FREQUENTLY ASKED QUESTIONS ON PROPOSED NS SETTLEMENT AGREEMENT– February 2005 About the SEDA-COG Joint Rail Authority The JRA is an eight-county joint municipal authority formed in 1983 with its primary mission to preserve essential rail service and to further economic development in the region through improvement and expansion of rail infrastructure. Freight operations are provided under contract by a private short line operator comprising 185 miles. The lines are: Juniata Valley R. R., Lycoming Valley R. R., Nittany & Bald Eagle R. R., North Shore R. R. and Shamokin Valley R. R. Together the lines provide rail service to 70 companies employing 7,000 persons. Below is a table of the Authority’s railroad ownership in central Pennsylvania: Railroad Counties Miles of Rail Line Ownership per County Juniata Valley Mifflin 11 Lycoming Valley Lycoming 37 Clinton 1 North Shore Northumberland 10 Montour 12 Columbia 15 Nittany & Bald Eagle Clinton 5 Centre 60 Blair 5 Shamokin Valley Northumberland 27 White Deer & Reading Union 2.5* *non-operating In 2004 over 35,000 rail carloads were handled. Of the interchanged traffic with the two Class I railroads, 93% was with Norfolk Southern. The remaining 7% was with Canadian Pacific Railway. The SEDA-COG Joint Rail Authority is founded on the principle that the rail service is required infrastructure for economic development. Accordingly, the Rail Authority was organized to hold the ownership in the public domain to ensure its existence in perpetuity. The lines are operated, under contract, by a private company (“Robey Railroads”). What is the Issue? Freight to and from the short line railroads in central Pennsylvania generally must be interchanged with the larger railroads (known as Class I carriers) for transportation outside of our area. Before 1999, industries in our region had direct, commercial access to only one Class I carrier, which was Conrail. The long-haul major railroads enjoy something of a monopoly on lines they own, subject solely to oversight by the federal Surface Transportation Board. In the late 1990’s another large railroad, CSX, tried to buy Conrail. Their major competitor, Norfolk Southern (NS), objected and sought to purchase portions of the Conrail system. During that process, NS contacted short line railroads and other groups to support their effort to acquire portions of Conrail. Several railroads and shippers did offer support to the NS effort. In 1997, NS offered, through a letter to Richard Robey (operator of many of the short lines in the area), the opportunity to exchange rail cars at Sunbury with the Canadian Pacific Railway (CP), another Class I carrier. This was not permitted previously by Conrail. NS’s offer was conditioned upon traffic to and from CP local stations or to their short lines that connect solely with them. NS 1 added a caveat in their offer to move forward with “access to CP that does not harm Norfolk Southern ” (emphasis added). NS and CSX split Conrail in mid-1999 and merged portions of Conrail into their own systems. Both carriers found this task daunting and for at least a year there were severe operating problems. At that time, the Sunbury gateway was opened and operated in a laissez-faire environment; that is, without an agreement governing its use. Such a railroad agreement is required to move rail cars on the NS Buffalo line between Sunbury and other short lines. In 2001, the short line operator (Robey) signed a trackage rights agreement with NS that defined the short lines’ use of the Buffalo line and clarified which segments of the CP system that could be accessed. Traffic that moved during the 2000-2001 timeframe was “grandfathered”, but there was some justifiable concern that the “grandfathered” traffic could be eliminated by NS in the future. Some shippers served by the Robey operations, either on Rail Authority-owned lines or others located on privately owned lines in Union County, developed business based on railroad traffic to and from the CP and other lines that connect with CP. Some of that traffic developed during the laissez-faire period could not be expected to continue even under a liberal interpretation of the earlier NS promise. Some of these shippers are concerned that a full implementation of the agreement signed in 2001 would adversely affect their business and negatively impact economic development in the region. To that end, the SEDA-COG Joint Rail Authority, in cooperation with some of the shippers, formed a Mediation Team to work out issues with our shippers and to negotiate with NS and Robey to achieve secure competitive access. The Authority has, through difficult negotiations with NS, been able to achieve significant, and lasting, access. What was the “NS Promise”? That direct interchange at Sunbury is allowed for railroad traffic to and from CP local stations and CP short lines that connect with it only and not another railroad, unless otherwise identified (for example IMRL, see below). Open access to other railroads that CP may connect with outside of that definition was not promised. Why is competitive access important? In any marketplace competition is a good thing; railroads are no exception. The ability to connect to more than one Class I railroad is an advantage for railroad customers. Typically it brings lower transportation costs and a wider variety of potential railroad routings. It helps economic development because industrial prospects that require rail service are aware of the advantages competitive access brings. An individual company, however, has to examine its source of raw material or finished goods market location to see whether they can take advantage of competitive access. May CP interchange any traffic at Sunbury? No, only traffic to or from CP local stations, or traffic from other railroads that connect solely with CP. Traffic from CP connections that also interchange with other railroads (for example, Canadian National) cannot be brought directly to Sunbury. Some of this traffic can be brought into the region at Harrisburg subject to another agreement between NS and CP. This traffic is then hauled from Harrisburg to the central PA short lines by NS. 2 What CP traffic is allowed under the proposed settlement? Draw a north-south line at Sault Ste. Marie, ON. Local stations on CP (and captive CP short lines) east of that line are permitted to flow via CP to the Sunbury interchange. This traffic need not be “grandfathered” because the routing is open and available right now to our region’s shippers. What about west of that line? It is a more complicated picture. Unrestricted traffic is permitted over the Sunbury interchange to and from stations on the former IMRL (a 1,100 mile regional railroad in Iowa and surrounding states). Those origins are an important source of grain to the agricultural customers in our region. In recognition of the business that was developed in the 2000-2001 time period, there is a “grandfathering” of the pairs of origins and destinations of traffic to the CP stations west of that line. What is meant by “grandfathered” or “historical” traffic? Except for the IMRL traffic mentioned above, it would be the railroad routings that were established between September 1, 2000 and August 31, 2001. That is determined simply by looking at what is called an origin/destination (O/D) pair. For example, a rail car moved from Chicago on the CP to Sunbury is considered as one O/D pair and results in an established traffic lane. Can NS take away that “grandfathered” or “historical” traffic? No. The proposal under consideration has a provision whereby NS is required to leave the “grandfathered” traffic alone. That previously was not the case. This settlement is a significant improvement over the standing 2001 agreement. Will we lose CP Access? No, the terms of the proposed settlement ensure CP access going forward. The railroad operator is exercising due diligence to accept only rail cars at Sunbury that are allowed at that interchange. Cars that should be taken by CP to Harrisburg will be identified and directed there. The settlement does provide for an increase in the number of rail cars accepted at Sunbury in violation of the agreement. If that threshold is exceeded NS could conceivably cancel the access. That possibility will be avoided through the adoption of a “Routing Guide” to be used within the railroad community so that cars will not be misrouted, in error, through the Sunbury gateway. Will it be devastating to existing businesses? No, the terms of the proposed settlement ensure CP access going forward. A few shippers have traffic that is not covered by the “NS promise”, but the data shows that nearly 80% of 2004 traffic interchanged with CP can continue to be received at Sunbury. Last year 23 shippers used CP access. For ALL of those shippers only 84 rail cars could not have been brought in via CP routings. Each shipper with those concerns needs to meet with the railroad operator, NS and/or CP to work out any traffic lanes that may be adversely affected. Almost every existing shipper using the Sunbury gateway will not see any change in their traffic flows. 3 What happens if the Rail Authority changes operators? The current agreement with the railroad operator expires in July of 2007. The proposal recognizes the Rail Authority as a “third party beneficiary”, which means any trackage rights agreement(s) entered into with NS would apply to successor railroad operators. This secures competitive access in the future regardless of who the operator might be; this previously was not the case. Is it proper for a public authority to forego legitimate revenue in exchange for waivers of $835,000 in penalties assessed by NS against the JRA’s operator? The Authority will not see any reduction in revenue as a result of this settlement.