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OUR LAST OPPORTUNITY
It is clear that Congress has never gotten to the bottom of this matter. The finding in the 1940s that the railroads had paid off the grants rested on evidence that is less than convincing. As I have suggested above, very important questions remain. We should answer these questions. The Burlington Northern is about to march off with a sizable portion of this nation's partrimony, on the basis of a claim that may well be false. If we do not investigate this question now, we may never have an opportunity to do so again.
There is a more important point. The claim that the railroads have paid back their land grants, is utterly irrelevant.
The railroad land grants were not a cash-and-carry deal. They were an enduring public trust, an endowment for the continuing support of railroad service. The requirement of cut rates for the government was but one provision of the grants. It was not the entire bargain.
Congress provided in Section Twenty of the BN's original land grant that it intended for this grant to help in "keeping (the railroad) in working order."
A Congressional Research Service study of this question, undertaken at the request of myself and other members of Congress, concluded that ". . . it appears both from the language of the Northern Pacific grants and the legislative history surrounding their enactment that Congress did envision a constructed and operating railroad as the purpose and result of the land grants.'
This is the standard which we must hold the recipients of these land grants, including the Burlington Northern.
TAXPAYERS WILL PAY TWICE
And this is why the Burlington Northern's move to set up a holding company is the business of every taxpayer in this country, as well as of every person who relies on the Burlington Northern railroad.
If the Burlington Northern retreats from railroad service, then the burden will fall on our taxpayers. They will be asked to subsidize rail service, to buy or maintain branch lines, or even to take over some rail operations entirely. They will be forced to pay for the highways and other facilities necessary to replace service that the Burlington Northern no longer offers.
Our nation needs this transportation service and someone will have to provide it. American taxpayers have already payed for this service once. They have already bestowed upon the Burlington Northern an endowment so generous as to defy the imagination, to enable it to provide transportation that our nation needs. It simply is not fair to expect our taxpayers to pay a second time, while the Burlington Northern or any other railroad walks away with this endowment and converts it to its own private gain.
The Burlington Northern's holding company will lead us down that path.
We must act now.
Here are a few of the steps that we should take.
1. INVESTIGATION OF LAND GRANTS
It is time for a complete Congressional investigation of the land grant question. We need to know what the railroads have, how they are using those grants, and whether the original purpose of those grants is being served.
We also need to get to the bottom of the railroads' claim that they have repaid their land grants ten times over. We need to ask why the many questions surrounding this claim have been swept under the rug for so long.
2. REAFFIRM INTERSTATE COMMERCE COMMISSION JURISDICTION
True to form, the ICC has gone to great lengths to find reasons why it can't do anything about railroad holding companies.
It seems plain that existing law gives the ICC at least some authority in this area. Even the Commission's 1977 report on railroad holding companies suggested as much.
Given the Commission's recalcitrance, however, we should enact legislation that explicitly affirms the ICC's jurisdiction. The holding company device should not be an escape hatch by which the Burlington Northern and others can avoid their responsibility to keep the financial health of their railroads as their top corporate priority.
3. REVIEW TAX PROVISIONS THAT JEOPARDIZE RAIL SERVICE
Tax loopholes are one of the primary engines driving the wave of mergers and acquisitions in railroading and other businesses. We must eliminate these loopholes both to protect rail service and to promote competition and individual initiative in our entire economy.
We must look in particular at the way the railroads are using the billions of dollars in new tax breaks we gave them in last year's tax bill. The new reductions were so generous that the Burlington Northern is expected to pay no federal income tax at all this year. The purpose of those tax breaks was to promote investment in railroad operations. Instead, the Burlington Northern and others seem inclined to use their hundreds of millions in new breaks to help provide cash for other ventures. In other words, the railroads are using their tax breaks just as they have used their land grants-to enlarge their empires, as much as to serve the public.
This is nothing new. After examining the records of at least seven railroad holding companies, the 1977 ICC Report concluded that "since there is no evidence that the holding companies have reinvested these tax savings in the carriers, the savings have been employed to finance diversification and other noncarrier activities of the holding companies."
We should make certain that the railroads use their tax breaks for the purpose for which they were intended.
FORFEITURE OF LAND GRANTS FOR RAIL LINE ABANDONMENTS
The purpose of the rail land grants was to support rail service. If the railroads are not going to provide that service, then they should give back a portion of the land grants that we gave them.
I have introduced a bill that would accomplish this. My bill, The Railroad Accountability Act of 1981, (H.R. 5114, 5115) would require the railroads to forfeit their land grants to a state, in the proportion that they abandon service in a state.
This Act would also require the railroads to include land grant income in their branch line balance sheets when trying to justify a branch line abandonment to the ICC. This would prevent the railroads from wearing a tattered cloth coat before the ICC when actually they are rolling in land grant cash.
Senator BAUCus. Mr. Fogarty.
STATEMENT OF BILL FOGARTY, ADMINISTRATOR, TRANSPORTATION DIVISION, MONTANA DEPARTMENT OF COMMERCE Mr. FOGARTY. Mr. Chairman, members of the committee, and guests, my name is Bill Fogarty. I am the administrator of the Division of Transportation, Montana Department of Commerce. I appreciate the opportunity to testify before the committee today.
The Montana Department of Commerce and its Transportation Division provide the transportation nucleus for the State of Montana.
First, I would like to give you a brief overview of the State of Montana and its relationship to its transportation system. Transportation has been and continues to be one of the single most vital links in the development of Montana's economic base. At the June 1981, meeting with the Governor's Ad Hoc Committee on Agriculture, farm organizations and agricultural leaders from all over the State agreed that transportation was the No. 1 problem confronting agriculture, the State's No. 1 industry. Montana's economy is basically agrarian based and extractive oriented.
The $1.5 billion in cash receipts from the marketing of agricultural products is the single largest contribution to Montana's general economy.
A large portion of this money is generated from commodities sold in the export markets.
Price competitiveness in the world market is critical to the maintenance and development of export markets. Outside of the cost of production, transportation is the single largest factor in determining the price of any Montana agricultural product destined for a foreign market.
During the 1980 grain market year, 95 million bushels of wheat with a value of $393.3 million was shipped out of the State.
Let us take a look at Montana's specific transportation conditions. Approximately one-half of Montana's wheat is produced in an area called the golden triangle, an area bounded by the points of Shelby, Great Falls, and Havre. Approximately one-fourth of Montana's wheat is grown in the northeast corner, an area shaped roughly as a square bounded by the points Glasgow, Bainville, Plentywood, and Opheim. The triangle wheat is mostly winter wheat, with the northeastern wheat being predominantly spring wheat. Approximately one-eighth to one-quarter of Montana's wheat is grown in and around the Stanford-Lewistown area, which is located in central Montana. Approximately 80 percent of the wheat produced in the State moves westbound, and 90 percent of that amount goes into export channels. It is obvious that we are an export-oriented State and depend on the world price for our product to have value to the State.
Traditionally, because of its dominant position, the BN has been able to maintain its transportation rates in Montana, at the breakeven point of the truck/barge combination. The truck/barge combination is the only form of competition which the BN has in the movement of grain. Rail rates from Great Falls, Conrad, Shelby are at a level which will not encourage more than 10 to 15 percent of the wheat to go by truck to Lewiston, Idaho, and then down the Columbia River by barge to Portland. The railroad has traditionally allowed 10 to 15 percent of the grain to be trucked by competitors. However, when that level starts approaching 35, 40, or 45 percent, the railroad reacts by rate incentives and providing inducements to attract the grain back to the system. The railroad then prices its service at the truck/barge break-even point. It is a logical conclusion then that the truckers exist at the mercy of the railroad.
A most alarming threat to Montana grain marketing is that we could possibly become a marginal supplier of grain for export. Due to the high freight rates, the Midwestern States move their grain to west coast markets, and only then if there is still adequate world demand can Montana move its higher cost grain to the west coast for sale. Part of this problem is that Montana is faced with a lack of competitive transportation systems. The distances are long and the requirements to move bulk commodities are very real.
The passage of the Staggers Rail Act of 1980 partially deregulating the railroads was widely regarded by the business and invest
ment communities as a great victory for free markets, free competition, and the free enterprise system. I submit to you that the actual consequences do not quite live up to initial expectations.
The Staggers Rail Act has resulted in increases of revenue and profits to the railroads, as it was intended to do, but the question is at what cost to the economy and the public interest. In Montana, the effects have been to lessen competition between and among the modes. Today the regulatory system is in shambles, and discriminatory pricing of rail service on captive traffic is the rule. It is important to note that the effects of deregulation have improved substantially the earnings of all railroads including the one serving our State.
The formation of a holding company by a railroad tends to separate from the carrier entity those assets which could serve to assist them in their providing of transportation services.
While advances to noncarrier affiliates, typically the parent holding company, may technically be characterized as an asset to the carriers, the realities of the business world and the search for greater rates of return in noncarrier investments indicate the usage of this asset may permanently be lost to the carrier. The fact that what goes up to the parent frequently does not flow back to the carrier concerns us. In light of the control exercised by a holding company over its subsidiaries, the Interstate Commerce Commission has advised Congress that special attention be given to the possibility of disinvestment of railroad capital or the direct or indirect transfer of public financial support, intended to strengthen the railroad transportation, to other economic interests in the conglomerate firm. The ICC has found that railroads, as subsidiaries of holding companies, are in danger of weakened financial strength resulting from the loss of previously available noncarrier income from investments and resources. In a study of holding companies, the ICC has explained that the loss of those assets sometimes diminishes current potential earnings of the affected railroads.
Our concern is that sometimes noncarrier resources have been diverted from railroads without adequate compensation. Railroads have been deprived of wealth accumulated over the years, including resources such as land grants which were acquired at the public expense. Ultimately, the removal of such assets has reduced the railroad's earning power.
The Commission has characterized the transfer of land grants without adequate compensation as an abuse of the public interest. While there are many benefits to the formation of holding companies to the railroads, there could be many liabilities to the individual shippers.
The railroads making up the present BN received some 40 million acres, which accounts for about 35 percent of all the total Federal land granted to all railroads. The grants cover various portions of various States. In Montana approximately 16 percent of the total State was given to the railroads in the form of land
grants. Approximately 24 percent of the land area of North Dakota was given to the railroads. The land grants noted above were in addition to the public lands conveyed for use in right-of-way construction itself and consisted of every odd-numbered section of land alternating in a checkerboard pattern on either side of the line being constructed, extending outwardly from the line from a minimum of 6 miles to a maximum of 50 miles. In the lands that were territories the land grant width allowed 50 miles on either side of the railroad line.
The purpose of my testimony today is not to debate the issue of whether land grants were proper but that land grants were given to the railroads, and that income and wealth generated from these grants should be revested back to the railroad system in order to lower the operating costs.
The revestment in the BN railroad of the land grant assets is a matter of immediate concern both to the economy of the grain industry and mineral producing areas of Montana. The exclusion of such income in determining a level of rates on the BN necessarily affects the competitive posture of all the modes. As the Commission found in the conglomerate report, in the hands of the nonholding company railroads, the income from the land grant assets is available for transportation purposes.
Montana sees the benefits of a holding company from the railroad standpoint. The benefits include such things as promoting better and more efficient utilization of the resources within the holding company and the ability of one of the subsidiary companies to ship on the railroad any coal or other resources that it develops. Conversely, the State is concerned that the creation of the holding company may present an opportunity to transfer some of the assets that were formerly with the railroad company to other subsidiaries and make them unavailable to the carrier in the future.
Montana is not assuming the right or wrong of any land-grant issues. What it is proposing is that some safeguards ought to be in place to insure the carrier company is not stripped of its assets that are properly part of it.
The important fact is that the holding company controls a large railroad system and that regulation is in the public interest and should be the ICC's responsibility.
We are also concerned with the ability of railroads to serve the heart of the State's economy. The county elevator is a prime example. Beginning with the implementation of the unit train grain rates in December 1980, Montana grain marketing system is reflecting major changes. Smaller elevators lack moneys to switch to the larger transportation efficient grain subterminal. While rate negotiations are continuing with the railroad, it is evident that, if they are purely concerned with profit and not public interest, they have the capability to cause widespread economic dislocation. Some competitive carriers have more rate options including three-car rate. The State of Montana believes that it is in the best interest of the State's economy to keep the 26-car unit train rates within 3 to 4 cents of the 52-car unit train rates to lessen the severity of the economic impacts on the State's economy, our highway systems, and the grain marketing systems.
I appreciate the opportunity to testify.