Whiteside & Associates – Billings, Montana

Transportation Perspectives – Surface Transportation Board Whiteside & Associates – Billings, Montana

About The Current STB Chairman Dan Elliott comes from Philadelphia where he served as counsel to the UTU. His stated public purpose is trying to bring more harmony to the relationship between shippers and railroads by breathing new life into the STB’s dormant arbitration system and bolstering the Board’s informal dispute resolution process. Vice Chair Ann Begemenfrom a farm in South Dakota was the Staff Director for the Senate Committee on Commerce, Science, and Transportation. She has also served as Acting Chief of Staff and Legislative Director for Senator John McCain and as a Legislative Assistant to South Dakota Senator Larry Pressler Board Member Frank Mulveyis an PhD economist served as head of the Rail Subcomittee of the House T&I Committee under Rep. Oberstar. His PhD in economics is from Washington State University. His term expired December, 2012 but intends to stay on until a new member is nominated and confirmed

The STB Has Been Under Fire From Shippers for Years • They have carved out a history of being pro-railroad • A history of former chairman moving to railroad employment after their terms expire has not helped create an image of impartiality • They have been under fire by Chairman Rockefeller – head of the Senate Commerce Committee for the last 10 years • Under the current Chairman Dan Elliott – the STB is trying to become more pro-active • STB has opened a whole series of proceedings (at the urging of the Senate Commerce Committee) during the last 24 months – designed to examine STB procedure – but they have a long way to go – let’s examine some of those proceeding

STB’s Own Studies Show the Problem • A study commissioned by the STB provides solid evidence of the abuse of monopoly power by the freight rail industry resulting in higher prices for American consumers, the agricultural sector and rural America • “A Study of Competition in the U.S. Freight Railroad Industry and Analysis of Proposals that Might Enhance Competition” 2008

Criticism of the Agency Has Been Widespread • “In ruling after ruling, the STB has denied captive rail shippers their due process for reasonable rates and fair treatment by the railroads, even though that was the charge given the Board when Congress created it in 1995”

BUT THE BOARD IS UNDERGOING CHANGE • Shipper concerns are becoming more focused at the Board • Shippers have been actively educating the Board members • Organizations such as Alliance for Rail Competition which NDGDA is a member, have taken active roles in proceedings affecting captive and agricultural shippers

A Few of the More Important Proceedings to Agriculture in the last 7 years • EX PARTE NO. 558 (SUB-NO. 13), RAILROAD COST OF CAPITAL 2007 • Ex Parte 677 - RR Common Carrier Obligations –– 2008 • Ex Parte No. 646 (Sub-No. 3) THREE-BENCHMARK RAIL RATE PROCEEDINGS 2006 and 2007 • Ex Parte No. 677 (Sub-No.1): Common Carrier Obligation of Railroads—Transportation of Hazardous Materials 2006 • Ex Parte No. 646: Simplified Standards for Rail Rate Cases 2006 • Ex Parte No. 658: The 25th Anniversary of the Staggers Rail Act of 1980: A Review and Look Ahead 2005 • Ex Parte No. 661: Rail Fuel Surcharges 2006 • Ex Parte No. 665: Rail Transportation of Grain 2006 • Ex Parte No. 699 Assessment of Mediation and Arbitration Procedures 2010 • EX PARTE NO. 712 IMPROVING REGULATION AND REGULATORY REVIEW 2009 • Ex Parte No. 705, Competition in the Railroad Industry 2011

STB Competition Hearings - Ex Parte 711 and Ex Parte 715 • Re: railroads and shippers over pricing and service levels – Chairman Elliott “STB will open a proceeding ‘soon’ to explore ideas” • Dan Elliott, chairman of the Surface Transportation Board, said in an interview following a speech in NY (May 25, 2012) that the most likely course is for the agency to issue "ideas" to help resolve the conflicts and then solicit input. But "it will be something of substance," Elliott said. • Ex Parte 715 RATE REGULATION REFORMS • Ex Parte 711 PETITION FOR RULEMAKING TO ADOPT REVISED COMPETITIVE SWITCHING RULES which is an outgrowth of Ex Parte 705 on the state of rail competition • NITL the original petitioner is budgeting $750,000+ for evidentiary development in this proceeding.

STB on Mediation and Arbitration – XP 699 • STB is proposing streamlined Mediation and Arbitration rules – to ‘save time and money’ on routine disputes • Problem: requires shippers and railroads to agree to mediation or arbitration – rr’s usually like to utilize a time tested procedure of ‘spend out a shipper’ in a dispute

STB Premiums Case Is Important • This is a hurry up case – reason – STB needs to release 2010 numbers – and needs to include some valuations that would come out of these proceedings in their calculations • Different than virtually all other purchases • The bottom line is that if the $8 Billion Premium is included – it will raise BNSF URCS cost levels – upwards of 10+% points – raising the threshold on all BNSF and many competitive railroads (i.e. they will be able to increase all rates – captive shippers will bear the brunt of the increases)

The Two Biggest Issue In BH/BNSF For Captive Shippers Is the “Premiums” Issue and Revenue Adequacy • When BH bought BNSF it paid an estimated $38 Billion in excess over and above the stock value of the BNSF for the railroad • AND because there was no STB review – the Premiums issue could not be brought up by shippers or critically reviewed by DOJ, FRA, DOT or USDA • Then BNSF then last spring applied to the STB to allow it to add $8 Billion of the paid premium to its rate base – which would push up the base and allow them to increase rail rates – on captive shippers and lowers its revenue adequacy • Now what? Should prove to be interesting

BNSF In Their Opening Statement Relies on GAAP Accounting To Justify Inclusion Of Premium • GAAP is known as General Accepted Accounting Principles • Even Warren Buffett has cautioned investors about utilizing GAAP to justify investment value • This purchase by Berkshire Hathaway of a major railroad is unique – never happened before – therefore STB is considering its merger/accounting rules • Very IMPORTANT case for Shippers to put in their input

Mr. Buffett himself warned that investors should be cautious of GAAP accounting yet BNSF is utilizing it to justify inclusion of the Premiums: “There are managers who actively use GAAP to deceive and defraud. They know that many investors and creditors accept GAAP results as gospel. So these charlatans interpret the rules "imaginatively" and record business transactions in ways that technically comply with GAAP but actually display an economic illusion to the world. As long as investors - including supposedly sophisticated institutions - place fancy valuations on reported "earnings" that march steadily upward, you can be sure that some managers and promoters will exploit GAAP to produce such numbers, no matter what the truth may be. Over the years, Charlie Munger and I have observed many accounting-based frauds of staggering size. Few of the perpetrators have been punished; many have not even been censured. It has been far safer to steal large sums with a pen than small sums with a gun”. (emphasis added) http://www.investorwords.com/tips/219/be-cautious-of-gaapbased-accounting.html

OPPS: Berkshire Hathaway ‘Forgot’ It Owned Some Common Carrier Railroads When It Purchased the BNSF • Apparent slipup – BNSF reported to STB that contrary to earlier statements – BH was an owner of several “small” carriers at the time it purchased BNSF • Puzzling? • BNSF and its EVP Law – Roger Nober (former head of STB) knew the law - if you own another railroad requires a full review • BNSF has an army of Commerce attorney’s who knew the law • AND BNSF interchanges regularly with the CBEC (one of the ‘forgotten’ railroads) which moves coal to power plants in IA from UP and BNSF

Chairman Rockefeller Has Called Upon STB To Respond To A Directed Letter RE: BNSF/Berkshire Hathaway • Given that no application was filed with the STB and the fact that the STB did not conduct its statutorily-required review, was the approvalof Berkshire's acquisition of BNSF lawful? • If, as should have occurred, the STB had reviewed the acquisition, specifically how would the STB's review have differed from the review conducted by the DO] and FTC given the differing missions and review requirements among these agencies? • In light of last week's discoveries, will the STB now conduct its own review of the merger? • What specific steps does the STB intend to takein order to provide a full, thorough review of and remedy to this situation? What is the STB's timeline for making these determinations? • Given the unique circumstances of this matter, it is prudent that the Board allow for public comment so that stakeholders can provide input and thoughtsconcerning the acquisition of BNSF by Berkshire Hathaway. Doing so would provide a sense of transparency into the Board's process for dealing with this issue. Does the STB intend to open a docket for public comment? • In an acquisition, the acquiring entity is charged with determining whether it is a carrier or non-carrier. As an institutional practice, does the STB conduct its own independent review to confirm whether an entity is a carrier or not? If the acquiring entity determines it is not a carrier, does the STS require any certification to this fact? • What, if any, effect will this development have on the pending case at that STB concerning the $8 billion acquisition premium paid by Berkshire Hathaway in its acquisition of BNSF and whether or not that premium should be applied to BNSF's asset base? • What effect, if any, will the revenues from the newly identified railroads that are owned by Berkshire Hathaway have in determining whether BNSF is revenue adequate?

SUMMARY – STAYING ENGAGED WITH STB AND ITS PROCEEDINGS IS IMPORTANT FOR GRAIN DEALERS • Education of the Board Members is very important • Board is addressing Shipper Issues more vigorously • Education by participation in proceeding and personally with the individual Board members is important • RR’s will continue to have influence on the Board and Agriculture must continue to express its voice • The Alliance for Rail Competition will continue to work closely with NGFDA, USDA, NAWG, Commodity organizations and Wheat and Barley Committees

Whiteside & Associates – Billings, Montana