North American Fertilizer Transportation Conference

Recent Activities at the STB and the State of North America’s Railroads

Acting Chairman Francis P. Mulvey August 10, 2009

Whistler, British Columbia

STB Background

• Successor to the ICC

• Three member board—non-partisan

• Railroad rate and service disputes

• Railroad mergers and acquisitions

• Abandonments and new construction

• Limited jurisdiction over other modes

Rail Rate Cases at the STB

• Much railroad traffic exempt from STB regulation—traffic moving under contracts, commodity exemptions

• Many shippers claimed that rate cases took too long and cost too much to adjudicate

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

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

New STB Procedures for Handling Rate Cases

In October 2006 STB issued decision that called for a “streamlined” approach to large rate cases

In September 2007 STB issued new guidelines for small rate cases, giving access to the roughly 73 percent of shippers for whom the large case procedures are impractical

Courts have upheld the new procedures

Experience with Streamlined Process for Large Rate Cases

• 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

New Standards for Small 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

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 considered correction

• Cases have settled via STB mediation• Two US Magnesium vs. UP chlorine

cases currently before STB

Board Activities on the Common Carrier Obligation

• By statute railroads must provide “transportation or service on reasonable request”

• Bedrock principle of transportation, especially rail freight transportation

• But: what does it mean? How absolute is it? What constitutes a reasonable request?

Board Activities on the Common Carrier Obligation

• April 2008 hearing on Common Carrier Obligation led to comments on a variety of issues including:

--Effect of capacity constraints on the common carrier obligation

--Economically motivated service restrictions

--Use of embargoes (Coos Bay case)• High participation at hearing by chemical

industry, including Fertilizer Institute• TIH issues dominated proceeding

Board Activities on the Common Carrier Obligation

• At July 2008 hearing on TIH, STB sought comments on: What is a reasonable request? Are there unique costs associated with TIH movements and who should bear them? Are there any solutions to address railroads’ concerns about ruinous liability?

• Shippers want assured access; AAR wants policy statement approving rail right to require liability sharing

• Still pending at the Board

Recent STB Activities on Hazmat Transportation

• March 2005—Declaratory order on Washington, DC government ban on hazmat movements in the city

• January 2009--ANPR sought comments on updating STB cost system to address costs of transporting hazmats

• February 2009--Decision on preemption of local restrictions on transloading ethanol in Alexandria, VA

• June 2009--Declaratory order requiring UP to quote a rate for moving chlorine through high threat areas

Informal STB Activities Involving TIH/Hazmat Issues

• STB staff closely monitor informal complaints involving TIH movements

• STB’s Rail Consumer Protection Program handled 25 complaints in 2008 involving chemicals including TIH materials

• So far in 2009 staff have handled 14 complaints involving chemicals including TIH materials

Canadian/US Railroad Restructuring

• STB’s revised merger guidelines

• The Board’s classification of railroad mergers (major, significant and minor)

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

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

Pending Legislation Involving the STB

• House and Senate Committees (Oberstar & Rockefeller) drafting legislation that would– Reauthorize the STB– Change how the railroad industry is regulated

• Proposed changes to railroad antitrust exemptions would have– Given DOJ shared authority over rail mergers and

acquisitions– Removed railroad immunity from antitrust laws for anti-

competitive actions – Allowed states and private parties to sue for injunctive

relief– Might be considered in STB Reauthorization bill

• Rail infrastructure 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

• Overall rail traffic flat this year • Nearly one-half million railcars idled as are

thousands of locomotives• Capital expansion plans are on hold and

thousands of workers have been furloughed

0

50000

100000

150000

200000

250000

300000

1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2008

Growth and Decline of Railroad Mileage

Railroad Employment 1939-2007 (in thousands)

0

200

400

600

800

1000

1200

1400

1600

1800

1939 1944 1947 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2007

Carloads Originated

1998-2007

25,000

26,000

27,000

28,000

29,000

30,000

31,000

32,000

33,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total TrafficU.S. Class I Railroads 2007- Present

190,000

220,000

250,000

280,000

310,000

340,000

370,000

1/5/2007

3/5/2007

5/5/2007

7/5/2007

9/5/2007

11/5/2007

1/5/2008

3/5/2008

5/5/2008

7/5/2008

9/5/2008

11/5/2008

1/5/2009

3/5/2009

5/5/2009

Car

load

s O

rig

inat

ed

Class 1 Railroads Rates of Return on Net Investments

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

RATE

Rate 1.73%1.20%4.22%4.58%8.11%7.04%9.36%7.56%7.00%6.93%6.48%6.85%7.04%6.33%6.12%8.46%10.17 9.87%

1970 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Railroad Revenue Adequacy – ROIs and Cost of Capital

Railroad 2000 2001 2002 2003 2004 2005 2006 2007

BNSF

8.8 7.1 6.4 6.2 5.84 9.7611.43

A9.97

CSX3.6 4.6 5.2 4.0 4.43 6.23 8.15 7.61

CN/Grand Trunk5.9 4.9 3.1 4.5 5.95 8.07 9.47 10.11

KCS6.3 7.0 6.5 3.7 8.3 5.89 9.31 9.37

NS

5.5 8.3 9.1 9.111.64

A13.21

A14.36

A13.55A

CP/Soo Line5.6 5.9 5.7 0.9 3.28 8.89 11.60A 15.25A

UP6.9 7.6 8.6 7.3 4.54 6.34 8.21 8.90

COST OF CAPITAL 11.0 10.2 9.8 9.4 10.1 12.2 9.94 11.33

"A" Signifies that the carrier was revenue adequate for the particular year.

State of the Railroad Industry

• When will railroads recover?• Rail carloadings have generally been

considered a leading economic indicator• Despite some positive signs it is not clear

that a turnaround has begun• Rail’s 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

Thank youAny Questions?