The State of the Nation’s Freight Railroads and the Role of the STB

Acting Chairman Francis P. Mulvey

Midwest Association of Rail Shippers

July 14, 2009

Delavan, Wisconsin

Recent Changes at the STB

• Commissioner Doug Buttrey retired

• Currently, only two STB Commissioners on board, but not an unprecedented situation

• President Obama named Mulvey Acting Chairman in March 2009

• President nominated Daniel Elliott to be next Chairman on July 6, 2009

STB’s Responsibilities

• Focus is on regulating railroads—rates for captive shippers, mergers and acquisitions, abandonments and new construction, service levels

• Residual responsibility for water carriage, pipelines, and trucking

The Mission of the STB

• Despite changes in STB leadership, primary mission of the STB remains unchanged

• STB must balance need for railroads to earn adequate revenues with shippers’ need for reasonable rates

• Ensure structural changes in the railroad industry are in public interest

• STB must adapt to changing conditions

Rail Rate Cases at the STB

• Much railroad traffic exempt from STB rate regulation

• Shippers often claimed rate cases took too long and cost too much to bring

• Many shippers felt they had no access to STB’s processes for rate relief

• Congress directed the Board to develop procedures for small rate cases

Recent Activities at the STB

• Streamlined procedures to reduce time and cost for adjudicating large rate cases—Court of Appeals upheld

• First large rate cases handled under new guidelines—AEP North Texas, Western Fuels, KCPL

• Major shipper win in Western Fuels• Major case involving DuPont and CSX

resolved through STB-facilitated mediation• Small rate case guidelines applied in DuPont

cases

Simplified Standards for “Small” Rail Rate Cases

• STB Decision – September 2007, Court of Appeals upheld in June 2009

• Provides access to the rate reasonableness process for all sizes of rail rate disputes, and in particular, to the estimated 73% of challengeable rail traffic for which the large rate case process would be financially impracticable

• Requires, for all rail rate disputes, mandatory, nonbinding mediation—a mechanism that has been used successfully in previous cases to arrive at negotiated settlements

Simplified Standards for Rail Rate Cases

• Allows rail customers to choose the methodology that is most appropriate for consideration of their complaint:

– A rail customer choosing the simplest approach, the “Three-Benchmark” methodology, is eligible to recover up to $1 million over a 5-year period

– A rail customer choosing the “Simplified Stand-Alone Cost” methodology is eligible to recover up to $5 million over a 5-year period

– Court upheld shipper challenge to maximum recovery levels

Experience with Small Rate Case Guidelines

• First cases brought by DuPont

• Six lines of traffic found market dominant; rate relief ordered

• Cases were appealed; court docket held in abeyance while STB considers applying a formula that would correct a tax issue

Review of Carrier Operating Practices

• Hearing on the railroads’ common carrier obligation

• New disclosure rules on paper barriers; Entergy case, shipper permitted to re-file case under appropriate section of statute

• Fuel surcharge decision, changes in filing requirements

Railroad Restructuring

• STB’s Revised Merger Guidelines

• Agency’s classification of railroad mergers

• Canadian Pacific’s acquisition of the DM&E—first significant case

• Canadian National’s acquisition of the EJ&E—minor transaction but full EIS

• Pan Am/NS Patriot Corridor project

Environmental Reviews

• Overall responsibility for environmental review of new railroad construction and abandonments

• DM&E Powder River Basin expansion project and the IC&E

• Yucca Mountain• Environmental review of the CN/EJ&E

acquisition• Pan Am/NS Patriot Corridor project

• Rail Cost of Capital Methodology Revision and Adoption of Capital Asset Pricing Model

• Inclusion of Multi-Stage Discounted Cash Flow Model

• Creation of Rail Energy Transportation Advisory Council

• Reorganization of Consumer Protection and Enforcement and Public Affairs Sections

• Hearing on Uniform Railroad Costing System April 30, 2009—staff examining how to update/improve URCS

Changes in the STB’s Practices and Procedures

Changes in STB’s Responsibilities

• Changes incorporated in Clean Railroads Act

• Requirements to mediate commuter/freight rail access disputes

• Requirements to decide causes of intercity passenger train delays and prescribe remedial actions

Pending Legislation Involving the STB

• House and Senate drafting legislation that proposes to

– Reauthorize the STB

– Change how the railroad industry is regulated

• Proposed removal of railroad antitrust exemptions now may be incorporated in STB Reauthorization legislation

• Rail Investment tax credits

State of the Railroad Industry

• After several years of constrained capacity, railroads again have excess capacity

• Traffic is down for virtually every commodity hauled by rail

• Nearly one-half million railcars idled as are thousands of locomotives

• Capital expansion plans are on hold and thousands of workers are being furloughed

State of the Railroad Industry

• When will railroads recover?• Rail carloads are generally a leading

indicator—despite some positive signs it is not clear we have reached bottom

• Railroads’ long run capital needs might be less than forecast earlier

• New study for STB by Christensen Associates takes into account economic downturn and the trends in composition of rail traffic

Total TrafficU.S. Class I Railroads 2007- Present

190,000

220,000

250,000

280,000

310,000

340,000

370,000C

arlo

ads

Orig

inat

ed

Lumber TrafficU.S. Class I Railroads 2007- Present

0

1000

2000

3000

4000

5000

6000C

arlo

ads

Orig

inat

ed

Metals & Products TrafficU.S. Class I Railroads 2007- Present

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Car

load

s O

rigin

ated

Thank youAny Questions?