National Coal Transportation Association

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National Coal Transportation Association Annual
Meeting and Conference Denver, Colorado September
13, 2005 Surface Transportation Board Roger
Nober, Chairman
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Coal Transportation Issues

• Powder River Basin Maintenance
• Rates and Rate Cases
• Fall Peak 2005 Service
• General Freight Capacity
• Future for Coal demand

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2005 PRB Maintenance Issues
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Background

• Highest density rail lines in world
• Unique joint line
• Focus of great deal of Board attention due to key
  role PRB coal plays in economy and regulatory
  scheme
• Made first-ever agency site visit to PRB last
  year

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PRB STB Action Items

• BNSF and UP addressed Board members on PRB
  situation in July 2005
• Hosted joint conference call with BNSF and UP to
  address on-going issues in the PRB
• Numerous meetings with utilities and other coal
  shippers to hear concerns about PRB service
• STBs Office of Compliance and Enforcement hosts
  weekly conference calls with BNSF and UP to
  address PRB and Joint Line issues
• Constant contact with coal shippers and utilities
  to gauge industry views and concerns

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Joint Line/PRB Status

• Total joint line handled an average of 59.5
  trains per day in August 2005
• Loading levels improving total trains per day
  continually increasing, although not in a
  straight line
• Joint Line maintenance is on schedule BNSF
  completed the 2nd phase of 3 phase maintenance
  plan in August
• Not all transportation issues railroads fault
  issues lay with mines also

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Next Steps -- PRB

• Carriers must cooperate in completing maintenance
• Railroads must determine causes of dust
• Railroads, mines and utilities must all be part
  of solution to prevent future coal-dust related
  line failures
• Looking at entire coal supply chain to ensure we
  are optimizing available capacity
• STB will continue to focus on PRB as a core
  agency responsibility

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Coal Rate Cases
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Summary

• Board currently has 5 pending SAC Cases.
• Fewer than past years despite utility unhappiness
  with rates.
• Regulatory responsibility to adjudicate cases on
  record before agency.
• Shippers often want redress for large increases
• Railroads feel commercially reasonable rates
  should govern unless they are revenue adequate

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Summary of Recent SAC Cases
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Pending SAC Cases
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Current SAC Issues

• Held Spring 2005 hearing on SAC issues. Major
  substantive issues discussed included
• The appropriate use of cross-over traffic
• How the agency should project operating expenses
  and
• Possible changes to the rate prescription
  methodology.
• No party offered a detailed proposal on how to
  revise the SAC test.
• Rulemaking v. Adjudication Shipper groups
  favored resolution of SAC issues via
  adjudication, Railroads favored rulemaking.

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Future

• Coal Rate Guidelines offer several alternatives
  for challenging rates, including SAC and the
  Revenue Adequacy constraints
• Several Class I carriers approaching earning
  their cost of capital
• Unanswered question when does earning cost of
  capital means railroad is revenue adequate
• Board, stakeholders must explore revenue
  adequacy, what it means for traditional doctrines
  under the Interstate Commerce Act

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Fall Peak Service Issues
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2005 Service Actions

• 2005 Letter to railroads asking them to submit
  Fall Peak plans, capacity bottlenecks and plans
  to alleviate those identified issues
• Impact of Hurricane Katrina still being evaluated
  
• Industry-wide customer forum next week
• Individual carrier meetings where appropriate

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2005 Service Complaints to the STB

• 90 customer complaints in 2005, YTD
• 12.5 percent y/y increase from 2004
• 123 total complaints in 2004, 19 percent increase
  over 2003
• 2005 Complaints Filed
• UP 19 CN 4CSXT 15 KCS 1
  
• BNSF 9 CP 0 NS 7

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Capacity
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Insufficient Capacity A New Kind of Regulatory
Problem

• Current and future service issues largely demand
  and capacity driven
• Most commodities are deregulated by virtue of
  being modally-competitive or shipped by contract
• Regulatory powers intended for different type
  situation
• Interstate Commerce Act laws and doctrines look
  at reasonableness of regulated traffic
• Customers want fairness for all movements

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Capacity Constraints Causes of Increased
Demand

• Expanding economy
• Large grain harvests in recent years
• Soaring demand for coal
• Double-digit increases in intermodal growth
• Shortness of crew and equipment
• Insufficient capital expenditures

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Capacity Constraints Long-term Causes

• Constraints on capital investment for private
  companies
• Railroads inability to achieve revenue adequacy
• Need to cut expenses to maximum extent
• Demands of investors
• Under capacity and over capacity at the same time
  
• Demands of changing freight flows
• Long-term nature of rail investment versus
  business-cycle fluctuations in demand
• Returns will have to justify further investment

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Future of Coal Transportation
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Questions for the Future

• Can mines, railroads and utilities keep up with
  ever-increasing demand for coal?
• What role should regulators play in the
  relationship between mines, utilities and
  railroads?
• Will a third line into the PRB ever be built?
• What will the long-term effects be of coal
  traffic on rail networks?
• What are the policy implications of tight coal
  supply?

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