Every effort will be made to complete the funding of projects for which funds have been appropriated and reserved in order that an orderly termination can be achieved.

Senator Andrews: Wouldn't these kinds of assistance programs be helpful in selling Conrail?

Response: Our aim is to end the Government's role as financier in the railroad business and we are confident that the financial backing needed for the Conrail divestiture will be provided by the private sector.

The acquisition and rehabilitation of Conrail branchlines is primarily a matter of state and local concern which in many cases is now being handled without Federal involvement. Recently, some Conrail lines have been purchased by Shippers' groups with assistance from the

states.

TERMINATION OF LOCAL RAIL SERVICE ASSISTANCE

Senator Andrews: Another one of the assistance programs you plan to end is the Local Rail Service Assistance Program which helped states who lost essential rail service by line abandonments or by the creation of Conrail. As I understand the Rail Safety and Service Improvement Act of 1982, the mileage of lines Conrail abandons are now added into the basis for calculating how much a state can receive under this Program. Presumably, this action was taken to protect small shippers because Conrail is abandoning so many lines. What will happen to these shippers without the Local Rail Service Assistance Program?

Response: Shipper impact studies indicate that most small shippers are able without ma jor economic consequences to shift to alternative modes of transportation, or to piggyback service, or to the use of centrally located team tracks where railroads locate cars for general unloading. In addition to states which have developed their own funding programs, we have seen evidence of shippers joining together to purchase and operate lines which Conrail proposed for abandonment.

The Rail Safety and Service Improvement Act of 1982 made a technical change to ensure that Conrail lines proposed for abandonment would continue to be included in the LRSA formula which determines each State's entitlement. This change was made because Conrail no longer submits a Rail System Diagram Map as a result of the expedited abandonment provisions of the Northeast Rail Service Act of 1981. Since all other rail carriers are required to submit Rail System Diagram Maps to the Interstate Commerce Commission,

the change ensures that Conrail mileage is treated comparably with other rail mileage under the LRSA formula.

Senator Andrews: When Conrail ends-up being transferred as an entity or sold-off in pieces, wouldn't this Program make the dislocations that are likely to occur less devastating?

Response: In conjunction with our 1981 analysis of rail service in the Northeast, we have studied the impact on shippers of the loss of rail freight service. The results of the study are included in our March 1981 Report to Congress on the Future of Rail Service in the Northeast. Based on the study results, we believe that the dislocations which would impact low volume shippers can be minimized by service alternatives, such as the use of trailer-onflat car and centralized loading facilities. Ultimately, service alternatives will result in a more permanent solution than continuation of a limited

formula grant program.

Specifically, 135 companies were studied to determine the impact of lost rail service. In all but 2 cases the firms were able to shift to alternative forms of transportation and in only 7 cases did business reductions result in employee layoffs.

Senator Andrews: How will small shippers be protected with all the mergers that are occurring and the related abandonments? What other forms of recourse do states have to help shippers whose rail service has been abandoned?

Response: With the funding available under the LRSA Program, states have become proficient at addressing local rail service issues including the impact of rail restructuring and mergers. The states with the most serious problems have developed their own non-Federal sources of funding from bond issues, legislative appropriations, gas and other highway user taxes. The following table reflects the states with established rail programs:

SHORTLINES

Senator Andrews: Last year, Mr. Blanchette

testified that a lot of entrepreneurs were becoming shortline operators and taking over branchline operations. Has this trend continued? What are the effects on this trend if the section 505, 511 and local rail service assistance programs are terminated?

Response: The trend has continued; we do not believe termination of the assistance programs will have a major or negative impact on branchline projects.

Low density branchline projects have been funded largely through the Local Rail Service Assistance program The which provides grants (70/30 match) to the states. states with the most serious rail issues have established their own funding programs. The major local rail service problems are either behind us or being funded locally. Economically justified shortline operations can stand on their own.

RAIL DEREGULATION

Senator Andrews: The ICC has recently completed several major deregulatory rulemakings. In December, Ex Parte MC-156 allowed railroads to apply for motor carrier operating rights on the same basis as anyone else, Ex Parte 347(1) set extremely favorable maximum coal rates for the railroads, and boxcar and coal export traffic was recently deregulated. What part has the FRA played in all these decisions? Did the Department file comments in these proceedings?

Response: DOT filed in all these proceedings. FRA provides guidance on policy and economic issues raised in rail-related proceedings, and works with the Office of the General Counsel and the Office of the Assistant Secretary for Policy to develop official Department of Transportation comments.

The FRA believes that the Staggers Act called for the removal of regulation wherever competition and the demand for services are sufficient to maintain reasonable rail rates. This belief forms the basis for our positions taken before the Interstate Commerce Commission in exemption proceedings.

DOT supported the exemption of export coal traffic because we believe that the export market for both steam and metallurgical coal is highly competitive. Numerous U.S. mines, served by several railroads as well as other transportation modes, produce coal meeting the needs of foreign customers. In addition, U.S. coal competes for markets with coal produced by other countries and with alternative sources of energy. We also believe that an exemption will enhance the expansion of coal exports,

because it will allow mines, railroads, and foreign buyers to develop innovative marketing and transportation

arrangements.

Our support for exemption of boxcar traffic from regulation was also based on the high degree of competition in this area. There is considerable competition from trucks for the traffic which moves in boxcars, as well as from the railroads' own TOFC/COFC service, which is already exempt. To regulate a commodity when it moves in a boxcar but not in a trailer or container prevents shippers from obtaining optimum rate and service combinations, since a railroad would be able to offer flexible arrangements for movements of one type, but not the other.

The Department's position in Ex Parte MC-156 supported removal of the special circumstances doctrine, which had severely restricted the operating authority of rail-owned motor carrier service. This restriction was adopted in 1935 to protect the newly developing trucking industry from predatory practices; it is no longer necessary or appropriate today. As in the Staggers Act, a basic principle of the Motor Carrier Act of 1980 is that competition is the most desirable means of assuring reasonable rates and service to shippers. Removal of the "special circumstances" test assures competition by providing freedom of entry for all trucking firms, regardless of ownership.

The maximum coal rate guidelines covered in Ex Parte 347(1) apply only in those specific movements where the Commission has determined that the railroad in question has market dominance over the traffic, i.e., where no competition exists. DOT believes that the Staggers Act requires the ICC to regulate these rates in a manner which places maximum reliance on market forces, allows railroads the opportunity to earn a rate of return sufficient to attract and retain capital, and assures that common costs are recovered from shippers in equitable a manner as possible. We urged the ICC to develop rate standards which allowed railroads to consider the differences in shippers' demand for rail services, while ensuring that no shipper should be required to pay more than necessary to cover the total cost incurred for facilities and operations providing service to that shipper. Nor should a shipper have to make up for a reserve shortfall resulting from traffic not contributing to the going concern value of a railroad.

ECONOMIC EFFECTS OF DEREGULATION

GENERAL

Senator Andrews: You have an office that analyzes these types of relaxed regulation for effects on the economy as well as the rail industry. What are the effects on the economy of these decisions? Does the consumer benefit? Will these ICC decisions just give the railroads more profit for corporate expansion or will the railroads apply the profits to necessary capital improvements?

Response: The decision on rail-affiliated motor carriers was served January 6, 1983. The boxcar and export coal exemptions and the coal rate guidelines have not gone into effect, and the final details are not firm. Therefore, the overall long-term effects on the economy cannot yet be assessed.

The Department believes that where market forces operate, they foster more efficient transportation service than Government regulation can. As formulated in the Staggers Act, the national rail transportation policy also reflects that principle, emphasizing relying on competition in the marketplace to the maximum extent possible and minimizing Federal regulatory control of railroads. The resulting improvements in flexibility and competitiveness of the railroads offer benefits to shippers and consumers. With increased opportunities to adjust rates and service to meet their costs and market demands, the railroads will also be better able to earn adequate revenues.

In recent years as regulations were eased and railroad earnings improved from less than 2 percent return on investment in 1975-78 to close to 4 percent in 1980 and 1981, railroads have nearly doubled their annual capital expenditures for track, and have continued to spend approximately the same high proportion of rail revenues on maintenance of track and right-of-way. Nearly all the deferred maintenance reported in the 1970's has now been eliminated and the national rail system is now in much-improved condition. We expect that if the flexibility and incentives afforded the railroads by the Staggers Act are preserved, the railroads will continue to maintain their facilities, and the cycle of disinvestment and deferred maintenance of earlier decades will not be repeated.

Senator Andrews:

INTERMODAL

How many railroads have applied for motor carrier authority? What will the effects on their rail operations be if they get involved in trucking? What are the likely effects on shippers of railroads getting into the trucking business?

Response: Since the Motor Carrier Act of 1980 was enacted, motor carriers affiliated with nine Class I railroads have requested and received expanded motor carrier authority. Four of these now have 48-State authority, and another request for 48-State authority is pending at the ICC.

The ICC's March 1981 exemption of piggyback traffic also exempts the rail-provided motor carrier portion of a continuous intermodal movement. Six railroads, including two of the nine mentioned above, have taken advantage of this significant change by making arrangements with owner-operators to complement their piggyback service. At least one other railroad (also among the nine) is expecting to initiate this type of operation in the near future.