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MANAGING DIRECTOR

SENATOR ANDREWS: What does this office do? Please provide a workload description for this office. Why are 97 staff-years needed?

ANSWER: As outlined in the Commission's budget submission, the Office of the Managing Director provides for the day-to-day administration of the Commission. It is responsible for the coordination of the Bureaus' and Offices' programs and activities; it provides all necessary administrative support for both headquarters and field staff.

The Managing Director's immediate office oversees the administrative activities of the agency and coordinates plans and operations to ensure that agency programs are run effectively, Bureau and Office responsibilities do not overlap or fall between Jurisdictional lines, and resources are properly matched with workload. The office also handles Privacy Act and Freedom of Information Act requests and represents the Agency in hearings before the Merit Systems Protection Board.

The Personnel Office plans, develops, and implements the personnel management program. This includes recruitment, position management, classification, employee and labor/management relations, official personnel records maintenance, employee training, and administration of the employee benefits program. The Budget and Fiscal Office develops and executes the Commission's budget, assesses resource use and needs, analyzes workload, reviews program accomplishments and expenditures, and provides accounting, auditing, payroll, leave administration, payment, and other fiscal services.

The Section of Administrative Services provides the following support services to the entire Commission: paperwork management, forms control, equipment evaluation and maintenance, purchasing, contracting, supply, property management, building maintenance, safety and security, space and facilities planning and management, telecommunications, motor vehicle administration, and parking.

The Section of Systems Development provides both computer and word processing support to the Commission through the design, development and operation of the Commission's transportation and management information systems. This includes the operation and maintenance of ADP and word processing equipment and facilities, as well as the establishment and maintenance of computer-related service contracts.

During development of the budget, this Office analyzed trends and projected FY 1985 and FY 1986 workload for each sections' major activities. Based on the projected volume, the staff-years necessary to accomplish workload projected for each activity was determined. The total requirement of 97 staff-years was developed through this process.

A workload description for this Office for fiscal years 1984-86 is included on pages 65-68 of the fiscal year 1986 budget justification document.

SENATOR ANDREWS: What success has the Commission (as a whole) had in reducing its space requirements? Please list by office square footage (reflected by SLUC charges) requirements for 1980 through 1984, estimated for 1985 and projected for 1986.

ANSWER: The breakdown of office space by bureau and office is not available for the years 1980, 1981, 1982 and 1983; however, we can present the aggregate square footage for the Commission by headquarters and field for those years.

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* Reflects space for housing National Association of Regulatory Utility Commissions in fiscal years 1984-1986.

DIRECTED RAIL SERVICE

SENATOR ANDREWS: What is the unobligated balance in this account? Can it be used for other purposes? Do you propose keeping the uncbligated balance in this account? Why?

ANSWER: As of March 31, 1985, the unobligated balance in the directed rail service account was $2,353,000. This account is a separate appropriation from which transfer cannot be made without statutory authority.

On March 27, 1985, the Commission voted to deny a request for additional compensation from the Kansas City Terminal Railway Co. (KCT). However, since the KCT has the opportunity to appeal this decision, we cannot say that the funds remaining will not be needed. Therefore, the balance should remain in this account until the KCT's appeal is decided.

SENATOR ANDREWS:

POLICY QUESTIONS

Do you agree with Secretary Dole that there is no need to reopen the Staggers Act at this time? On what do you base this response?

ANSWER: We do not believe that there is a need to reopen the Staggers Act. The Staggers Act is a good piece of legislation that balances the needs of the shipping public with those of the rail industry and does not require change.

There are a number of people who are largely, if not exclusively, dependent upon rail service for shipment of certain types of commodities and for shipments in certain areas. There are potential problems for shippers in those instances where no effective competition exists, and the Commission has the responsibility of protecting those shippers against unreasonable rates.

To assist the Commission in evaluating our efforts in this area, we instituted a proceeding, Ex Parte 456, The Staggers Rail Act of 1980-Conference of Interested Parties. The objective of the proceeding is to develop a factual representation of the nature of shippers' and carriers' actual experience with postStaggers Act rail pricing. In late February, the Chief Administrative Law Judge certified the record in this proceeding to the Commission for review. A number of rulemaking proposals were developed as a result of the Ex Parte 456 process which are now pending before the Commission.

SEPARATE EXPRESSION OF COMMISSIONER SIMMONS

I agree with my colleagues that the Staggers Act representз a balance between the needs of the shipping public and those of the rail industry. I have attempted to implement this balance during my two terms at the ICC. However, I would not presume that it is my prerogative to tell Congress whether or not additional legislation is needed. Only Congress can determine whether the Commission's implementation of the Staggers Act has made new legislation necessary.

REVENUE ADEQUACY

SENATOR ANDREWS: Who is right regarding Norfolk Southern's financial health, the Commission or the Secretary of Transportation? Please elaborate.

ANSWER: The financial condition of the Norfolk Southern is examined for different purposes by the Commission and by the Secretary of Transportation, so their findings may be different without being in conflict. The Commission's revenue adequacy determinations relate a railroad's current return from provision of rail services to its investment in those services to determine whether the return is adequate to attract reinvestment in the long-term. The Secretary of Transportation focuses on the current financial resources available to the railroad necessary to consummate a particular transaction, as well as the probable impact of that transaction on the railroad's future financial condition.

A determination that the Norfolk Southern can assemble the liquid resources required to purchase Conrail and that the result would be financially beneficial to the combined railroads in the future does not conflict with the Commission's findings that Norfolk Southern's rail operations have not generated a competitive return on their investment in railroad property and equipment. Liquidity, per se, is not a sound measure of revenue adequacy since the liquidity results in part from funds produced by the depreciation of plant and equipment as well as from the profits earned on those assets. Unless the rate of return produced by rail assets meets competitive standards, prudent business managers and investors will direct their liquid resources to alternative investments. Thus, since the Commission and the Secretary of Transportation are examining the financial condition of Norfolk Southern from different perspectives for different purposes, their answers may vary without contradicting each other.

SENATOR ANDREWS: Does the cost of capital measure understate a railroad's financial health?

ANSWER: The cost of capital is the valid measure of a railroad's long-term financial health, and rests on the economic principle that an investment must yield competitive returns in order to attract and retain reinvestment. The regulatory responsibility of the Commission requires it to consider the long-term revenue adequacy of a railroad, in conformity to the national transportation policy of maintaining a sound national transportation system. Other measurements of profitability and liquidity may be used to evaluate railroad securities for prospects of short-term profits or repayment of debt, but are unsuitable in determining the revenue levels needed to meet the long-term capital requirements of the railroads. Cost of capital is a measure of long-term financial health, and failure to meet this standard does not mean that it understates the health of the railroads in the short run.

SENATOR ANDREWS: Is the return on investment calculation applied to railroads consistent with the calculation done on other industries by other rating services?

ANSWER: Financial services which evaluate debt and equity securities use a variety of measures, including return on

investment, to assess the securities of other industries. The return on investment criterion is almost universally employed in evaluating public utilities, which like the railroads, have large investments in durable assets. Public utility commissions rely on return on investment as the primary yardstick of adequate returns in their ratesetting process. Bond rating services emphasize adequacy of cash flows to service outstanding debt, while stock price analysts focus on opportunities for near-term profitability and prospective growth in assessing equity securities of railroad holding companies, as well as for other industries. Neither of these approaches, because of their focus on the short term, adequately serves the Commission's requirement to determine the revenue levels needed by the railroads to provide for their long-term capital requirements so that they may continue to provide adequate rail transportation services.

SENATOR ANDREWS: Some shippers urge dropping the cost of capital standard altogether in favor of other financial tests such as return on stockholders' equity. Do these proposals have merit? If not, why not?

ANSWER: A rate of return on investment equal to the current cost of capital now used by the Commission to determine revenue adequacy is intended to determine whether rail transportation service produces a sufficient return from investment in rail assets to attract and retain future investment in those assets. As a gauge of long-term revenue adequacy, it is superior to return on equity in several respects. It focuses on the profitability of railroading by excluding elements of income and expense which are extraneous to rail operations. In 1983, for example, income from sources other than railroad operations accounted for one-third of the total income of all Class I railroads. (These results do not include income of parent holding companies derived from non-railroad subsidiaries). Return on equity is also affected by railroad dividend policies which influence the amount of earnings retained. Over one-half of total stockholders' equity in the railroads in 1983 represented accrued earnings from prior years. These factors diminish the validity of return on equity as a measure of adequate current earnings.

The use of multiple financial ratios to determine revenue adequacy, such as those employed by the Commission prior to the Staggers Act, leads to subjective judgements in cases where the application of a number of different ratios yield ambiguous or conflicting results. Some arbitrary scheme of weighting for each ratio must then be devised to determine whether a railroad has crossed the threshold of revenue adequacy.

A single standard for revenue adequacy that measures whether the rate of return on investment equals the current cost of capital is a rigorous and fundamental test. Other ratios which measure financial and business risk by examining cash flows or estimating potential earnings growth are supplementary inputs to the process of determining the cost of capital. Once the cost of capital has been determined, these other indicators of financial health become redundant.

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