National Coal Transportation Association Annual Meeting and Conference Denver, Colorado

1. National Coal Transportation Association Annual Meeting and Conference Denver, Colorado September 13, 2005 Surface Transportation Board Roger Nober, Chairman

2. Coal Transportation Issues • Powder River Basin Maintenance • Rates and Rate Cases • Fall Peak 2005 Service • General Freight Capacity • Future for Coal demand

3. 2005 PRB Maintenance Issues

4. Background • Highest density rail lines in world • Unique “joint” line • Focus of great deal of Board attention due to key role PRB coal plays in economy and regulatory scheme • Made first-ever agency site visit to PRB last year

5. PRB – STB Action Items • BNSF and UP addressed Board members on PRB situation in July 2005 • Hosted joint conference call with BNSF and UP to address on-going issues in the PRB • Numerous meetings with utilities and other coal shippers to hear concerns about PRB service • STB’s Office of Compliance and Enforcement hosts weekly conference calls with BNSF and UP to address PRB and Joint Line issues • Constant contact with coal shippers and utilities to gauge industry views and concerns

6. Joint Line/PRB Status • Total joint line handled an average of 59.5 trains per day in August 2005 • Loading levels improving – total trains per day continually increasing, although not in a straight line • Joint Line maintenance is on schedule – BNSF completed the 2nd phase of 3 phase maintenance plan in August • Not all transportation issues railroad’s fault – issues lay with mines also

7. Next Steps -- PRB • Carriers must cooperate in completing maintenance • Railroads must determine causes of dust • Railroads, mines and utilities must all be part of solution to prevent future coal-dust related line failures • Looking at entire coal supply chain to ensure we are optimizing available capacity • STB will continue to focus on PRB as a core agency responsibility

8. Coal Rate Cases

9. Summary • Board currently has 5 pending SAC Cases. • Fewer than past years despite utility unhappiness with rates. • Regulatory responsibility to adjudicate cases on record before agency. • Shippers often want redress for large increases • Railroads feel commercially reasonable rates should govern unless they are revenue adequate

10. Summary of Recent SAC Cases

11. Pending SAC Cases

12. Current SAC Issues • Held Spring 2005 hearing on SAC issues. Major substantive issues discussed included: • The appropriate use of “cross-over” traffic; • How the agency should project operating expenses; and • Possible changes to the rate prescription methodology. • No party offered a detailed proposal on how to revise the SAC test. • Rulemaking v. Adjudication: Shipper groups favored resolution of SAC issues via adjudication, Railroads favored rulemaking.

13. Future • Coal Rate Guidelines offer several alternatives for challenging rates, including SAC and the Revenue Adequacy constraints • Several Class I carriers approaching earning their cost of capital • Unanswered question: when does earning cost of capital means railroad is revenue adequate • Board, stakeholders must explore revenue adequacy, what it means for traditional doctrines under the Interstate Commerce Act

14. Fall Peak Service Issues

15. 2005 Service Actions • 2005 Letter to railroads asking them to submit Fall Peak plans, capacity bottlenecks and plans to alleviate those identified issues • Impact of Hurricane Katrina still being evaluated • Industry-wide customer forum next week • Individual carrier meetings where appropriate

20. 2005 Service Complaints to the STB • 90 customer complaints in 2005, YTD • 12.5 percent y/y increase from 2004 • 123 total complaints in 2004, 19 percent increase over 2003 • 2005 Complaints Filed: UP 19 CN 4CSXT 15 KCS 1 BNSF 9 CP 0 NS 7

21. Capacity

22. Insufficient Capacity – A New Kind of Regulatory Problem • Current and future service issues largely demand and capacity driven • Most commodities are deregulated by virtue of being modally-competitive or shipped by contract • Regulatory powers intended for different type situation • Interstate Commerce Act laws and doctrines look at reasonableness of regulated traffic • Customers want fairness for all movements

23. Capacity Constraints – Causes of Increased Demand • Expanding economy • Large grain harvests in recent years • Soaring demand for coal • Double-digit increases in intermodal growth • Shortness of crew and equipment • Insufficient capital expenditures

24. Capacity Constraints – Long-term Causes • Constraints on capital investment for private companies • Railroads inability to achieve revenue adequacy • Need to cut expenses to maximum extent • Demands of investors • Under capacity and over capacity at the same time • Demands of changing freight flows • Long-term nature of rail investment versus business-cycle fluctuations in demand • Returns will have to justify further investment

25. Future of Coal Transportation

26. Questions for the Future • Can mines, railroads and utilities keep up with ever-increasing demand for coal? • What role should regulators play in the relationship between mines, utilities and railroads? • Will a third line into the PRB ever be built? • What will the long-term effects be of coal traffic on rail networks? • What are the policy implications of tight coal supply?