increase by almost 67% and international trade will nearly double. These many factors require the STB to adjust its regulatory approach to deal with this new reality. It is no longer appropriate to utilize past practices to respond to today’s market place. First and foremost, the STB needs a more balanced regulatory approach. The League is pleased that under the leadership of Chairman Nottingham, the STB appears to have adopted such an approach. Earlier this year the STB announced a more fair and balanced approach to fuel surcharges. In this connection, the League believes that if railroads desire to cover the changes in their cost of fuel, they should be able to apply a cost-based fuel surcharge to all rail shipments, whether they are commodities regulated by the STB or not. However, if rail carriers enter into contracts that do not allow for the application of such cost-based surcharges, those remaining shippers that are subject to fuel surcharges should not be made to make up, for the shortfall in fuel cost recovery. The STB’s recent proposal to modify its calculation of the rail industry's cost of capital is also a positive development. That decision more closely aligns the STB's calculation of the rail industry's cost of capital with that used by the Federal Reserve Board. The change is long overdue: it was a cause for wonderment that, while Wall Street analysts were touting the financial strength of the rail industry, the STB was citing the industry's poor financial condition. If the STB follows through with its proposal, the view of the financial community and the view of the regulatory agency would be more reasonably aligned. We urge the STB to act promptly to adopt its proposal. The recently announced decision on Simplified Rate Case standards is also in part a step in the right direction, although the League is still seriously concerned about several important aspects of the decision. This effort, mandated by Congress over 10 years ago, was recently released by the STB. The League has been active in this proceeding for years and believes that shippers need an reasonable approach to resolving rate disputes with carriers – one of the services the STB is directed to provide. The League believes that this decision, while in part a step forward, needs further changes. The League, along with 41 other associations and entities, has recently asked to the STB to reconsider its decision in a number of important respects. The League looks forward to early and favorable action by the STB on its petition. A matter of some concern is the recent action by the AAR and five Class I railroads in filing a petition for judicial review of this decision with the DC Appellate Court which could suggest that the railroads intention is to impact the positive direction of the STB. However, the League believes that the optimal solution to the issues confronting shippers and rail carriers is a private sector agreement that will address the needs of both. The League has been engaged with the railroads through the AAR in just such discussions. The League has developed a proposal that would provide an alternative dispute resolution methodology for shippers and carriers that would be simple, fair and expeditious. It is the League's hope that such an agreement would provide the framework for a new relationship between the parties, allowing all parties to quickly resolve their differences and focus on the larger issues facing our freight transportation industry. As these discussions are on-going, we do not believe it is appropriate to discuss them publicly. The League would be pleased to brief Members and staff at their convenience. The League is pleased to have the opportunity to present our views before the committee and looks forward to helping in developing solutions to deal with the challenges of meeting the growing transportation needs of our country.
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