Rail Transportation of Coal to Power Plants: Reliability Issues

Rail Transportation of Coal to Power Plants:
Reliability Issues
September 26, 2007
Stan Mark Kaplan
Specialist in Energy and Environmental Policy
Resources, Science, and Industry Division

Rail Transportation of Coal to Power Plants:
Reliability Issues
Summary
Half the nation’s electricity comes from coal, and most of that coal is delivered
to power plants by railroads. The reliable supply of coal by rail is therefore important
to the electric power system. Concern over reliable deliveries of coal and other
commodities, limited rail system capacity, and related issues such as rail rates,
sparked several congressional hearings in 2006.
This report provides background information and analysis on coal transportation
by rail to power plants. The report discusses:
^!Problems since 1990 with the rail delivery of coal.
^!Implications of rail capacity limits on service reliability.
^!The role of coal inventories as a backstop to reliable coal deliveries.
^!Proposed legislation intended, in part, to improve the quality of rail
service to coal-fired plants and other shippers.
The report also identifies data and analysis gaps that complicate measuring the
scope of rail service and capacity issues, determining the need for federal action, and
evaluating the possible efficacy of proposed legislation.
Freight rail transportation and electric power generation are mutually dependent
network industries. Railroads accounted for over 70% of coal shipments to power
plants in 2005, and due to economic and physical limitations on other modes (truck,
barge, and conveyor) the heavy dependency of the power industry on rail
transportation is likely to continue into the future. From the standpoint of the rail
industry, coal transportation is an important business, accounting in recent years for
about 20% of freight revenues for the major railroads.
The mutual dependency between the rail and power industries creates a complex
business relationship. There are connections and to some degree tradeoffs between
such factors as railroad investments in capacity and service enhancement, and power
company tolerance for transportation risk and willingness to carry the cost of larger
coal stockpiles. A central point is that increasing the reliability of coal deliveries to
power plants costs money, as does coping with disruptions. A central issue between
power companies and railroads is how these costs should be shared.
Proposed legislation before the 110^th Congress discussed in this report includes
the Freight Rail Infrastructure Capacity Expansion Act of 2007 (S. 1125 and H.R.
2116), the Railroad Competition and Service Improvement Act of 2007 (S. 953 and
H.R. 2125), and the Railroad Antitrust Enforcement Act of 2007 (S. 772 and H.R.

1650).

This report will be updated as developments warrant.

Contents
Introduction and Review of Findings...................................1
Review of Findings............................................1
Background: Coal and Rail in the U.S. Power System.....................6
Role of Coal and Rail in Power Production..........................6
Critical Role of the Powder River Basin............................7
Background: the Railroad Industry...................................13
Composition of the Industry....................................13
Period Before Passage of the Staggers Rail Act.....................16
The Staggers Act.............................................19
Railroad Productivity and Efficiency Trends........................22
Railroad Capacity.................................................25
Rail System Capacity and Service................................25
Means of Increasing and Allocating Rail System Capacity.............27
Railroad Capital Spending......................................29
Rail Capacity Metrics..........................................34
Future Rail Capacity and Investment Needs........................38
Coal Stocks as a Complement to Rail Capacity Expansion.............39
Railroad Service and Disruptions in Coal Transportation..................43
Service Quality Since Staggers..................................43
Rail Service Metrics and Disruptions ............................46
Consequences for Power Generation of Coal Transportation Disruptions.49
Rail Rate Trends.................................................52
Analysis of Legislative Proposals: Tax Incentives.......................56
Description of Legislative Proposals..............................57
Discussion ..................................................59
Control .................................................59
Expected Outcomes.......................................62
Information .............................................64
Tax Incentives: Considerations and Options....................64
Analysis of Legislative Proposals: Regulatory Restructuring...............65
National Rail Transportation Policy..........................66
Bottlenecks and Competitive Rail Access......................66
Interchange Commitments/Paper Barriers......................67
Rail Service.............................................68
Rate Appeals............................................68
Authority to Investigate and Suspend.........................69
Description of Legislative Proposals: Antitrust......................69
Discussion ..................................................72
Rail Industry Competition and Service........................72
Revenue Adequacy.......................................75

Appendix 1. Significant Disruptions in Deliveries of Coal to Power Generators
Since 1990..................................................87
Appendix 2. Costs and Other Consequences of the 2005-2006 Disruption
in Rail Transportation of Coal...................................88
List of Figures
Figure 1. Coal Fields and Regions of the United States....................9
Figure 2. Powder River Basin Coal Field and Railroads...................10
Figure 3. Burlington Northern Santa Fe Rail System.....................11
Figure 4. Union Pacific Rail System..................................11
Figure 5. Proposed Combination of the Canadian Pacific and Dakota,
Minnesota, & Eastern Rail Systems...............................12
Figure 6. Norfolk Southern Rail System...............................15
Figure 7. CSX Rail System.........................................16
Figure 8. Rail Share of Domestic Surface Freight Market.................18
Figure 9. Class I Railroad Productivity Trends..........................23
Figure 10. Trends in Rail Operating Cost and Revenue Margin Efficiency....24
Figure 11. Capital Expenditures by Class I Railroads, 1983-2005,
in Nominal and Constant 2000 Dollars............................31
Figure 12. BNSF Investments to Increase Coal Capacity,
1994-2005 ..................................................34
Figure 13. Annual Average Coal Stocks, Electric Power Sector,
Expressed as Days of Burn.....................................40
Figure 14. Trends in Electric Utility and Independent Power Producer
Coal Stocks, Measured in Days of Burn...........................42
Figure 15. Annual Average Speed of Class I Railroad Freight Trains........44
Figure 16. Trends in Average Speed of Coal Unit Trains, March 1999 to
June 2007, 12 Week Trailing Average.............................44
Figure 17. Trends in GAO Rail Rate Indices, All Freight Traffic...........53
Figure 18. Trends in GAO Rail Rate Indices, Coal Traffic................54
Figure 19. Trends in Rail Rates for New Powder River Basin
Coal Transportation Agreements.................................55
Figure 20. Difference in Percentage Points Between the Rail Industry
Regulatory Cost of Capital and Return on Investment................79
Figure 21. Class I Railroad Industry Regulatory Cost of Capital
and Return on Investment......................................79
List of Tables
Table 1. Class I Railroad Traffic and Productivity Trends.................22

Rail Transportation of Coal to Power Plants:
Reliability Issues
Introduction and Review of Findings
Half the nation’s electricity comes from coal, and most of that coal is delivered
to power plants by railroads. The reliable supply of coal by rail is therefore important
to the electric power system. Concern over reliable deliveries of coal and other
commodities, limited rail system capacity, and related issues such as rail rates,¹
sparked several congressional hearings in 2006.
This report provides background information and analysis on coal transportation
by rail to power plants. The report discusses:
^!Problems since 1990 with the rail delivery of coal.
^!Implications of rail capacity limits on service reliability.
^!The role of coal inventories as a backstop to reliable coal deliveries.
^!Proposed legislation intended, in part, to improve the quality of rail
service to coal-fired plants and other shippers.
The report also identifies data and analysis gaps that complicate measuring the
scope of rail service and capacity issues, determining the need for federal action, and
evaluating the possible efficacy of proposed legislation.
Review of Findings
CRS research finds that there have been nine episodes since 1990 in which coal
supply to power plants has been disrupted by rail transportation problems (Appendix

1). The causes of these problems vary, including severe weather; surges in demand;

difficulties with rail system integration consequent to railroad mergers; and major,
unplanned maintenance programs. The most significant events were probably in
1997 and 1999 (merger-related), and in 2005 (related to unplanned maintenance to
western coal lines). Research indicates that each of these events involved major,
widespread congestion and concomitant delivery delays. However, the cost
consequences of these events appear to be ill defined. We are unaware of any
comprehensive cost estimates by the electric power industry, government agencies,
or other entities. CRS identified, from scattered electric power industry sources,

¹ These included House Committee on Transportation and Infrastructure (Subcommittee on
Railroads, April 26, 2006); Senate Committee on Energy and Natural Resources (full
committee, May 25, 2006); Senate Committee on Commerce, Science and Transportation
(Subcommittee on Surface Transportation and Merchant Marine, June 21, 2006); House
Committee on Resources (Subcommittee on Water and Power, August 9, 2006).

estimates totaling $228 million in costs from the rail service delays that began in

2005 (Appendix 2).

In addition to these major events, other more persistent indicators of service
issues have appeared. The average speed of coal unit trains on the major
coal-carrying railroads has generally declined since the early part of this decade. The
electric power industry and other industrial shippers claim that the railroads are
increasingly unwilling to offer strong service quality guarantees. This may indicate
the reluctance, or inability, of the railroads to guarantee service quality when their
systems are capacity constrained.
Capacity limits on the rail system appear to have contributed to coal
transportation service problems. The rail industry has historically been plagued with
uneconomic excess capacity. Since passage of the Staggers Rail Act in 1980, the
railroads have brought capacity and the demand for rail services into alignment by
increasing traffic, shedding assets and staff, and by generally not building new
capacity far ahead of near-term demand expectations.
It appears that the railroads believe it would be uneconomic to build more buffer
capacity to handle service contingencies, and question whether customers would be
willing to pay for it. Wall Street has at times encouraged the rail industry to pursue
a conservative approach to capital spending. However, without more buffer capacity,
the rail network may lose resiliency. Unexpected events, such as bad weather or
surges in demand, may be more likely to cause persistent congestion, and delays in
deliveries of coal and other commodities.
A final aspect of tight rail system capacity is that it seems to have been an
important factor in allowing the railroad industry — which has never been found
revenue adequate by the Surface Transportation Board (STB) — to significantly
increase coal and other rates, and boost profits since 2004. Other factors contributing
to the ability of the railroads to raise rates include demand growth and muted
competition from trucks (due to cost and capacity issues in that sector). Some parties
have also suggested that the increase in rates is indicative of the ability of the rail
industry to exercise pricing power, at least in some markets. The Government
Accountability Office has performed a limited study of this issue, with inconclusive
results. The STB is planning a study of this issue, due to be completed in late 2008.
The coal stockpiles stored at power plants are in some respects a backstop to rail
system capacity. Power plant coal stocks cannot replace reliable rail service — even
large stocks will eventually be depleted by a major transportation disruption, and not
all plants have the space to store large amounts of coal — but stocks can act as a
“shock absorber,” postponing the need for plant operators to find expensive
alternative fuel or electricity supplies in the event of delivery delays. Power plant
coal stockpiles, measured in days of burn,² have generally been declining since the
1970s (stocks dropped by 40% by the latter half of the 1990s). Coal transportation
problems likely contributed somewhat to this decline, but a primary factor seems to

² “Days of burn” means the number of days the stockpiles can support normal operations
assuming no further deliveries.

have been efforts by the power industry to cut costs to improve financial results. In
the case of regulated electric utilities, the impetus to cut costs was sometimes at the
behest of regulators. The unregulated independent power producers (IPPs), who
entered the coal generation market in the 1990s with the advent of power market
restructuring, have generally maintained lower stocks then regulated utilities. This
may reflect the greater exposure of IPPs to market forces and investor demands.
The electric power industry cut stocks even as more coal was shipped long
distances from western mines. The decisions made to cut stocks presumably
reflected, in part, the service guarantees included in rail transportation contracts, and
the receding risk of coal miner strikes as more production came from non-union
western mines. Nonetheless, it appears the power industry reduced stocks even as
its supply lines lengthened and arguably became more vulnerable.
Since 2006, as rail service improved, the power industry has increased coal
stocks. In addition to rebuilding western coal stocks depleted due to the rail service
problems beginning in 2005, this trend probably reflects recognition of the risk of
being caught short on coal supplies given the capacity constraints on the rail network.
The stock build also may reflect the difficulty, noted above, the power industry (and
other industries) claims to have had securing strong service quality guarantees from
the railroads.
Several legislative proposals before the 110th Congress address rail service and
other rail issues such as rate levels. These proposals fall into two categories: tax
incentives to encourage the expansion of rail system capacity, and regulatory
restructuring proposals aimed at changing the rail regulatory regime that has been in
effect since the 1980s.³
The tax incentives are intended to encourage investments in rail system capacity,
particularly for investments that expand system capacity.⁴ Our understanding is that
the incentives would be available to any party making rail-related investments,
including, in addition to railroads, power plants and coal mines that make such
capital expenditures.
The objective of increasing system capacity appears to be broadly consistent
with the interests of coal and other shippers who want a more robust and reliable rail
network, and of transportation planners who believe the market should have more
options for moving some freight traffic off of highways. By effectively reducing the
cost of capital expansion, the tax incentives also seem to address the reluctance of the

³ The specific bills are the Freight Rail Infrastructure Capacity Expansion Act of 2007 (S.

1125 and H.R. 2116), the Railroad Competition and Service Improvement Act of 2007 (S.

953 and H.R. 2125), and the Railroad Antitrust Enforcement Act of 2007 (S. 772 and H.R.

1650).

⁴ A related issue, which is how or if the federal government should seek to ensure
modal-neutral funding for rail and other freight modes, is beyond the scope of this report.
Also note that because the proposed tax incentives would reduce revenues, the legislation
may require offsets under Congressional “pay-as-you-go rules.”

rail industry to take on the additional financial risks inherent in greater capital
spending.
Issues that may be of interest in evaluating the tax incentive proposals include:
^!Scope of the Problem and Information: There is limited public
information on rail system capacity or service for coal shipments and
other traffic. This makes it difficult to quantify the current rail
capacity and service situation, and would make it difficult to
measure any benefits that flow from rail tax incentives. If there is
interest in having the government collect and publish additional
service and capacity data, a potential issue is data confidentiality.
The rail industry may consider detailed capacity and service data to
be business sensitive and proprietary. If data confidentiality is a
concern, steps can be considered to prevent disclosure of
confidential information, such as by aggregating or otherwise
masking carrier-specific data.
^!Expected Outcomes: Coal shippers appear to want a fluid, resilient
rail network able to operate reliably even under adverse conditions.
However, this may imply a level of investment in buffer capacity
that the rail industry would find undesirable and unaffordable, even
with tax incentives. As noted earlier, excess capacity has
historically been a financial burden on the railroad industry; more
recently, the close balance between rail capacity and demand appears
to have contributed to the ability of the industry to raise rates and
increase profits. Because of these factors, the response of the
railroad industry to tax incentives may be cautious and yield limited,
not system-wide, improvements in capacity and service quality.
^!Control: Some groups have argued that the public should have more
control over how the rail tax incentives would be used. The rail
industry believes that the direction of rail system investments should
be left to private managers who have the best information on
railroad capacity constraints and traffic patterns. Another
consideration is that it may be difficult to implement some proposals
for limiting the tax incentives to certain categories of traffic, such as
coal shipments to power plants captive to a single railroad. As
pointed out by transportation system analysts, railroads are networks,
so an investment in one location can have wide effects. It may
therefore be difficult to determine if a specific investment will
primarily benefit any one category of traffic.
The regulatory restructuring proposals include bills that would remove certain
antitrust law exemptions that apply to the rail industry, and bills that would more
generally revise the current regulatory scheme. The intent of the bills appears to be
to use new regulatory rules to introduce more competition into the rail industry. The
concept is that more competition will lead to innovation and cost reductions that will
improve coal and other service, decrease rates, and help the rail industry win new
business. The railroad industry characterizes these proposals as “re-regulation.” It

argues that the proposals would inhibit the pricing and operational freedom that has
been important to the revival of the rail industry, and would cause the industry’s
finances and service quality to regress.
The emphasis in the regulatory restructuring proposals on enhanced competition
appears consistent with an underlying principal of the current regulatory regime,
which is “to allow, to the maximum extent possible, competition and the demand for
services to establish reasonable rates for transportation by rail” (49 U.S.C. § 10101).
However, the proposals would accomplish this goal through new rules and
government oversight, so depending on how the goals outlined in the proposed
legislation are actually implemented there is a risk that the outcome could be, at least
to some extent, more regulatory control instead of more reliance on the market. In
general, the outcomes from the regulatory restructuring bills may depend heavily on
the details of implementation.
Other factors that may be of interest in evaluating the regulatory restructuring
proposals include:
^!Scope of the Problem and Information: Are the coal and other rail
service reliability and related issues (such as rates) of sufficient
severity to justify major revisions to the current regulatory
framework? This is arguably an open question because of the
limited available data on rail service, rates, and the degree to which
coal and other shippers are subject to market power.
^!Financial Condition: A central objective of the Staggers Rail Act of
1980 was to restore the long-term financial health of the railroad
industry. An evaluation of regulatory restructuring may turn in part
on whether the rail industry has achieved this goal of “revenue
adequacy.” However, the reliability of the STB’s annual revenue
adequacy determinations is uncertain. Some parties contend that
various aspects of the STB’s methodology are flawed. Based on a
review of financial literature, one technical criticism seems to have
particular significance. This criticism is that the STB, by using a
specific computational approach (a “single-stage discounted cash
flow” model) in combination with the recent high rates of earnings
growth in the railroad industry, has overstated the railroad industry’s
threshold for achieving revenue adequacy. A more general concern
is also suggested by a review of financial literature. This is whether
the STB’s reliance on one financial ratio to determine if a railroad
has achieved revenue adequacy may put too much weight on a single
metric. A contrast can be drawn to typical electric power rate cases,
where an evaluation of multiple factors by the regulatory body is
used to determine a utility’s rate of return.
^!Service Focus: as an alternative to extensive revision of the current
regulatory regime, could more limited changes result in material
improvements in coal rail service? If otherwise desirable, a more
limited agenda might include elements of current proposals,
including giving rail service problems and their resolution greater

public visibility; creation of a rail public advocate; and new
requirements in the law for reliable rail service.
The remaining sections of this report include:
^!Background: Coal and Rail in the U.S. Power System.
^!Background: The Railroad Industry.
^!Railroad Capacity.
^!Railroad Service and Disruptions in Coal Transportation.
^!Rail Rate Trends.
^!Analysis of Legislative Proposals: Tax Incentives.
^!Analysis of Legislative Proposals: Regulatory Restructuring.
Background: Coal and Rail in the
U.S. Power System
Role of Coal and Rail in Power Production
Coal has historically fueled about half the electricity generated in the United
States.⁵ The federal Energy Information Administration (EIA) projects annual coal
burn by power plants to increase 21% between 2005 and 2020 (by 223 million tons
per year).⁶ The great majority of this coal would move to power plants by rail.
Railroads accounted for over 70% of coal shipments to power plants in 2005.⁷
The balance moved by truck, barge, and conveyor. Most coal moved by rail because
coal mines are often distant from power plants, and rail is usually the most
economical means for moving bulk commodities long distances. Truck shipments
of coal are generally uneconomic over about 50 miles; barge is practical only for
mines or power plants near navigable water; and conveyors can be used only if a
power plant is adjacent to a coal mine. For most power plants the only feasible
means of shipping coal is by railroad.
The importance of rail transportation of coal has grown as more western coal
is shipped long distances to Midwestern, southern and eastern markets. In 2005, 52%

⁵ U.S. Department of Energy, Energy Information Administration, Annual Energy Review

2005, Table 8.2a.

⁶ U.S. Department of Energy, Energy Information Administration, Annual Energy Outlook
2007, Table A15 (Reference Case projection). Note that EIA projections assume
continuation of current law and regulation (Ibid., page 2). Regulatory and policy changes,
as well economic and energy market trends that differ from EIA assumptions, could result
in actual future coal burn deviating significantly from EIA’s Reference Case estimates. As
an example of uncertainties in the outlook for coal-fired generation, see Steve Mufson,
“Coal Rush Reverses, Power Firms Follow,” The Washington Post, September 4, 2007.
⁷ U.S. Department of Energy, Energy Information Administration, table on “Distribution of
U.S. Coal by Origin State, Consumer, Destination, and Method of Transportation, 2005.”
[ ht t p: / / www.ei a.doe.gov/ c neaf / c oal / page/ coal di st r i b/ 2005/ o_05st a t e .pdf ] .

of coal production (585 million tons) came from mines located in western states,
compared to 29% in 1983. EIA projections show the western share increasing to
58% by 2020.⁸ The growing use of western coal means greater national dependence
on long rail hauls of coal to fuel power plants.
Critical Role of the Powder River Basin
The Powder River Basin (PRB) in Wyoming and Montana (see Figures 1 and

2) is the nation’s most important source of coal. In 2005 the PRB accounted for 38%⁹

of all coal produced in the United States (430 million tons), making it not only the
largest source of coal, but the nation’s largest single source of any fuel for electricity.
PRB coal is in high demand due to its environmental and cost advantages. PRB coal
emits fewer air pollutants when burned than most coal. The coal is found in seams
dozens of feet thick located near the surface, so it can be strip-mined at low cost.
Economical transportation, primarily by rail, has made it practical for PRB coal
mined in Wyoming to fuel power plants in Georgia.
The PRB is in the lightly-populated northern plains. To reach the nation’s
population and power generation centers the coal must be transported by railroad.
Although some PRB coal is transferred from rail to water for final delivery to power
plants, almost all shipments originate on railroads.
The large volume of production in the PRB means that the nation’s largest
single source of fuel for electricity rests on one concentration of infrastructure located
in a limited geographic area. All of this coal comes from 18 mines, most in¹⁰
northeastern Wyoming. PRB shipments are originated by one of two railroads, the
Union Pacific Railroad (UP) or the Burlington Northern Santa Fe Railway (BNSF),
and most PRB traffic begins the journey to consumers by traveling over a single rail
corridor, the 103 mile “Joint Line” in Wyoming (Figure 2). Handling over 60
loaded coal trains a day, each train more than a mile long, the Joint Line is the busiest¹¹
stretch of railroad in the world. Once out of the PRB, most of the coal travels over
a handful of major rail corridors to consumers.

⁸ U.S. Department of Energy, Energy Information Administration, Annual Energy Outlook
2007, Table A15; and U.S. Department of Energy, Energy Information Administration, Coal
Production in the United States — an Historical Overview, Table 2, [http://www.eia.doe.gov
/cneaf/coal/page/coal_production_review.pdf].
⁹ U.S. Department of Energy, Energy Information Administration, Annual Coal Report 2006,
Table 6.
¹⁰ This total of the number of mines counts the following as single operations: Black
Thunder and South Black Thunder (Rochelle); Cordero and Caballo Rojo; and Clovis Point
and Wyodak.
¹¹ Testimony of Janssen Thompson, General Manager, Powder River Division, BNSF
Railway Co., U.S. Congress, House Committee on Resources, Subcommittee on Water and
Power, hearing, Keeping the Lights On and Maintaining Wyoming’s Jobs: Overcoming the^th^nd
Challenges Facing Western Power Generation Facilities, 109 Cong., 2 sess., August 9,

2006, p. 2.

PRB rail capacity and routing options may increase if a long-planned project to
build a new rail line into the PRB comes to fruition. The Dakota, Minnesota &
Eastern Railroad (DM&E), a regional (“Class II”) carrier that currently serves grain
markets in the northern plains, proposed in 1997 a multi-billion dollar project to open
a new route into the PRB. The project would involve upgrading 600 miles of
existing rail lines and building about 250 miles of new track. If completed, the
DM&E project would open a new outlet for PRB coal into the Midwest, bypassing
the Joint Line and the existing BNSF and UP main line rail corridors (see Figures

3, 4, and 5).

Although the DM&E project has been in development for many years and
received regulatory approvals, it has never begun construction and there is no firm
initial operating date. The backers have been unable to secure the financing needed
to launch the project. In February 2007 the Federal Railroad Administration (FRA)
rejected the project’s application for a $2.3 billion loan guarantee, concluding that
the project was too risky to commit public funds.¹² The project has also been
opposed, at least without changes to the routing, by some landowners and
communities on the project’s route, in particular by the city of Rochester, Minnesota,
and the Mayo Clinic.¹³

¹² FRA Press Release, FRA Administrator Denies DM&E Powder River Basin Loan
Application Citing Unacceptable Risk to Federal Taxpayers, February 26, 2007.
¹³ For example, see “DM&E Opponents Turn to Court to Derail Project over Enviro [sic]
Review,” Platts Coal Outlook, November 20, 2007.

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Figure 1. Coal Fields and Regions of the United States

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Figure 2. Powder River Basin Coal Field and Railroads

Figure 3. Burlington Northern Santa Fe Rail
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Figure 4. Union Pacific Rail System (Trackage
Rights Not Shown)

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Figure 5. Proposed Combination of the Canadian Pacific and Dakota, Minnesota, & Eastern Rail
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In September 2007 the Canadian Pacific Railway, a large (“Class I”) carrier with
operations in the United States and Canada, announced a plan to purchase the
DM&E, fold it into the CP system, and possibly pursue the PRB project. Although
CP expects to close the acquisition before the end of 2007, it would not actually take
control of the DM&E until and if control is approved by the STB. CP expects the
STB to complete its review by the end of 2008.
Based on statements by CP, there is no assurance as to if or when it will commit
to building the PRB project. CP stated that it is buying the DM&E based on the
DM&E’s access to U.S. agricultural and ethanol markets, and it characterized the
PRB project as potential “icing on the cake,” not as the centerpiece of the deal.¹⁴
Other information indicates that CP’s horizon for starting construction could extend
as far as 2025, although CP has said that it may make a launch decision within three
years.¹⁵ Other observers reportedly claim that “CP would not have paid so much for
the deal if it did not intend to pursue the PRB plan....”¹⁶ If CP decides to proceed and
is able to do so, the expected construction time is reportedly two to three years.¹⁷
The DM&E’s PRB line would be one of the largest rail construction project in
the U.S. in more than a century. If the project is ultimately built, it would add a large
amount of capacity to the biggest U.S. coal transportation market. The project could
reportedly access, mainly through connecting railroads, up to 101 coal-fired plants.¹⁸
Background: the Railroad Industry
Composition of the Industry
The U.S. rail industry consists of two broad categories of companies: seven
Class I carriers that move the vast majority of rail traffic, and about 553 regional and
short lines that either feed traffic to the Class I railroads or make final delivery of
freight shipped on the big carriers.¹⁹ These railroads play an important role in freight

¹⁴ “Canadian Pacific Acquires DM&E, Ready to Become Third Rail Operator in PRB,”
Platts Coal Trader, September 6, 2007.
¹⁵ Ibid.; L.B. Foster Co. Press Release, Foster Announces Sale of DM&E Interest, September

5, 2007.

¹⁶ “CP DM&E Buy to Shift PRB Balance of Power,” Argus Coal Transportation, September

11, 2007, p. 4.

¹⁷ Ibid.
¹⁸ Ibid., p. 5.
¹⁹ Designation of a railroad as Class I is made by the federal Surface Transportation Board
based on a periodically-adjusted revenue threshold. The 2005 threshold was minimum
operating revenue of $319.3 million. In 2005 the Class I railroads accounted for 93% of
freight railroad revenues, 89% of freight railroad employees, but only 68% of freight
railroad track mileage. The short lines which operate the balance of the track mileage in
many cases use relatively lightly-used lines that have been sold or leased by the Class I
(continued...)

transportation. As described by the American Association of State Highway and
Transportation Officials (AASHTO), “in the ‘freight transportation service
spectrum,’ rail occupies a place between and overlapping water transport and
trucking. It competes with water transport for heavier, lower-value, less
time-sensitive commodities. It competes with trucking for higher-value, often
containerized, shipments moving over longer distances. And it is the preferred mode
for a number of economically important, but heavy and bulky commodity groups,
such as coal, farm products, and minerals.”²⁰
Within the group of seven Class I railroads, most rail traffic is carried by four
dominant carriers: In the western states, the UP and BNSF (Figures 3 and 4, above),
and in the eastern states, the Norfolk Southern Railway (NS) and CSX Transportation
(CSX; Figures 6 and 7, below). These four carriers are the industry giants,
accounting in 2005 for 92% of Class I railroad operating revenues.²¹
The rail industry is sometimes characterized as consisting of two duopolies, one
in the east and one in the west.²² The actual situation may be more complex. The
degree to which the railroads have market leverage appears to vary by commodity,
individual customer, geography, and other factors. For example, in general the
railroads face more competition from trucks for general merchandise shipments than
for coal and other heavy bulk goods. A coal-fired plant with access to barge
shipments of coal has more competitive leverage in the transportation market than
a plant remote from navigable waterways served by a single railroad. The
competitive environment also changes over time. As discussed in the report’s section
on rates, coal rates declined for many years but have more recently increased sharply.
The extent to which the rail industry is able to exercise market power appears to vary
across markets and time.
Since 2004 the freight market has been especially favorable for railroads. For
reasons discussed later in this report, the rail industry has been able to significantly
increase rates, which have translated to strong financial results. In May 2007, UBS
Investment Research concluded that “the North American railroads are in their best
financial shape in decades as the so-called rail renaissance enters its fourth year in

2007.”²³ According to Standard and Poor’s, Class I railroad industry profits grew by

¹⁹ (...continued)
carriers. See Association of American Railroads, Railroad Facts 2006 Edition, pp. 3 and 8.
²⁰ AASHTO, Freight-Rail Bottom Line Report, 2003, p. 14.
²¹ Association of American Railroads, Railroad Ten-Year Trends, Vol. 23, p. 34. The other
three Class I carriers are the Kansas City Southern (KCS), serving portions of the south,
Midwest and (through an affiliate) parts of Mexico; the Canadian National (CN) in the
Midwest and south, and the Canadian Pacific (CP) with operations in parts of the Midwest
and Northeast (CN and CP operate predominantly in Canada).
²² Jeffrey O. Moreno, “Changing Role of Rail Rate Regulation in a Capacity Constrained
Market,” Journal of Transportation Law, Logistics & Policy, pre-print, third quarter 2007,
p. 292.
²³ Fadi Chamoun, et. al., “Debt Is the Engine for Growth for Rails,” Barron’s Online, May
(continued...)

46% in 2005 and 32% in 2006, and return on investment also improved
substantially.²⁴ (Note that these results are not necessarily equivalent to the railroad
industry achieving the regulatory goal of revenue adequacy, as discussed elsewhere
in this report.)
Figure 6. Norfolk Southern Rail System
(Trackage Rights Not Shown)

²³ (...continued)

3, 2007 [http://online.barrons.com/article/SB117814759058790096-search.html?

K EYWORDS=r ai l r oads&COLLECT ION=bar r ons/ 6mont h] .
²⁴ Standard & Poor’s, Industry Surveys, Transportation: Commercial, June 21, 2007, p. 7.

Figure 7. CSX Rail System (Trackage Rights
Not Shown)

Period Before Passage of the Staggers Rail Act
Today’s highly concentrated and increasingly profitable rail industry contrasts
with the situation in the 1970s. Prior to 1980 the rail industry included 39 Class I
railroads, many in poor financial and physical condition. Current policy debates are
colored by the history of the railroads, in particular by concerns, expressed by some
parties, that changing the existing regulatory system could cause the rail industry to
regress, financially and operationally.
Until the mid-1970s, the rail industry labored under tight federal regulation.
The Interstate Commerce Commission (ICC) controlled rail rates, conditions of
service, and construction and abandonment of rail lines, and had authority over
proposed railroad mergers. This regulatory system was designed for a 19^th and early
20^th Century transportation market dominated by railroads and characterized by
“indiscriminate construction, market manipulation, rate abuses, and discriminatory

practices against certain types of freight customers and passengers.”²⁵ But by the

1920s the railroads faced increasing competition from trucks and barge shipments.

While trucks and barge companies had significant freedom to adjust rates and terms
of service to meet market needs, regulation handicapped the ability of the railroads
to respond to competition and changing market conditions (regulation did not
insulate the industry from periodic booms and busts related to overall economic
trends). Between 1950 and 1975 the railroad share of domestic surface freight
shipments declined from 63% to 50%, with most of the market share lost to trucks
(see Figure 8).²⁶
The loss of market share was accompanied by financial and physical decay. In
1970 the Penn Central, the major northeastern railroad, collapsed in what was then
the largest bankruptcy in the nation’s history. Other large carriers also failed, and for
the industry as a whole returns on investment dropped to low levels (just over 1% in²⁷²⁸

1975). The railroad industry was in “serious economic decline.”

²⁵ Raymond Atkins, Office of the General Counsel, STB, Written Statement of the Surface
Transportation Board Before the Antitrust Modernization Commission, December 1, 2005,
pp. 2 -3.
²⁶ There are at least four, partly inconsistent sources of data on freight transportation by
mode. The Department of Transportation (DOT) reports this data in two statistical series
covering overlapping time periods, one of which uses an updated methodology. According
to DOT the series are not comparable; see [http://www.bts.gov/publications/
national_transportation_statistics/], Tables 1-14a and 1-14b. The Eno Foundation publishes^th
data for 1950 to 2001 in the 19 edition of its publication Transportation in America; the^th
20 edition has revised data but only back to 1990. Market shares by mode are estimated
for this report as follows: the percentages shown are the railroad share of total truck, rail,
and domestic water revenue ton-miles. Coastal shipping, pipeline, and air freight are
excluded. Data for 1950 to 1960 are from Eno Foundation, Transportation in America, 19th
Edition, p. 42; for 1965 to 1975, rail data are from Transportation in America, p. 42, and all
other data are from [http://www.bts.gov/publications/national_transportation_statistics/],
Table 1-14a; for 1980 to 2004, all data are from
[http://www.bts.gov/publications/national_transportation_statistics/], Table 1-14b. The
truck ton-miles for 1950 through 1975 were adjusted upward to be consistent with the trend
in the revised DOT methodology. The adjustment factor (1.118) was derived by comparing
DOT Tables 1-14a and 1-14b data for all years in which the tables overlap. Water (river,
canal, and Great Lakes) shipments include some non-domestic freight for 1950 to 1960.
²⁷ Final Standards, Classification, and Designation of Lines of Class I Railroads in the
United States, Vol. I, U.S. Department of Transportation, 1977, p. 1
²⁸ GAO, memorandum report to Congressional Requesters, Freight Railroads: Updated
Information on Rates and Other Industry Trends, August 15, 2007, p. 1.

Figure 8. Rail Share of Domestic Surface Freight Market

⁶⁵^%
⁶⁰^%
^s
⁵⁵^%^Mⁱ^l^e
^n-
⁵⁰^%^To
⁴⁵^%^e^v^e^nue
⁴⁰^%^o^f^R
^%
³⁵^%
³⁰^%
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^No^t^e^s^aⁿ^d^S^o^u^r^ce^s^:^r^aⁱ^l^r^o^{ad s}^h^ar^{e of}^t^oⁿ^-^mⁱ^l^e^s^f^o^r^t^o^t^a^l^o^f^t^r^uc^k^s^,^r^aⁱ^l^,^a^{nd dom}^e^s^tⁱ^c^w^a^t^e^r^.^E^x^c^l^ude^s
^c^o^as^t^a^l^s^hⁱ^p^pⁱⁿ^g^,^pⁱ^p^e^lⁱⁿ^e^an^d^aⁱ^r^f^r^ei^gh^t^.^Da^t^a^f^r^om^h^t^t^p^:^/^/^www.^b^t^s^.^g^o^v^/^p^u^b^lⁱ^c^a^tⁱ^oⁿ^s^/ⁿ^a^tⁱ^onal^_
^t^r^an^s^p^o^r^t^a^tⁱ^o^n_s^t^a^tⁱ^s^tⁱ^c^s^/^,^T^a^bl^es^1-¹⁴^a^and¹^-¹⁴^b,^a^nd^Eⁿ^o^F^oun^datⁱ^on,^T^r^aⁿ^s^p^or^t^a^tⁱ^onⁱⁿ^A^m^erⁱ^c^a,
^19t^{h E}^dⁱ^tⁱ^o^n,^p^.^42.^T^r^u^c^k^dat^{a i}^s^par^t^l^y^e^s^tⁱ^m^a^t^e^d^b^y^C^R^S^;^s^{ee m}^aⁱⁿ^t^e^x^t^o^f^r^epor^t^f^o^r^det^ai^l^s^.^W^a^t^e^r^-
^bor^ne^f^r^ei^ght^f^o^r¹⁹⁵^{0 -}¹⁹⁶^{0 i}ⁿ^c^l^ude^s^non^-^d^om^es^tⁱ^c^s^hⁱ^p^m^e^nt^s^.
By 1976, 15% of the route miles of the entire Class I rail system were owned by
bankrupt carriers. Most of the northeastern rail system had been absorbed within a
government-owned corporation, Conrail. In part because of the reluctance of the ICC
to allow railroads to abandon lightly-used rail lines, the railroad industry was
operating thousands of miles of uneconomic railroad.²⁹ According to a 1978 U.S.
Department of Transportation (DOT) report, “the railroad industry finds itself in the
worst economic condition of any privately operated mode of transportation,” with
very low return on investment, deteriorating physical plant, and, if trends continued,
the likelihood of more railroads falling under government control.³⁰
As difficult as the picture appeared, the extent and depth of the rail industry’s
troubles in the 1970s and early 1980s should not be overstated. The financial and
physical condition of the rail industry in the 1970s was mixed, not uniform. The

1978 report by DOT cited above, in addition to cataloging the rail industry’s troubles,

also concluded that the weakness of the rail industry was to a degree a regional
problem centered in the Northeast and Midwest,³¹ where problems were most severe,
²⁹ Final Standards, Classification, and Designation of Lines of Class I Railroads in the
United States, Vol. I, U.S. Department of Transportation, 1977, p. A2-1.
³⁰ A Prospectus for Change in the Freight Railroad Industry: A Preliminary Report by the
Secretary of Transportation, U.S. Department of Transportation, 1978, pp. 2, 3, and 11.
³¹ The regional concentration of rail financial and maintenance problems is partly
attributable to the patterns of rail industry development after the Civil War. Depressed
economic conditions in the South, and climatic and geographic conditions in the West,
limited the construction of rail lines in those regions. Most overbuilding of rail lines
(continued...)

and that other parts of the industry were in reasonably good financial and physical
condition. The investment analysis firm Standard and Poor’s, writing in 1979, found
that “the financially strong and profitable carriers should be able to fund their sizable
[capital] requirements from internally generated monies, and excellent credit
standings will provide access to the debt and equity markets....the negative industry
picture masks sectors of acute weakness and relative strength.”³² As DOT concluded
in 1978, “parts of the [rail] system are sick, but the system as a whole is far from
dead.”³³
The Staggers Act
Congress decided to address the ills of the rail industry with deregulation.³⁴ In
October 1980, Congress passed the Staggers Rail Act (P.L. 96-448). This legislation,
and its implementation by the ICC and the successor STB, created the current
railroad regulatory regime.³⁵
The Staggers Act established a 15-point national Rail Transportation Policy,
including:
(1) to allow, to the maximum extent possible, competition and the demand for
services to establish reasonable rates for transportation by rail;
(2) to minimize the need for Federal regulatory control over the rail
transportation system and to require fair and expeditious regulatory decisions
when regulation is required;
(3) to promote a safe and efficient rail transportation system by allowing rail
carriers to earn adequate revenues, as determined by the Board;
(6) to maintain reasonable rates where there is an absence of effective
competition and where rail rates provide revenues which exceed the amount
necessary to maintain the rail system and to attract capital;

³¹ (...continued)
occurred in the industrialized Northeast and Midwest, including passenger lines that fell into
disuse as more traffic moved to roads and airlines. See Freight Capacity for the 21st
Century (Washington, DC: Transportation Research Board, 2003), pp. 59-60; Elizabeth
Pinkston, Freight Rail Transportation: Long-Term Issues, Congressional Budget Office,
2006, p. 8; James N. Heller, Coal Transportation and Deregulation: An Impact Analysis of
the Staggers Act (Washington: The Energy Bureau and Serif Press, 1983), p. 149.
³² Manuel Correia, Standard & Poor’s Industry Surveys: Railroads Basic Analysis. Standard
& Poor’s, 1979, pp. R33-R34.
³³ A Prospectus for Change in the Freight Railroad Industry: A Preliminary Report by the
Secretary of Transportation, U.S. Department of Transportation, 1978, p. iv.
³⁴ In addition to the substantial deregulation of the rail industry, other transportation
deregulation actions taken about this time by the Congress included passage in October 1978
of the Airline Deregulation Act (P.L. 95-504), and in July 1980, the Motor Carrier Act of

1980 (P.L. 96-296).

³⁵ Congress’ first effort at deregulation was the Railroad Revitalization and Reform Act of
1976 (P.L. 94-210, often referred to as the “4R Act”). However, the results of this
legislation were viewed as unsatisfactory, in part because the ICC chose to narrowly
interpret the provisions of the act intended to give the railroads more freedom to set rates.

(12) to prohibit predatory pricing and practices, to avoid undue concentrations³⁶
of market power, and to prohibit unlawful discrimination.
These points illustrate the balancing aims of the Staggers Act: to allow
competition to determine the operation of the rail freight market, to provide for the
financial recovery of the rail industry, and to protect shippers from abuses of market
power. Within this balance, restoring the financial integrity of the railroad industry
was a primary objective. According to the conference committee report:
The overall purpose of the Act is to provide, through financial assistance and
freedom from unnecessary regulation, the opportunity for railroads to obtain
adequate earnings to restore, maintain and improve their physical facilities while³⁷
achieving the financial stability of the national rail system.
The act and its implementation by the ICC and STB have given the railroads
wide discretion to freely set coal and other rates in response to market conditions.
As directed by the act, the ICC exempted almost entirely from regulation categories
of traffic with general access to competitive transportation options, such as most
agricultural commodities and intermodal shipments.³⁸ Shippers of traffic potentially
subject to railroad market dominance and rates that could be unreasonable, such as
coal and grain shipments, retained the option of appealing rates to the ICC.³⁹
However, rates could be appealed only if the shipper could demonstrate that it was
“captive” to one railroad; that is, it had no credible competitive alternative for
receiving coal other than delivery by a single railroad.⁴⁰
The act also provided for:
^!Faster processing of railroad applications to merge, and of requests
to abandon, sell, or lease track a railroad no longer wanted to
operate. The Class I railroads responded with rapid consolidation
and contraction of parts of its physical plant. Between 1980 and
2002, the Class I rail industry shrank from 39 carriers to the current
seven, of which four account for most traffic and revenues.

³⁶ 49 U.S.C. § 10101.
³⁷ U.S. Congress, Conference Committees, Staggers Rail Act of 1980, conference report to
accompany S. 1946, 96^th Congress, 2^nd sess., September 29, 1980, H.Rept. 96-1430
(Washington: GPO, 1980), p. 80.
³⁸ Intermodal transportation, in the context of the rail industry, means the carriage of
truck-trailers or containers by rail. In a typical domestic intermodal shipment, a truck takes
a trailer to an intermodal terminal where it is loaded on rail. The railroad long-hauls the
cargo hundreds or thousands of miles to a terminal where the trailer is reloaded onto a truck
for final delivery. Import and export containers may be transferred directly between ship
and rail, or a truck may transfer the container between the port and railroad. For additional
information see CRS Report RL31834, Intermodal Rail Freight: A Role for Federal
Funding?, by John F. Frittelli.
³⁹ 49 U.S.C. § 10701(d)(1).
⁴⁰ For additional background information on the issue of captive shippers, see CRS Report
RL34117, Railroad Access and Competition Issues, by John Frittelli.

^!Other things being equal, the most profitable business for a railroad
is typically long-haul movements where the entire route is on its own
tracks (“single-line” movements). But past regulatory practice had
required railroads to offer joint (multi-carrier) rates “on practically
all possible combinations of railroad tracks between two points,”
and to offer identical rates for each route “without regard to the
actual cost of providing the service.”⁴¹ Staggers gave a railroad wide
discretion to rationalize its traffic flows by canceling joint
movements, changing rates, and funneling traffic to its single line
routes. This was economically beneficial to the railroads, but
potentially reduced the competitive routing options available to coal
and other shippers. However, Staggers gave the ICC new authority
to direct railroads to interchange traffic when in the public interest
or “necessary to provide competitive rail service.”⁴²
^!Railroads were given an unambiguous right to enter into confidential
contracts for rail service, with rates and service terms customized for
specific customers. The terms of contracts are outside of regulatory
jurisdiction.
The Staggers Act left substantial regulatory powers with the federal government,
including rate appeals for non-exempt traffic, authority to approve and condition
mergers,⁴³ authority to direct railroads to routinely interchange traffic at designated
gateways when in the public interest,⁴⁴ emergency powers to direct rail traffic in the
event of disruptions to railroad service such as severe congestion,⁴⁵ authority to
proscribe unreasonable business practices by railroads,⁴⁶ and authority to require
financial and operations reports by the rail industry.⁴⁷
The ICC Termination Act of 1995 (P.L. 104-88) replaced the ICC with the STB,
an independent regulatory agency with a three-member board administratively
housed within DOT. The ICC Termination Act made other relatively limited changes
to rail regulation, and essentially left intact the regulatory regime created by the
Staggers Act and the ICC.

⁴¹ Baltimore Gas & Electric v. United States, 817 F.2d 108 (D.C. Cir 1987), at 110-111.
⁴² 49 U.S.C. § 11102(c)(1).
⁴³ 49 U.S.C. § 11321-11328.
⁴⁴ 49 U.S.C. § 11102. This is referred to, depending on the circumstance, as joint use of
terminal facilities or reciprocal switching. The STB’s interpretation of this provision is
discussed later in this report. This is an instance in which the Congress used the Staggers
Act to increase the regulatory power of the federal government over the railroads by
expanding authority previously available to the ICC; see Baltimore Gas & Electric v. United
States, 817 F.2d 108 (D.C. Cir 1987), at 113.
⁴⁵ 49 U.S.C. § 11123.
⁴⁶ STB, Ex Parte No. 661, Rail Fuel Surcharges, Decision, January 25, 2007, pp. 7-8.
⁴⁷ 49 U.S.C. §§ 11144-11145

Railroad Productivity and Efficiency Trends
Since the rail industry was largely deregulated in 1980, the Class I railroads
have dramatically improved their productivity. However, cost-efficiency and
revenue generation has improved more slowly, and in some respects service quality
has improved little or not at all. The basis for these conclusions is discussed below.
Railroads have improved their productivity by introducing improved technology
and management practices; abandoning, leasing, or selling lightly-used rail lines;
cutting payrolls; and employing their assets much more intensively than in the past.
As shown below in Table 1, employment by the Class I railroads dropped by 65%
between 1980 and 2005, and miles of railroad operated declined by 42%. At the
same time traffic increased substantially. Revenue ton-miles increased by 85%
between 1980 and 2005. The fastest-growing major railroad business line was
intermodal traffic, with units shipped up 277%. Coal traffic increased by 54% for the
same period. The railroad share of all domestic surface freight, after reaching bottom
at 46%, has slowly increased back to 50% (Figure 8, above).
The railroads were able to move more traffic with fewer employees and a
smaller system by greatly improving the utilization of their resources and increasing
traffic density. Between 1980 and 2005 freight-revenue ton-miles per employee
increased by 425% and ton-miles per mile of road grew by 217% (Table 1). As
shown in Figure 9, the gains in productivity have generally been steady over time.⁴⁸
Table 1. Class I Railroad Traffic and Productivity Trends
^R^e^ve^nue^R^e^ve^nue^T^o^n-
^M^ile^{s o}^f^R^e^ve^nue^Int^erm^odal^Coal^(m^illioⁿ^s^o^f^Toⁿ^-^M^ile^s^M^ile^{s p}^e^r
^Year^Em^p^l^oy^ees^(th^o^u^saⁿ^d^s⁾^Road^Toⁿ^-^M^ile^s^Un^its^toⁿ^s^pe^r^Mⁱ^l^e^of^Road
^(th^o^u^saⁿ^d^s⁾^(b^illioⁿ^s⁾^(m^illioⁿ^s⁾^o^r^igin^a^t^e^d⁾^Em^p^l^o^y^ee^(m^illioⁿ^s⁾
^(m^illioⁿ^s⁾
¹⁹⁸⁰⁴⁵⁸¹⁶⁵⁹¹⁹^3.1⁵²²^2.0⁵^.58
¹⁹⁹⁰²¹⁶¹²⁰¹⁰³⁴^6.2⁵⁷⁹^4.8⁸^.63
²⁰⁰⁰¹⁶⁸⁹⁹¹⁴⁶⁶^9.2⁷⁵⁸^8.7^14.77
²⁰⁰⁵¹⁶²⁹⁶¹⁶⁹⁶^11.7⁸⁰⁴^10.5^17.70
^%
^C^h^an^ge,^-65%^-42%^85%^277%^54%^425%^217%
^{1980 -}
²⁰⁰⁵
^S^o^u^rce:^A^s^s^o^cⁱ^a^{tion of}^A^m^e^r^ic^aⁿ^R^a^ilr^oa^ds^,^Railr^{oad Fac}^t^s^{, 2005 Edition, e}^x^c^e^p^{t f}^o^{r c}^o^a^l^da^ta^{. Coa}^l^da^ta^is
^f^r^om^A^s^s^o^cⁱ^a^{tion of}^A^m^e^r^ic^aⁿ^R^a^ilr^oa^ds^,^Railr^{oad 10-}^Ye^ar^Tr^e^nds^{, Volum}^e^s^{1, 7, 16, a}^{nd 23.}

⁴⁸ Locomotives provide an illustration of how the railroads achieved productivity gains. The
industry negotiated new labor agreements which allowed it to reduce train crews from three
to two people; purchased more powerful and reliable locomotives that can pull longer and
heavier trains with fewer breakdowns; and it upgraded rail lines to handle heavier loads and
more wear and tear. The result has been more intensive, higher-volume operations with
fewer people.

^Notes:^A^“^r^e^v^e^nue^ton-^m^ile^”^is^one^{ton of}^f^r^eⁱ^g^h^{t m}^o^v^e^{d one}^m^ile^{in r}^e^v^e^nue^-^e^a^r^ning^s^e^r^v^ic^e^;^aⁿ^“ⁱ^nte^r^m^oda^l
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Figure 9. Class I Railroad Productivity Trends

^Mⁱ^l^lⁱ^ons^of^R^e^v^e^nue^Ton-^Mⁱ^l^e^s⁽^R^TM⁾^P^e^r^Uⁿⁱ^t
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Improvements in railroad cost efficiency and revenue generation have been
harder to consistently achieve than the gains in productivity. As shown in Figure 10,
operating cost per revenue ton-mile, tracked in constant dollars, declined by over
50% between 1983 and 1996, but has shown little improvement since. The revenue
margin (the difference between operating revenues and operating costs), also tracked
in real dollars, has moved erratically over time, declining from the mid-1990s until
it began to sharply increase in 2004 and 2005. As discussed later in this report, the
improvement in real-dollar margins after 2003 is consistent with reported increases
in rail rates due to tight capacity and other factors.

Figure 10. Trends in Rail Operating Cost and Revenue Margin
Efficiency

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^R^e^v^e^nue^T^on-^Mi^l^e^.^D^a^t^aⁱ^s^f^r^{om A}^A^R^,^R^aⁱ^l^roa^d^T^en-^Y^e^ar^T^r^ends^;^c^o^mput^atⁱ^o^ns^b^y^C^R^S^.
The railroads have achieved some cost reductions by encouraging or demanding
the transfer of costs from the carriers to shippers.⁴⁹ For example, the railcars on a
coal train can be either railroad-supplied or “private” cars supplied by the shipper.
Railroads have offered rate discounts to encourage power companies to provide
railcars, freeing the railroads of coal car investment and maintenance costs. Many
power companies now provide the railcars used to move coal to their power plants.
Between 1987 and 2007 the percentage of coal shipped in private railcars grew from

47% to 68%.⁵⁰

Cost-shifting combined with rate reductions can save money for railroads and
shippers. However, the utility industry claims that as rail capacity has tightened and
the market power of the railroads has increased, railroads have sometimes insisted
that power companies “pay for substantial infrastructure improvements identified by
the railroad as a condition for discussing or providing rates and service terms^.”⁵¹
⁴⁹ GAO, Freight Railroads: Industry Health Has Improved, but Concerns about Competition
and Capacity Should Be Addressed, November 2006, pp. 15-17.
⁵⁰ Data developed by the GAO from STB records [http://www.gao.gov/special.pubs/
ga o-07-292sp/c2t4.html ].
⁵¹ Statement of William M. Mohl, Vice President, Commercial Operations, Entergy
Services, Inc., on Behalf of the Edison Electric Institute, before the Surface Transportation
Board, Ex Parte 671, Rail Infrastructure and Capacity Requirements, April 4, 2007, p. 17.

From the power company perspective these costs may be “onerous;”⁵² from the
standpoint of the railroad this may be a rational response to a situation in which rail
capacity is tight and the carrier must stretch a limited capital budget.
Railroad Capacity
Rail System Capacity and Service
The national rail system generally had substantial excess capacity when the
railroad industry was largely deregulated in 1980. The railroads have since brought
their capacity and volume of business into alignment by increasing traffic; selling off,
leasing, or abandoning surplus track and equipment; and by cutting staff.⁵³ They
have also added capacity in some sectors; for example, to support intermodal traffic
and PRB coal shipments.
The changing traffic mix on the rail system has also contributed to tighter
capacity. There is a tradeoff between the number of coal and other bulk cargo trains
running on a system versus high-speed/high-priority intermodal traffic. To compete
against trucks, rail intermodal traffic must be price competitive and offer speed and
timeliness. Consequently, intermodal traffic usually takes priority over coal trains
(and other freight traffic). When intermodal and coal trains are in conflict for the
same segment of track, the intermodal train is typically allowed to run through while
coal and other traffic is moved to a siding or otherwise held.⁵⁴ In general, when trains
of varying speeds are mixed on a rail system and the faster trains are given priority,
the effective carrying capacity of the slower trains — the amount of cargo they can
move over a given period of time — is reduced.⁵⁵
A capacity-constrained rail network may lack resiliency and have limited ability
to deal with unexpected events (e.g., bad weather, mechanical failures, unexpected
growth in demand). Shocks to the system can result in widespread and prolonged
congestion. According to 2006 congressional testimony by the FRA, “... events that
once would have had little effect now cause major disruptions throughout the rail

⁵² Ibid.
⁵³ Capacity reduction through the disposal of excess track was most important in the eastern
states, less in the west where the system was not as overbuilt. Also see James McClellan,
“A Railroad Perspective,” presentation to Transportation Research Board, Conference on
Freight Demand Modeling, September 27, 2006, p. 9.
⁵⁴ I-95 Corridor Coalition, Mid-Atlantic Rail Operations Study, Appendix B, Mid-Atlantic
Rail Capacity Issues, April 2002, p. 4; Arvid E. Roach, J. Michael Hemmer, and Pamela L.
Miles, letter filed with the STB on behalf of the UP Railroad, Ex Parte 573/Service Order
No. 1518 — Rail Service for Construction Materials in Texas, July 28, 1998, p. 3.
⁵⁵ Tellier, Paul, “Intermodal’s Elusive Ingredient: Profit,” Railway Age, June 1996; Edward
Morlok, Introduction to Transportation Engineering, McGraw-Hill Book Company, New
York, 1978, p. 210; and Frank J. Pergolizzi, “Western Rail Service Crisis and its Impact on
Contract Coal Shippers,” presentation to the Western Coal Transportation Association,
Tucson, April 6, 1999, unpaginated. [http://www.sloverandloftus.com/fjp.htm].

network, because there is no reserve capacity.”⁵⁶ As explained by the Congressional
Budget Office (CBO):
Capacity can be constrained by a shortage of any critical input — infrastructure
(for example, tracks or switching systems), equipment (locomotives and other
railcars), or labor. And because the transportation industries are networks, the
existence of capacity constraints at one key junction or along one key corridor
can cause delays that cascade throughout the system. A late afternoon
thunderstorm at a hub airport, for example, can cause airplanes destined for that
hub to be grounded at numerous other locations. Even people traveling between
cities with clear weather may be delayed, either because they have to travel
through the disrupted hub or because the aircraft they are supposed to fly aboard⁵⁷
has been held up. Such effects can occur in the freight rail industry....
Unlike airlines, which can “reset” their networks relatively quickly because of
the mobility of aircraft and their freedom from fixed infrastructure except at the
origin and destination, railroad equipment has limited mobility within a system of
track and yards that cannot be appreciably expanded or modified over the short term.
Consequently, congestion on rail networks can persist for weeks or months.
When a rail system is congested it loses “fluidity.” As the term suggests, the
system slows down. Trains are late and the railroads may be unable to carry all the
traffic a shipper has contracted for or otherwise wants to move. A congested railroad
may not be able to deliver all of the coal required by generators, and power plants can
run short of fuel.
Tight capacity and consequent risks of delays in rail service have been identified
since at least the mid-1990s. According to a 1998 White Paper by an advisory panel
to the STB, “the serious railroad transportation problems experienced in 1997
throughout the United States prompted [our analysis of] whether rail infrastructure
continues to be capable of efficiently moving the volume of goods demanded by
citizens. Our conclusion is that ... our rail system has reached the point of being
capacity constrained.”⁵⁸ The Wall Street Journal reported in 1998 that “railroads say
they increasingly are caught short of the resources to handle more business.”⁵⁹

⁵⁶ FRA also noted “While much of the [rail] system needed paring back due to redundancy
and unused and light density lines, traffic on the remaining portion is moving over heavily
traveled corridors. This has resulted in a reduction in system average train speed by nearly

20 percent, accompanied by network congestion and deterioration in service reliability.”

Statement of Joseph H. Boardman, Federal Railroad Administrator, U.S. Congress, House
Committee on Transportation and Infrastructure, Subcommittee on Railroads, U.S. Rail^th^nd
Capacity Crunch, hearing, 109 Congress, 2 sess., April 26, 2006, pp. 2 and 4. Also see
“This Capacity Crunch May Not Be the Last,” Railway Age, September 2004; “Freight Rail
Transportation: Long-Term Issues,” Congressional Budget Office, January 2006, p.1.
⁵⁷ Elizabeth Pinkston, Freight Rail Transportation: A Review of the 2004 Experience,
Congressional Budget Office, May 2005, p. 1.
⁵⁸ Railroad-Shipper Transportation Advisory Council, White Paper I (Washington, DC,

1998), p. 2.

⁵⁹ Daniel Machalaba,”Railroads’ Big Outlays on Infrastructure Are Questioned — Critics
(continued...)

Means of Increasing and Allocating Rail System Capacity
Railroads have several avenues for increasing capacity, including:
^!Running more trains. However, operating more trains is not always
an effective means of increasing capacity. If a system is already
congested or on the edge, adding more trains can trigger or
exacerbate slowdowns.
^!Running trains faster. Greater velocity allows a railroad to move
more traffic with the same amount of equipment.⁶⁰ Railroads can
increase velocity through capital improvements that de-bottleneck
the system and by streamlining train handling procedures.
^!Running trains closer together. A minimum headway between trains
is required for safe operations. If the headway can be reduced the
density of trains on the system increases. The freight railroads are
testing advanced braking and train control systems that could reduce
headway.
^!Running bigger trains. By increasing the number of cars in a train
and using more locomotives a railroad can deliver more coal with
fewer trains, releasing capacity for new coal traffic or other business.
The biggest coal trains in routine power plant service currently have

135 cars and tests are underway on 150 car trains.⁶¹

^!Installing and improving track. Examples include adding
double-track and more sidings to heavily-used rail corridors,
straightening curves that force trains to slow down, replacing
light-duty rail with heavier track that permit faster and heavier trains,
and expanding or building new rail yards and intermodal terminals.

⁵⁹ (...continued)
Fear Spending Won’t Bring Adequate Amount of New Business,” The Wall Street Journal,
April 30, 1998.
⁶⁰ An average system velocity increase of one mile per hour can free 250 locomotives, 5,000
freight cars, and 180 train crews to move more traffic. A one mile per hour velocity increase
has also been equated to a savings of $200 million annually for a major railroad. See
Statement of Edward R. Hamberger, President and Chief Executive Officer, Association of
American Railroads, U.S. Congress, Senate Committee on Science, Commerce and
Transportation, Subcommittee on Surface Transportation and Merchant Marine, hearing,^th^nd
Economics, Service and Capacity in the Freight Railroad Industry, 109 Congress, 2 sess.,
June 21, 2006, pp. 14-15; and Statement of Joseph H. Boardman, Federal Railroad
Administrator, U.S. Congress, House Committee on Transportation and Infrastructure,^th^nd
Subcommittee on Railroads, U.S. Rail Capacity Crunch, hearing, 109 Congress, 2 sess.,
April 26, 2006, p. 7.
⁶¹ “PRB Efforts May Contribute to Velocity,” BNSF Today (website), June 9, 2006.
[htt p://www.bnsf.com/ employees/communica tions/bnsf_today/ 2006/ 06/2006-06-09-f.html ].

^!Technological improvements. New technology has historically been
instrumental to increasing rail system capacity and productivity.
Examples include more powerful and reliable locomotives,
light-weight aluminum railcars that carry more coal than steel cars,
and track-side sensors that can detect and automatically alert a train
crew to incipient equipment failures before a railcar breaks down.
^!Adding and managing staff. Personnel planning and management is
essential to fluid rail operations. At the system level, railroads want
to avoid overstaffing but must have enough crews to handle traffic.
In 2004 the UP was caught short-staffed, causing delivery shortages
and delays for power companies and other shippers.⁶² Because it
takes months to train new crews, staff shortages cannot be quickly
eliminated. At the individual train management level, railroads must
precisely synchronize the positioning of coal and other long-haul
trains with relief crews. A train must stop, wherever it is, when its
crew reaches the end of its 12 hour shift. The train will sit idle until
the railroad can transport a new crew to the train. Stalled trains can
block tracks and delay other trains, causing more crews to reach the
end of their shifts remote from crew change points. These delays
can cascade through a rail system, causing widespread congestion.
Railroads allocate capacity, current and planned, to balance customer demands,
operational constraints, and the railroad’s financial goals. As discussed above,
capacity is routinely allocated by assigning priorities to different classes of rail
traffic. The highest priority is given to passenger traffic and to time-sensitive, truck-
competitive intermodal traffic. The lowest priority is given to bulk shipments, such
as coal trains. Another means of allocation is through pricing. Under federal law
railroads are “common carriers” that are required to provide service, when reasonably
practicable and on reasonable terms, to any requesting shipper.⁶³ In practice, the rail
industry uses “price rationing of available capacity” (also known as “congestion
pricing”) as a means of managing traffic.⁶⁴ According to AASHTO, in some cases
railroad companies use high prices to “de-market” business in order to release
capacity that can be used more profitably and to prevent overloading of their
systems.⁶⁵ As explained by the Union Pacific railroad:

⁶² Transcript of First Quarter 2004 Union Pacific Earnings Conference Call, April 29, 2004,
FD (Fair Disclosure) Wire.
⁶³ 49 U.S.C. § 11101(a).
⁶⁴ Francis P. Mulvey, Vice-Chairman, STB, The STB and the Nation’s Railroads,
presentation to the American Forest and Paper Association, May 23, 2006, p. 20.
⁶⁵ AASHTO, America’s Freight Challenge, 2007, p. 22 (“It [the rail industry] also is using
pricing to turn away less profitable business.”); James McClellan, “Railroad Capacity
Issues,” paper presented to Research to Enhance Rail Network Performance: A Workshop,
Transportation Research Board, April 5, 2005, p. 5 (“A railway may choose to deal with a
capacity issue by effectively demarketing certain low-margin traffic or traffic which creates
extraordinary congestion”).

We ... need to maintain a balance between the traffic we accept and the capacity
we own. We maintain this balance as any other business would in the
marketplace: we adjust prices to reflect demand in the market, at least where
contracts give us that freedom. If we fail to act in this responsible manner, we
could again be overwhelmed by more traffic than we could handle and suffer
severe congestion, a situation we encountered in the fall of 2003 when traffic
surged unexpectedly.
Requiring us to satisfy all demand and requiring us to provide reliable service on
infrastructure that lacks capacity to meet every shipping demand would put us⁶⁶
in an impossible position.
Railroads, and other transportation modes, can also deal with capacity shortages
by reducing the quality of service, generally or for some customers. As described by
a former railroad executive, “A railway may simply accept lower standards of service
during peak times or lower service quality for some customers. A strategy of poorer
service or higher rates during peak times is a de facto reality with all transportation
modes today.”⁶⁷
Railroad Capital Spending
Most of the options for increasing railroad capacity involve capital investment
in equipment or infrastructure. In addition, railroads must invest large sums annually
to renew or replace their existing capital stock. Railroads are consequently much
more capital intensive than most businesses and comparable to electric power
companies. Over the period 1998-2005, the Class I railroads spent on average the
equivalent of 17% of their annual revenues on capital investment, compared to 3%
for all manufacturing industries and 5% for the truck transportation sector.⁶⁸

⁶⁶ James R. Young, Chairman, President, and CEO, Comments of Union Pacific Railroad
Co., before the Surface Transportation Board, Ex Parte 671, Rail Infrastructure and
Capacity Requirements, April 11, 2007, p. 18.
⁶⁷ James McClellan, “Railroad Capacity Issues,” paper presented to Research to Enhance
Rail Network Performance: A Workshop, Transportation Research Board, April 5, 2005, p.

5. McClellan worked for the Norfolk Southern and other railroads.

⁶⁸ While railroads are clearly capital intensive, the rail sector is sometimes incorrectly
referred to as the most capital intensive major industry (for example, in AASHTO,
America’s Freight Challenge, 2007, p. 21). The capital intensity of the electric power
industry is similar to that of the rail industry; both sectors spent on capital the equivalent of
about 17% of revenues during the period 1998-2005. The oil and gas extraction industry
is more capital intensive (an average of 29% of revenues for the period). Note that the data
on capital intensity is incomplete because capital investments made overseas by U.S.
companies are not captured in government statistics (Michael Mandel, “What Spending
Slowdown?,” Business Week, April 23, 2007). Comparisons with years prior to 1998 can
be difficult to make because of a change in the industrial classification system used by the
federal government.
Capital intensity was computed primarily from Bureau of the Census data, including
the 2002 Economic Census; Annual Survey of Manufactures: 2005; and Annual Capital
Expenditures, volumes for 1998 to 2005. Revenue data for the electric power sector and the
oil and gas extraction sector are estimates from the economic analysis firm Global Insight,
(continued...)

As shown in Figure 11, Class I railroad capital spending in real dollars has
varied since 1983, in part tracking the overall economic performance of the rail
industry:
^!Investment grew strongly in the mid-1990s, peaking at $7.6 billion
(constant 2000 dollars) in 1998. The railroads invested to meet⁶⁹
expected demand growth and to integrate merged rail systems.
^!Following the 1998 peak, capital expenditures dropped by over a
third to a recent low of $5.0 billion (constant 2000 dollars) in 2001.
Factors in the decline include the 2001 recession, efforts by the
railroads to pay down debts and resolve operating problems
associated with the mergers of the 1990s, less demand growth than
anticipated, and generally mediocre financial performance in the⁷⁰
latter part of the 1990s.
^!Since 2001, railroad capital spending has increased continuously to
an estimated $7.2 billion (constant 2000 dollars) in 2006, 43%
higher than the 2001 trough and on-par with the peak years of the

1990s.

⁶⁸ (...continued)
except for 2002, when the source is the Economic Census. Railroad data is from AAR,
Railroad Ten-Year Trends, Volume 23, page 77.
⁶⁹ Daniel Machalaba, “Railroads’ Big Outlays on Infrastructure Are Questioned — Critics
Fear Spending Won’t Bring Adequate Amount of New Business,” The Wall Street Journal,
April 30, 1998.
⁷⁰ Transcript of Fourth Quarter 2003 Norfolk Southern Earnings Conference Call, January
28, 2004, FD (Fair Disclosure) Wire; Stan Kaplan and Trygve Gaalaas, Strategic Analysis
of Railroad Rate, Cost, and Service Prospects (Electric Power Research Institute: 1999), pp.

3-1 to 3-5; Tony Hatch, “The Capital Question — Again,” Progressive Railroading.Com,

May 11, 2004. [http://www.progressiverailroading.com/commentary/article.asp?id=4748]

Figure 11. Capital Expenditures by Class I Railroads,

1983-2005, in Nominal and Constant 2000 Dollars

^$9,⁰⁰⁰
^$8,⁰⁰⁰
^$7,⁰⁰⁰
^$6,⁰⁰⁰^a^r^s
^ll
^$5,⁰⁰⁰^f^D^o
^o
^$4,⁰⁰⁰^ioⁿ^s
^ill
^$3,⁰⁰⁰^M
^$2,⁰⁰⁰
^$1,⁰⁰⁰
^$-
³⁹⁸⁵⁹⁸⁷⁹⁸⁹⁹⁹¹⁹⁹³⁹⁹⁵⁹⁹⁷⁹⁹⁹⁰⁰¹⁰⁰³⁰⁰⁵
¹⁹⁸¹¹¹¹¹¹¹¹²²²
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^No^t^e^:^Iⁿ^v^e^s^t^m^eⁿ^t^da^t^a^f^o^r¹⁹⁸³^an^d^a^f^t^e^rⁱ^s^no^t^f^u^l^l^y^c^o^m^p^a^r^a^b^l^e^t^o^e^a^r^lⁱ^e^r^y^e^ar^s^du^e^t^o^{a c}^h^an^{ge i}ⁿ^r^aⁱ^l^r^o^a^d^ac^c^o^un^tⁱⁿ^g^pr^a^c^tⁱ^es^.^So^u^r^c^e^s^{: A}^A^R^,^R^aⁱ^l^r^oa^{d T}^e^n-^Y^e^a^r^T^r^en^ds^;^e^s^tⁱ^m^a^t^e^f^o^r²⁰⁰⁶^f^r^o^m^B^N^S^F^p^r^e^s^eⁿ^ta^ti^oⁿ^to^th^e
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The recent growth in capital expenditures has been almost directly proportional
to the increase in operating revenues that has resulted from volume growth and
higher rates. Railroad capital spending as a percentage of revenues has been
relatively steady from 2000 through 2005 at 15% to 16%, compared to 22% in 1998.
Railroad capital investment proportional to traffic has also been steady since 2000,
varying, in constant 2000 dollars, from a low of 3.3 mills per revenue ton mile in

2001 (a mill is a tenth of a cent) to a high of 3.7 mills per revenue ton mile in 2005.

This compares to 5.5 mills in 1998.
This pattern, in which capital investment changes in-step with growth in revenue
and traffic but not more rapidly or slowly, appears to be consistent with the industry’s
stated approach to capacity expansion. In order to improve their return on
investment, the railroads tailor investments to the expected change in demand over
the short term. They do not “build ahead” of short-term demand forecasts. As one
former industry executive explains, “[T]oo much capacity (again, track, terminals,
cars, locomotives, and crews) means that financial returns decline and the availability
of capital becomes more expensive. So management is in a constant struggle to create
‘just in time’ capacity; having the needed resources in place when needed and not six
months too soon or six months too late.”⁷¹ According to the President of the
Association of American Railroads (AAR), a “build ahead” approach is financially
unviable:
⁷¹ James McClellan, “Railroad Capacity Issues,” paper presented to Research to Enhance
Rail Network Performance: A Workshop, Transportation Research Board, April 5, 2005, p.

... to contend that railroads can afford to have significant amounts of spare
capacity on hand ‘just in case’ — or that shippers would be willing to pay for it,
or capital providers willing to finance it — is completely unrealistic. Like other
companies, railroads try to build and staff for the business at hand or expected
soon to be at hand. “Build it and they will come” has rarely been a winning⁷²
strategy for freight railroads.
A related point is that when a railroad expands its asset base it also incurs on-
going costs for operating and maintaining those assets.⁷³ Because rail investment
tends to be long-lived, railroads focus their investment dollars where they can either
expect long-term traffic and revenues, or can recover investments quickly.
In trying not to build capacity too far ahead of, or behind, demand, railroads are⁷⁴
not unique; the same capital budgeting problem can face any firm. In respect to
coal traffic, the railroad industry, and the coal production and power industries, must
deal with long-term strategic questions in making investment decisions. Because of
actual or prospective actions at the state and federal levels in such areas as carbon
emission controls, enhanced controls on other air emissions, and encouragement of
renewable energy sources, there is uncertainty concerning the volume and source of
future coal flows. The degree of this uncertainty has not stopped coal-related
investment, as evidenced by continuing railroad investment in coal traffic and power
company construction of new coal plants. Nonetheless, these uncertainties and
incomplete information complicate long-term investment planning for railroads. For
example, according to a trade press report:
Eastern U.S. coal producers and railroads are moving to better plan for coal-
sourcing shifts in the East, calling on the STB for assistance, as one railroad
[CSX] cites a lack of solid information on which to base capital expenditures....
[According to the railroad] CSX recognizes the coming shift, but the railroad has⁷⁵
little solid information to go on.
A conservative approach to capital investment has been encouraged at times by
Wall Street; for example, an investment analyst testified to Congress in 2001 that
“investors, again becoming aggravated by poor returns, are now pressuring railroad

⁷² Statement of Edward R. Hamberger, President and Chief Executive Officer, Association
of American Railroads, U.S. Congress, Senate Committee on Science, Commerce and
Transportation, Subcommittee on Surface Transportation and Merchant Marine, hearing,^th^nd
Economics, Service and Capacity in the Freight Railroad Industry, 109 Congress, 2 sess.,
June 21, 2006, pp. 5-6.
⁷³ E. Hunter Harrison, How We Work and Why: Running a Precision Railroad (Montreal:
Canadian National Railway Co., 2005), p. 59.
⁷⁴ J. Fred Weston and Eugene F. Brigham, Managerial Finance, 7th Edition, 1981, pp. 395-

396.

⁷⁵ “Eastern Producers, Rails Seek Better Planning,” Argus Coal Transportation, April 19,

2007. Also see, Steve Thomas, “Delayed Scrubbers Contribute to Market Uneasiness,”

Platts Coal Outlook, June 11, 2007.

management to cut back on capital expenditures.”⁷⁶ Tight rail system capacity has
also helped the railroads increase rates and profits. The chief executive officer of the
BNSF noted in a 2007 STB hearing that it has taken about 25 years for the rail
market to find an “equilibrium of demand and capacity,” and in such a market rail
rates will tend to rise.⁷⁷ The GAO identified a “capacity-constrained environment in
which the demand for [rail industry] services exceeds its capacity in some areas” as
contributing to rate increases.⁷⁸
There are no firm estimates of how railroad capital spending is divided between
system maintenance and capacity expansion. A rough estimate is that the railroads
dedicate about 15% to 20% of their annual capital spending to capacity expansion,
or about $1 billion to $2 billion.⁷⁹ Industry-wide data are unavailable on how much
of the capacity-expansion investment made by the railroad industry is attributable to
coal shipments, but data for the BNSF suggests that coal-specific spending can be
highly variable. As shown in Figure 12, BNSF’s annual coal-related capacity-
expansion capital spending varied from over $400 million (constant 2000 dollars)
to zero during the period 1994 to 2005.

⁷⁶ Testimony of James J. Valentine, Morgan Stanley, U.S. Congress, Senate Committee on
Commerce, Science, and Transportation, Subcommittee on Surface Transportation and^th^st
Merchant Marine, hearing, State of the Rail Industry, 107 Cong., 1 sess., May 9, 2001, p.
3. For other examples of investors encouraging the rail industry to limit capital spending
see Christopher Palmeri, “Serving Two (Station) Masters; More Spending May Assuage
Burlington Northern’s Customers, but Not Wall Street,” Business Week, July 24, 2006, and
Daniel Machalaba,”Railroads’ Big Outlays on Infrastructure Are Questioned — Critics Fear
Spending Won’t Bring Adequate Amount of New Business,” The Wall Street Journal, April

30, 1998.

⁷⁷ Comments of Matt Rose, Chief Executive Officer, BNSF Railway, before the Surface
Transportation Board, Ex Parte 671, Rail Infrastructure and Capacity Requirements, April

4, 2007 (from video file Hearing041107_1.wmv [http://www.stb.dot.gov/stb/audiomee.nsf],

at approximately 20 minutes 52 seconds).
⁷⁸ GAO, Freight Railroads: Industry Health Has Improved, but Concerns about Competition
and Capacity Should Be Addressed, November 2006, pp. 11-12.
⁷⁹ The Federal Railroad Administration suggests as a rule of thumb that about 15% to 20%
of annual Class I railroad investment is dedicated to capacity expansion (Statement of
Joseph H. Boardman, Federal Railroad Administrator, U.S. Congress, House Committee on
Transportation and Infrastructure, Subcommittee on Railroads, U.S. Rail Capacity Crunch,^th^nd
hearing, 109 Congress, 2 sess., April 26, 2006, p. 5). For the period 2001 to 2006 this
would translate to about $0.75 billion to $1.6 billion. A 2003 study by AASHTO suggests
that the railroads spend about $2 billion annually on capacity growth (AASHTO,
Freight-Rail Bottom Line Report, 2003, p. 61). When GAO requested a breakdown showing
how much of estimated 2006 capital investment would be used for capacity expansion, it
was told by the AAR that the information would not be available until completion of a
special study (GAO, Freight Railroads: Industry Health Has Improved, but Concerns about
Competition and Capacity Should Be Addressed, November 2006, p. 57).

Figure 12. BNSF Investments to Increase Coal Capacity,

1994-2005

^Mⁱ^l^lⁱ^ons^of^C^ons^t^a^nt²⁰⁰⁰^$
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¹⁹⁹⁴¹⁹⁹⁵¹⁹⁹⁶¹⁹⁹⁷¹⁹⁹⁸¹⁹⁹⁹²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵
^S^o^ur^c^e^s^:^da^t^aⁱⁿⁿ^o^mⁱ^nal^do^l^l^ar^s^f^r^o^m^B^N^S^F^Raⁱ^l^way^,^P^r^e^s^en^t^a^tⁱ^on^t^o^t^h^e^S^out^{h Da}^k^o^t^a^P^u^blⁱ^c^Utⁱ^lⁱ^tⁱ^e^s
^Co^m^mⁱ^s^sⁱ^on,^A^p^rⁱ^l²¹^,²⁰⁰⁶^.^Nomⁱ^na^l^v^a^l^ues^c^onv^er^t^{ed t}^o^c^o^ns^t^aⁿ^t^d^o^l^l^a^r^s^u^sⁱ^{ng t}^h^eⁱ^m^plⁱ^cⁱ^t^p^rⁱ^c^e
^de^f^l^at^o^r^f^o^r^g^r^o^s^s^do^m^e^s^tⁱ^c^pr^od^uc^t^.
In addition to investments by railroads, coal producers and power companies
install coal train loading and unloading facilities. Modern facilities load and unload
the largest trains in four hours or less, compared to older equipment which can take

24 hours to process a train. Large mines, as in the PRB, also build “landing spots”

— holding tracks which position trains off the main lines and close to the mine,
ready for loading on short notice. These investments increase system capacity by
improving train utilization.⁸⁰ However, there appears to be no compiled historical
data or tracking of these investments by the electric power industry or otherwise, so
a clear picture of the past, current, or projected future spending by mining and power
companies on rail-related infrastructure is unavailable.
Rail Capacity Metrics
Policy development would probably benefit from quantitative measures of
railroad capacity utilization and service quality. However, most of the public
information on railroad capacity are anecdotal. This is in contrast, for example, to
the industrial capacity utilization indices published by the Federal Reserve Board.⁸¹
The unavailability of public data on rail capacity is in part because rail system
capacity is difficult to measure and define. Another consideration is that the rail
network is privately owned, and capacity data may be considered proprietary by the
railroads. However, as discussed below, these complications are not in themselves
insuperable barriers to making more data on rail system capacity publicly available.
⁸⁰ Thomas C. Canter, Written Statement of National Coal Transportation Association before
the Surface Transportation Board, Ex Parte 671, Rail Infrastructure and Capacity
Requirements, April 4, 2007, pp. 2 -3.
⁸¹ Available at [http://www.federalreserve.gov/releases/G17/].

One study broadly defines rail capacity “as the greatest possible output while
maintaining a specified minimum acceptable level of service (e.g., a minimum
speed).”⁸² However, this kind of formulation does not address a host of
complications. There are in fact no standard definitions or measures of rail system
capacity.⁸³ As noted by the CBO, the concept of transportation network capacity is
“el usi v e.”⁸⁴
A measure of rail system capacity is ultimately a function of the assumptions
made by the analyst. The U.S. rail network has 70,000 origin-destination pairs, many
routing options, and carries a wide variety of products.⁸⁵ The carrying capacity of a
section of railroad depends on the quality of the track, whether the corridor is single-
tracked or double-tracked, the number and length of sidings, and the type of signaling
system installed. Railroads move trains over the network at varying speeds,
depending on the quality of service needed to compete with trucks or barges, the
weather, maintenance programs, and the condition of the track.⁸⁶ Capacity is also a
function of the cost of service the railroad is willing to incur and which shippers are
willing to pay. Without a consideration of cost, “the concept of capacity is
m eani n gl ess.”⁸⁷
Railroad network capacity is consequently not a single metric, but is different
for each type of traffic, and depends on the assumptions made for traffic mix,
acceptable costs, and many other variables. Since the amount of capacity on a rail
network is hard to pin down, the degree to which total capacity is being utilized is
also “elusive.”

⁸² Committee for the Study of Freight Capacity for the Next Century, Freight Capacity for
the 21st Century (Washington, D.C: Transportation Research Board, 2003), pp. 26-27.
⁸³ Ibid., pp. 26-27; Edward K. Morlok and Stephanie P. Riddle, Estimating the Capacity of
Transportation Systems: A Model with Applications to Freight Transportation (Mid-Atlantic
Universities Transportation Center, 1998), p. 1.
⁸⁴ Elizabeth Pinkston, Freight Rail Transportation: A Review of the 2004 Experience,
Congressional Budget Office, May 2005, p. 1.
⁸⁵ The count of origin-destination pairs is from Letter from Edward Hamberger, President
and CEO, AAR, to John B. Ficker, President and CEO, National Industrial Transportation
League, September 29, 2006, pp. 1 and 2.
⁸⁶ System velocity, and therefore capacity, is reduced when a train must be held at a siding
either to give the right of way to a train heading in the opposite direction or to allow a fast
train to pass a slower train. Delays are minimized when a stretch of railroad has many
sidings that can handle the longest trains. Traffic management options are even greater, and
delays minimized, when a stretch of railroad has double track. In the Powder River Basin
some parts of the railroad have triple and quadruple track. Track with modern
communications systems (centralized traffic control, or CTC) can safely handle more traffic
than “dark” rail.
⁸⁷ Comment of Alan Greenspan in Lawrence R. Klein, et al., “Capacity Utilization: Concept,
Measurement, and Recent Estimates,” Brookings Papers on Economic Activity 1973, no. 3.
A related point — that the definition and measurement of capacity cannot be separated from
assumptions concerning the cost and efficiency of operations, and the chosen operating
mode — is made in Frank De Leeuw, “The Concept of Capacity,” Journal of the American
Statistical Association 57, no. 300 (December 1962): 826-840.

In spite of these complications, estimates of rail system capacity and capacity
utilization are developed and used by the rail industry itself. The drivers of rail
system capacity have been defined by railroad executives and other analysts; for
example, the BNSF lists volume, train density, physical plant elements, and
productivity as determinants of system capacity.⁸⁸ And while the practicality (and
utility) of encapsulating the capacity utilization of an entire rail system in a single
index number may be questionable, it is possible to define capacity for key corridors
and categories of traffic for a given set of assumptions.⁸⁹ For instance, in the past
CSX has reported the degree of capacity utilization on its network for general
merchandise traffic and for intermodal traffic.⁹⁰ Union Pacific has described its
capacity situation in terms of specific corridors:
[Capacity] ... is by certain corridors. Like the Sunset Corridor [from Los Angeles
to El Paso]. We’re at capacity on the Sunset Corridor. We are pressing capacity
on the South Central [corridor] between Los Angeles and Salt Lake City. There’s
other areas we are not at capacity. So … it’s a little more complicated answer
than probably you would like to hear but [in] some areas [with] the railroad⁹¹
we’re bumping capacity [and in] other areas we are still in pretty good shape.
Railroads estimate the current and projected capacity of parts of their systems
in order to make investment decisions. An example is the critical Joint Line in the
PRB, the nation’s most important coal-carrying rail line. According to BNSF and
UP:
For many years, CANAC, a Montreal-based rail engineering firm, has been
evaluating [for the railroads] PRB coal production forecasts and both railroad
and mine infrastructure capacity needed to support forecasted production.
Recommendations for railroad capacity proposed by CANAC in 1999 ... will be
fully implemented by September 2006.... CANAC began a new study of the Joint
Line in early Fall 2005.... In response, Union Pacific and BNSF have advanced
construction plans to add the more than 40 miles of third and fourth main line
capacity to meet the annual projected growth in demand for S[outhern]PRB coal⁹²

in 2007 through 2009.
⁸⁸ Summary of Testimony of Matthew K. Rose, Chairman, President and CEO, Burlington
Northern Santa Fe Corp., before the Surface Transportation Board, Ex Parte 671, Rail
Infrastructure and Capacity Requirements, April 11, 2007, pp. 3-4.
⁸⁹ Railroads often refer to freight corridors, with distinct traffic flows and investment plans.
For example, Union Pacific has the Sunset Corridor (or Route) from Los Angeles to New
Orleans and the Overland Route from Oakland to Chicago [http://www.uprr.com/aboutup
/maps/attachments/upcomnam.pdf].
⁹⁰ In early 2001 CSX reported having 30% excess capacity on its network for general
merchandise traffic (Transcript of CSX First Quarter 2001 Earnings Conference Call, from
Financial Disclosure Wire). In early 2002 it reported 60% utilization of its intermodal
capacity (Transcript of CSX First Quarter 2002 Earnings Conference Call, from Financial
Disclosure Wire).
⁹¹ Transcript of UP Fourth Quarter 2004 Earnings Conference Call, from Fair Disclosure
Wire.
⁹² BNSF and UP joint press release, UP, BNSF Announce Southern Powder River Basin
(continued...)

In summary, while a system-wide capacity index may be difficult or impractical
to develop, corridor-specific capacity measures appear to be meaningful and
feasible.⁹³ However, the federal government does not collect the data needed to
estimate rail system capacity or require the railroad industry to provide estimates.
The Association of American Railroads doubts the value and feasibility of
publishing capacity estimates. In September 2006, the National Industrial
Transportation League (NITL, an industrial shipper trade association which has at
times raised concerns over rail industry service) suggested to the AAR a joint project
to “create an objective measure of capacity for the rail industry.” NITL stated that
even if not entirely precise, “given the significant public dialogue about the need for
increased rail capacity, such a metric would allow rail carriers, their customers and
the public sector to gain a better view of the [capacity] problem.”⁹⁴ AAR’s response
was that creation of a capacity metric was probably impractical. Because the rail
system is so complex, “... it is difficult to believe that meaningful aggregations or
comparisons across railroads can be obtained.” The AAR was concerned that
compared to the basic performance measures, such as train speed, already publicly
available, a capacity index would be “far more complicated, considerably less
applicable to any particular circumstance, and potentially subject to greater misuse.”⁹⁵
Nonetheless, as noted above, capacity estimates are made and used by railroads.
While the possibility of misuse or misinterpretation of capacity estimates exists, this
same risk presumably can exist for any metric of economic activity. As discussed
later in this report the absence of published railroad capacity estimates may impede
informed analysis of rail and coal transportation policy. It also can impede efficient
private-sector decision-making. In a 2007 STB hearing, the Canadian National
Railway suggested that the STB “consider organizing efforts by the railroads and
shippers to project future traffic growth over capacity-constrained lanes. This could
help lead to efforts to direct investment dollars more efficiently.”⁹⁶

⁹² (...continued)
Joint Line $100 Million Capacity Expansion Plan, May 8, 2006.
[http://www.uprr.com/newsinfo/releases/capital_inve stme nt/2006/0508_sprb.shtml].
Another example is UP’s investment plans for its Sunset Corridor. [http://www.uprr.com/
newsinfo/releases/capital_investment/2005/0630_sunset.shtml ].
⁹³ On the value of corridor-level measures of capacity, see Edward K. Morlok and Stephanie
P. Riddle, Estimating the Capacity of Transportation Systems: A Model with Applications
to Freight Transportation (Mid-Atlantic Universities Transportation Center, 1998), p. 3.
⁹⁴ Letter from John B. Ficker, President and CEO, NITL, to Edward Hamberger, President
and CEO, AAR, September 18, 2006, p. 1.
⁹⁵ Letter from Edward Hamberger, President and CEO, AAR, to John B. Ficker, President
and CEO, NITL, September 29, 2006, pp. 1 and 2. As of mid-2007 there had been no
further progress between NITL and the AAR on the development of a rail capacity index
(CRS telephone interview with John Ficker, June 20, 2007).
⁹⁶ Sean Finn, Senior Vice-President, Public Affairs, et.al., Statement of Canadian National
Railway Company, before the Surface Transportation Board, Ex Parte 671, Rail
Infrastructure and Capacity Requirements, April 4, 2007, p. 8.

Some or much of the relevant data may be considered confidential by the
railroads, coal producers, and power companies. GAO found in 2006 and 2007
studies that the railroads considered information on capacity planning, and on the
condition of railway tunnels and bridges (which has system capacity as well as safety
implications), to be business-sensitive and proprietary.⁹⁷ Nonetheless, if Congress
concludes that better public data on rail capacity is needed for rail policy
development or otherwise, the confidentiality issue can perhaps be dealt with by
aggregating or otherwise masking the published version of the data for specific rail
corridors.
Future Rail Capacity and Investment Needs
Just as there are no public metrics that directly measure current rail system
capacity, there are also no firm estimates of future capacity needs or costs.
According to American Association of State Highway and Transportation Officials:
Unlike with highways, there is no national planning process which allows the
magnitude of rail congestion to be measured. Because “what gets measured, gets
managed” there is no systematic national management of the nation’s rail
congestion needs. The individual railroads run their companies efficiently and
make investments that meet the criteria of their business plans but, from the
perspective of the performance of the national freight transportation system,
there is no baseline for service, no standards for operations, no true measure of⁹⁸
what type of system and service the country needs.
A principal reason the national planning process, management, and data do not
exist is that the rail network is privately owned and operated, unlike the publicly
owned and operated highway system. As noted above, GAO reports indicate that
much of the data AASHTO specifies would likely be considered business-sensitive
and proprietary by the railroads.
Trends in railroad capacity and system congestion are important to
transportation policymakers because freight traffic is projected to grow enormously.
DOT and AASHTO both estimate growth in the freight traffic carried by all modes
of about 60% from the 2000-2002 time period to 2020.⁹⁹ Because rail capacity can
be less expensive to build, more cost-efficient to operate, and more friendly to the
environment than truck transportation and road-building, some transportation
planners are advocating a large increase in rail system capacity with the primary goal
of displacing growth in truck traffic.

⁹⁷ GAO, Freight Railroads: Industry Health Has Improved, but Concerns about Competition
and Capacity Should Be Addressed, November 2006, p. 55; GAO, Railroad Bridges and
Tunnels: Federal Role in Providing Safety Oversight and Freight Infrastructure Investment
Could be Better Targeted, August 2007, p. 3
⁹⁸ AASHTO, America’s Freight Challenge, 2007, p. 24.
⁹⁹ The American Trucking Association’s estimated growth of 32% percent between 2004
and 2016. These estimates are cited in GAO, Freight Railroads: Industry Health Has
Improved, but Concerns About Competition and Capacity Should Be Addressed, November

2006, p. 54.

For example, in a widely-cited 2003 study, Freight Rail Bottom Line Report,
AASHTO estimates that “there is an estimated unfunded annual need for $2.65
billion to $4.15 billion of additional freight-rail infrastructure improvements,” or $53
billion to $83 billion over 20 years. However, this estimate is focused on the new
capacity needed to put part of the growth in general merchandise traffic on rail
instead of trucks, not on the capacity needed to reliably ship coal or other bulk
commodities.¹⁰⁰ Moreover, AASHTO cautions that its cost estimates are no more
than “‘first approximations’ for purposes of illustration and discussion” based on
extrapolation from other studies and professional judgement.¹⁰¹ It notes that
“long-term, system-wide cost estimates that are comparable to those developed for
the highway and transit systems do not exist. The railroads and the states generate
cost estimates for specific projects to calculate return on investment and estimate
public benefits, but there is no program to systematically compile these costs
estimates and forecast future investment levels.”¹⁰² In summary, rigorous national-
level assessments of rail system capacity needs and expansion costs do not appear to
exist.
Coal Stocks as a Complement to Rail Capacity Expansion
Coal-fired power plants maintain coal stocks for two purposes: as a buffer
against short term variability in coal deliveries and to provide an emergency supply
in case deliveries are badly disrupted. The size of a plant’s stockpile largely
determines how much delay in coal shipments a plant can tolerate before the operator
must take costly emergency measures, such as running more expensive natural gas
plants in lieu of its coal generation. However, there is also a cost in tying up working
capital in a large coal stockpile.
There is a rough analogy between the excess capacity a railroad can build to
handle peak demands and contingencies, and the coal stocks a power plant holds to
provide a reserve of fuel. Railroads have suggested that it may be more economical
for power companies to store more coal at their power plants than to pay the railroads
to build enough surplus capacity to minimize the chance of a service problem. For
example, at an April 2007 hearing before the STB on railroad capacity, CSX Chief
Executive Officer Michael Ward said:
... it would make “better economic sense” for utilities to keep higher inventory
levels to give them “flexibility” to make up for some unreliability of the coal
supply chain. “When you think about the supply chain, my guess is that the
better economic tradeoff [for utilities] is to have larger stockpiles,” he said. If
utilities want “100% guaranteed delivery” they would need to be willing to pay

¹⁰⁰ AASHTO, Freight Rail Bottom Line Report, 2003, pp. 60-61. AASHTO presents three
scenarios of increasingly aggressive investment in expanding railroad capacity, and the level
of unit train shipments (which would include coal and grain) is identical in each case (pp.
63-64, Tables 9, 10, and 11). Unit train traffic only varies (drops) in a case that assumes
zero future investment in expanding railroad capacity (Table 6 on page 63).
¹⁰¹ Ibid., pp. 60 and 62. The AASHTO cost estimates appear to be in nominal dollars, do
not take inflation into account, and do not express the total costs as a present value.
¹⁰² Ibid., p. 60.

for necessary rail infrastructure, which would not be as good of an economic¹⁰³
choice for them....
This suggestion assumes that a plant has the room to keep a large coal stockpile,
which is not always the case.
Coal inventories are often measured as “days of burn”; that is, the number of
days the coal stockpile can keep a plant running assuming no coal deliveries. As
shown in Figure 13, days of burn for the electric power sector¹⁰⁴ have generally
declined since the 1970s and early 1980s, from a range of about 80 to 100 days of
burn to 40 to 50 days of burn by the turn of the century.
Figure 13. Annual Average Coal Stocks, Electric Power
Sector, Expressed as Days of Burn

¹²⁰
¹⁰⁰
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¹⁹⁷¹¹¹⁹¹⁹¹¹¹¹¹¹⁹¹⁹¹¹²²²²⁰
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The electric power industry cut its coal stocks for several reasons:
^!To reduce inventory holding costs and coal handling expenses in
order to improve financial results.
¹⁰³ Marcin Skomial, “From Railroad View, Large Coal Stocks Make Sense,” Platts Coal
Outlook, April 16, 2007.
¹⁰⁴ The electric power sector consists of regulated electric utility companies and independent
power producers whose primary business is selling electric power. The electric power
sector excludes industrial and commercial cogenerators.

^!The reduced threat of major coal miner strikes, as more coal
production moved to non-union western mines.¹⁰⁵
^!Opposition to larger stocks by staff or other parties at state public
utility commission rate hearings.¹⁰⁶
^!The change in coal inventory levels presumably reflected to some
degree the performance guarantees included in rail transportation
contracts.
Another factor was the sale of coal-fired power plants to non-utility independent
power producers (IPPs), following the advent of power market restructuring. IPPs
began buying large coal plants from utilities in the latter half of the 1990s and by
2006 accounted for 24% of total electric power sector coal consumption.¹⁰⁷ IPPs face
more financial risk and potential rewards than utilities. Utilities often have
monopoly service territories and regulated rates, and can earn a regulated return on
the working capital tied up in coal inventories. IPPs have none of these regulatory
benefits, but have more latitude to earn profits than utilities (whose rates are designed
to earn a target rate of return). In this environment IPPs reduce costs by maintaining
smaller stockpiles than utilities (see Figure 14, below).
The ability of power companies to build up stockpiles has been limited at times
by coal transportation problems. Nonetheless, the long-term trend by the electric
power industry to reduce its coal inventories is clear. By reducing inventories as
more coal was shipped long distances from western coal mines, the power industry
was cutting its “shock absorber” against coal supply interruptions at the same time
the coal supply chain was getting longer and potentially more vulnerable to
interruption. The reduction in coal stocks also occurred in the context of the history
of coal transportation disruptions (see Appendix 1).
By cutting its coal inventories the electric power industry incurred more coal
supply risk. According to one 2005 analysis power company “inventory
optimization programs typically indicated that the holding costs of maintaining a
large coal stockpile exceeded the expected [i.e., probability-weighted] cost of running
out of coal.”¹⁰⁸ Utility inventory studies prior to 2005 may have excluded the

¹⁰⁵ Mark Bossard and Trygve Gaalaas, “Coal Stockpiles: How Much is Enough?,” Coal Age,
September 2005, pp. 33-34; Patti Best, Ellen Ewart, and Jerry Vaninetti, “Coal Stockpiles:
Size Matters,” Coal Age, September 1999, pp. 57-58.
¹⁰⁶ For an example of contention over increased coal inventories, see Rebuttal Testimony of
Thomas D. Crowley on Behalf of Southwestern Public Service Company, before the Texas
State Office of Administrative Hearings, SOAH Docket 473-06-2536, Public Utility
Commission of Texas Docket/Control No. 32766, Application of Southwestern Public
Service Company for (1) Authority to Change Rates, et. al., January 29, 2007, pp. 50-52.
¹⁰⁷ U.S. Department of Energy, Energy Information Administration, Electric Power Monthly,
March 2007, Table ES1.B.
¹⁰⁸ Mark Bossard and Trygve Gaalaas, “Coal Stockpiles: How Much is Enough?,” Coal Age,
September 2005, p. 33.

possibility of extended, major delays in coal shipments, based on the assumption that
past major disruptions were “historical anomalies.”¹⁰⁹
Figure 14. Trends in Electric Utility and Independent Power
Producer Coal Stocks, Measured in Days of Burn

⁷⁰
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^A^d^mⁱⁿⁱ^s^t^ratⁱ^oⁿ^an^{d E}^I^A^'^s^E^l^e^c^t^rⁱ^c^P^o^w^e^{r M}^oⁿ^t^hl^y^,^T^a^bl^e^3.^1.
Inventories declined sharply due to the 2005 coal transportation problems.
Electric power sector coal stocks dipped to an average of 37 days in 2005 and hit
bottom at 32 days in August 2005; these are the lowest levels on record going back
to January 1973. Stocks actually began to decline in 2004, which is consistent with
the drop in coal train speeds during this decade (discussed below) and claims by
some power companies that the deterioration in western rail service pre-dated the
May 2005 derailments in the PRB.¹¹⁰
Rail service has generally improved since 2005 and power companies have been
rebuilding stockpiles. Electric power sector coal inventories averaged 51 days of
burn in 2006, the highest level since 2002, and continued to increase into early 2007.
¹⁰⁹ Thomas D. Crowley, Rebuttal Testimony of Thomas D. Crowley before the Arkansas
Public Service Commission, In the Matter of an Investigation into Entergy Arkansas , Inc.’s
Interim Revision to its Energy Cost Recovery Factor, Docket No. 05-116-U, March 15,

2006, pp. 26-27.

¹¹⁰ Statement of William M. Mohl, Vice President, Commercial Operations, Entergy
Services, Inc., on Behalf of the Edison Electric Institute, before the Surface Transportation
Board, Ex Parte 671, Rail Infrastructure and Capacity Requirements, April 4, 2007, p. 17;
Testimony of Steven Jackson, Director, Power Supply, Municipal Electric Authority of
Georgia, U.S. Congress, Senate Committee on Energy and Natural Resources, Coal-Based^th^nd
Generation Reliability, hearing, 109 Congress, 2 sess., May 25, 2006, S. Hrg. 109-601,
(Washington: GPO, 2006), pp. 26.

The increase in stocks has been especially large for utility companies (see Figure 14,
above).
In summary, in an effort to reduce costs, the rail industry and the power industry
have both been pursuing types of “just in time,” cost-minimizing strategies. For the
rail industry, this has meant not building capacity ahead of demand; for the power
companies, it had meant reduced inventory policies. The simultaneous pursuit of
these policies by the power and rail industries, and the development of a resilient coal
supply chain, may be mutually exclusive. An issue between power companies and
railroads is how should the cost of improving reliability be shared between paying
for larger stocks at power plants and building more rail capacity.
The trend toward increased stocks — though still not to the levels of the 1973-
1990 period — suggests that power producers have decided to bear higher inventory
costs to improve the reliability of their coal supplies. Given, as discussed below, the
reported unwillingness of railroads to offer strong service guarantees, power
companies may have had little choice except to increase coal stockpiles. Depending
on the observer’s perspective, this may be indicative of an exercise of market power,
or a rational and efficient economic outcome.
Railroad Service and Disruptions in
Coal Transportation
Service Quality Since Staggers
As rail system capacity has tightened, the quality of service for some freight
traffic has degraded. As explained in 2006 by one analyst:
The capacity crunch is real, it could go on for a long time, and it has serious
consequences. Over the past 10 years, there have been many occasions where
mergers, bad weather, or spikes in demand have triggered prolonged periods of
congestion. All of the major US railroads have suffered from such episodes, and
customers have frequently complained about long and unreliable transit times
and equipment shortages.¹¹¹
As shown in Figure 15, average train speed has declined in recent years and in
2005 was about the same as in 1980. For coal trains specifically, average speed
dropped between 2002 and mid-2007 on all four of the major rail systems, and with
the exception of the Norfolk Southern was about the same or worse in 2007 than in

1999 (Figure 16; earlier data are unavailable).

¹¹¹ Statement of Carl D. Martland, Senior Research Associate & Lecturer, Department of
Civil & Environmental Engineering, Massachusetts Institute of Technology, U.S. Congress,
House Committee on Transportation and Infrastructure, Subcommittee on Railroads, U.S.^th^nd
Rail Capacity Crunch, hearing, 109 Congress, 2 sess., April 26, 2006, p. 3.

Figure 15. Annual Average Speed of Class I Railroad Freight Trains
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Figure 16. Trends in Average Speed of Coal Unit Trains, March

1999 to June 2007, 12 Week Trailing Average

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Coal shippers have complained about the quality of service. According to a
electric utility trade group, the Edison Electric Institute (EEI), even after the western
railroads claimed in 2006 to have recovered from the severe coal service disruption
of 2005 (discussed later in this report) some power plants were still not receiving
their contracted coal tonnage. EEI noted that the increase in deliveries since 2005 to
the Louisiana and Arkansas coal plants operated by Entergy (a large utility company),
had been achieved by adding trains to the routes, not by restoring velocities to pre-

2005 standards.¹¹² A power company is presumably indifferent between running
more trains versus fewer but faster trains, as long as the railroad is willing to supply
the additional trainsets and coal delivery obligation are met; but other things being
equal, system capacity is enhanced by faster trains, and consumed when more, slower
trains are needed to serve customers.
The problems with rail service extend beyond coal traffic. According to United
Parcel Service, average speeds have also dropped since 2002 for intermodal trains:
During the past 15 years, rail velocity has not been up to par with other
improvements in transportation. All other transportation modes have seen
significant time-in-transit enhancements during this period, with the exception
of rail. Our intermodal freight movements move at slower speeds today than they
did in the mid-90s, while service has declined. The [Surface Transportation]
Board should consider an intriguing question: What mode of transportation
moves slower today than it did 15 years ago? UPS continues to experience
significant rail service issues in the Western U.S., with an improved service¹¹³
picture in the East.
Railroad perspectives on the quality of service appear to vary. During the 2006-

2007 time period, BNSF described its service as improved but still not acceptable,

and CSX also pointed to the need for improvement.¹¹⁴ NS on the other hand viewed¹¹⁵
its service since 2003 as “superior.” The industry trade association described coal
service as especially strong in 2007.¹¹⁶ The improvement is indicated by the
substantial growth in coal stocks, which probably would have been impossible to
achieve without significant service gains. Electric power sector coal stocks reached
60.2 days of burn in April 2007, the highest level since the first half of 2002 and one
of the highest monthly levels since the early 1990s.
As rail capacity has tightened, rail carriers have reportedly become increasingly
unwilling to provide strong service quality guarantees for coal shipments and other
freight. According to NITL, “meaningful service provisions in contracts are virtually¹¹⁷
impossible to obtain.” Foundation Energy Sales, a coal producer, testified at a

¹¹² Statement of William M. Mohl, Vice President, Commercial Operations, Entergy
Services, Inc., on Behalf of the Edison Electric Institute, before the Surface Transportation
Board, Ex Parte 671, Rail Infrastructure and Capacity Requirements, April 4, 2007, pp. 7-9.
¹¹³ Testimony of Thomas F. Jensen, Vice President, United Parcel Service, before the
Surface Transportation Board, Ex Parte 671, Rail Infrastructure and Capacity
Requirements, April 4, 2007, p. 2.
¹¹⁴ Transcript of First Quarter 2007 BNSF Earnings Conference Call, April 24, 2007, Voxant
FD (Fair Disclosure) Wire; Transcript of First Quarter 2006 CSX Earnings Conference Call,
April 19, 2006, Voxant FD (Fair Disclosure) Wire.
¹¹⁵ Transcript of Norfolk Southern comments at the BB&T Capital Markets Transportation
Services Conference, February 15, 2007, Voxant (FD) Fair Disclosure Wire.
¹¹⁶ AAR Press Release, Summer’s Heat Bested by Rail-Delivered Coal, July 26, 2007.
¹¹⁷ Testimony of John B. Ficker, President, National Industrial Transportation League, U.S.
Congress, Senate Committee on Science, Commerce and Transportation, Subcommittee on
(continued...)

2006 STB hearing that rail contracts “often have few if any service requirements.”¹¹⁸

At the same hearing EEI stated that:
... the railroads are now unwilling to accept responsibility for guaranteed
performance at any meaningful level. In general, the service performance
standards in rail contracts have deteriorated substantially over time as the¹¹⁹
railroads have gained more market power and as competition has deteriorated.
The mid-2007 version of the BNSF’s standard Common Carrier Pricing
Authority for PRB coal shipments states that “until further notice, service¹²⁰
commitments previously offered ... will not be accepted.” EEI also asserts that
railroads have become much more likely than in the past to use the force majeure¹²¹
clauses in transportation agreements to excuse inability to timely deliver coal, but
there is no data series that can be used to verify this claim.
Rail Service Metrics and Disruptions
As in the case of railroad capacity, the data available on railroad service are
limited and largely anecdotal. An average speed for all freight traffic can be
computed from data published by the AAR (Figure 15, above), but this measure is
so broad that it is not useful for determining, for example, if cycle times for coal
shipments are improving or deteriorating, or which corridors on a rail system may be
a service bottleneck. A more valuable set of service indicators has been published¹²²
by the rail industry since 1999. These indicators show for each of the seven Class
I railroads several system-wide performance measures, including, for example:
average speed of unit coal trains (Figure 16, above), intermodal trains, and other
types of traffic; the number of railcars on the system (an indication of congestion);

¹¹⁷ (...continued)
Surface Transportation and Merchant Marine, hearing, Economics, Service and Capacity^th^nd
in the Freight Railroad Industry, 109 Congress, 2 sess., June 21, 2006, p. 3.
¹¹⁸ Betsy B. Monsue, Vice President, Transportation, Comments of Foundation Energy
Sales, Inc. before the Surface Transportation Board, Ex Parte 671, Rail Infrastructure and
Capacity Requirements, April 4, 2007, p. 4.
¹¹⁹ Statement of William M. Mohl, Vice President, Commercial Operations, Entergy
Services, Inc. on Behalf of the Edison Electric Institute, before the Surface Transportation
Board, Ex Parte 671, Rail Infrastructure and Capacity Requirements, April 4, 2007, p. 12.
¹²⁰ BNSF Railway Co., Common Carrier Pricing Authority BNSF 90068 Revision 48, Issued
June 8, 2007, p. 2.
¹²¹ Statement of William M. Mohl, Vice President, Commercial Operations, Entergy
Services, Inc. on Behalf of the Edison Electric Institute, before the Surface Transportation
Board, Ex Parte 671, Rail Infrastructure and Capacity Requirements, April 4, 2007, p. 15.
A force majeure clause excuses non-performance due to extraordinary circumstances
(sometimes referred to as “acts of God”) beyond the control of the non-performing party.
¹²² The data for six of the seven Class I carriers is posted at [http://www.railroadpm.org/].
Data for the Canadian National railroad is located at
[http://www.cn.ca/abou t/investors/perfmeasures/en_InvPerfMeasures.shtml].

and the dwell time trains spend on hold in key rail yards. While this information is
useful, it is limited:
^!The train speed and cars on-line data are system-wide, so problem
corridors cannot be identified.
^!According to the AAR the data are not comparable between
railroads.¹²³ The lack of comparability is significant because it makes
it difficult to determine if service issues on one railroad are unique
to that carrier or part of a wider problem.
^!The limited set of metrics excludes other measures (presumably
important) used by the railroads themselves to measure
performance.¹²⁴ The railroads may consider this data to be
proprietary.
^!The data are posted on-line for the most recent 53 weeks. As each
week rolls off the website it is not retained. There does not appear
to be any readily accessible public archive of the data. To the degree
it is available, data prior to 2005 may not be consistent with later
years due to a change in methodology. In addition, the Canadian
National railroad, which operates in the United States, does not use
the same methodology to compute performance measures as the
other Class I railroads.¹²⁵
In the case of coal shipments, there is no statistical or other type of standard
source that can be used to determine the frequency, duration, or seriousness of
service disruptions. Perhaps the most severe recent examples of rail system
congestion were:
^!Major delays in PRB coal shipments beginning in 2005. Delays
began in May when two coal trains derailed on the Joint Line. The
UP and BNSF determined the derailments were due to a widespread

¹²³ “Despite the use of a common methodology, one railroad’s performance metrics cannot
meaningfully be compared to another railroad’s, due to differences including, but not limited
to, those associated with network terrain and design characteristics, traffic mix, traffic
volume, length of haul, extent of passenger operations, and operational practices — as well
as external factors such as weather and port operations which can impact carriers
differently.” [http://www.railroadpm.org/]
¹²⁴ These measures include, for example, mine to power plant and back cycle times;
locomotive supply; locomotive and freight car miles per day; connection performance (the
percent of time cars meet their departure times); and time required for interchange between
carriers. Some of these values may appear irregularly in railroad presentations or financial
statements, but they are not routinely reported. “How Valuable are AAR Performance
Measures?,” Argus Rail Business, July 16, 2007, p. 1, and Transcript of UP First Quarter

2006 Earnings Conference Call, from Voxant FD (Fair Disclosure) Wire.

¹²⁵ On CN using its own methodology, see “How Valuable are AAR Performance
Measures?,” Argus Rail Business, July 16, 2007, p. 4.

track instability problem caused by the infiltration of coal dust into
the railroad ballast (ballast is the material, usually crushed rock, on
which track is laid).¹²⁶ The railroads had to launch a months-long
maintenance program to fix the problem, causing major delays, and
a delivery shortfall in 2005, as estimated by a shipper trade
association, of about 30 million tons.¹²⁷ UP and BNSF both
triggered the force majeure clauses in their coal transportation
contracts to excuse non-performance. The UP recommended that
power companies take steps to conserve coal.¹²⁸ BNSF believed
that enough coal would ship so “that everybody is okay,” but also
stated that almost every BNSF-served plant using PRB coal was
below target on inventory, customers would not be able to increase
coal stockpiles until late 2005 or Spring of 2006, and that it would
be prudent for customers to have contingency plans for alternate coal
and transportation.¹²⁹ Due to the service delays and lack of capacity
the UP stopped accepting new customers for PRB coal service for
almost two years, from July 2005 to March 2007.
^!UP and Southern Pacific merger (1997); and
^!Division of the Conrail system between CSX and NS (1999). In both
cases the integration of the rail systems resulted in severe system
congestion and delays lasting months. The congestion on the UP
system (often referred to as a “meltdown”) was so bad the STB
issued an emergency order allowing the diversion of UP traffic to
other railroads.¹³⁰

¹²⁶ Coal dust can blow off of railcars as they move along the tracks. As part of a lawsuit
between UP and the power company Entergy Arkansas, Inc., UP has claimed that the power
company was responsible for the coal dust coming off the cars and is liable for damages to
UP. Although not explicitly mentioned in the complaint, this claim presumably relates to
whether Entergy Arkansas should have paid to have the coal company treat the coal as it was
loaded into the railcars to reduce dust blow-off. UP, First Amended Complaint and
Application for Declaratory Judgment and Damages, Union Pacific Railroad Co. vs. Entergy
Arkansas, Inc., et. al., Case No. CV2006-2711, Circuit Court of Pulaski County, Arkansas,
Sixth Division, served May 30, 2007, pp. 10-11.
¹²⁷ Thomas C. Canter, Written Statement of National Coal Transportation Association before
the Surface Transportation Board, Ex Parte 671, Rail Infrastructure and Capacity
Requirements, April 4, 2007, p. 5.
¹²⁸ “While we continue to do everything we can on the delivery side, we strongly encourage
each of you to take steps to conserve coal until normal operations resume on the Joint Line.
At this stage, we do not expect to be in a position to operate the Joint Line unencumbered
until late November 2005 when track repair is completed for the year or suspended due to
weather.” UP, Southern Powder River Basin Update for July 1, 2005
[http://www.uprr.com/ customers/ energy/ sprb/updates_2005.shtml ].
¹²⁹ “Market Commentary” and “BNSF, UP Decided to Absorb Big Hit Now to Fix Joint Line
Once and For All,” Coal and Energy Price Report, June 30, 2005.
¹³⁰ Richard Saunders, Jr., Main Lines: Rebirth of the North American Railroads, 1970-2002
(continued...)

In addition to the consequences for shippers, these kinds of events can also be
very costly for the railroads. For example, the after-tax cost of the meltdown to UP
in 1997 alone was about $450 million, including business it lost and claims it paid
to customers.¹³¹
While these events were unique in scope and severity, significant disruptions in
rail transportation of coal date back to the 1970s when large-scale service out of the
PRB was initiated by the Burlington Northern railroad.¹³² Disruptions in coal service
occurred repeatedly in the 1990s and this decade. Appendix 1 lists nine episodes
since 1990 when coal service was significantly disrupted, identified primarily
through a review of the trade press. The triggers of these congestion and delay events
varied; factors included severe weather, demand outstripping capacity, problems
integrating merged rail systems, and unanticipated major maintenance projects
Tight railroad capacity increases the chance of future disruptions in coal and
other freight services. As explained by the AAR, “at full or near-full capacity,
transport systems become more fragile. With inadequate redundancy, there are fewer
alternative routes and facilities, breakdowns and back-ups proliferate faster and¹³³
further, and recovery from disruptions takes longer.” Evaluating the seriousness
of this situation depends in part on understanding the consequences of past
disruptions in coal transportation service. However, as discussed below, this
information is difficult to find.
Consequences for Power Generation of
Coal Transportation Disruptions
Coal transportation disruptions can impose two types of costs on power
companies and their customers:
^!Direct costs an individual shipper incurs when it takes steps to
compensate for undelivered coal. Power companies can replace
coal-fired generation with purchased power or electricity generated
from plants using other fuels (typically natural gas); attempt to find
alternative coal supplies with secure transportation (in 2005-06,
some generators resorted to imported coal);¹³⁴ or try to increase coal

¹³⁰ (...continued)
(DeKalb: Northern Illinois University Press, 2003), pp. 329-336, 340-345; “STB Expands,
Extends Western Service Order,” Rail Business, December 8, 1997.
¹³¹ UP 1997 10-K filing.
¹³² Chuck Conway, “Powder River Coal, Part 2,” CTC Board, April 1991, pp. 34-35.
¹³³ Statement of Edward R. Hamberger, President and Chief Executive Officer, Association
of American Railroads, U.S. Congress, Senate Committee on Science, Commerce and
Transportation, Subcommittee on Surface Transportation and Merchant Marine, hearing,^th^nd
Economics, Service and Capacity in the Freight Railroad Industry, 109 Congress, 2 sess.,
June 21, 2006, pp. 6-7.
¹³⁴ For example, Arkansas Electric Power Cooperative and the Municipal Electric Authority
(continued...)

deliveries by buying or leasing more railcars. A power company can
also keep large coal inventories on-site as a backup fuel source in the
event of transportation or supply problems. These steps can keep a
power plant from running out of coal, but the tradeoff is higher
costs.¹³⁵
^!Market costs are the market-wide increases in coal prices and rail
rates that can occur when power companies have to scramble to
secure coal supplies and reliable transportation services. These
higher costs are incurred by all buyers, whether or not they are
affected by transportation problems.
If the generator is a regulated electric utility, the higher costs may be passed
through to ratepayers or absorbed in whole or part out of profits, depending on state
regulations.
These costs can be difficult to estimate. To estimate the direct costs an analyst
must develop a “what-if” picture of how a power system would have operated if the
rail delivery disruption had never occurred. The relationship between a rail
disruption and the market price for coal is much harder to parse. But even after
granting these complications, it is notably difficult to locate quantitative information
on the costs and other consequences of shortfalls in coal deliveries. There appears
to be no comprehensive estimates of the costs of the 2005-06 PRB coal shipment
delays by the electric power industry, the federal government, or other parties.
Published estimates from electric-power related groups range from “hundreds of

¹³⁴ (...continued)
of Georgia imported coal from Indonesia to compensate for shortfalls in deliveries of PRB
coal. Note that while this may be a cost issue for the utilities and their ratepayers, according
to the U.S. Department of Energy, “The United States does not face a security problem due
to coal imports nor is it likely to incur one in the foreseeable future.” E-mail from Steve
Sharp (AECC) to Stan Kaplan (CRS), July 17, 2007; U.S. Congress, Senate Committee on^th
Energy and Natural Resources, Coal-Based Generation Reliability, hearing, 109 Congress,^nd
2 sess., May 25, 2006, S. Hrg. 109-601 (Washington: GPO, 2006), page 26 (Testimony of
Steven Jackson, Director, Power Supply, Municipal Electric Authority of Georgia) and page
75 (supplemental response of Dr. Howard Gruenspecht, Deputy Administrator, Energy
Information Administration, Department of Energy).
¹³⁵ A power plant usually buys the least expensive coal (combination of price at the mine,
cost of transportation, pollution control costs, and combustion efficiency) it can find.
Almost by definition, alternative supplies are likely to be more expensive. Power plants are
also designed to burn specific types of coal, so a plant’s ability to use alternatives to its
primary supplies may be limited. Putting more railcars into service may yield only a small
increase in deliveries if a rail system is congested, and the additional cars could further
degrade system performance by increasing the load on the system. For this reason a
congested railroad may refuse to accept more trainsets.

millions of dollars”¹³⁶ to “roughly $4-6 billion to the economy.”¹³⁷ However, these
estimates are undocumented.¹³⁸
Appendix 2 lists 27 electric power generators that reported taking steps during
2005-06 to compensate for shortfalls in western coal deliveries. The list was created
from a CRS search of financial reports, regulatory filings, claims filed in lawsuits
between power companies and the UP railroad, and press reports. There is no
assurance that the list is comprehensive since additional research avenues, such as
a state-by-state review of utility rate case filings, were beyond the scope of this study.
Of the 27 entities listed in Appendix 2, a dozen reported incurring higher costs.
Whether the other 15 entities did not report higher costs because they did not incur
significant costs, could not reliably calculate the costs, chose not to reveal the costs,
or the costs are reported in a document or forum this research did not uncover, is
unknown. The costs that are reported total $228 million, of which four entities
account for almost 80% ($180 million).¹³⁹ This total does not include Arkansas
Electric Power Cooperative, which reported costs of “millions of dollars” but no
more precise figure.¹⁴⁰ The reported costs appear to be incremental to the expenses
the power company would have incurred with normal operations. This compilation
does not account for any market-wide increases in coal and transportation prices due
to the 2005-06 rail problems.
In summary, the research for this report located electric power industry reported
costs due to the 2005-06 rail transportation disruption of about a quarter billion
dollars. This is only a rough estimate. There appears to be no comprehensive
analysis of the costs and consequences of the 2005 disruption, or of earlier delays in
coal deliveries. This is an example of the information gaps that permeate the rail

¹³⁶ William L. Slover, et. al., Statement of the Western Coal Traffic League before the
Surface Transportation Board, Ex Parte 671, Rail Infrastructure and Capacity
Requirements, April 4, 2007, pp. 2 and 5.
¹³⁷ Thomas C. Canter, Written Statement of National Coal Transportation Association before
the Surface Transportation Board, Ex Parte 671, Rail Infrastructure and Capacity
Requirements, April 4, 2007, p. 5.
¹³⁸ As of September 2007 the Senate version of the appropriations bill for the Department
of Transportation (S. 1789) required in section 193 that “Not later than 90 days after the
date of the enactment of this Act, the Inspector General of the Department of Transportation
shall (1) conduct an investigation of rail service disruptions since 2004 and incidents since

2004 in which rail carriers failed to timely deliver various commodities, such as coal, wheat,

ethanol, and lumber; and (2) submit a report containing legislative and regulatory
recommendations designed to reduce such disruptions and incidents and to improve railroad
service to” committees of the House and Senate.
¹³⁹ These are the Tennessee Valley Authority ($80 million), Wisconsin Electric Power ($52
million), Municipal Electric Authority of Georgia ($28 million), and Wisconsin Power &
Light ($20 million).
¹⁴⁰ Arkansas Electric Power Cooperative (AECC) believes its costs are in the area of $100
million and still growing, as it continues to import coal from Indonesia to maintain
acceptable coal stockpile levels. (E-mail from Steve Sharp (AECC) to Stan Kaplan (CRS),
July 17, 2007.) This value does not appear in the annual reports reviewed by CRS.

policy debate. These gaps in data and analysis make it difficult to evaluate past and
current rail service and capacity, the severity of transportation disruptions, and
perhaps the need for government action.
Rail Rate Trends
This section of the report will review trends in rail rates. Although rates are not
the primary subject of this report, the relationship between rail system capacity and
rates is important for evaluating legislation intended to expand capacity and improve
service.
The rail rate environment since 2004 has been described as a railroad “pricing¹⁴¹
renaissance” Due in part to limited rail capacity
... rates are rising for the first time since the early 1980s. Rates were up on the
order of 10% in 2005, which is a major change from the prior 20 years.... The
reversal of a 20-year trend suggests a very significant change.... the driving
factors supporting higher rail rates are the shortage of capacity in the rail system
coupled with rising rates for trucking during a time when demand is growing,
most notably for coal and for containerized imports. Since service quality has
declined, the higher rates certainly do not reflect faster or more reliable trip
times! For the first time in a generation, the railroads are able to raise rates, so¹⁴²
they do.
The recent increases in rail rates follows a long period in which average rates
declined. Rail rate indices computed by GAO show that measured in nominal
dollars, average rates declined by about 20% between 1985 and 2004; converting the
indices to real terms shows a 49% drop, followed by a 5.5% real dollar increase in
2005. Rates for coal dropped more than the all-traffic average. GAO’s average coal
rate index declined by 40% between 1985 and 2004; in real terms the decline was
62%. In 2005 real coal rates increased by 13.3%, more than twice as much as the
industry-wide average. (See Figures 17 and 18.)¹⁴³
Coal and other rail rates declined until the middle of this decade due to:
^!Railroad productivity gains;

¹⁴¹ “Kansas City Southern Looks at 9%-13% Coal Revenue Growth,” Platts Commodity
News, March 19, 2007.
¹⁴² Statement of Carl D. Martland, Senior Research Associate & Lecturer, Department of
Civil & Environmental Engineering, Massachusetts Institute of Technology, before the U.S.
House of Representatives Committee on Transportation and Infrastructure, Subcommittee
on Railroads, April 26, 2006, p. 4.
¹⁴³ The data used to develop the graphs was downloaded from the GAO website
[http://www.gao.gov/special.pubs/gao-07-292sp/]. A related report is GAO, memorandum
report to Congressional Requesters, Freight Railroads: Updated Information on Rates and
Other Industry Trends, August 15, 2007. The GAO index was designed to account for year
to year changes in traffic mix and traffic flows, and is intended to be a measure of true price
change.

^!Competition between railroads, particularly between UP and BNSF
for the growing PRB coal market.
^!Efforts by railroads to compete with other modes, such as barges and
trucks, and to expand new markets with growth potential, such as
transportation of PRB coal;
^!At the outset of the post-Staggers period, surplus capacity on the rail
system;
^!The Staggers Act allowing the railroads to enter into customized,
multi-year contracts with shippers, permitting more efficient
planning and operations than public tariff rates.
^!Transfer of some costs from railroads to shippers, as discussed
above.
The swing from declining or relatively stable rates to increasing rates happened
abruptly, around 2004, due to the confluence of several factors. As noted above, rail
capacity began to tighten in the mid-1990s. After peaking in 1998, railroad capital
spending declined for several years and did not return to 1995 real dollar levels until

2005. Coincident with the slow recovery in capital spending, intermodal traffic,

which is especially capacity-intensive, was rapidly increasing. Intermodal shipments
grew by 27% between 2000 and 2005 (see Table 1 in the section of the report on
Railroad Productivity and Efficiency Trends, above).
Figure 17. Trends in GAO Rail Rate Indices, All
Freight Traffic

^1.²
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Figure 18. Trends in GAO Rail Rate Indices, Coal
Traffic

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Intermodal traffic grew in part because trucking capacity was also limited. New
hours-of-service rules effective in January 2004 cut the number of hours drivers
could work between breaks, effectively reducing trucking capacity. Trucking
companies also found it very difficult to recruit and retain drivers.¹⁴⁴ Rising fuel
costs have increased truck rates, and growing highway congestion has degraded
service. These circumstances threw long-haul traffic from truck to intermodal rail
and reduced the importance of the truck option as a check on rail rates. This shift may
represent the leading edge of a long-term trend favorable to the rail industry.
According to Standard & Poor’s:
Due to a combination of driver shortages, rising fuel prices, and cost
differentials, the trucking industry appears to be gradually moving away from
long-haul, cross-country routes, and towards shorter hauls. Many T[ruck] L[oad]
carriers are allocating an increasing number of their trucks to intermodal pickup
and deliveries — allowing railroads to carry containers the longest distances,
with the T[ruck] L[oad] carrier then performing the “last-mile” delivery to the
customer. Consequently, some carriers are increasing their purchases and¹⁴⁵
ownership of rail intermodal containers, chassis, and trailers.
¹⁴⁴ The turnover rates for truckload carriers in the third quarter of 2006 was 121%
(annualized basis), which was actually an improvement from the peak of 136% in late 2004.
Kevin Kirkeby, Standard & Poor’s, Industry Surveys, Transportation: Commercial, June 21,

2007, pp. 2 and 3.

¹⁴⁵ Ibid., p. 18. A “truckload” carrier moves large shipments from origin to destination with
no stops in between (p. 21).

Rates have also increased in response to higher fuel costs, an issue that has been
contentious between railroads and shippers.¹⁴⁶ A final consideration in rail rate
increases is the consolidation of the rail industry into seven large carriers of which
four are dominant. One press review of the rail industry noted that growth in demand
combined with industry consolidation “has done wonders for pricing.”¹⁴⁷
This nexus of factors has allowed railroads to broadly increase rail rates for coal
shipments. According to the Electric Power Research Institute, comparing 1999 and
2005, rates for new coal transportation agreements increased by 20% to 40% for
shippers with competitive alternatives and by 40% to 70% for captive shippers.¹⁴⁸
Figure 19 shows an estimate of the long-term trend in rates for new PRB rail
transportation agreements for service to customers with competitive rail access.
Rates in real terms generally declined after 1984, when the UP began to compete
with BN for PRB business. But from 2004 to 2006, estimated rates increase by 100%
(constant 2000 dollars). Whether this trend will continue is unknown.
Figure 19. Trends in Rail Rates for New Powder River Basin Coal
Transportation Agreements

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The increase in rates extends beyond coal traffic. As of late 2006, new rail
transportation rates generally were reportedly running 10% to 30% above pre-2004¹⁴⁹
levels, with contract renewals for coal showing some of the largest rate increases.
¹⁴⁶ For background information on increases in fuel costs to railroads and related disputes,
see STB, Ex Parte No. 661, Rail Fuel Surcharges, Decision, January 25, 2007.
¹⁴⁷ “Railways and Buffett,” Financial Times, April 11, 2007.
¹⁴⁸ Summary of M. Bossard, T. Gaalaas, G. Vicinus, Electric Power Research Institute, New
Price Structures for Coal Transportation: Evidence and Implications, prepared by Pace
Global Energy Services, Inc., November 2005 [http://my.epri.com/portal/server.pt?].
¹⁴⁹ “Railroad Freight Pricing is Going Up as Shippers Complain to Congress,” US Rail News,
(continued...)

In the view of the rail industry, higher rates are needed to secure the financial
viability of the industry and to justify capacity expansion. Railroads have reportedly
told power companies that “constrained capacity and the need to raise more money
for capital investments” require higher rail rates.¹⁵⁰ As explained by the UP railroad,
“We cannot invest for the future unless we provide service that justifies what we call
reinvestible rates — rates that are sufficient to allow us to replace the infrastructure
that we use to provide the service.... If government acts in a manner that allows us
to obtain market-based, reinvestible rates, our ability to invest in capacity will grow,
and the amount of traffic we can carry will expand. It’s that simple.”¹⁵¹
Coal shippers have characterized the rate increases as unreasonable. They have
also criticized the STB’s rate appeals process as an ineffective deterrent to or remedy
for unreasonable rate increases, a concern shared by GAO.¹⁵²
The rate increases in themselves do not necessarily signify an unreasonable
exercise of market power. As discussed below, the railroads have arguably never
achieved the financial adequacy goal established by the Staggers Act, in which case
higher rates may be a financial necessity. A 2006 GAO study of rail rates concluded,
in respect to captive shippers, that its findings “may reflect reasonable economic
practices by the railroads in an environment of excess demand, or they may indicate
a possible abuse of market power.”¹⁵³ As discussed later in this report, at GAO’s
urging the STB plans to conduct a study of rail competition and rates.
Analysis of Legislative Proposals: Tax Incentives
As noted earlier, two types of legislative proposals have been put before the^th

110 Congress to address rail service and rate issues: tax incentive bills and

¹⁴⁹ (...continued)
November 22, 2006, p. 180. By comparison, between 2004 and 2006, the overall rate of
inflation as measured by the change in the implicit price deflator for gross domestic product
was about 6% (implicit price deflator data from the St. Louis Federal Reserve Bank FRED
database [http://research.stlouisfed.org/fred2/], visited February 28, 2007).
¹⁵⁰ “Rollovers to Short-Term Rail Contracts Expected to Raise Revenues, Give Flexibility,”
Platts Coal Trader, November 28, 2006, p. 1.
¹⁵¹ James R. Young, Chairman, President, and CEO, Comments of Union Pacific Railroad
Co., before the Surface Transportation Board, Ex Parte 671, Rail Infrastructure and
Capacity Requirements, April 11, 2007, p. 19.
¹⁵² Testimony of the Honorable Glenn English, Chief Executive Officer, National Rural
Electric Cooperative Association, U.S. Congress, Senate Committee on Science, Commerce
and Transportation, Subcommittee on Surface Transportation and Merchant Marine,^th
hearing, Economics, Service and Capacity in the Freight Railroad Industry, 109 Congress,^nd

2 sess., June 21, 2006, pp. 12-13; GAO, Freight Railroads: Industry Health Has Improved,

but Concerns about Competition and Capacity Should Be Addressed, November 2006, p.

66.

¹⁵³ GAO, Freight Railroads: Industry Health has Improved, but Concerns about
Competition and Capacity Should Be Addressed, November 2006, “Highlights” page.

regulatory restructuring legislation. This section of the report describes and analyzes
the tax incentive proposals from the perspective of improving the reliability of coal
transportation to power plants.
Description of Legislative Proposals
S. 1125, the Freight Rail Infrastructure Capacity Expansion Act of 2007
(FRICEA), was introduced on April 17, 2007, and its House counterpart (H.R. 2116)
on May 2, 2007. Similar legislation was introduced in the second session of the 109^th
Congress without receiving further consideration (S. 3742, the Freight Rail
Infrastructure Capacity Expansion Act of 2006).
According to the rail industry, the object of FRICEA is to help resolve a
growing national problem with freight congestion, especially on highways, by
providing the capacity to put more freight traffic on railroads. The underlying
assumptions are that railroads are less costly to expand than highways, and that rail
freight is more fuel efficient and less polluting than truck transportation. However,
according to the AAR, “funding constraints will prevent railroads from meeting
socially-optimal future infrastructure investment needs entirely on their own.”¹⁵⁴
FRICEA includes two distinct but related inducements for capital spending.
The first is a 25% tax credit for capacity-expanding rail investments. The tax credit
would be available to any taxpayer making qualified investments, not only railroads.
The second incentive would increase rail investment generally, not just for
capacity expansion, by enhancing “modal tax equity.”¹⁵⁵ This would be
accomplished by allowing railroads and other tax payers to immediately deduct
(“expense”) qualifying rail capital investments from gross income. The immediate
deduction of capital costs is in contrast to the normal practice of depreciating the
value of capital investments over several years.¹⁵⁶
The option to expense investments is intended to end a discrepancy in the tax
treatment of the capital investment costs borne by railroads and other freight modes,
particularly trucks and barges. Railroads own and pay for their own rights of way
and structures. Tax recovery of these investments is made over time through tax
depreciation. In contrast, waterways and highways are usually publicly funded and
owned. Truck and barge operators pay for these facilities through taxes and user fees

¹⁵⁴ AAR, “Tax Incentives for Freight Railroad Capacity Expansion,” May 2007, p. 2
[http://www.aar.org/GetFile.asp?File_ID=819]. Also see AASHTO, Freight-Rail Bottom
Line Report, 2003, p. 2, on the interest by transportation planners in putting more freight
traffic on rail.
¹⁵⁵ Preambles to S. 1125 and H.R. 2116..
¹⁵⁶ When a capital investment is depreciated, the taxpayer annually deducts a fraction of the
total investment from gross income. The amount that can be deducted each year and the
length of the recovery period is determined by tax law and regulations. The underlying
concept is that tax recovery of long-lived investments should be spread over a period of
years. In contrast, operating cost items such as fuel are an expense that can be deducted in
their entirety from gross income the same year the cost is incurred.

that can be immediately taken as an income tax deduction. The notion is that
allowing the railroads to expense infrastructure investment will level the financial
playing field between freight transportation modes.¹⁵⁷
Advocates of modal equity in the tax treatment of freight investment costs argue
it will lead to a more optimal allocation of society’s resources, likely including
greater investment in rail capacity.¹⁵⁸ A closely related issue is whether trucks and
barges pay the full cost of the infrastructure provided by the public. According to the
CBO:
The Federal Highway Administration estimates that large trucks pay in taxes
only about 50 percent to 80 percent of the [federal] costs attributed to them.
Barge operators on the inland waterways pay taxes that cover only about 20
percent of the amount the Corps of Engineers spends on navigation projects. In
contrast, the railroads pay for their rights-of-way and infrastructure and often
must pay local taxes on those investments as well. Those factors translate into
lower private costs for truckers and water carriers and enable them to attract
some freight shipments that could be carried at a lower total cost by the railroads.
That encourages greater spending on highway and waterway construction than
would be justified on economic grounds and leads to an inefficient use of the¹⁵⁹
economy’s resources.
As proposed, FRICEA defines two main categories of railroad property.
Qualified Freight Rail Infrastructure Property includes investments in hardware
(such as track, rail yards, and freight loading and unloading terminals, and
communication and control equipment) and related software. Investments in land
and rail cars are specifically excluded.¹⁶⁰ Qualified Locomotive Property includes
purchases of locomotives that meet the following criteria: 1) the taxpayer’s total
locomotive capacity, measured in horsepower, is greater at the end of the tax year
than at the end of the preceding tax year, and 2) the new locomotives meet the U.S.
Environmental Protection Agency’s emission standards for locomotives in effect on
December 31, 2006.
The 25% tax credit would be available for New Qualified Freight Rail
Infrastructure Property and New Qualified Locomotive Property. To qualify as
“new” — that is, capacity enhancing — the original use of the property or locomotive

¹⁵⁷ AAR, “Tax Incentives for Freight Railroad Capacity Expansion,” May 2007
[ h t t p : / / www.aar .or g/ Get Fi l e .asp?Fi l e _ID=819] .
¹⁵⁸ Ibid. Also see the discussion of modal equity issues in GAO, Freight Railroads: Industry
Health Has Improved, but Concerns about Competition and Capacity Should Be Addressed,
November 2006, pp. 62-63
¹⁵⁹ Elizabeth Pinkston, Freight Rail Transportation: Long-Term Issues, Congressional
Budget Office, January 2006, p. 17.
¹⁶⁰ According to the AAR, rolling stock was excluded because “it was felt that investment
in freight rail infrastructure and qualified locomotives — two types of property that would
allow rolling stock (and the freight carried by such rolling stock) to be moved in greater
quantities and at faster speeds — would provide the greatest benefit.” Another
consideration was controlling the cost of the tax benefits. E-mail from H.K. Obie O’Bannon
(AAR) to Stan Kaplan (CRS), May 31, 2007.

must commence with the taxpayer. In addition, infrastructure property that merely
replaces existing property does not quality as “new” with the exception of expanded
or replacement bridges and tunnels which increase rail capacity.
The option to expense rail investments would apply to all Qualified Freight Rail
Infrastructure Property, but not Qualified Locomotive Property. “Qualified
Locomotive Property” that is not “New” would not qualify for any tax incentive
under FRICEA.
The tax credit would reduce the investment basis for calculating tax
depreciation. The taxpayer could not take both the tax credit and the expense option
on the same dollar of investment. FRICEA would apply to investments made
between January 1, 2008, and December 31, 2012, when it would expire.
Discussion
The FRICEA objective of increasing system capacity appears generally
consistent with the interests of coal and other shippers who want a more robust and
reliable rail network, and of transportation planners who want the option of moving
some freight traffic off of highways. The tax incentives also directly address the
reluctance of the rail industry to take the additional financial risks inherent in greater
capital spending by effectively reducing the cost of capital expansion.
This discussion of FRICEA policy issues focuses on three questions:
^!Who should control how the FRICEA tax incentives are used?
^!Will FRICEA investments meet expectations of increasing rail
system capacity and improving the reliability and quality of rail
service?
^!Does the data exist to determine the need for and track the results of
FRICEA?
The issue of how or if the federal government should seek to ensure modal-
neutral funding for rail and other freight modes is beyond the scope of this report.
Also note that because FRICEA tax incentives would reduce revenues, it may require
offsets under Congressional “pay-as-you-go rules.”¹⁶¹
Control. From the standpoint of the rail industry, an advantage of FRICEA is
that it leaves investment decisions to the railroads: “the railroads themselves are the
ones who know where the chokepoints are in the rail network and where
infrastructure expansion would do the most good.”¹⁶²
From the standpoint of some electric power and other shippers, the disadvantage
of FRICEA is that shippers and the government would not have more control over

¹⁶¹ For information on the “pay-as-you-go” rules, see CRS Report RL32835, PAYGO Rules
for Budget Enforcement in the House and Senate, by Robert Keith and Bill Heniff Jr.
¹⁶² Association of American Railroads, “Freight Rail Infrastructure Capacity Frequently
Asked Questions,” Item 11 [http://www.aar.org/itc/FAQ_flyer_v3_FINAL.pdf].

how the incentives are used. As argued by the American Public Power Association,
“we strongly believe Congress should not issue a blank check in the form of an
investment tax credit for railroad infrastructure. Any such tax credit must be coupled
with a package of much needed reliability, accountability and policy reforms.”¹⁶³ The
GAO has expressed a different, more general concern about the efficacy of rail tax
incentives. In a 2006 report GAO noted that:
We have also raised concerns about federal tax policies. For railroads, some
industry groups have proposed freight rail tax credits to encourage investment.
However, our work has shown that it is difficult to target tax credits to the
desired activities and outcomes and ensure that tax credits generate the desired
new investments, as opposed to substituting for investment that would have¹⁶⁴
occurred anyway.
The impact of FRICEA investments on coal or other shippers is unpredictable.
However, the railroads could choose to focus the incremental investments triggered
by FRICEA toward specific geographic areas or categories of traffic, such as¹⁶⁵
intermodal traffic. Intermodal investments have reportedly far out-stripped coal-
related spending since the middle of this decade.¹⁶⁶ If FRICEA puts more intermodal
traffic on the rails, it would achieve the aims of public officials concerned with
highway congestion, but could put at risk or even degrade the reliability of coal
shipments. As one analyst notes, this is because “mixing the much faster intermodal
trains with the slower bulk freight train movements tends to devour network capacity
at an alarming rate.”¹⁶⁷ There have been instances in which railroad efforts to
increase intermodal service have caused major delays for other traffic.¹⁶⁸
Specific qualifications shippers have recommended that Congress impose on
FRICEA include:¹⁶⁹

¹⁶³ Statement of Alan H. Richardson, President and CEO, American Public Power
Association, before the Federal Energy Regulatory Commission, Discussions with Utility
and Railroad Representatives on Market and Reliability Matters, Docket No. AD06-8-000,
June 15, 2006, pp. 5-6.
¹⁶⁴ GAO, Freight Railroads: Industry Health has Improved, but Concerns About
Competition and Capacity Should Be Addressed, November 2006, p. 64 (footnote omitted).
¹⁶⁵ On the increase in the profitability and volume of intermodal traffic, see Larry Kaufman,
“Success at Last: Intermodal Has Become Worthwhile,” Trains, March 1, 2004.
¹⁶⁶ Trygve Gaalaas. “The Outlook for Coal Transportation,” presentation to the American
Coal Council, Coal Market Strategies Conference, October 9, 2006, p. 8.
¹⁶⁷ Statement of Robert H. Plymale, Director, Nick J. Rahall, II Appalachian Transportation
Institute, before the Surface Transportation Board, Ex Parte 671, Rail Infrastructure and
Capacity Requirements, April 4, 2007, p. 4.
¹⁶⁸ Ibid.; Don Phillips. “Freight-Car Congestion Is Worrying Union Pacific,” The New York
Times, March 31, 2004; “Union Pacific to Shift Some U.P.S. Cargo to Trucks,” The New
York Times, April 1, 2004.
¹⁶⁹ Statement of William M. Mohl, Vice President, Commercial Operations, Entergy
Services, Inc., on behalf of the Edison Electric Institute, before the Surface Transportation
(continued...)

^!The credit should be tied to the imposition of mandatory railroad
reliability standards and a firm obligation to serve.
^!Capacity expansion should focus on assistance to domestic coal and
other domestic shipments, including domestic shipments moving to
export ports, in contrast to import traffic.
^!First priority for investment should be captive coal shippers and
other shippers captive to a single railroad, and there should be a ban
on applying the tax credit to help fund investments that would
enhance railroad monopoly power.
^!A general recommendation for regulatory oversight to ensure that
the tax credit is used in the public interest and not simply to increase
capacity in the most profitable rail markets.
All of these proposed qualifications lack specificity and perhaps, in some cases,
would be difficult to implement. Railroads are networks, so an investment in one
location can have wide effects. It can be very difficult to determine if a specific
investment will primarily benefit specific domestic shippers or groups of shippers.
The implication of the proposed qualifications is that each FRICEA investment
would have to be individually reviewed by the government before it could qualify for
the tax credit. This degree of review (and likely associated delay) might choke off
the additional investment FRICEA is intended to encourage.
It is also important to consider that the community of railroad shippers is not
homogenous. For example, intermodal shippers are unlikely to support restrictions
designed to funnel investment toward captive coal traffic. Other shippers support
FRICEA as it stands, including the National Mining Association (which represents
coal and other mining industries) and TXU, a large Texas-based electric power
com p any.¹⁷⁰
If Congress does want to consider the possible restrictions on FRICEA
investments mentioned above, other formulations might require less intrusive federal
oversight. An example is limiting the FRICEA incentives to specific types of
investments with system-wide effects on capacity and quality of service. Examples
of these “freight-neutral” investments include advanced electronically controlled

¹⁶⁹ (...continued)
Board, Ex Parte 671, Rail Infrastructure and Capacity Requirements, April 4, 2007, pp. 3-
6; Submission of Written Testimony, Richard L. Charter, Senior Vice President, Total
Petrochemicals USA, Inc., before the Surface Transportation Board, Ex Parte 671, Rail
Infrastructure and Capacity Requirements, April 4, 2007, pp. 2-3; Testimony of the
Honorable Glenn English, Chief Executive Officer, National Rural Electric Cooperative
Association, U.S. Congress, Senate Committee on Science, Commerce and Transportation,
Subcommittee on Surface Transportation and Merchant Marine, hearing, Economics,^th^nd
Service and Capacity in the Freight Railroad Industry, 109 Congress, 2 sess., June 21,

2006, pp. 12-13.

¹⁷⁰ The AAR posts a list of supporters of FRICEA on its website
[ h t t p : / / www.aar .or g/ IT C/ IT C_suppor t e r s .asp] .

pneumatic (ECP) brakes and positive train control (PTC) systems, and de-
bottlenecking specified major choke points.¹⁷¹ This targeted-investment approach
could supplement current “public-private partnerships” which jointly fund specific
freight rail projects.¹⁷²
This alternative approach to directing FRICEA investments may require less
detailed federal supervision than some other approaches, but still has potential
disadvantages, including the following: it pre-judges today which investments would
best enhance system capacity, something which could change with market and
technical developments; tax incentives would not flow to worthwhile investments
outside of the specified categories; and this approach, like other proposed limitations
on FRICEA investments, could constrain the ability of the private sector managers
responsible for the coal supply chain (and other traffic) from directing the incentives
to what in their judgment would be the most productive uses.
Expected Outcomes. As discussed earlier, information on rail capacity and
service quality is limited. Without a common baseline, different interests may have
radically different views of the extent of current capacity and service issues, the¹⁷³
benefits FRICEA is likely to yield, and what would constitute success for FRICEA.
The greatest difference in expectations is likely to be between shippers, such as
electric power producers, and the railroads. Power companies want fast, reliable
service over a rail network with sufficient capacity to smoothly absorb traffic growth
at what they view as economical rates. They also want the system to have enough
redundancy to be able to quickly bounce back from disruptions, such as bad weather

¹⁷¹ General use of ECP brakes and PTC would, in principle, increase capacity by allowing
a greater density of trains to safely use the rail network. H.R. 2095, The Federal Railroad
Safety Improvement Act of 2007, would require implementation of PTC systems by Class
I railroads by the end of 2014. For additional information on these technologies see
Zeta-Tech Associates, Quantification of Business Benefits from Positive Train Control,
prepared for the Federal Railroad Administration, March 15, 2004; Federal Railroad
Administration press release, FRA Approves Waiver for New Braking Technology to
Improve Train Safety and Control, March 29, 2007.
¹⁷² Public-private partnerships (PPP) are projects by private railroads and public agencies
to enhance railroad capacity and service. The funding contributed by each party is intended
to reflect the relative benefits the public and the railroad will gain from the project.
Examples include the CREATE project to relieve rail congestion at Chicago, a projected
$1.5 billion project that had received as of mid-2007 $100 million in federal funding, and
the $2.4 billion Alameda Rail Corridor project in Long Beach and Los Angeles. The
Alameda Corridor was completed in 2002 and received a $400 million federal loan. Unlike
the FRICEA tax incentives, public support of PPP projects is targeted to achieve specific
benefits. See [http://www.createprogram.org/faq.html#funded]; and James R. Blaze,
“Redeveloping Aged Urban Rail Freight Infrastructure,” presentation to the National Urban
Freight Conference, February 1-3, 2006, p. 6.
¹⁷³ For example, Arkansas Electric Cooperative believes that rail system capacity is adequate
and that the reduction in average train speeds is the result of efforts by the carriers to reduce
fuel consumption. Martin W. Bercovici and Michael A. Nelson, Supplemental Comments
of Arkansas Electric Cooperative Corp. before the STB, Ex Parte 671, Rail Infrastructure
and Capacity Requirements, May 4, 2007, p. 2.

or unexpected surges in demand. However, from the railroad perspective this
scenario may imply ill-considered investment in excess rail capacity in lieu of the
power industry purchasing larger coal stocks for power plants.
The railroad industry entered the post-Staggers era with financially burdensome
excess capacity. As noted above, it has eliminated this surplus by, for example,
increasing traffic, shedding assets and labor, increasing efficiency, and not building
too far ahead of excess demand. The resulting tight capacity had directly contributed
to the ability of the rail industry to raise rates and revenues. According to JP Morgan
Securities, “it appears that the long term trend of growth in demand for rail
transportation finally caught up with available capacity, and the past two years have
been a period of much tighter rail capacity compared to the historical norm. As a
result rail transportation rates have risen significantly in 2004 and 2005.... While the
situation of tight capacity has had a negative impact on rail service for several
railroads and many shippers have received less reliable rail transport service, it has
also been a significant positive from a investor perspective.”¹⁷⁴ In early 2007 the
railroads were reported to be “buoyed by new financial reports that validate their
strategy of keeping capacity snug and pricing firm.”¹⁷⁵
The rail industry has expressly noted the pricing advantages of running railroad
systems with limited surplus capacity. According to the BNSF, “We don’t bring
capacity on sooner than we need it, so we always have a natural tightness.... Supply
chains from all industries are feeling a ‘tightness’ in their ability to immediately
leverage up for additional volume. This will result in increasing the value for our
service, improving our returns.”¹⁷⁶ CSX’s strategy for increasing the profitability of
its intermodal business included reducing excess capacity.¹⁷⁷ UP told Wall Street
analysts in 2005 that “in some ways we are where we always wanted to be with the
demand for our service outstripping the supply.”¹⁷⁸ Part of the business strategy
outlined by UP was to “leverage strong demand to drive [revenue] yield improvement
by swapping out less profitable business for higher yielding moves ... our price plan

¹⁷⁴ Thomas R. Wadewitz, JP Morgan Securities, presentation before the Surface
Transportation Board, Ex Parte 658, The 25^th Anniversary of the Staggers Rail Act of 1980,
October 19, 2005, unpaginated.
¹⁷⁵ John D. Boyd, “Building Up Rails,” Traffic World, February 5, 2007.
¹⁷⁶ William C. Vantuono, “Fluidity, Velocity, Capacity, Consistency,” Railway Age,
December, 2004. In 2005, the BNSF operations team was “trying to tighten capacity to
ensure there isn’t too much slack in the asset base.” Scott Flower, “BNSF Seeks to Balance
Pricing, Service Performance and Capital Spending to Boost Profits,” Progressive
Railroading.Com, May 16, 2005 [http://www.progressiverailroading.com/commentary/
article.asp?id=6839].
¹⁷⁷ Transcript of First Quarter 2001 CSX Earnings Conference Call, FD (Fair Disclosure)
Wire, April 23, 2001.
¹⁷⁸ Transcript of Fourth Quarter 2004 UP Earnings Conference Call, FD (Fair Disclosure)
Wire, January 24, 2005.

is actually designed to meter the flow of business onto the railroad and to drive up
the profitability of the business that we do handle.”¹⁷⁹
The strategy of minimizing excess capacity to support prices is not unique to the
railroad industry. According to the investor Warren Buffett, speaking of the electric
power industry:
In a deregulated market, generators have a clear incentive to reduce power
reserves.... “If you own in a deregulated environment, if you own generation
assets, what do you want? Things to be tight.”
... [T]he nation’s responsibility is to have “some — not too much, [but] some —
excess capacity at all times. It’s crazy to operate without a margin of safety,” he
said. Wise utility regulation allows for extra capacity and an adequate return on
investment.... “The last thing in the world an unregulated operator wants is
excess capacity around....”
However, it may be possible for industry actors to deliberately maintain a tight
capacity environment, conducive to pricing power, only if the industry is highly
concentrated or if competition is otherwise muted.
To the degree that tight capacity has contributed to the recent ability of the
railroads to raise rates, it is not clear why the railroads would build significant surplus
capacity with or without FRICEA incentives. In this case, FRICEA may not result
in system-wide improvements to rail system service and resiliency in the face of
adverse circumstances.
Information. Because the public data on rail capacity and service is limited,
the problems FRICEA is intended to resolve cannot be clearly defined. Looking
ahead, no existing metrics in the public domain could be used to rigorously measure
the changes in coal capacity and service caused by FRICEA or other factors.
FRICEA does not require industry or government to define a service and capacity
baseline, provide a detailed characterization of investments that use FRICEA
incentives, or determine the improvements to capacity and service, if any, that result
from FRICEA incentives.
The relevant data may be considered proprietary by the railroads, coal
producers, and power companies. Nonetheless, as discussed earlier in this report, if
Congress concludes that better public data on rail capacity and service is needed, the
confidentiality issue can perhaps be dealt with by aggregating or otherwise masking
published capacity and service data for specific rail corridors.
Tax Incentives: Considerations and Options. Issues that may be of
interest in evaluating the tax incentive proposals include:
^!Should the public influence how the FRICEA incentives are used
(beyond the guidelines built into the proposed legislation)? If so,

¹⁷⁹ Ibid.

how can this intervention be structured as to be practical and not
unduly burdensome?
^!Are the expected outcomes from FRICEA clear? Coal and other
shippers want a fluid, resilient rail network offering high quality
service even under adverse conditions. This implies a level of
investment in buffer capacity that may not be affordable, even with
FRICEA incentives, and may not be attractive to the rail industry in
any event because tight capacity has contributed to the industry’s
ability to raise rates. The question is whether FRICEA is expected
to lead to system-wide improvements in rail capacity and service or
more limited benefits.
^!Does the government need additional information on rail capacity
and service? This could include a baseline and on-going data that
would make it possible to evaluate the need for and effectiveness of
FRICEA. Collecting and publishing more capacity and service data
may require taking steps to protect the confidentiality of business-
sensitive information.
Analysis of Legislative Proposals:
Regulatory Restructuring
The rail regulatory restructuring bills before the 110^th Congress are intended to
deal with a host of concerns, raised by coal and other shipper interests, over rail
service and rates. This discussion will focus on how the proposals could affect the
reliability of coal transportation to power plants.
The restructuring bills fall into two categories: comprehensive restructuring and
repeal of railroad antitrust exemptions. The two categories of bills are summarized
below, followed by an analysis of their potential impacts. Note that a legal analysis
of the bills, and in particular on disagreements concerning the current application of
the antitrust laws to the railroad industry, is beyond the scope of this report.
Description of Legislative Proposals:
Comprehensive Restructuring
S. 953, the Railroad Competition and Service Improvement Act of 2007
(RCSIA), was introduced on March 21, 2007, and its House counterpart (H.R. 2125)^th
on May 3, 2007. Similar legislation was introduced in the 109 Congress without
receiving further consideration, including the Railroad Competition Acts of 2005 (S.
919) and 2006 (S. 2921), and the Railroad Competition Improvement and
Reauthorization of Act of 2005 (H.R. 2047). According to the preambles, the bills
are intended to “ensure competition in the rail industry, enable rail customers to
obtain reliable rail service, and provide those customers with a reasonable process
for challenging rate and service disputes.”

RCSIA would make major changes to federal rail regulation, as summarized
below:
National Rail Transportation Policy. The existing policy (49 U.S.C. §
10101) would be amended to put additional emphasis on ensuring head-to-head
competition between railroads, establishment of reasonable rates, and “consistent,
efficient, and reliable rail transportation service” (RCSIA section 101).
Bottlenecks and Competitive Rail Access. From a regulatory
perspective, a rail bottleneck is a situation in which more than one railroad can
originate the traffic required by a customer, such as PRB coal, but only one railroad
has physical access to the customer, such as a power plant.¹⁸⁰ The bottleneck carrier
is then in a position to direct all shipments over its lines and to charge relatively high
rates for service over what may be a very short distance. The STB has the authority
to use “reciprocal switching” and joint terminal access to open bottlenecks (49
U.S.C. § 11102), but it has construed this authority relatively narrowly; specifically,
to situations where a shipper can demonstrate that a bottleneck carrier has engaged
in anti-competitive behavior, or when the shipper has, in certain defined
circumstances, entered into a contract with another railroad for the non-bottleneck
part of the haul.¹⁸¹ According to GAO no shipper has successfully pursued the anti-
competitive option before the Board.¹⁸² One shipper was successful using the
contract option.¹⁸³

¹⁸⁰ A bottleneck at the destination would be most common for coal traffic, but configurations
with the bottleneck at the origin also exist. Union Pacific Railroad Co. v. Surface
Transportation Board, 220 F.3d 337 (D.C. Cir. 2000). For additional information on
bottleneck situations, see CRS Report RL34117, Railroad Access and Competition Issues,
by John Frittelli, pp. 4-7.
¹⁸¹ 49 C.F.R. 1144; Surface Transportation Board, Finance Dockets 41242, 41295, and

41626, Decision, December 27, 1996 (“Bottleneck I”); Surface Transportation Board,

Finance Dockets 41242, 41295, and 41626, Decision, April 28, 1997 (“Bottleneck II”);
Baltimore Gas & Electric v. United States, 817 F.2d 108 (D.C. Cir 1987); MidAmerican
Energy Co. v. Surface Transportation Board, 169 F.3d 1099 (8th. Cir. 1999). The
conference report for the Staggers Act described reciprocal switching as a remedy the ICC
“may require ... where practical and in the public interest or where such agreements are
necessary to provide competitive rail service.” U.S. Congress, Conference Committees,^th^nd
Staggers Rail Act of 1980, conference report to accompany S. 1946, 96 Congress, 2 sess.,
September 29, 1980, H.Rept. 96-1430 (Washington: GPO, 1980), p. 84. The ICC’s
implementation of the Staggers Act has in practice made the reciprocal switching authority
of little consequence. On expectations that reciprocal switching would play a larger role in
rail regulation, see James N. Heller, Coal Transportation and Deregulation: An Impact
Analysis of the Staggers Act (Washington: The Energy Bureau and Serif Press, 1983), pp.

151-153.

¹⁸² GAO, Freight Railroads: Industry Health has Improved, but Concerns About
Competition and Capacity Should Be Addressed, November 2006, p. 42.
¹⁸³ Surface Transportation Board, Finance Docket 33467, FMC Wyoming Corp. V. Union
Pacific R.R. Co., Decision, December 12, 1997; Union Pacific Railroad v. Surface
Transportation Board, 202 F.3d 337 (D.C. Cir 2000).

RCSIA sections 102 (requiring rail carriers to quote rates and provide service
between any two points on their systems) and 104 (directing the STB to order
reciprocal switching between railroads if in the public interest or if necessary to
provide competitive service) would give shippers wide latitude to open bottlenecks
and create competitive rail access. By doing so, RCSIA would appear to reverse a
long-standing policy of permitting railroads, under most circumstances, to keep a
shipment on its own tracks rather than forcing it to interchange.¹⁸⁴ Long-hauls and
single-line hauls are the most economical modes of rail operations, in contrast to
short-hauling.
Section 105 of RCSIA, “Areas of Inadequate Rail Competition,” addresses rail
competition across a much wider scope. As described in a summary of the bill, this
section of RCSIA:
Allows a Governor to petition the STB to have all or part of his or her state
designated as an “area of inadequate rail competition.” To qualify, the area must
be served by essentially one carrier, most of the rates must exceed 180 percent
of the direct cost to the railroad of the transportation and the state or area of the
state must have suffered significant economic adversity because of this lack of
competition. Within 60 days after the STB so designates a state or area of the¹⁸⁵
state, the STB shall fashion a remedy for this lack of rail competition.
The remedies specified in Section 105 include reciprocal switching, expedited
arbitration of rate disputes, expedited review of whether rates are discriminatory,
requiring a rail carrier to provide rail service on its system on behalf of another
railroad, and “other remedies authorized by law.”
Interchange Commitments/Paper Barriers. When a railroad sells or
leases track to a short line railroad, the transfer agreement may restrict the short line
from interchanging certain traffic with other carriers. The object is to allow the Class
I railroad to remain (in conjunction with the short line) the only railroad serving a
market. These restrictions are referred to as “paper barriers” or “interchange
commitments.” RCSIA would ban paper barriers in the future and, upon review by
the STB, make current interchange commitments unlawful (Section 103). This is
another means of introducing more competition into the rail system.
Effectuating this ban on interchange commitments would likely be complex and
contentious. The existing sale and lease agreements that contain paper barriers
presumably have sale prices, lease rates, and perhaps other terms predicated in part
on the traffic and revenues the Class I railroad expects to receive consequent to the
interchange restrictions.¹⁸⁶ Eliminating the papers barriers could therefore change the

¹⁸⁴ Federal policy to end the practice of “open routing,” which required the railroads to
provide a multiplicity of interline routings between origin and destination pairs, began with
the 4R Act of 1976 and was reinforced in 1980 by the Staggers Act.
¹⁸⁵ Summary of the Railroad Competition and Service Improvement Act of 2007
[http://craig.senate.gov/ rail_comp_section_110th.pdf].
¹⁸⁶ CRS Report RL34117, Railroad Access and Competition Issues, by John Frittelli.

economic basis of the agreements, with impacts on rates, operations, and possibly
even the viability of the transactions that are difficult to predict.
Rail Service. RCSIA has several provisions that directly address rail service
quality. The bill would require the STB to post information about rail service
complaints and their resolution on its website and submit an associated annual report
to Congress (Section 201); require rail transportation subject to the jurisdiction of the
STB to be “reliable and efficient” (section 202); qualify the precedence that contract¹⁸⁷
service has over common carrier service under current law (section 102); state that
a rail carrier may be liable for payment of damages “due to failure of timely delivery”
(Section 203); and create an Office of Rail Customer Advocacy within DOT, to be
appointed in consultation with the Secretary of Agriculture. The advocate would
“accept rail customer” complaints, participate in STB proceedings, have the ability
to initiate STB proceedings, and would have the power to collect information and¹⁸⁸
have access to the data collected by the STB (Section 204). (Under Section 304
of RCSIA shippers agricultural products can demand binding arbitration to resolve
service and rate issues. This option is not available to shippers of coal or other
goods.)
Rate Appeals. The current STB rate appeal process has been widely criticized
by coal and other shipper interests. GAO concluded in 2005 that the STB’s rate
appeal process is “ineffective.”¹⁸⁹ The rate appeal process is of particular interest to
power companies because almost all rate cases since the passage of Staggers have
involved coal shipments to power plants. This is because coal shipments are one of
the few categories of regulated traffic that have enough volume and revenue at stake,
and the prerequisite lack of competitive service, to justify the cost (several million
dollars) and time (typically more than three years) necessary to pursue a rate appeal.
Section 302 of RCSIA directs the STB to develop a new rate appeal process
based on a railroad’s cost of service, akin to the process used in electric utility rate
cases. The process is to take no longer than nine months, “shall not require excessive

¹⁸⁷ This part of section 102 is not included in H.R. 2125.
¹⁸⁸ Although RCSIA establishes the Office of Rail Customer Advocacy within DOT, it also
states that the Office shall “carry out other duties and powers prescribed by the [Surface
Transportation] Board.” The independence of the Advocate relative to the STB seems
ambiguous.
¹⁸⁹ GAO, Freight Railroads: Industry Health Has Improved, but Concerns about
Competition and Capacity Should Be Addressed, November 2006, p. 66. According to GAO
“...there is widespread agreement that STB’s standard rate relief process is inaccessible to
most shippers and does not provide for expeditious handling and resolution of
complaints...[S]hippers we interviewed agreed that the process can cost approximately $3
million per litigant....Thus, shippers noted that only large-volume shippers, such as coal
shippers...[can] afford the STB rate relief process. In addition, shippers said that they do not
use the process because it takes so long for STB to reach a decision. Lastly, shippers
continue to state that the process is both time consuming and difficult because it calls for
them to develop a hypothetical competing railroad to show what the rate should be and to
demonstrate that the existing rate is unreasonable. Since 2001, only 10 cases have been
filed, and these cases took between 2.6 and 3.6 years — an average of 3.3 years per case —
to complete. Of those 10 cases, 9 were filed by coal shippers.” Ibid., p. 41.

litigation costs,” and puts the burden of proof on the railroad to demonstrate that the
rate is reasonable (currently the burden of proof is on the complainant to show that
a rate is unreasonable). It also explicitly bans any rate appeal process that relies, like
the current procedure, on the cost of a hypothetical competitor. (As noted above,
Section 304 of RCSIA gives agricultural shippers an option, unavailable to other
shippers, of opting-out of the rate appeal process altogether and relying on binding
arbitration to resolve rate disputes.)
The rate appeal process, and the proposal to change it, is a point where major
threads of rail policy intersect. The existing process is deliberately designed to allow
railroads to charge rates to captive customers that will include a large share of the
system-wide “non-attributable” costs that cannot be specifically tied to any individual
rail movement. This allows the railroads to charge lower rates (but never lower than
direct cost) to customers who have competitive alternatives and are price sensitive.
A cost-based rate appeal process — that is, rates based primarily on the costs that can
be directly tied to a specific movement — could sharply reduce the amount of
non-attributable costs chargeable to captive customers.¹⁹⁰
If the railroad industry is still not revenue adequate, or if the high rates charged
to captive customers are a cornerstone of the rail industry’s financial stability, then
cost-based rate appeals could detrimental to the financial stability of the rail industry.
However, under other circumstances — such as, the industry is revenue adequate,
there are relatively few captive customers, and/or the higher rates captive shippers
are charged are not central to the financial integrity of the rail industry — a cost
based rate appeal process may be feasible. As discussed elsewhere in this report, the
information available on rail competition, rail rates, and the revenue adequacy of the
railroad industry is deficient. This makes it difficult to judge whether a cost-based
rate appeal process would pose financial risks to the rail industry.
Authority to Investigate and Suspend. The Board currently has authority
to initiate investigations “only on complaint” (49 U.S.C. § 11701). Section 401
would allow the STB to begin investigations on its own initiative. It also allows the
Board to suspend railroad practices that it believes may be in violation of the law.
Section 201 of the bill requires the STB to respond within 90 days to complaints
requesting injunctive relief against railroad practices alleged to be unlawful
(excluding allegations of unreasonable rail rates).
Description of Legislative Proposals: Antitrust
S. 772, the Railroad Antitrust Enforcement Act of 2007, was introduced on
March 6, 2007, and its House counterpart (H.R. 1650) on March 22, 2007. Similar^th
legislation was introduced in the second session of the 109 Congress but did not
receive further consideration (S. 3612, the Railroad Antitrust Enforcement Act of

2006). According to the preambles, the bills are intended to “amend the Federal

¹⁹⁰ The proposed process would set a floor on appealed rates of 180% of direct costs. Rates
at this level would still recover non-attributable costs, but less than under current rates.
How much less is unknown.

antitrust laws to provide expanded coverage and to eliminate exemptions from such
laws that are contrary to the public interest with respect to railroads.”
The railroad industry historically has had limited exemptions from the antitrust
laws. The exemptions were predicated on the assumption that normal market forces
could not operate in the rail industry, and accordingly allowed the rail industry to
operate in ways, such as the coordination of rates, that would have been unacceptable
in a free market. The exemptions also reflected the notion that the comprehensive
regulation of rates, service, market entry and exit, and mergers by the ICC effectively
replaced the usual antitrust oversight of the Department of Justice and Federal Trade
Commission.¹⁹¹
In its most recent revision to rail regulation, the ICC Termination Act of 1995,
the Congress chose to continue these exemptions. The key exemptions include:
^!The STB has sole jurisdiction over railroad mergers. Railroads are
the only regulated industry whose mergers cannot be challenged by
Department of Justice (DOJ).¹⁹²
^!Railroads generally cannot be sued for injunctive relief for antitrust
violations by private parties.
^!“Railroads are generally exempt from Sherman Act antitrust actions
for treble damages if common carrier rates ‘approved by the
[government]’ are involved.”¹⁹³
^!Joint rates established by two or more railroads which have been
approved by the STB are exempt from antitrust review.
While these exemptions do not block all possible avenues for antitrust inquiry,
they are significant. In 2004, DOJ noted that bottleneck rates and interchange
commitments might be areas of interest for antitrust review, but because these
transactions were approved by the STB they may not be subject to the antitrust laws.
On the other hand, DOJ at the same time expressed interest in reviewing for possible

¹⁹¹ Letter from William E. Moschella, Assistant Attorney General, Department of Justice,
to the Honorable F. James Sensenbrenner, Jr., Chairman, House Committee on the Judiciary,
September 27, 2004, p. 1. Note that the creation of the Interstate Commerce Commission
in 1887 predates subsequent anti-trust legislation.
¹⁹² “By statute, the STB must give ‘substantial weight’ to the DOJ’s views on whether the
transaction will adversely affect competition, but the STB makes the final decision on
whether to allow the merger. In 1996 the STB approved the merger between Union Pacific
and Southern Pacific, despite the DOJ’s objections that the merger was anticompetitive.”
Antitrust Modernization Committee, Report and Recommendations, April 2007, p. 364
(footnotes omitted).
¹⁹³ Letter from the Honorable F. James Sensenbrenner, Jr., Chairman, House Committee on
the Judiciary, to R. Hewitt Pate, Assistant Attorney General, Department of Justice, July 15,

2004, p. 1.

antitrust violations the practice of the western rail carriers of publicly disclosing
certain rates. The status of this review, if underway, is not known.¹⁹⁴
The proposed legislation would eliminate these exemptions. Advocates
apparently anticipate that shippers will use these new openings to attack bottleneck
rates and paper barriers, and perhaps seek to add what they view as pro-competitive
conditions to existing rail merger terms. Proponents also believe that if new mergers
are proposed between the Class I railroads, perhaps to create trans-continental
carriers, DOJ would take a broader view of market power and competitive effects
than the STB has done.¹⁹⁵ The proposal to eliminate the STB’s jurisdiction over
mergers is consistent with the recommendations of the federal Antitrust
Modernization Commission.¹⁹⁶
The railroads oppose the antitrust proposals, noting that:
^!The implication of proponents that the “railroads can engage is
conduct over which there is no government oversight ... is false.”
The railroads are subject to other aspects of the antitrust laws and
extensive regulation by the STB.
^!The limited exemptions that apply to the railroads are “narrowly
applied,” are intended to avoid dual jurisdiction between the STB
and other parts of the government, and in some cases reflect special
circumstances. For example, according to the AAR the exemption
from private demands for injunctive relief is intended to prevent
interruptions in rail system operations.
^!The proposed changes to the law are unnecessary. For example, “the
STB has the authority to enforce certain provisions of the antitrust
laws in lieu of the Federal Trade Commission. Moreover, the
federal government is not precluded from seeking injunctive relief,
and the federal antitrust provisions permitting private parties to sue
for damages contains no exclusion for railroads.”
^!In the view of the AAR, proponents of this legislation basically do
not like certain decisions made by the STB and are seeking to move
decisions to a different forum. The AAR argues that “limited

¹⁹⁴ Letter from William E. Moschella, Assistant Attorney General, Department of Justice,
to the Honorable F. James Sensenbrenner, Jr., Chairman, House Committee on the
Judiciary, September 27, 2004, pp. 2-3.
¹⁹⁵ Interview with Robert Szabo, director of Consumers United for Rail Equity, April 23,

2007.

¹⁹⁶ Antitrust Modernization Committee, Report and Recommendations, April 2007, pp. 363-
365. (According to the report, “Congress established the Antitrust Modernization
Commission ‘to examine whether the need exists to modernize the antitrust laws and to
identify and study related issues.’ [The] Report sets forth the Commission’s
recommendations and findings on how antitrust law and enforcement can best serve
consumer welfare in the global, high-tech economy that exists today.” Ibid., p. 1.

antitrust exemptions for the railroads exist because railroads are
subject to economic regulation .... If one is to assess whether the
antitrust exemption should be eliminated, one should also assess
whether the remaining regulatory regime should be treated
likewise.”¹⁹⁷
Discussion
The regulatory restructuring bills before the 110^th Congress are the latest in a
series of legislative proposals dating from 1983 to substantially change federal rail
regulation.¹⁹⁸ The antitrust and rail competition bills described above are intended
by proponents to
^!Improve coal and other service.
^!Drive down rail rates, by giving shipper interests new avenues to
force head-to-head competition between railroads.
^!Simplify the rate appeal process and tie prescribed rates to costs.
^!Encourage improved service by creating new legal obligations for
railroads to provide good service, and by highlighting service issues
through the web posting process, annual report to Congress on
service, and creation of the Rail Customer Advocate.
The railroad industry characterizes these proposals as “re-regulation.” It argues
that the proposals would inhibit the pricing and operational freedom that has been
important to the revival of the rail industry, and would cause the industry’s finances
and service quality to regress. According to the AAR:
Reregulation would deprive U.S. freight railroads of several billion dollars in
revenue each year, making it impossible for them to fund the rail capacity
improvements our country needs. The result would be a shrunken rail network,
higher shipping costs, more gridlock and environmental degradation as freight
that otherwise would move by rail moved on the highways instead, and
eventually a government bailout. It would be foolhardy to destroy the best
freight rail system the world has ever seen in order to move toward a discredited¹⁹⁹
system that failed in the past and would fail again in the future.
Rail Industry Competition and Service. Critics of rail industry service
have suggested that in a more competitive environment the railroads will be more
innovative and attuned to customer demands. The rail industry contends that it has
been on the leading edge of technological innovation;²⁰⁰ critics claim it has been slow

¹⁹⁷ AAR, Antitrust and the Railroads, June 2007.
¹⁹⁸ “Staggers Act End Run,” Coal Week, December 19, 1983.
¹⁹⁹ AAR, Destructive Railroad Reregulation, June 2007.
²⁰⁰ Statement of Edward R. Hamberger, President and Chief Executive Officer, Association
of American Railroads, U.S. Congress, Senate Committee on Science, Commerce and
Transportation, Subcommittee on Surface Transportation and Merchant Marine, hearing,^th^nd
Economics, Service and Capacity in the Freight Railroad Industry, 109 Congress, 2 sess.,
(continued...)

to implement new processes and technologies that could improve service and reduce
costs.²⁰¹ In 2004 the National Industrial Transportation League commented, in
relation to its assertion at the time that more competition was needed in the rail
market:
Competition drives efficiencies and innovation. It leads to a fundamental shift in
thinking, away from a static and ultimately counterproductive effort to protect
a “franchise,” toward a positive effort to grow business opportunities and
eliminate costs. Competition promotes cooperation between transportation
providers and their customers as both become partners in an effort to eliminate
inefficiencies and improve their market opportunities. The result of these efforts²⁰²
is increased demand for the service — that is, growth.
The current restructuring proposals aim at improving service by heightening
competition. The emphasis on competition is consistent with an underlying principal
of the current regulatory regime, which is “to allow, to the maximum extent possible,
competition and the demand for services to establish reasonable rates for²⁰³
transportation by rail;” though, as discussed below, it is not certain that more
reliance on market forces would be the actual outcome from the proposals.
The bills would not require the government to develop and enforce specific rail²⁰⁴
service standards, as has been proposed in the past. The bills also do not directly
address the limited information on rail service and capacity discussed earlier in this
report. Without more information, aspects of the proposed legislation are difficult
to evaluate. For example, the emphasis on rate relief and greater competition in the
bills presumes that high rail rates, especially for captive shippers, is a significant
national issue. This may or may not be the case.²⁰⁵ No thorough analysis exists on

²⁰⁰ (...continued)
June 21, 2006, pp. 12-15.
²⁰¹ Testimony of Thomas F. Jensen, Vice President, United Parcel Service, before the
Surface Transportation Board, Ex Parte 671, Rail Infrastructure and Capacity
Requirements, April 4, 2007, pp. 3-4; Frank Wilner, “Could a Monkey Run a Railroad?
These Capitalists Want to Know,” Journal of Transportation Law, Logistics & Policy (May

2007).

²⁰² Testimony of John B. Ficker, President, National Industrial Transportation League, U.S.
Congress, House Transportation and Infrastructure Committee, Subcommittee on Railroads,
hearing, The Status of the Surface Transportation Board and Railroad Economic^th^nd
Regulation, 108 Congress, 2 sess., March 31, 2004, pp. 6-7. NITL has not taken a stance
on the regulatory restructuring and tax incentive proposals discussed in this report. (E-mail
from John Ficker (NITL) to Stan Kaplan (CRS), September 14, 2007.)
²⁰³ 49 U.S.C. § 10101.
²⁰⁴ A bill introduced in July 2006, The Program for Real Energy Security Act (H.R. 5965),
would have directed the STB to develop and enforce mandatory rail service standards. The
bill did not received further consideration.
²⁰⁵ One study concluded that “there is little justification on economic efficiency grounds for
proposals to address the captive shipper issue.” Curtis Grimm and Clifford Winston,
“Competition in the Deregulated Railroad Industry: Sources, Effects, and Policy Issues,” in
(continued...)

the degree to which rail traffic is captive or of the rates paid by these shippers.
According to a 2006 study by GAO, there is:
... a reasonable possibility that shippers in selected markets may be paying
excessive rates related to a lack of competition in these markets. While our
analysis of available measures shows that the extent of captivity appears to be
dropping in the freight railroad industry, shippers that may be captive are paying
substantially over the statutory threshold for initiating a rate relief case. This
situation may simply reflect reasonable economic practices ... or it may represent
an abuse of market power. Our analysis provides an important first step in
assessing competitive markets nationally, but it is imperfect given the inherent
limitations of the Carload Waybill Sample [an STB data set] and the proxy
measures available for weighing captivity. A more rigorous analysis of
competitive markets nationally is needed — one that identifies the state of²⁰⁶
competition nationwide and inquires into pricing practices in specific markets.
The GAO recommended that the STB conduct a comprehensive study of rail
competition and rates, a suggestion the STB initially rejected based on GAO’s
inconclusive findings and its own lack of resources.²⁰⁷ In June 2007 the STB
reversed itself and said it would hire a contractor to conduct such a study to be
completed by late 2008. GAO commended the STB “for taking this action, [but] it
remains to be seen whether these analysts would have STB’s statutory authority and
sufficient access to information to determine whether rail rates in selected markets
reflect justified and reasonable pricing practices or an abuse of market power by the
railroads.”²⁰⁸
The effect of the bills, particularly RCSIA, is also difficult to evaluate because
the outcomes will largely depend on how the legislation is implemented.
Implementation may produce results that differ from the apparent objectives of its
supporters. For example:
^!Under reciprocal switching or other avenues for opening rail
bottlenecks, the new competing railroad would be required to pay
the incumbent railroad a fee for the use of the incumbent’s tracks.
For example, a new competing railroad delivering coal to a
previously captive power plant might pay a trackage rights fee to the
incumbent for each ton of coal it delivers. A study performed for
the FRA suggests that the fee should be designed to, in effect,

²⁰⁵ (...continued)
Sam Peltzman, and Clifford Winston, eds., Deregulation in the Network Industries: What’s
Next?, Washington, D.C: AEI-Brookings Joint Center for Regulatory Studies, 2000. On the
other hand, other analysts believe that railroad market power is a major issue; for example,
Jeffrey O. Moreno, “Changing Role of Rail Rate Regulation in a Capacity Constrained
Market,” Journal of Transportation Law, Logistics & Policy, pre-print, third quarter 2007.
²⁰⁶ GAO, Freight Railroads: Industry Health has Improved, but Concerns about
Competition and Capacity Should Be Addressed, November 2006, p. 43.
²⁰⁷ Ibid., pp. 77-82.
²⁰⁸ GAO, memorandum report to Congressional Requesters, Freight Railroads: Updated
Information on Rates and Other Industry Trends, August 15, 2007, p. 10.

include all of the profit the incumbent carrier had earned before the
bottleneck was opened. The report suggests that this and other
aspects of its recommended approach would yield the most efficient
outcome and keep incumbent railroad financially whole, but such a
large fee could, in many cases, eviscerate the competitive value of
reciprocal switching.²⁰⁹
^!RCSIA requires the STB to replace its current rate appeal process
with a cost of service approach “similar to the rate regulatory
systems of [state] public service commissions and the Federal
Energy Regulatory Commission.”²¹⁰ However, traditional utility rate
cases can be complex, time consuming to prepare and litigate, and
very expensive. While RCSIA puts a nine month time limit on rate
cases, it may nonetheless have less impact on the accessibility and
affordability of the process than its proponents intend.
^!As noted above, Section 105 of RCSIA authorizes the STB to
designate areas of inadequate rail competition and implement within
those zones numerous remedies, not all of which are specified in the
legislation (“other remedies authorized by law”). This provision is
so broad that its potential geographic and regulatory scope, and its
impact on rail rates, revenues, service, and profits, are very difficult
to judge. Section 105 is probably the part of RCSIA with the
greatest potential for reintroducing pervasive regulation into the rail
industry.
In general it is unclear how complex and intrusive a regulatory framework the
STB would have to create to implement RCSIA. A related issue is the practical
ability of the STB to timely handle the additional workload RCSIA would assign to
the agency. The Board is a small agency, with 137 full time equivalent staff and a
budget of $26.1 million in FY2006.²¹¹ It may be difficult for the Board to effectively
execute the proposed additional duties without more resources.
Revenue Adequacy. An important question concerning the rail restructuring
proposals is the impact they would have on a central goal of the Staggers Act,
returning the rail industry to financial health. By reducing the number of captive
shippers and otherwise driving down rail rates, the restructuring proposals would
likely cut railroad revenues and profits for some period of time. The railroad
industry’s position is that the financial impact would be crippling, particularly since
the railroads have still not achieved the objective of revenue adequacy established by
Staggers. If this is the case service would likely deteriorate for coal and other
shippers.

²⁰⁹ Eric Beshers, Efficient Access Pricing for Rail Bottlenecks, prepared by Hagler Bailly
Services, Inc., for the John A. Volpe National Transportation Systems Center in support of
the Federal Railroad Administration, June 1, 2000.
²¹⁰ Summary of the Railroad Competition and Service Improvement Act of 2007
[http://craig.senate.gov/ rail_comp_section_110th.pdf].
²¹¹ Surface Transportation Board, Budget Request, FY2008.

The issue of the financial impact of the restructuring proposals is particularly
apt because the proposals could have the effect of changing the existing approach to
railroad rate setting. This approach, called “constrained market pricing,” was
developed by the ICC in 1985 with coal traffic at the forefront.²¹² Constrained
market pricing is predicated on two principles: The railroad industry is not revenue
adequate, and to achieve revenue adequacy the railroad industry must be able to
differentially price its services based on the price sensitivity of various groups of
customers. For instance, when trying to win business that has a truck alternative, the
railroad might price the movement to recover little more than the costs directly
attributable to that movement, and few or none of the system-wide “non-attributable”
costs (such as yard expenses) incurred by the railroad. On the other hand, it may set
rates to move coal to a captive power plant at a price that recovers all the attributable
costs of the movement plus a substantial share of the non-attributable system-wide
expenses.
Demand-sensitive differential or “strategic” pricing is widely used in American
industry.²¹³ In the case of the rail industry, where potential competition is limited by
high barriers to entry, rates to the captive customers are, in principle, ultimately
“constrained” by the shippers’ option to appeal to the STB. Rates can be appealed
if the shipper can demonstrate that it is captive and that rates exceed 180% of the
direct costs of the movement. If a protested rate meets these initial criteria, the STB
then determines whether the rate exceeds the costs of a hypothetical most-efficient
competitor (a “stand-alone” railroad). The costs of the stand-alone railroad represent,
according to the underlying theory, the highest reasonable rate ceiling;²¹⁴ if the rate
is ultimately determined by the STB to exceed stand-alone costs, a new rate is
prescribed based on this ceiling.
In short, constrained market pricing is designed to help the rail industry achieve
financial recovery by allowing it to charge relatively high rates to captive customers
and relatively low rates to customers who have competitive options. The rail
restructuring proposals, by providing avenues for reducing the number of captive
shippers and the rates they pay, would chip away at a pillar of the constrained market

²¹² STB, Ex Parte No. 347 (Sub-No. 1), Coal Rate Guidelines, Nationwide, Decision, August

8, 1985.

²¹³ Timothy Aeppel, “Changing the Formula: Seeking Perfect Prices, CEO Tears Up the
Rules,” The Wall Street Journal, March 27, 2007. For further background on differential
pricing see CRS Report RL30373, The Cost of Prescription Drugs for the Uninsured Elderly
and Legislative Approaches, and Robert Willig and William Baumol. “Using Competition
as a Guide,” Regulation, vol. 11, no. 1 (1987).
²¹⁴ “The theory behind the stand-alone cost test, as the ICC acknowledges, is that of
‘contestable markets’.... In such markets, the price of a product lies somewhere between its
incremental and its stand-alone cost; just where it falls in the range depends on the state of
demand. Thus, for regulatory purposes, stand-alone cost constitutes the proper cost-based
ceiling for prices.” Robert Willig and William Baumol. “Using Competition as a Guide,”
Regulation, vol. 11, no. 1 (1987).

pricing system. However, this may be more or less of a concern depending on
whether or not the rail industry has reached the Staggers goal of revenue adequacy.²¹⁵
In summary, it can be hypothesized that if the railroad industry is revenue
adequate, it may be better able to withstand the stronger dose of competition and
regulation the proponents of regulatory restructuring propose, and may be better
positioned to respond to more intense competition with lower costs, greater
efficiency, and better service. If the industry is not revenue adequate, then the
regulatory status quo may be the better course of action. In particular, should the
regulatory restructuring proposals, if implemented, undermine the industry’s
finances, then the results of regulatory change could be deterioration in rail service
for coal and other traffic. There is arguably a contradiction between demands for
both lower rates and better service. This point is made by Norfolk Southern:
[The Norfolk Southern CEO testified at an STB hearing] that he hears three
things from rail customers. “They want more capacity; they want better service;
and they want lower rates. And I don’t know how you do all three”.... [H]is
summary of the three themes he hears from rail customers was reinforced by
subsequent witnesses with no one even trying to reconcile the irreconcilable....
Unfortunately, many parties fail to see that infrastructure investment, better
service, and rates are three legs to one stool. No one wants to pay; everyone²¹⁶
wants someone else to pay.
The counter-argument, noted above, is that more competition will force
innovation, efficiency gains, and traffic growth that will leave the railroads whole or
better off.
Because of these considerations it would be useful to know if the rail industry
is achieving the Staggers Act objective of revenue adequacy. As required by statute,
the STB makes an annual determination of revenue adequacy for each Class I
railroad. However, for the reasons discussed below, the reliability of these
determinations is problematic.

²¹⁵ The ICC appeared to envision that once the rail industry achieved revenue adequacy,
significant changes would be made to the constrained market pricing framework. In its
constrained market pricing decision the ICC explicitly stated “captive shippers should not
be required to continue to pay differentially higher rates than other shippers when some or
all of that differential is no longer necessary to ensure a financially sound carrier capable
of meeting its current and future service needs.” Exactly what this means is uncertain, since
it is difficult to envision a financially viable rail system in which the railroads do not have
significant discretion to vary rates with the price sensitivity of different customers.
Nonetheless, it seems clear that when the ICC created the current pricing framework, the
expectation was that there would be significant adjustments when revenue adequacy was
reached. STB, Ex Parte No. 347 (Sub-No. 1), Coal Rate Guidelines, Nationwide, Decision,
August 8, 1985, p. 18.
²¹⁶ James A. Hixon, George A. Aspatore, and John M. Scheib, Supplemental Statement of
Norfolk Southern Railway Company, before the STB, Ex Parte 671, Rail Infrastructure
and Capacity Requirements, May 11, 2007, pp. 2 and 6.

The ICC’s methodology for determining revenue adequacy was defined in a
1981 decision.²¹⁷ The test selected by the ICC is whether a railroad’s return on
investment was at least equal to its cost of investment capital. As explained by the
ICC:
... “adequate” revenues are those which provide a rate of return on net investment
equal to the current cost of capital (i.e., the level of return available on
alternative investments). This is the revenue level necessary for a railroad to
compete equally with other firms for available financing in order to maintain,
replace, modernize, and, where appropriate, expand its facilities and services.
If railroads cannot earn the fair market rate of return, their ability both to retain
existing investments and obtain new capital will be impaired, because both the
existing and prospective funds could be invested elsewhere at a more attractive²¹⁸
rate of return.
The ICC “emphasize[d] that revenue adequacy is a long-term concept that calls
for a company, over time, to average a return on investment equal to its cost of
capital.”²¹⁹ Therefore, while a railroad might be revenue adequate in one year, it
would not be deemed to have met the Staggers Act objectives for financial
performance until it had achieved this threshold for a period of time. However, the
ICC declined to specify “what period of time may be sufficiently representative in
every case. This will vary depending upon the carrier’s traffic base and the relative²²⁰
stability of the economy at the time.”
The ICC also noted that “we want to make clear that we will not and cannot
guarantee any railroad a return equal to the cost of capital. A railroad, like any other
firm, should earn such a return only if it provides a desired service in an efficient
manner. We want to take great care, however, not to deny railroads the opportunity²²¹
to earn the cost of capital.”
The ICC applied this approach retroactively to 1979 and subsequently. Using
this standard, the financial performance of the railroad industry has been poor. As
shown in Figure 20, over 27 years the Class I railroad industry as a whole has never
once been revenue adequate. The difference between the industry’s return on
investment and cost of capital narrowed from 1979 to 1990, but the gap has not
subsequently been closed or consistently narrowed (Figure 20). During this period
the ICC and STB made 445 individual determinations of revenue adequacy for
railroad companies. It found railroads to be revenue adequate in just 32 instances,
of which just over half were for two companies, the Illinois Central (now part of
Canadian National) and Norfolk Southern. Including subsidiaries and merger

²¹⁷ ICC, Ex Parte No. 393, Standards for Railroad Revenue Adequacy, Decision, March 26,

1981.

²¹⁸ STB, Ex Parte No. 347 (Sub-No. 1), Coal Rate Guidelines, Nationwide, Decision, August

8, 1985, p. 18.

²¹⁹ Ibid. (Emphasis in the original.)
²²⁰ Ibid., p. 19.
²²¹ ICC, Ex Parte No. 393, Standards for Railroad Revenue Adequacy, Decision, March 26,

1981, p. 19.

partners, the Union Pacific had one finding of revenue adequacy in 27 years by the
STB’s reckoning, CSX three findings, and BNSF four findings.²²²
Figure 20. Difference in Percentage Points Between the
Rail Industry Regulatory Cost of Capital and Return on
Investment
¹⁸
¹⁶¹⁶
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⁴⁴³³⁴⁴⁴³³³⁴⁴⁴
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⁰
⁴⁸⁶⁸⁸⁹⁰⁹²⁹⁹⁴⁹⁹⁶⁹⁸⁰⁰⁰²⁰⁴
¹⁹⁸⁰¹⁹⁸²¹⁹⁸¹⁹¹⁹¹⁹¹⁹¹¹¹⁹²⁰²⁰²⁰
^N^o^t^e^:^v^a^l^u^e^s^ar^e^r^oun^{ded t}^o^near^es^t^p^e^r^c^en^t^age^poi^nt^.^S^our^c^e^:^c^a^l^c^u^l^at^ed^by^C^R^S
^f^r^om^dat^aⁱⁿ^A^s^s^o^cⁱ^a^tⁱ^{on o}^f^A^m^erⁱ^c^aⁿ^R^aⁱ^l^r^oads^,^R^aⁱ^l^r^oa^{d T}^en-^Y^e^ar^T^r^ends^.
Figure 21. Class I Railroad Industry Regulatory Cost of
Capital and Return on Investment

²⁰
¹⁸
¹⁶
¹⁴
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¹⁰^rc
⁸^Pe
⁶
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²
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¹⁹⁷⁹¹⁹⁸¹¹⁹⁸³¹⁹⁸⁵¹⁹⁸⁷¹⁹⁸⁹¹⁹⁹¹¹⁹⁹³¹⁹⁹⁵¹⁹⁹⁷¹⁹⁹⁹²⁰⁰¹²⁰⁰³²⁰⁰⁵
^R^a^te^o^f^R^e^t^u^rⁿ^oⁿ^N^e^{t I}ⁿ^v^e^st^m^eⁿ^t⁽^%⁾^Co^s^t^o^f^Ca^pⁱ^t^a^l^(%⁾
^S^o^u^r^c^e^:^A^s^s^o^cⁱ^a^tⁱ^oⁿ^of^A^m^erⁱ^c^an^R^aⁱ^l^r^o^ads^,^R^aⁱ^l^r^o^a^d^T^e^n-^Y^e^a^r^T^r^en^ds^.
²²² Most revenue adequacy findings were made in the 1980s when there more Class I
railroads (as many as 37 in some years). Since 1990, when the number of Class I railroads
has varied from 13 to 7, the ICC and STB have made 150 determinations of revenue
adequacy for individual railroads. In these 150 evaluations, individual railroads were found
to be revenue adequate in 20 instances, three quarters of which are accounted for by the
Illinois Central (9 times) and Norfolk Southern (6 times).

Under the economic theory underpinning the Board’s revenue adequacy test, the
consistent inability of the railroad industry as whole, or even individual carriers, to
achieve revenue adequacy for over a quarter century should result in significant
capital shortages and even disinvestment in the rail industry. According to testimony
relied upon by the ICC²²³ in developing its revenue adequacy test:
In the final analysis, the only valid test of adequacy of a railroad’s revenues is
that they yield a rate of return equal to the opportunity cost of capital. Failing
that, regulation will result in service deterioration as a result of disinvestment.
... any firm that earns less than this amount [its cost of capital] will be unable to
compete in the market for funds. Its owners will neither wish nor be able to keep
the enterprise’s capital intact. They will withdraw their capital as quickly and²²⁴
as expeditiously as they can.
The ICC concluded that “railroad management has little incentive to reinvest
funds generated by ratepayers in continued rail uses if greater returns are available
elsewhere. Railroads are private companies whose stockholders would not permit
such reinvestment. Thus, even retained earnings will not be invested in the company²²⁵
if they cannot earn a rate of return equal to the cost of capital.”
Nonetheless, the railroads continued to invest billions of dollars in their systems
over the years, even as they consistently fell short of the regulatory standard for
revenue adequacy. This discrepancy between the failure to achieve revenue adequacy
and the continued availability of investment capital has been explained as a
consequence of optimistic investors putting money into the rail industry in
anticipation of financial results that were not realized.²²⁶ Other observers have
suggested that the ICC’s methodology for measuring railroad revenue adequacy does

²²³ ICC, Ex Parte No. 393, Standards for Railroad Revenue Adequacy, Decision, March 26,

1981, pp. 17 and 19.

²²⁴ Verified Statement of William J. Baumol on behalf of the AAR, before the Interstate
Commerce Commission, Ex Parte No. 393, Standards for Railroad Revenue Adequacy, pp.

5 and 9.

²²⁵ ICC, Ex Parte No. 393, Standards for Railroad Revenue Adequacy, Decision, March 26,

1981, pp. 18-19.

²²⁶ This explanation is made in Testimony of James J. Valentine, Morgan Stanley, U.S.
Congress, Senate Committee on Commerce, Science, and Transportation, Subcommittee on^th
Surface Transportation and Merchant Marine, hearing, State of the Rail Industry, 107^st
Cong., 1 sess., May 9, 2001, pp. 2-3. (“Investors bought railroad stocks throughout the
1980s on the idea that once the benefits of Staggers could be realized, these companies
would earn their cost of capital. By the early 1990s, investors were becoming frustrated by
the lack of progress although they became pacified when PEB [Presidential Emergency
Board, for resolving labor disputes] 219 reduced crew sizes from 5-man to 2-man, resulting
in better margins and thus better returns for the industry, but still not enough to earn the cost
of capital. A few years later, after it was clear that even with 2-man crews the industry
would not earn its cost of capital, investors began to lose faith at which point the industry
leaders initiated a major round of mergers, with the prospects of reducing costs and capital
needs through consolidation. But now, six years after this round of mergers began, we still
have an industry with inadequate returns.”)

not comport with the true state of the industry. The ICC itself made adjustments to
the details of its methodology in 1986 after observing that its approach “does not
appear to produce a realistic picture of the state of the rail industry.”²²⁷ According
to Standard and Poor’s, writing, respectively, in 1995 and 1999:
... until it earns at least its cost of capital, the rail industry is considered
unhealthy — at least in the technical sense. We think the industry is actually fit
as a fiddle, so how can this be? We believe that the [ICC’s] definition of cost of²²⁸
capital is at fault.
... the industry technically remains “revenue inadequate”.... The fact that the
industry may not achieve revenue adequacy is not particularly meaningful,²²⁹
however, given the many flaws in the design of this financial test.
The revenue adequacy conclusions drawn by the STB are contradicted at times
by statements made by railroads to financial analysts. The STB determined that NS
was revenue adequate in 2004, but the railroad told investment analysts that it had²³⁰
not achieved its cost of capital. UP, which according to the STB analysis has been
revenue adequate only once since 1979, told Wall Street that it “did achieve our cost²³¹
of capital in many years and even exceeded.” These contradictions can perhaps be
explained by differences which may exist between the financial measurement
methods specified by the STB for regulatory filings versus those used by individual
companies for their own purposes. Nonetheless, a situation in which the Board’s
metric of revenue adequacy — which in essence is a measure of how willing
investors should be to put money into the railroad industry — differs from the rail
industry’s own reports to the investment analysts who advise those same investors,
creates some uncertainty about the utility of the STB determinations.
Critics who claim that the STB’s methodology understates the rail industry’s
actual financial performance have raised numerous technical objections to the
Board’s approach. One criticism that appears to have particular significance relates
to the methodology used by the Board to determine the rail industry’s cost of equity
capital, a component of the overall cost of capital.
The STB uses a “single-stage discounted cash flow” (DCF) model to estimate
the cost of equity. A key input into this method is an earnings growth rate that is

²²⁷ STB, Ex Parte No. 463, Railroad Revenue Adequacy — 1984 Determination, May 1,
1986, p. 1. That is, the industry was moving away from revenue adequacy in spite of the
Staggers reforms.
²²⁸ Stephen R. Klein, Standard & Poor’s Industry Surveys: Railroads & Trucking Current
Analysis, 1995, p. R5.
²²⁹ Stephen R. Klein, Standard & Poor’s Industry Surveys: Transportation: Commercial.

1999, p. 4.

²³⁰ Transcripts of Third Quarter 2005 Norfolk Southern Earnings Conference Call, October

26, 2005 and Fourth Quarter 2004 Norfolk Southern Earnings Conference Call, January 26,

2005, Financial Disclosure Wire.

²³¹ Transcript of First Quarter 2002 Union Pacific Earnings Conference Call, April 25, 2002,
Financial Disclosure Wire.

assumed to continue, unchanged, indefinitely. The assumption of an unchanging
growth rate is workable for steady-state industries with growth rates that roughly
mirror the growth of the overall economy. However, if an industry has been growing
rapidly — as has recently been the case for the railroads — and this current high
growth rate is used in the DCF formula — as the STB has done — the DCF model
will produce an overstated cost of equity. This methodological pitfall is documented
in the financial literature; for example, one standard text notes that “The simple
constant-growth DCF formula is an extremely useful rule of thumb, but no more than
that. Naive trust in the formula has led many financial analysts to silly conclusions
... resist the temptation to apply the formula to firms having high current rates of
growth. Such growth can rarely be sustained indefinitely, but the constant-growth
DCF formula assumes it can.”²³²
This problem was pointed out to the STB at least as early as 1997.²³³ In August
2007 the STB proposed changing the approach used to estimate the cost of equity
from the DCF model to an alternative “capital asset pricing model” (CAPM)
methodology. The Board’s sample CAPM calculations show that application of the
new method could cut its estimate of the railroad industry’s overall cost of capital in
2005 by more than a third, from 12.2% to 7.5%. Using these new estimates, the
railroad industry as a whole was revenue adequate in 2005.²³⁴
The significant change in revenue adequacy that results from what is, in essence,
a technical adjustment, points at a broader possible problem with the STB’s revenue
adequacy methodology. This is the STB’s effort to peg the financial state of the
railroad industry to a single, relatively simple to calculate measure that can be
determined with a minimum of judgment. This objective may be difficult to achieve.
Financial analysis is often not as cut-and-dried as running numbers through a
model and receiving clear results. For example, the Board noted that the literature
on estimating just the equity component of the cost of capital is “vast ... covering the
fields of finance, economics, and regulation.”²³⁵ Another source notes that “there is
no generally accepted definition of the cost of equity capital, but only a number of
competing theories that are more or less capable of being applied numerically.”²³⁶

²³² Richard A. Brealey, Stewart C. Myers, and Franklin Allen. Principles Of Corporate
Finance, 8th Edition, 2005, p. 68-69; the same point is made in the 1981 edition of this book
at pp. 48- 51. For further detail see the record in STB, Ex Parte No. 664, Methodology to
be Employed in Determining The Railroad Industry’s Cost of Capital, posted on-line in the
STB’s “E-Library” [http://www.stb.dot.gov/].
²³³ Jerome E. Hass, An Evaluation of the Measurement and the Use of the STB’s Annual
Railroad Revenue Adequacy Determination, prepared by National Economic Research
Associates for the Alliance for Rail Competition, 1997, p. 4.
²³⁴ STB, Ex Parte No. 664, Methodology to be Employed in Determining the Railroad
Industry’s Cost of Capital, Corrected Decision, August 20, 2007, p. 8, Table 2.
²³⁵ STB, Ex Parte No. 664, Methodology to be Employed in Determining the Railroad
Industry’s Cost of Capital, Corrected Decision, August 20, 2007, p. 2.
²³⁶ Edward Kahn, Steven Stoft, and Timothy Belden, Impact of Power Purchases from
(continued...)

In a situation with this degree of methodological uncertainty, it is not clear that
an essentially mechanical determination of revenue adequacy based on one financial
ratio will necessarily yield reliable results. Note that in traditional utility rate
hearings the appropriate rate of return is typically set through a contested hearing
process, not through the mechanical application of a formula and procedure.
According to one source, for a public utility commission:
It is appropriate to use the results of mathematical financial models to provide
a ‘zone of reasonableness’ for the [return on equity or ROE].... However, the
determination of the ROE is not an exact science. Judgment is inherent and
certainly used by financial analysts when applying financial models. Certainly,
a commission needs to exercise similar judgment to evaluate the overall results²³⁷
of those models and select an appropriate ROE....
In contrast to the current use of a single financial ratio to determine revenue
adequacy, prior to passage of the Staggers Act the ICC relied on a qualitative
evaluation of multiple financial indicators.²³⁸ When it adopted its current
methodology in 1981, the Commission rejected a “multi-faceted standard” because
it would require “a considerable amount of subjectivity in terms of selecting the mix
of indicators to use and the performance standards applicable to each indicator....
Based on the record, we must reject a multi-indicator standard ... because no practical
way has been shown to implement it objectively.” The STB later noted that an
advantage of the ICC’s method for computing the key cost of equity component is
that “the simple DCF method required few inputs and few judgment calls....”
However, it may be difficult to avoid introducing considerable judgment into the
revenue adequacy determination. For example, the CAPM approach the STB has
proposed using in its future revenue adequacy determinations requires its own set of
assumptions; the STB notes that “there are disputes over how to apply the model and
whether newer methods are superior.”²³⁹ According to a survey of finance
practitioners, there are “substantial disagreements” on how to estimate all three of the
key inputs to the CAPM model.²⁴⁰
As one text observes, “finance is in large part a matter of judgment, and we²⁴¹
simply must face this fact.” Financial analysis of a firm or industry for revenue

²³⁶ (...continued)
Nonutilities on the Utility Cost of Capital, Lawrence Berkeley Laboratory, 1994, p. 3.
²³⁷ J. Robert Malko, Phillip R. Swensen, and Joseph Monteleone, “Some Thoughts on
Estimating the Cost of Common Equity for a Regulated Business,” The Electricity Journal,
June 2007, pp. 56-57.
²³⁸ ICC, Ex Parte 353, Adequacy of Railroad Revenue (1978 Determination), Decision,
December 6, 1979.
²³⁹ STB, Ex Parte No. 664, Methodology to be Employed in Determining the Railroad
Industry’s Cost of Capital, Corrected Decision, August 20, 2007, p. 6.
²⁴⁰ Robert F. Bruner, et.al., “Best Practices in Estimating the Cost of Capital: Survey and
Synthesis,”Financial Practice and Education, Spring/Summer 1998, p. 16.
²⁴¹ “Ratios, then, are extremely useful tools. But as with other analytical methods, they
(continued...)

adequacy purposes may require the use of multiple measures, and the application of
judgment in weighing the indicators and arriving at a final assessment.²⁴²
There is no consensus on whether or not the railroad industry has achieved
revenue adequacy. There is a large body of opinion that the railroad industry has not
achieved returns equal to its cost of capital or perhaps has done so only recently, or
question how long current favorable financial trends will continue. For example, the
Financial Times reported in 2007 that industry consolidation “along with solid
demand ... has done wonders for pricing, allowing the sector to earn its cost of capital
and more for a change. It is far from clear, however, how long that trend can
continue.”²⁴³ A study for the Electric Power Research Institute concluded in 2005
that the rail industry returns were approaching but had not yet reached the industry
cost of capital.²⁴⁴ A transportation investment analyst testified to Congress in 2001

²⁴¹ (...continued)
must be used with judgment and caution, not in an unthinking, mechanical manner.
Financial ratio analysis is a useful part of an investigation process.... Based on our own
experience in estimating equity capital costs, we recognize that both careful analysis and
very fine judgments are required in this process. It would be nice to pretend that these
judgments are unnecessary and to specify an easy, precise way of determining the exact cost
of equity capital. Unfortunately, this is not possible.” (J. Fred Weston and Eugene F.
Brigham, Managerial Finance, 7th Edition, 1981, pp.160 and 601); “Although
shareholders like to see their companies earn a high return on assets, consumers’ groups or
regulators often regard a high return as evidence that the firm is charging excessive prices.
Naturally, such conclusions are seldom cut and dried. There is plenty of room for argument
as to whether the return on assets is properly measured or whether it exceeds the cost of
capital.” (Richard A. Brealey, Stewart C. Myers, and Franklin Allen. Principles Of^th
Corporate Finance, 8 Edition, 2005, p. 794-95 [footnote omitted]; “A single ratio does not
generally provide sufficient information from which to judge the overall performance of the
firm. Only when a group of ratios is used can reasonable judgments be made.” (Lawrence^th
J. Gitman, Principles of Managerial Finance, 10 edition, 2002, p. 52 [emphasis in the
original]). The originators of the methodology used by the STB to determine the equity
portion of the cost of capital observed that opinions on the growth rate used in the formula
will “vary among individuals with the information they have on a host of variables and with
their personalities.” Myron Gordon, and Eli Shapiro, “Capital Equipment Analysis: the
Required Rate of Profit,” Management Science vol. 3, no. 1 (October 1956), p.105.
²⁴² Interpretation of bond ratings is an example of the judgment that must be applied in
interpreting financial indicators. The point has been made that railroad bond ratings of BBB
are just above “junk bond” status and indicative of the financial fragility of the rail industry
(James R. Young, Chairman, President, and CEO, Comments of Union Pacific Railroad Co.,
before the Surface Transportation Board, Ex Parte 671, Rail Infrastructure and Capacity
Requirements, April 11, 2007, p. 2; Comments of BNSF CEO Matt Rose in “How to Solve
Capacity Constraints?” Railway Age, May 2007). However, UP has also described a BBB
rating as a “sweet spot” consistent with its financial goals (Transcript of Bear, Stearns
Global Transportation Conference-Final, May 8, 2007, Voxant FD (Fair Disclosure) Wire).
NS has also expressed satisfaction with a BBB rating (Transcript of Fourth Quarter 2003
Norfolk Southern Corp. Earnings Conference Call, January 28, 2004, FD (Fair Disclosure)
Wire).
²⁴³ “Railroads and Buffett,” Financial Times, April 11, 2007.
²⁴⁴ Summary of M. Bossard, T. Gaalaas, G. Vicinus, Electric Power Research Institute, New
(continued...)

that “the bottom line is the railroads don’t earn their cost of capital ... they destroy
capital every year.”²⁴⁵
In summary, opinion on the regulatory restructuring proposals may hinge in part
on views of the railroad industry’s financial condition. For the reasons discussed
above, the STB’s revenue adequacy determinations may be of uncertain value in
developing such a view.
Regulatory Restructuring: Considerations and Options. The
following issues may be of interest in evaluating the regulatory restructuring
proposals:
^!Are the coal and other rail service (and related rate and competitive
access) issues the restructuring bills address of sufficient import to
justify extensively revising the current regulatory framework?
Existing data on service, capacity, rates, and the degree to which
captive coal and other shippers are subject to market power are
incomplete at best. Should the executive agencies be directed to
gather and analyze additional data in these areas on an ongoing
basis? As of mid-2007 the STB plans to conduct a study of rail
competition and rates, but this will apparently be a one-time
analysis.
^!What is the actual financial state of the railroad industry?
Congress’s view of the restructuring proposals may depend in part
on an evaluation of the financial condition of the railroads; in
particular, whether they have achieved the regulatory goal of revenue
adequacy. A financially robust industry may be able to respond to
enhanced competition with the innovation and service improvements
suggested by proponents. A weaker industry may contract in
response to more intense competition, and service could deteriorate.
There are other perspectives: if the railroads have achieved revenue
adequacy then it might be unwise to make major changes; if it has
not, then more competition may be needed to jump-start the
industry. A predicate for reaching any of these conclusions is a
rigorous analysis of the financial state of the railroads, and this does
not currently appear to be available.
^!Would the restructuring proposals actually achieve substantial
service improvements? RCSIA leaves implementation details
undefined, making the outcomes from the law uncertain. These
implementation issues include, for example, the fees for bottleneck
service, how a cost of service rate appeal process could be

²⁴⁴ (...continued)
Price Structures for Coal Transportation: Evidence and Implications, prepared by Pace
Global Energy Services, Inc., November 2005 [http://my.epri.com/portal/server.pt?].
²⁴⁵ John Gallagher, “Inadequate,” Traffic World, August 20, 2001.

economically managed, and operation of the remedies proposed for
areas of inadequate competition.
^!Service Focus: as an alternative to extensive revision of the current
regulatory regime, could more limited changes result in material
improvements in coal rail service? If otherwise desirable, a more
limited agenda might include elements of current proposals,
including giving rail service problems and their resolution greater
public visibility; creation of a rail public advocate; and new
requirements in the law for reliable rail service.

CRS-87
Appendix 1. Significant Disruptions in Deliveries of Coal to Power Generators Since 1990
^r^Descriptioⁿ
^T^r^aiⁿ^derai^l^m^en^t^sⁱⁿ^May^{2005 t}^rⁱ^g^g^e^{r a l}^a^rg^e-^s^cal^{e m}^aⁱⁿ^t^eⁿ^aⁿ^{ce proj}^ect^on^t^h^{e PR}^{B Joi}ⁿ^t^Lⁱⁿ^e^{, cau}^sⁱⁿ^g^del^a^y^s^an^{d coal}^delⁱ^v^ery^sh^o^r^tf^{alls th}^r^o^u^g^h
^m^o^s^t^of^t^h^{e y}^{ear on}^t^h^{e U}^P^an^{d BN}^S^F^s^y^s^t^em^s^.^D^e^lⁱ^v^ery^s^h^ort^f^al^l^s^f^o^{r s}^o^m^e^s^hⁱ^ppers^lⁱⁿ^g^e^{r i}ⁿ^t^o^{2006. U}^Pⁱ^m^pos^es^an^em^barg^{o on}^acceptin^gⁿ^e^w
^cu^s^t^om^ers^f^o^{r P}^R^B^{coal s}^h^ipm^eⁿ^t^s^th^{at con}^tin^u^e^s^uⁿ^{til March}^{27, 2007.}
^R^a^{il s}^y^s^t^em^capacity^is^g^eⁿ^e^rally^s^t^res^s^e^{d by}^s^h^{arp in}^creas^esⁱⁿⁱⁿ^term^{odal an}^{d g}^r^ain^traf^fⁱ^{c. UP}^con^tin^u^e^s^{to ex}^perien^{ce s}^h^or^tf^{alls in}^Co^lo^r^a^d^o^an^d
^Utah^{coal s}^h^ipm^eⁿ^t^s^an^{d s}^o^m^e^problem^sⁱⁿ^th^{e P}^R^B^,ⁱⁿ^{part du}^e^{to bein}^g^s^h^ort-^s^t^af^f^e^{d an}^{d n}^eedin^g^m^o^{re locom}^o^tiv^es^{. NS an}^{d C}^S^X^h^a^v^e^sh^o^r^tf^alls
ⁱⁿ^s^h^ipm^eⁿ^t^s^of^eas^tern^{coal to dom}^es^{tic g}^eⁿ^e^rators^du^{e to a}^s^u^rg^{e in}^{coal ex}^{port dem}^aⁿ^d^an^{d capacity}^lim^itation^s^ex^{acerbated b}^y^h^u^rrican^{e dam}^a^g^e^.
^Delay^sⁱⁿ^UP^sh^ip^m^eⁿ^t^{s o}^f^co^{al m}ⁱⁿ^e^dⁱⁿ^Co^lo^r^a^d^o^an^d^Utah^{, d}^u^{e to}^sh^o^r^tag^e^o^f^staf^f^an^d^lo^co^m^o^tiv^es.
^Sev^e^r^e^coⁿ^g^e^stioⁿ^an^d^d^e^liv^er^y^sh^o^r^tf^{alls in}^th^{e east d}^u^{e to}^p^r^o^b^l^em^{s w}^ith^th^{e in}^teg^r^atioⁿ^o^f^th^{e Co}ⁿ^r^{ail sy}^stemⁱⁿ^to^{NS an}^d^CS^X.
^Se^ve^r^e^d^e^lⁱ^v^e^r^y^sho^r^t^f^a^l^l^s^t^h^r^o^ugho^ut^t^h^e^U^P^sy^st^e^m^d^u^e^t^o^p^r^o^b^l^e^m^{s w}ⁱ^t^h^t^h^eⁱⁿ^t^e^gr^a^tⁱ^o^{n o}^f^t^h^e^SP^r^aⁱ^l^r^o^a^d^.^Mⁱ^d^-^y^e^a^r^{1998 s}^h^ort^f^al^l^sⁱⁿ^eas^t^e^rn^coal
ⁱ^{ki/CRS-RL34186}^sh^ip^m^eⁿ^t^{s o}ⁿ^th^{e NS sy}^stem^{, r}^e^p^o^r^ted^l^y^d^u^{e to}ⁱⁿ^su^f^fⁱ^cien^{t lo}^co^m^o^tiv^es.
^g/w^rl^{y 1996}^Eas^t^ern^{coal s}^h^ipm^eⁿ^t^s^{are dis}^r^u^p^{ted by}^h^a^rs^h^wⁱⁿ^t^{er w}^eath^e^r^an^{d dif}^fⁱ^cu^lty^m^eetin^g^{a s}^u^rg^{e in}^pow^{er plan}^{t dem}^aⁿ^d^f^o^{r coal.}
^s^.or
^le^ak^S^u^rg^{e i}ⁿ^dem^aⁿ^d^f^o^{r PR}^{B coal}^l^eads^t^o^con^g^e^s^tⁱ^oⁿ^an^{d del}ⁱ^v^ery^s^h^ort^f^al^l^s^on^t^h^{e U}^P^an^{d BN}^S^F^s^y^s^t^em^s^.^In^t^h^{e f}ⁱ^rs^t^part^of¹⁹⁹⁴^{, d}^e^liv^er^y^sh^o^r^tf^alls
^o^f^easterⁿ^co^{al ar}^{e ex}^p^e^rⁱ^en^ced^oⁿ^th^{e Co}ⁿ^r^{ail sy}^stem^{s d}^u^{e to}^h^a^r^s^h^wⁱⁿ^t^er^w^eath^e^r^an^d^dⁱ^f^fⁱ^cu^{lties im}^p^l^em^en^tin^g^{a m}^aⁱⁿ^ten^aⁿ^ce^prog^ram^.
^://wiki
^h^ttp^C^o^al^s^hⁱ^p^m^eⁿ^t^s^h^ort^f^al^l^s^{, pri}^m^ari^l^yⁱⁿ^t^h^{e Mi}^dw^es^t^,^du^{e t}^o^wⁱ^des^p^{read s}^u^m^m^e^{r f}^l^oodiⁿ^g^.
^P^R^B^co^{al d}^e^liv^er^y^sh^o^r^tf^{alls d}^u^{e to}^coⁿ^g^e^stioⁿ^oⁿ^th^{e UP}^sy^stem^.
^r^ces:^{2007: “}^A^f^t^e^r^N^e^a^r^ly^T^w^{o Y}^e^a^r^s^,^U^P^R^e^m^o^v^e^s^Em^ba^r^g^{o on N}^e^w^P^R^B^B^u^sⁱ^ne^s^s^,^”^C^{oal O}^u^tlook^{, A}^p^r^{il 2, 2007. 2005-}^{06: Sta}^t^e^m^eⁿ^{t of}^H^o^w^a^r^d^G^r^ue^ns^pe^c^h^{t, D}^e^puty^A^d^mⁱ^nis^t^r^a^tor^,^Ene^r^gy
^r^m^a^{tion A}^d^mⁱ^nis^t^r^a^{tion, U}^.^{S. D}^e^pa^r^t^m^e^{nt of}^Ene^r^g^y^{, be}^f^o^r^e^the^C^o^m^m^itte^e^{on Ene}^r^g^y^a^{nd N}^a^tur^a^{l R}^e^s^our^c^e^s^{, U}^.^{S. Se}^na^te^{, Ma}^y^25,^{2006, pp. 3, 8-}^{10. 2004: “}^D^e^s^ir^e^{to D}^o^wⁿ^sⁱ^z^e^Hⁱ^nde^r^s^R^a^ilr^oa^ds^’
ⁱ^oⁿ^s^,^”^U^.^{S. C}^{oal Re}^vⁱ^e^w^{, A}^p^r^{il 5, 2004; “}^W^e^s^te^rⁿ^B^itumⁱ^nous^Supplie^s^Lⁱ^k^e^ly^{to be}^D^o^wⁿ^f^r^om^U^P^Situa^tion,”^U^.^{S. C}^oal^Re^vⁱ^e^w^{, A}^p^r^{il 26, 2004, “}^R^a^{il C}^a^pa^c^ity^H^its^Mine^W^a^ll,”^Traffic^W^o^rld^,
^e^m^b^e^r^{8, 2004, “}^U^{nion P}^a^cⁱ^fⁱ^c^C^ong^e^s^{tion P}^r^oble^m^s^W^o^r^s^eⁿ^{, A}ⁿ^a^l^y^s^ts^Sa^y^,^”^C^{oal O}^u^tlook^{, A}^p^r^{il 19, 2004, “}^C^aⁿ^W^e^H^a^ndle^I^t^?^,^”^Railway^Age^{, J}^u^ly^{1, 2004; C}^ong^r^e^s^sⁱ^ona^{l B}^udg^e^t^O^f^fⁱ^c^e^,^Fr^eⁱ^ght
^ans^por^tation:^{A Re}^vⁱ^e^w^{of the}^{2004 Ex}^pe^rⁱ^eⁿ^c^e^{, Ma}^y^{2005, pp. 1-}^{6; 2003: “}^M^[^o^r^g^an^]^S^[^t^an^l^e^y^]^D^o^wⁿ^g^r^a^d^e^s^U^P^,”^C^{oal O}^u^tlook^{, O}^c^tobe^r^{6, 2003; “}^C^olor^a^{do C}^o^a^l^Shippe^r^s^C^o^m^p^la^{in of}^U^P
^ce,^”^C^{oal O}^u^tlook^{, N}^o^v^e^m^b^e^r^{24, 2003; 1999-}^{00: Sa}^unde^r^s^{, R}ⁱ^c^h^a^r^{d, J}^r^.,^M^a^{in Line}^s^:^Re^bir^t^{h of the}^N^o^r^t^{h Am}^e^r^ic^{an Railr}^oads^{, 1970 -}²⁰⁰²^{, No}^rth^e^rn^Illin^oⁱ^{s Un}^iv^ers^ity^P^r^e^{ss, De}^Ka^{lb, Illinois,}
^{345; 1997-}^{98: Sa}^unde^r^s^{, R}ⁱ^c^h^a^r^{d, J}^r^.,^M^aⁱⁿ^Line^s^:^Re^bir^t^h^{of the}^N^o^r^t^{h Am}^e^r^ic^{an Railr}^oads^{, 1970 -}²⁰⁰²^{, N}^o^r^t^he^rⁿ^I^llinois^Uⁿ^iv^e^r^s^ity^P^r^e^s^s^,^D^e^K^a^{lb, I}^llinois^,^2003,^pp.^329-^336;^“^S^upplie^r^s
^rⁿ^C^o^a^l^tha^t^N^o^r^f^olk^Southe^rⁿ^C^ontinue^s^{to P}^e^r^f^or^m^Slug^gⁱ^s^h^ly^,”^U^.^{S. C}^{oal Re}^vⁱ^e^w^,^J^une^{15, 1998; “}^R^e^por^ts^Mix^e^{d on R}^ecen^t^NS^Co^al^S^e^rvi^ce,^”^C^{oal O}^u^tlook^{, J}^une^{29, 1998; W}ⁱ^nte^r^of^1995-
^arket^w^at^ch^,^”^Co^a^l^{Week In}^t^e^rn^a^tⁱ^onal^{, Fe}^br^ua^r^y^{20, 1996; “}^M^a^r^k^e^tw^a^t^c^h^,”^C^{oal W}^e^e^k^,^Fe^br^ua^r^y^19,^{1996; 1994-}^{95: “}^P^R^B^G^a^ins^a^r^e^{Solid, P}^r^ic^e^Sa^y^s^{; D}^e^m^a^{nd is}^Shor^{t of}^H^ope^f^u^{l P}^r^oje^c^tions^,”
^e^e^k^{, Se}^pte^m^be^r^{11, 1995; “}^M^a^r^k^e^tw^a^t^c^h^,”^C^{oal W}^e^e^k^{, Fe}^br^ua^r^y^6,^1995;^“^C^&^N^W^,^B^N^,^U^P^P^l^a^y^C^a^tc^h-^U^p^{; C}^a^pa^c^ity^P^r^oble^m^s^{in the}^P^o^w^d^e^r^Rⁱ^v^e^r^B^a^sⁱ^n,”^Railway^Age^{, O}^c^tobe^r^{1, 1994; “}^O^ut
^Ne^w^Stra^te^g^y^,”^Railway^Age^{, Ma}^y^{1, 1996; “}^R^iv^e^r^D^e^liv^e^r^ie^s^A^l^s^o^H^it,”^U^.^{S. C}^{oal Re}^vⁱ^e^w^{, Fe}^br^ua^r^y^{14, 1994; “}^I^{t A}^ppe^a^r^s^tha^t^the^P^r^oble^m^s^of^the^Ea^s^t^e^r^{n R}^a^ilr^oa^{d a}^{nd R}ⁱ^v^e^r^Sy^s^t^e^m^s^A^r^e
^{t Ov}^e^r^W^ith,”^U^.^{S. C}^{oal Re}^vⁱ^e^w^,^A^p^r^{il 4, 1994; 1993: “}^M^a^r^k^e^tw^a^t^c^h^,”^C^{oal W}^e^e^k^{, A}^u^g^u^s^t^{2, 1993; “}^R^a^{il a}^{nd Ba}^rg^e^D^e^liv^e^r^ie^s^Ma^k^e^P^r^og^re^s^s^T^o^w^a^rd^N^o^rm^a^lity^,”^U^.^{S. C}^{oal Re}^vⁱ^e^w^{, A}^u^g^u^s^t^24,
^H^ow^U^P^I^s^C^l^os^ing^the^C^a^pa^c^ity^G^a^p,”^Railway^Age^{, Ma}^r^c^{h 1, 1994; “}^M^a^r^k^e^tw^a^t^c^h^,”^C^{oal W}^e^e^k^{, Ma}^r^c^{h 25, 1991; “}^M^a^r^k^e^tw^a^t^c^h^,”^C^{oal W}^e^e^k^{, Ma}^r^c^{h 11, 1991.}
^U^P⁼^Uⁿ^{ion P}^a^cⁱ^fⁱ^c^Ra^ilroa^{d; BN}^{SF =}^Burling^t^{on N}^o^rthe^{rn Sa}^nta^Fe^Ra^ilw^a^y^{(until 1996, Burling}^t^{on N}^o^rthe^{rn Ra}^ilw^a^y^{or “}^B^N^”^{); CS}^{X =}^C^S^{X T}^r^aⁿ^s^por^ta^{tion; N}^S⁼^N^o^r^f^olk^Southe^rⁿ^R^a^ilr^oa^d;
⁼^P^o^w^d^e^r^Rⁱ^v^e^r^B^a^sⁱ^{n c}^o^a^l^pr^oduc^ing^r^e^gⁱ^{on; SP}⁼^Southe^rⁿ^P^a^cⁱ^fⁱ^c^R^a^ilr^oa^{d. A}^“^s^ig^nifⁱ^c^aⁿ^{t dis}^r^uption”^la^s^t^s^w^e^e^k^s^or^long^er,^co^veriⁿ^g^m^o^{re t}^h^an^oⁿ^e^st^at^e.

Appendix 2. Costs and Other Consequences of the
2005-2006 Disruption in Rail Transportation of Coal
^Nam^e^{of E}ⁿ^tity^Cons^erved^Acquired^Mo^r^e^Purchas^ed^SO²^Co^st^Notes^{and Sources}
^C^oal^Ra^ilca^r^s^Allo^w^a^nces⁽^M^illio^ns)
^A^m^erenU^NR^Sou^r^{ce: 1}
^A^m^erican^{Electric P}^o^w^e^rU^NR^Sou^r^{ce: 6}
^A^q^u^ilaUU^NR^Sou^r^{ce: 1}
^A^r^k^aⁿ^s^as^ElectricU^“^m^illioⁿ^s^Sou^r^{ce: 9}
^C^ooperatⁱ^v^{e C}^o^rporatⁱ^oⁿ^of^dol^l^a^rs^”
^A^s^s^o^{ciated Electric}U^$6.5^S^ou^rce:³
^C^ooperatⁱ^v^e
^CLE^C^OU^NR^Sou^r^{ce: 1}
^C^P^{S En}^erg^y^(SanU^NR^Sou^r^{ce: 11}
^An^t^oⁿⁱ^o⁾
^Dairy^l^an^d^P^o^w^e^rU^NR^Sou^r^{ce: 3}
^C^ooperatⁱ^v^e
^D^y^ne^gyU^NR^Sou^r^{ce: 1}
^Em^pi^{re Di}^s^t^ri^ct^El^ect^ri^cUUU^Sou^r^{ce: 3}
^C^o^s^t^doesⁿ^o^{t in}^clu^d^{e railcar leas}^e
^$1.4^cos^t^{or cos}^t^of^{coal con}^s^erv^a^tion
^at^Em^pi^re’^s^A^s^bu^ry^an^{d R}ⁱ^v^e^rt^on
^pl^an^t^s^.
^En^terg^yU^NR^Sou^r^{ce: 1}
^A^r^k^aⁿ^s^{as P}^u^b^{lic Ser}^v^ice
^C^o^m^mⁱ^s^sⁱ^on^con^c^l^u^{ded t}^h^at
^En^ter^g^y^f^a^iled^to^m^aⁱⁿ^tain
^adequ^a^{te coal in}^v^eⁿ^t^ories^;^cas^e
^w^a^s^s^{till open}ⁱⁿ^mⁱ^d-^2007.
^Gran^d^Rⁱ^v^e^{r Dam}UU^NR^Sou^r^{ce: 3, 4}
^A^u^th^o^r^ity
^Kan^s^{as City}^P^o^w^e^r^&U^NR^Sou^r^{ce: 1}
^Li^ght
^Kan^s^as^Gas^&^ElectricU^NR^Sou^r^{ce: 1}
^L^aⁿ^sⁱⁿ^g^,^Mich^ig^an^{, B}^o^ard^NR^Sou^r^{ce: 7}
^of^Wat^e^{r an}^{d L}ⁱ^g^h^tU
^L^a^ramⁱ^{e R}ⁱ^v^e^{r S}^t^atⁱ^oⁿU^$8.0^S^ou^rce:¹¹
⁽^M^isso^ur^{i B}^a^{sin P}^o^w^e^r^Co^{st sh}^o^wⁿ^{is acq}^uⁱ^sitioⁿ^o^f^oⁿ^e
^P^r^o^j^{ect; six}^u^tility^t^r^aiⁿ^s^et^{. T}^h^{e ow}ⁿ^e^rs^report^e^dl^y
^owⁿ^e^rs⁾^leased^an^ad^d^itioⁿ^a^{l tr}^ain^s^{et an}^d
^pu^rch^a^s^e^{d s}^u^pplem^en^{tal coal}
^sup^p^lie^s.

^Nam^e^{of E}ⁿ^tity^Cons^erved^Acquired^Mo^r^e^Purchas^ed^SO²^Co^st^Notes^{and Sources}
^C^oal^Ra^ilca^r^s^Allo^w^a^nces⁽^M^illio^ns)
^Muⁿⁱ^{cipal Electric}UU^$28.0^S^ou^rce:^{8 (pag}^{e 26)}
^A^u^t^h^ori^t^y^of^G^e^orgⁱ^a
^Niso^u^r^ceU^NR^Sou^r^{ce: 1}
^Ok^lah^o^m^a^{Gas &}^ElectricU^NR^Sou^r^{ce: 6}
^Om^ah^{a P}^u^{blic P}^o^w^e^rU^$7.2^S^ou^rce:⁵
^Di^s^t^ri^ct^(OP^P^D⁾^OP^P^D^claim^e^{d dam}^a^g^e^s^w^e^re
^c^o^ntⁱ^nui^{ng t}^o^gr^o^w^a^s^o^f^M^a^y
^2007.
^Otter^T^a^{il P}^o^w^e^r^,U^A^bou^t^$7.9^S^ou^rces^:¹²
^Nort^h^W^es^t^e^rn^En^erg^y^,^T^o^{tal co}^{st estim}^ated^b^y^{CRS u}^sⁱⁿ^g
^an^{d Mon}^t^an^a-^Dak^o^ta^t^h^{e report}^e^{d cos}^t^{per m}^oⁿ^t^h^an^d
^Utilities^th^{e d}^u^r^a^tioⁿ^o^f^th^{e co}^{al d}^e^liv^er^y
^probl^em^.
^T^e^nne^sse^e^V^a^l^l^e^yU^$80.0^S^ou^rce:¹⁰
^A^u^th^o^r^ity
^T^r^i-^{State Gen}^e^ration^an^dU^$10.0^S^ou^rce:^{8 (pag}^{e 23)}
^T^r^aⁿ^sm^issioⁿ^A^sso^cⁱ^a^tioⁿ
^Wⁱ^sc^oⁿ^si^{n P}^o^w^e^r^{& Li}^ghtU^$20.0^S^ou^rce:⁴
^Wⁱ^s^c^on^sⁱⁿ^{Electric P}^o^w^e^rU^$52.0^S^ou^rce:¹
^Wⁱ^scoⁿ^sin^P^u^b^{lic Ser}^v^iceU^$6.6^S^ou^rce:²
^{Xcel En}^erg^yUU^NR^Sou^r^{ce: 1}
^Co^st^d^o^e^{s no}^tⁱⁿ^c^l^ud^e^p^l^a^nne^d
^u^p^g^r^ades^{to s}^o^m^e^{coal h}^aⁿ^d^lin^g
^f^{acilities to}^f^{acilitate co}^al
^d^e^liv^er^{ies b}^y^r^a^il.
^S^o^u^rces:⁽¹⁾²⁰⁰⁵¹⁰^-^K^r^e^por^{t; (}²⁾^{2006 10-}^K^r^e^por^{t; (}³⁾^{2005 a}^nnua^{l r}^e^por^{t; (}⁴⁾^{2006 a}^nnua^{l r}^e^por^{t; (}⁵⁾
^C^o^m^p^la^{int f}^ile^{d by}^O^P^P^D^Ma^y^{15, 2007,}^O^m^{aha Public}^Powe^r^Dⁱ^s^t^rⁱ^c^t^v^.^Uⁿ^{ion Pac}^ific^Railr^{oad Co.}^{, D}ⁱ^s^t^ric^t
^C^our^{t of}^D^oug^la^s^C^ounty^,^N^e^br^a^s^k^a^{; (}⁶⁾^10-^Q^r^e^por^{t f}^o^r^thir^{d qua}^r^t^e^r^2005;⁽⁷⁾^B^o^a^r^d^of^C^o^m^mⁱ^s^sⁱ^one^r^s^m^e^e^ting
^mⁱ^nute^s^f^o^r^N^o^v^e^m^b^e^r^{8, 2005, a}^{nd C}^onne^c^tions^ne^w^s^le^tte^r^f^o^r^D^ecem^b^e^r^{2005; (}⁸⁾^U^.^{S. C}^ong^r^e^s^s^,^Se^na^te^th^nd
^C^o^m^m^itte^e^{on Ene}^r^g^y^a^{nd N}^a^tur^a^{l R}^e^s^our^c^e^s^,^Coal-Base^d^Ge^ne^ration^Re^liability^{, he}^a^r^ing^,¹⁰⁹^C^ong^r^e^s^s^,²
^s^e^s^s^{., Ma}^y^{25, 2006, S. H}^r^g^.^109-^{601, (}^W^a^s^hing^{ton: G}^P^O^,²⁰⁰⁶⁾^{; (}⁹⁾^[^h^ttp:^//^www.^aecc.^co^m^/^go^vern^m^eⁿ^t^al^-
^a^f^f^a^irs/le^gⁱ^sla^tiv^e^-^issue^s^/]^a^nd^{Rail Shipm}^eⁿ^{t I}^s^s^u^e^s^Le^{ad to the}^For^m^{ation of Ar}^k^ans^as^C^U^RE^,^p^r^{ess r}^e^l^ease,
^A^r^k^a^ns^a^s^Ele^c^t^rⁱ^c^C^oope^r^a^tiv^e^C^o^r^p^.,^M^a^r^c^h^{8, 2007; (}¹⁰⁾^“^R^a^{il Shipm}^e^{nt W}^o^e^s^Iⁿ^f^l^a^t^e^T^V^A^C^o^a^l^C^o^s^t^s^,^”
^A^s^s^o^cⁱ^a^t^e^d^P^r^e^s^s^N^e^w^s^wⁱ^r^e^s^,^A^p^r^{il 3, 2006; (}¹¹⁾^St^a^t^e^m^eⁿ^t^of^A^l^aⁿ^H^.^Rⁱ^c^h^a^r^ds^{on, P}^r^e^s^ideⁿ^{t a}^{nd C}^E^O^,^A^m^e^r^ic^aⁿ
^P^u^blic^P^o^w^e^r^A^s^s^o^cⁱ^a^{tion be}^f^o^r^e^the^Fe^de^r^a^{l Ene}^r^g^y^R^e^g^u^la^tor^y^C^o^m^mⁱ^s^sⁱ^{on, D}^o^c^k^e^t^A^D^06-^8-^{000, J}^une¹⁵^,
^{2006; (}¹²⁾^U^pdate^{on Rail I}^s^s^u^e^s^{at O}^tte^r^{Tail Pow}^e^r^C^o^m^pany^{, pre}^s^eⁿ^ta^{tion to the}^{South Da}^k^o^ta^P^ublic^Utilitie^s
^C^o^m^mⁱ^s^sⁱ^on,^A^p^r^{il 21, 2006, a}^{nd P}^r^e^f^ile^{d R}^e^butta^{l T}^e^s^tim^ony^of^W^a^r^d^U^g^g^e^r^ud,^O^tte^r^T^a^il^P^o^w^e^r^C^o^m^p^aⁿ^y^,
^{South D}^a^k^o^ta^P^ublic^U^tilitie^s^Com^mⁱ^s^sⁱ^{on Ca}^s^e^N^o^{. EL}^{05-022, J}^une^{9, 2006.}
^Notes:^{NR = No}^t^Rep^o^r^t^e^d^.^“Coⁿ^s^e^r^v^e^d^Co^al^{” i}ⁿ^cl^u^d^e^{s su}^ch^st^ep^{s as rep}^l^aciⁿ^g^co^al^-fⁱ^r^ed^gen^e^ratⁱ^oⁿ^wⁱ^t^h
^g^eⁿ^e^r^a^tⁱ^oⁿ^f^r^o^m^g^a^s^-^fⁱ^r^e^d^or^othe^r^non-^c^o^a^l^p^o^w^e^r^p^l^aⁿ^t^s^aⁿ^d^p^u^r^c^h^a^s^e^s^o^f^e^l^e^c^t^rⁱ^cⁱ^t^y^o^f^f^o^f^t^h^e^g^rⁱ^d^.^I^t^a^l^s^o
ⁱⁿ^cl^u^d^e^{s rep}^l^aciⁿ^g^p^rⁱ^m^ary^co^al^su^p^p^lⁱ^e^{s w}ⁱ^t^h^al^t^e^rn^atⁱ^v^{e co}^al^.^“A^cq^uⁱ^red^M^o^{re Rai}^l^{cars” ref}^e^{rs t}^o^t^h^{e p}^u^r^ch^ases
^or^le^a^s^e^of^a^dditiona^{l s}^e^ts^of^c^o^a^l^c^a^r^s⁽^t^y^p^ic^a^lly^{120 to 135 c}^a^r^s^pe^r^tr^aⁱ^ns^et⁾^t^h^at^co^u^l^d^be^{put into s}^e^r^v^ic^e^to
^de^liv^e^r^m^o^re^c^o^a^l^{to the}^eⁿ^tity^.^“^P^urc^h^a^s^e^d^SO^{2 A}^llo^w^a^nc^e^s^”^m^e^aⁿ^s^tha^t^{in orde}^{r to us}^e^a^lte^rna^tiv^e^s^upplie^s
^of^c^o^a^l^w^{ith a}^sulf^{ur c}^onteⁿ^{t hig}^h^e^r^thaⁿ^{its norm}^a^{l s}^upplie^{s, the}^eⁿ^tity^ha^{d to purc}^h^a^s^e^a^llow^a^nc^e^s^tha^t^pe^rm^it
^the^r^e^le^a^s^e^of^inc^r^e^a^s^e^d^a^m^ounts^of^s^u^lf^ur^diox^ide⁽^S^O²⁾^.^Four^of^the^c^o^m^p^aⁿ^ie^s^{on this}^lis^{t s}^h^a^r^e^pow^e^r^plaⁿ^ts^,
^so^t^h^at^p^r^o^b^l^em^{s at}^oⁿ^e^p^l^an^t^af^f^ect^m^o^{re t}^h^an^oⁿ^e^co^m^p^an^y^.^Kan^s^{as G}^a^{s & E}^l^ect^ri^c,^Kan^s^{as P}^o^w^e^{r & L}ⁱ^gh^t^,^an^d
^A^q^uⁱ^l^a^al^l^o^wⁿ^sh^{ares o}^f^t^h^{e Jef}^f^r^ey^p^l^an^t^.^E^m^pⁱ^re^Di^st^ri^ct^E^l^ect^ri^c,^Kan^s^as^P^o^w^e^r^{& L}ⁱ^gh^t^,^an^d^A^q^uⁱ^l^a^{are j}^oⁱⁿ^t
^ow^ne^r^s^of^the^I^a^ta^{n pla}ⁿ^{t. I}ⁿ^a^{ddition, dur}^ing^this^pe^rⁱ^{od Em}^pir^e^ha^{d a}^fⁱ^r^m^pow^e^r^pur^c^h^a^s^e^c^ontr^a^c^t^w^ith^W^e^s^t^a^r
^Ene^r^g^y^.^Costs^show^{n a}^ppe^a^r^f^r^om^the^c^onte^x^{t to}^be^inc^r^e^m^eⁿ^ta^{l to those}^tha^t^the^eⁿ^tity^w^{ould ha}^v^e^norm^a^lly
ⁱⁿ^cu^rred^.