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million dollars. Last year it made one hundred sixty-five million dollars. And we anticipate we'll make a little bit more than that this year. This is a fine railroad. Mr. Creedy said it was a fine railroad. It is getting to be a better railroad. We seem to have a communication problem here. We're showing you what the spending is and you're giving me government quotes.
COMMISSIONER CONRAD: I am interested in trends as well. T. D. Manace, from Atlantic Richfield Oil, was reported in an interview in the Minneapolis Star daily newspaper on April first, 1981, as questioning the BN's plans to resuscitate the railroad with two billion dollars, to upgrade coal-hauling facilities. It's stated "Under Bressler's leadership, BN slashed projected capital spending in railroad operations during 1981 by 46 percent from the level of 1980. Meanwhile, capital spending for BN's oil and gas activities was up 76 percent."
MR. BOYCE: Yes. And most of that capital spending that was cut was investment in new locomotives. There were a lot of new locomotives bought in 1980 and very few bought in 1981. You know why we have got two hundred locomotives sitting idle? When you have got a lot of excess capacity, you don't buy more. That's why that decision was made. That would have been made by a railroad man just as well as by a man with a background in the oil industry and, in fact, the airline industry and all the other places he has worked.
COMMISSIONER CONRAD: Were there any other capital spending projects affected by that 46
MR. BOYCE: Yes, there were fewer cars bought because we had about thirteen thousand surplus
MR. KAUFMAN: Wheat shippers haven't been shipping a whole lot of wheat this year. If I could answer that one in a little more serious vein, Commissioner, in 1979, we opened a new line. It cuts across the Powder River Basin, an investment of one hundred million dollars. In 1979, we opened a new coal line through the Powder River Basin in Wyoming, an investment of something in excess of a hundred million dollars. The efficiencies that that gave us cut about two days of cycle time off the movement of unit coal trains. We have got approximately some sixty unit train sets, coal cars and locomotives, in storage this year, not because the coal business has been bad. We are going to move one hundred fifteen million tons of coal this year. They are there because the railroad has gotten more efficient than its own managers thought it would five or six years ago. I can't be responsible for the way a report in a public forum chooses to characterize the capital spending plan. He chooses to use the word "slash." I would use a different word.
COMMISSIONER CONRAD: You have talked about the amount of money that you're investing in the rail operations, three hundred forty million dollars. That's on the table. Maybe some questions are in order as to what kind of projects are being reinvested in. For example, in Appendix D to the Burlington Northern and St. Louis-San Francisco merger order, Volume 360 of the ICC report, it states that in 1977, BN launched a new five-year plan that contemplates capital expenditures of about two billion dollars for expansion and improvements. About half of the total will be for coal-related projects. Could you give us some idea of the three hundred forty million dollar investment that you're talking about, how much of that is coal-related projects?
MR. KAUFMAN: Relatively little because the development for coal has been accomplished, which is also one of the reasons why the capital spending dropped off from six hundred million dollars the previous year to three hundred forty this year.
COMMISSIONER CONRAD: Are you familiar with the Justice Department study that was done on the question of anticompetitiveness that could be created in the coal business as a result of the marriage of BN's very substantial coal resources with its monopoly transportation of those coal resources?
MR. BOYCE: I don't recall that term being used. I don't recall the "monopoly" term being used. Maybe it was. I am familiar with the study.
COMMISSIONER CONRAD: That report raises some interesting questions as they relate to Burlington Northern and what we have just talked about kind of creeps naturally into that subject. It's one of the things we have listed as a question. On page three of the Department of Justice testimony, which was provided - is this the Commerce Department?
MR. HARING: Justice Department.
COMMISSIONER CONRAD: Repeal of 2(C) from the Mineral Leasing Act which prohibits you from leasing Federal coal. This comment is made in the Justice Department testimony. "The results of that analysis were transmitted to Congress last year in the Department of Justice's third annual report on competition in the coal industry. ... If a railroad with market power over the transportation of coal in particular markets also owned substantial coal reserves in those markets, it could find it profitable to drive up the price
of coal by withholding coal transportation services. Monopoly profits that might otherwise be unattainable because of ICC regulation of transportation rates might thus be collected through coal." At a later point in that testimony, they go on to say, "Only one railroad originating coal in the west, the Burlington Northern, was found to have a significant degree of market power. Consequently, we believe that only the Burlington Northern might have an incentive to act anticompetitively if Federal coal leases were issued to it." I was just wondering if you could react to that.
MR. BOYCE: That was issued when? 1980, wasn't it? Two weeks ago, the Justice Department testified at a hearing on their appeal of Section 2(C), supporting the repeal of that section, made no comments about any problem that they saw with Burlington Northern because there are other provisions in that same Act which deal with the anticompetitive nature of each individual lease sale. I don't know how long you want to keep going on referring to government studies. What we're trying to transmit to you is the way that we, as a company, think. I suggest that's more important to the people of North Dakota than a bunch of studies out of Washington, D.C.
COMMISSIONER CONRAD: That's one of the concerns. You have announced your plans for the future and the plans of the abandonment of half of the branch lines in this State.
MR. KAUFMAN: Not so. Let's be accurate now.
COMMISSIONER CONRAD: Twelve percent of your mileage of what? The branch lines in North
Dakota? How much have you talked about potentially abandoning?
MR. KAUFMAN: We have stated that we intend in the next three years to file abandonment petitions on 423 or 432 - I am not sure which digit goes where — on miles of branch line, which is probably about thirty percent of the system branch line system.
MR. BOYCE: Twenty-two hundred miles of branch line.
COMMISSIONER CONRAD: How about in the other categories?
MR. BOYCE: We are studying those lines. As I said in my statement, we didn't have to put any of those lines on the map. We could have played it very close to the investigation, simply waited to see what happened; then, when those lines had very little or no business on them, because of development beyond our control on the grain marketing system, then move for abandonment. We chose not to do that, Commissioner. We thought it was best to be open with the people of North Dakota, to let them know how we think the future is developing. As I said today, if we're wrong, we will make changes. If those lines continue to prosper, if they carry more business in the future, we are ready and willing to change.
COMMISSIONER CONRAD: Okay. I think we are going to have to proceed here. We are going to get in the other witnesses who are here so that they can make their presentations. I want to thank both Mr. Boyce and Mr. Kaufman for taking the time to come here and present their testimony. We certainly appreciate that effort.
Next, we'll go with the agricultural panel, Mr. Jim Marsden, Mr. Robert Kadrmas, Mrs. Agnes Zimmerman, Mr. Kelly Shockman, President of the North Dakota National Farmers Organization; and Dina Butcher, Staff Assistant for the North Dakota Department of Agriculture.
I first want to thank the members of the agricultural panel for being here. Given the lateness of the hour, we will try to proceed as rapidly as possible with each of you giving your statements and entering your testimony into the record. Then we will proceed, if there is time remaining this afternoon, to our labor panel. If not, we'll ask them to begin this evening, but, hopefully, we can get through most of this, so we'll start with Mr. Marsden, Director of Public Affairs from the North Dakota Farm Bureau.
MR. JAMES MARSDEN: Good afternoon. My name is James H. Marsden. I am the Director of Public Affairs of the North Dakota Farm Bureau and more commonly referred to as the lobbyist of the organization. I appreciate the opportunity to speak to you today.
In my capacity as the legislative director or lobbyist, I have attended numeorous meetings on the issue of Burlington Northern's railroading of North Dakota in the past few years.
Like many of the others, who have attended those meetings, I have gone away frustrated because more could not be done.
However, in reflection, I do acknowledge the efforts of many who have saved North Dakota farmers millions of dollars over what they would have paid if it had not been for the efforts of the N.D. Wheat Commission, the North Dakota Public Service Commission, and the Upper Great Plains Transportation Institute. There are many of our members who are deeply concerned about statements by public officials that there isn't anything we can do and we've got to accept the inevitable.
Our people have been greatly heartened recently by the efforts of several prominent officials such as Commissioner of Agriculture Kent Jones and you, Commissioner Conrad. They also appreciate the efforts of our Congressional delegation, Senators Mark Andrews, Quentin Burdick and Representative Byron Dorgan.
In answer to the question: "Do land grant railroads serving North Dakota still owe anything to the public for the land and the mineral rights given them by the Federal Government more than a century ago?
You people have answered this in the affirmative and are trying to do something about it.
We have been told that the argument was settled in the 1940's when Congress passed a law recog nizing that land grant railroads had paid off their obligations for the free property they received. I have heard testimony recently that seriously questions that and hope that testimony presented at this hearing will clear the air.
I have also been informed that the Interstate Commerce Commission, which regulates the railroads has never considered mineral rights and real estate income when making decisions on branch-line abandonment applications or setting freight rates.
Perhaps that is the reason why the I.C.C. has ruled in favor of the railroads in all but two cases in the last 115 or 117 cases.
In the September 29th issue of the Tribune, two articles appeared on page 15, that were of much interest to many of us. One is headlined "Action urged to save branch lines."
A similar wary note was sounded by Gary Berreth, Director of the State Highway Department's Intermodal Planning and Rail Assistance Division.
"The reality is that a lot of those lines are going to go," he said.
But Berreth offered some hope too, saying that some of the lines the railroads are looking to abandon in the long term could be saved if people start acting now.
This can be done only if the railroad perceives a branch line as profitable, Berreth said.
PSC staff attorney Dan Kuntz said profitability of a branch line is a main factor the Interstate Commerce Commission looks at in determining whether to approve an abandonment application.
Kuntz said if people can show a line is being used, or will be in the future, that is important to ICC.
However, "Even if you do use the railroad, there's no guarantee that you're going to keep it,” he said. "But if you don't you're going to lose it for sure."
Roger Carpenter, who owns an elevator near Alexander, said BN complains about lack of revenues on branch lines, but he noted that he was forced last year to ship 30 cars of grain to Williston by truck because BN didn't have the cars available.
"This is revenue that could have been derived to BN," he said.
Carpenter also said BN hasn't done anything to keep up the branch line in 15 years.
BN's Dircector of branch line management, Dennis Mcleod, defended his company's approach to abandonment and said the abandonment map is not something that can't be changed.
"All our map was trying to do was project our marketing future," he said. "If you can work into our marketing system, we want to work with you."
"Our plans are not to abandon the rail lines in North Dakota that can support themselves in the
Mcleod was challenged by Tax Commissioner Kent Conrad on why BN wants to split off its mineral interests into a holding company.
Won't this mean less revenue for BN's branch lines? Conrad asked.
Mcleod said a decision to abandon a branch line depends on whether that particular line is profitable, not on how much income BN derives from other sources.
In the other article, "BN seeks better image," we can easily understand why and commend them in their effort.
Basically, their arguments came down to the same statement the railroad made before a state legislative committee last winer: "Trust us."
Our members respond to that statement with another - "We'd like to, but don't know if we can." The reasoning behind that comment is that there is considerable skepticism as to the real motives of the BN.
The BN officials said forming a holding company, which has been criticized for separating the railroad's land and mineral interests from the railroad operations, won't have any adverse effects on railroad service. They said it was done as the only practical means of being free to raise capital to develop the railroad's
Skeptics say that the proxy statement doesn't reveal this according to their interpretation. I think, in the interest of time, Mr. Conrad, I would like to introduce our President, Robert Kadrmas, for a statement from him. Bob is a full-time farmer and rancher and has a successful operation north of Dickinson. He has been actively involved in church and civic activities and has served on both the school board and the hospital board. He has served as president of the North Dakota Soil Conservation Office and he has served us very capably as the President of the North Dakota Farm Bureau. So I would like to relinquish my chair and have Bob Kadrmas come forth, if it meets with your approval.
COMMISSIONER CONRAD: Absolutely. That's fine. Thank you very much, Jim.
MR. ROBERT KADRMAS: I am Bob Kadrmas. I am President of the North Dakota Farm Bureau. I certainly appreciate the opportunity to speak to you this afternoon.
North Dakota Farm Bureau is a voluntary, non-governmental organization financed by membership dues and organized to provide a means by which farmers can work together to achieve benefits usually denied them as individuals. The approximately 20,000 Farm Bureau member families represent all counties in the State of North Dakota and are an important part of the American Farm Bureau made up of over 3,000,000 Farm Bureau member families from 2,834 counties in 49 states and Puerto Rico.
At our annual convention last December here in Bismarck, our delegates approved the following policy statement:
Railroads were given land and mineral rights in return for providing transportation, therefore, we recommend that the railroads be required to put their profits back into providing their equipment and tracks prior to other investments and further, we oppose the closing of branch lines.
In addition, they expressed their concern over the inequitable treatment branch lines had received in their requests for rail cars. Their feelings were so strong that they even called for an investigation of the matter.
Another statement of concern the delegates addressed was that of more equitable statewide freight rates for shipment of grain by rail.
North Dakota farmers paid $200 million to get their crops to market in the 1980-81 crop year. Freight rates charged to farmers are the largest indirect, not out-of-pocket, expense for farmers! A one percent increase in freight rates costs the North Dakota farmer $2 million dollars.
North Dakota is land locked and farther from deep water ports than any other region in the United States. In addition, we are dependent primarily on one railroad system with its only competition for long haul grain movements being less cost efficient trucks.
Due in large part to lack of competition, the Burlington Northern and Soo Line railroads charge North Dakota farmers higher grain rates than any other farmers in any wheat producing area in the United States. Similarly, the North Dakota grain freight rates are higher and more profitable than freight rates on almost any other commodity.
The Interstate Commerrce Commission has stated that if a freight rate produces 160% of variable cost, a railroad not only recovers all costs associated with moving the commodity, but also receives a profit.
According to cost studies conducted by the Upper Great Plains Transportation Institute and the Interstate Commerce Commission, wheat and barley movements out of North Dakota are extremely profitable movements for the railroads. Here are estimates of variable cost ratios associated with movements of various commodities:
ICC Declared Profitable Ratio
It is a fact that North Dakota wheat and barley rates are not only exorbitant but also, that they subsidize rail movements of less profitable commodities.
We have appreciated the fact that unit trains have helped the railroads meet rising demand and somewhat eased shipper costs.
In the September issue of the Wheat Grower, a national publication, Michael H. Karl, Senior Assistant Vice President Grain, Burlington Northern Railroad Co., St. Paul, Minn. points out that ultimately, the rate savings should be reflected in higher prices for the farmers' crops. This is viewed with considerable skepticism by many of our members.
An increasing number of our members are concerned that the 26 car unit train is only a temporary gesture to shippers and that the Burlington Northern insist on a 52 car unit train only. We strongly urge them to maintain the 26 car unit train and also follow the Soo Line example in granting a reduction on the 3 car rates.
A hot transportation issue in North Dakota facing us now and in the next couple of years is rail abandonment. We are told that not all lines currently shown as subject to abandonment will be abandoned. We wonder if the Burlington Northern listing of so many miles subject to abandonment studies was done for a special purpose.
North Dakota is being singled out by the Burlington Northern to face far more potential abandonments than any other state. In fact, over 25% of all Burlington Northern mileage which is subject to abandonment lies within North Dakota.
We think that 1201.6 miles subject to abandonment studies out of a total of 2,220.94 miles of total branch lines is excessive. We realize that our members who are shippers have a responsibility also to develop a strong enough case against abandonment in spite of the strong odds against them.
Several of our members are urging that the Attorney General's office research the Pacific Railway Act of 1864 to see if Burlington Northern is abiding by the terms set forth in this Act relative to acquisition and future use of the lands deeded to them.
I won't be surprised if resolutions are passed in several of our country Farm Bureau annual meetings this month calling for this step also.
I live in the Dickinson area and in western North Dakota many members refer to the arrogance of the Burlington Northern on the one hand abandoning rail lines - the lifelines of many communities in North Dakota - while sapping the state of mineral resources from lands given to them with the understanding that those resources be put back into the maintenance of the rails.
A blatant case in point is the branch line between Watford City and Fairview and Fairview to Sidney. Lands given free and clear to Burlington Northern to place and maintain those rail lines has produced one of the richest oil finds in North Dakota. Just south of Arnegard on the Red Wing Creek field, eight Burlington Northern wells have been pumping approximately 6,000,000 barrels for seven to eight years. Three of the eight have produced over 1,000,000 barrels.
While the wells have been thriving, the rails have been deteriorating. Although these rail lines may not be on this year's Burlington Northern abandonment design plan, they are being allowed to deteriorate so that the next round the questionable statistics will bear out Burlington Northern's cost effective-abandonmentrationale.
North Dakota has become the dog being wagged by the Burlington Northern tail. It's one thing to swallow abandonments based on profit-progress rationale, but somehow the profit gained from free rights to North Dakota minerals could allow most branch lines to remain functional plus subsidizing subterminal de velopment.