to process pending applications by the end of Fiscal 1983. In discussing our concerns, I will, first, provide background on the S&NC's operations and its proposed rehabilitation project, and, second, discuss its critical need for Federal assistance. I. ESSENTIAL RAIL SERVICE FOR THE The S&NC provides the only rail service for the entire Clympic Peninsula. As such, it is a critical part of the region's infrastructure. The S&NC moves freight cars along the Peninsula from Port Angeles to Port Townsend where they are loaded onto barges and transported about 57 miles across Puget Sound to Seattle. At Seattle, the cars are interconnected with the transcontinental rail systems of the Burlington Northern and the Union Pacific which then move the cargo to consumers throughout the United States, Canada and Mexico as well as abroad. The S&NC's principal shippers are the numerous mills involved in the country's lumber, pulp and paper industries. These mills make use of the vast forest resources of the Peninsula, producing a variety of products including woodpulp, newsprint, wrapping paper, groundwood paper, lumber and plywood. One index of the importance of the output of these mills is that roughly 40% of the telephone directory paper used by Western Electric is produced on the Peninsula. Furthermore, the sales of products from these mills to Canada, Mexico and overseas assist the nation by helping our balance of payments. The S&NC also directly benefits the people on the Olympic Peninsula as consumers since it transports propare gas inbound for use as an alternative fuel for motor vehicles as well as for residential and hospital heating purposes. The The importance of the line is further highlighted by fact that alternative transportation is inadequate, costly and time-consuming as trucks must rely on a narrow, two-lane highway to make the circuitous 200-mile trip to Seattle. only other available mode of transportation is by bulk cargo barge. This is also unsatisfactory since it requires additional handling for reloading into boxcars and increases the risk of damage to the freight. Thus, the loss of rail service by the S&NC would leave the people and mills of the Peninsula isolated and without adequate, cost-efficient transportation. Currently, With this background, it should not be surprising that the continued operation of the Olympic Peninsula line is critical to the economic viability of the region. unemployment on the Peninsula stands at 20%, almost twice the national average. If the S&NC were to cease operations, not only would its own employees be out of jobs but unemployment on the Peninsula would soar as increased transportation costs would force the mills to lay off hundreds of additional workers or shut down completely. Furthermore, a shutdown would also completely undermine the on-going industrial development efforts of both Port Townsend and Port Angeles to pull the region out of its current depression. If the line is abandoned, any hopes of future development would be crushed since new industries would not locate in a region which lacks essential transportation service. In summary, without rail service, the Peninsula would suffer economic disaster. II. THE LOAN GUARANTEE IS NECESSARY FOR The funds borrowed by the S&NC under a Federal loan guarantee would be used, first, to acquire the line from the Milwaukee's Trustee and, second, to perform critically needed rehabilitation. The S&NC presently operates the railroad under a LeaseOption Agreement with the Trustee. The net cost of the acquisition will be about $3.8 million. The cost for the necessary rehabilitation will be approximately $6.2 million. These funds are needed to repair years and years of deferred maintenance by the Milwaukee. When the S&NC commenced operations in 1980 the line was in absolutely terrible condition. The rail was badly worn, ties were rotting and derailments were a regular occurrence and a serious hazard even at speeds of 10 miles per hour. In fact, much of the track dates back to the turn-of-the century. This old lightweight rail is completely unsuitable and unsafe for the transportation of modern, heavy, cost-efficient railcars. The S&NC has a comprehensive rehabilitation plan to upgrade the track to Class 3 track safety standards, thereby allowing it to cut travel time in half and carry heavier, cost-efficient loads without the fear of derailments. Mr. Chairman, if this project is allowed to move ahead, the line will be saved from abandonment and the people and industries of the Olympic Peninsula will be assured safe, economical rail transportation for years to come. III. THE S&NC REQUIRES A FEDERAL LOAN GUARANTEE We filed our application with the FRA on March 3, 1983. Thus, we were shocked to hear the FRA's testimony to this Subcommittee on April 13, 1983, that no new meritorious applications have been filed, that the FRA does not foresee any new meritorious applications for major rail projects, and that, in any case, private financing is readily available. If that were true, we would not have sought a Section 511 guarantee since it does not really give us a lower borrowing rate but, rather, capital availability where there otherwise is none! Let me now briefly turn to our guarantee application and tell you where it stands and how the FRA has reacted. The S&NC has demonstrated the merits of its project in its application and has conclusively shown that: (1) rail service is absolutely necessary for the economic viability of the Olympic Peninsula, (2) safe, efficient rail service will generate additional development on the Peninsula, thereby reducing unemployment, (3) the costs of the project are reasonable, (4) traffic will increase in response to improved service, (5) the estimated internal rate of return of the project is substantial, and (6) the earning power and assets of the line will provide the FRA with reasonable assurance of repayment. In summary, this rehabilitation is clearly financially sound and in the public interest. Nonetheless, we have been given a completely cold shoulder by the FFA which simply does not want to provide any more 511 guarantees. The FRA does not like the program and, no matter what Congress seems to direct, it simply won't comply. It doesn't want the program and if Congress nonetheless authorizes and appropriates funds, the FRA simply won't administer them. This is not the way I thought the government worked. The S&NC is very concerned with the FRA's procedures in this instance. We had understood that, after the FRA initially reviewed our application, we would be contacted and conferences would be held to discuss any concerns that the FRA might have. We expected to have an opportunity to address these concerns and resolve any outstanding issues. Thus, we were dismayed that the FRA made its remarks before this Subcommittee without giving the S&NC any chance to discuss the application and to address the specific concerns, if any, that it has. In referring to "major" projects, the FRA appears to be indicating that the loan guarantee program is only available to the major intercontinental railroads. We understand that this was not the Congressional intent in establishing the loan guarantee program. The legislative history of the Railroad Revitalization and Regulatory Reform Act is quite clear that the Section 511 loan guarantee program is intended to assist small essential railroads such as the S&NC and not simply the larger lines. We understand that you yourself, Mr. Chairman, made this point in connection with the FRA's appropriations for Fiscal 1983, when, if you would allow me to quote you, you stated that: short-line rail services should have full In the Joint Explanatory Statement of the Committee on Conference, the conferees concurred on this colloquy, agreeing that the 511 program is available to small feeder railroads serving smaller communities. Indeed, small railroads such as the S&NC are more likely to need Federal assistance since they do not have access to normal sources of private financing as is the case with the larger carriers. Contrary to the FRA's statement, funding for projects such as the rehabilitation of the Olympic Peninsula line is not readily available through the private sector. I know! The S&NC has tried again and again for the last three years to obtain private financing but has been completely unsuccessful. We have discovered that, un fortunately, banks do not understand the needs of a small railway such as ourselves and that, furthermore, they prefer to invest their money in more glamorous high-technology ventures. Thus, Mr. Chairman, the S&NC is seeking Federal assistance only as a last resort and only after having had countless doors shut in its face. Without a loan guarantee, the S&NC will have to cease operations. As a result, the Olympic |