THE RENAISSANCE IN CONTEXT: RAIL CUSTOMERS & THE QUEST FOR CONSTRUCTIVE DIALOGUE

1. 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

2. 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.

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

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

5. 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.

6. 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.

7. What Has Actually Happened Over The Last 25 Years?

8. 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.

9. Monopoly Power • Consolidation to 4 large major railroads handling over 90% of the nation’s traffic Remainder of American Railroads Four Major Railroads

10. 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.

11. 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.

12. 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!

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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 theSenate Judiciary Committee

21. 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

22. 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

23. 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

24. 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