Taxpayers will end up footing the DM&E bill

Regardless of how the Federal Railroad Administration (FRA) rules, the evidence has now become overwhelming that the DM&E Railroad will never be in a position to pay back the proposed $2.3 billion loan it is requesting from the federal government. This was pointed out in a Bearing Point study of the railroad's finances earlier in 2006. Granted, the study was funded by the Mayo Clinic, a loan opponent, but Bearing Point's arguments are compelling. Meanwhile, the DM&E has done little, if anything, to counter the study's conclusions. Instead, it has continually asked states, cities and communities that would be affected by the railroad's plan to "trust us."

Marshall Damgaard is a prime researcher on the DM&E expansion project, and his work, while not widely disseminated, bolsters the Bearing Point conclusions, especially in light of developments that have occurred since the Bearing Point report was released. Below, reprinted by permission, is the text of a letter that he recently sent to ranchers affected by the proposed expansion. It is worthwhile for everyone who has an interest in this issue to read it. (NOTE: For those unfamiliar with the acronyms, a listing follows the article.)

Will the DM&E be able to repay the loan?

by Marshall Damgaard

On December 11, 2006, USDOT and BNSF filed comments in STB’s IMRL docket (F.D. No. 34177). What does that alphabet soup mean, and why is this development a problem for DM&E?

DM&E filed its PRB expansion project with STB on February 20, 1998. STB granted final approval to the project on January 30, 2002. A few weeks later, DM&E announced that it had purchased I&M Rail Link (IMRL, today known as IC&E) in a reported $150 million deal. The timing was not coincidental. In an August 19, 2002, news release, the financial advisor for the transaction called it “a difficult and complicated two-year process to negotiate the deal, finance the acquisition, and obtain regulatory approval….” Thus, while STB was busy examining the environmental consequences of the PRB scheme upon DM&E’s existing empire, DM&E was busy expanding that empire.

In the PRB docket, STB declined to cover “down-line” impacts of the project, meaning that its environmental scrutiny would not extend to either Winona, MN (which would receive the “benefit” of coal trains that DM&E would hand off to the Canadian Pacific at Minnesota City), or the IMRL line, which traversed about 1,700 route miles in Minnesota, Iowa, Wisconsin, Illinois, and Missouri. (IMRL’s/IC&E’s main line network links Chicago, Kansas City, and Minneapolis/St. Paul.)

In a pair of dockets approving DM&E’s acquisition and control of IMRL, STB had an opportunity to extend environmental protections to communities along that line. Yet, the Board did not, in part because it did not have definitive information about “what portion of the [PRB] traffic from the new line would move over which IMRL lines….” The Board did, however, prohibit any PRB coal traffic over IMRL lines until it had conducted the apropos environmental review (July 22, 2002). It also required notice of the start of construction for the PRB project and the submission of traffic and environmental information so the impacts could be properly assessed (February 3, 2003).

On May 12, 2006, 18 days after saying that routing PRB coal trains south through Iowa was a “screwball idea,” DM&E CEO Kevin Schieffer petitioned STB to lift its prohibition against moving PRB coal over the former IMRL lines. DM&E stated that the ban on moving PRB coal over the former IMRL lines was hindering its [fruitless, nine-year] efforts to obtain financing for the PRB expansion project. It also argued that it is unnecessary to wait until construction actually begins before the appropriate information is available. It submitted its version of the information necessary to conduct an appropriate environmental review, and, based upon that flimsy information, contended that there was no need to conduct any additional study of the impact of the PRB traffic or consider any mitigation conditions because there would be no potentially significant cumulative impacts.

On July 14, 2006, USDOT objected to that position, writing: “The STB deferred ‘a new environmental inquiry’ in light of uncertainty over both the construction of the PRB line and ‘what portion of the traffic from/to that new line would move over the [IMRL] (now IC&E) lines.” Thus, the Board’s clear intent was to treat the IC&E and IMRL communities now within the greater DM&E’s system in the same way it did those communities located on the original DM&E system, since the primary reason for not doing so in the PRB Construction proceeding had been removed. By leaving the communities in the same position they were in when DM&E ‘did not own’ the IC&E and IMRL lines, the petitioners would not defer the inquiry, they would avoid it entirely. Now that it does own those lines, however, DM&E must also take ownership of the consequences of its planned new operations on all of the communities within its larger system, just as any other merging carriers must.

STB responded to DM&E’s petition by asking DM&E to submit an Environmental Appendix “containing sufficient detail to assist [STB] in determining whether preparation of an EA or EIS is necessary.” Specifically, STB asked DM&E to develop “sufficiently detailed information about projected routing and levels of coal train traffic per day likely to operate over the IMRL rail lines.” (Victoria Rutson memo; July 26, 2006)

DM&E filed the Environmental Appendix on November 8, 2006, stating that its acquisition of the IMRL will have “insignificant environmental impacts and therefore no further formal environmental review is necessary.” (EA at 10 and 13) STB then solicited public comments on the Environmental Appendix.

On December 11, 2006, USDOT filed comments. It wrote: “The Board has repeatedly expressed uncertainty about the validity of an environmental review of the impacts of PRB coal traffic in the absence of specific contracts between DM&E and shippers. The record is still bereft of evidence of such contracts, and thus we remain uncertain about the ultimate truth of the Petitioners’ factual assertions that the eventual routings of PRB coal will mirror those projected in the PRB Construction case. Far more important, of course, is that fact that the impacts of those routings along the former IMRL lines have never been assessed in any proceeding.” (USDOT Comments at 6, footnote)

Also on December 11, 2006, BNSF filed comments. It wrote: “But even if the Board is inclined to conduct a new traffic study in connection with the present proposed action, as DM&E’s Environmental Appendix suggests, the data provided by DM&E is patently insufficient for involved parties to draw meaningful conclusions about impacts that would result from routing PRB coal traffic via the former IMRL routes. DM&E’s Environmental Appendix includes just three years of data for PRB coal shipments, and little if any indication of how it arrived at that data. Furthermore, since DM&E has provided no detailed operating plan, the public is left to speculate as to how this sparse data relates to any such plans . . . DM&E’s reasons for limiting the amount of PRB coal data in the Environmental Appendix are apparent. Adding two additional years of increasing foreseeable traffic would almost certainly mean exceeding the Board’s thresholds for environmental review on every segment of the former IMRL lines, nearly all of which carried, and continue to carry, light densities of traffic. Even the limited amount of data DM&E chose to provide shows that the thresholds would be exceeded on at least two segments, which under the Board’s regulations necessitates a detailed review of the entire proposed action.” (BNSF Comments at 4-5)

BNSF, of course, realizes the divide and conquer game that DM&E loves to play. In this case, DM&E is telling the financially-concerned FRA that it will send so many coal trains down its tracks that it can easily repay a $2.3 billion loan, and it is simultaneously telling the environmentally-concerned STB that it will send so few coal trains down its tracks that the environment is not even impacted.

BNSF writes: “An alternative way for SEA [STB’s Section for Environmental Analysis] to independently verify the limited PRB traffic projections contained in DM&E’s Environmental Appendix would be for SEA to compare such projections to what DM&E presumably has submitted to the FRA in support of its business case that it has the ability to repay a $2.3 billion federal loan (for a project expected to cost approximately $6 billion). It would be surprising to BNSF if DM&E’s traffic projections submitted to FRA in support of DM&E’s application for a loan with a maximum term of 25 years were limited to a three year window shown in its Environmental Appendix. It would therefore be appropriate for the STB to review the business case at its sister agency and compare the traffic projection and routing information provided to FRA to what DM&E has selectively disclosed to SEA and the public in the Environmental Appendix.” (BNSF Comments at 16-17, footnote)

BNSF then goes on to demolish another DM&E argument: “The projections in DM&E’s Environmental Appendix indicate that the amount of PRB coal transported on the former IMRL limes will not be at all different now that DM&E controls those lines. But as the STB and SEA know from prior proceedings, it is almost always the case that acquisitions promote the diversion of traffic to newly-acquired lines. Indeed, one of the benefits often identified with acquisitions is the value of single line service to shippers, even if the movement involves a longer haul.” (BNSF Comments at 26)

BNSF’s concerns are not philosophical and theoretical, but pragmatic and real. It argued that DM&E’s PRB traffic could cause substantial “ripple-effect” delays to BNSF’s traffic (including time-sensitive intermodal traffic) at Savanna, IL, where the Chicago-bound former IMRL line crosses—at grade—BNSF’s transcontinental main line connecting the Pacific Northwest and Chicago. BNSF also argues that STB must study the individual and cumulative impacts of DM&E sending millions of tons of PRB coal along the former IMRL into the Chicago Gateway, which is known as “Congestion Central” of America’s rail network. Impacts could include air quality, noise, rail congestion, traffic congestion, increased truck traffic, and freight rail safety—all of which could be faced by all communities along the former IMRL lines in Iowa and Illinois. Finally, BNSF said that STB must study potential impacts to commuters traveling into Chicago on regional Metra operations, which could be sharing tracks with DM&E’s mile-long coal trains.

DM&E’s initial response to BNSF’s filing was printed in Platts on December 13, 2006: “’It is OK for BNSF to borrow money through [the FRA] loan program, but it is not OK for us,’ he [Schieffer] told Platts. ‘This is a very hard argument to carry and the board will see through that.’” This is essentially the kind of illogical reasoning that characterizes first graders: “He has a fudge bar, so I get one, too.” In this instance, however, the crybaby argument is based upon one of DM&E’s often-told lies. According to FRA: “Neither the Union Pacific Railroad nor the BNSF Railway has ever applied for loans from the FRA.” (FRA e-mail to MD on May 7, 2006; confirmed in FRA e-mail to MD on June 23, 2006) DM&E’s crocodile tears aside, STB must judge BNSF’s comments based upon their factual and legal merits. If STB orders a full-blown EIS for the former IMRL lines, including Chicago, the process could take a long, long time, and there is absolutely no assurance that the ultimate outcome would be non-toxic to DM&E’s plans.

Owatonna, Winona, and Chicago represent the three legs on DM&E’s coal shipment stool. If you remove Owatonna, as the gateway to the former IMRL lines, then DM&E cannot ship PRB coal all the way to Chicago on its own lines. It must hand off virtually all of its PRB coal (and a large chunk of its hoped-for profits) to the CP at Winona (Minnesota City). If you remove Winona, as the connecting point to CP and Chicago, then the necessary volume of PRB coal traffic through Iowa sends the EIS meter into the red zone—and sends DM&E back to FRA to apply for another loan to upgrade its IC&E tracks to handle super-heavy coal trains. If you remove Chicago, which may not be able to accommodate millions of tons of DM&E’s PRB coal every year, then DM&E simply cannot get the pig to market. (BNSF and UP route a portion of their PRB coal traffic around EPA’s Chicago-Gary-Lake County non-attainment area, and some of that traffic does not go through Chicago at all. Thus, DM&E cannot argue that its coal trains will replace, one-for-one, BNSF’s and UP’s coal trains.) Take away any one leg of the three, and the stool topples. Gravity always wins.

DM&E’s 1998 application to STB said that it would send more than 34 coal trains down its tracks every day. Has Mr. Schieffer told the Iowans about all the trains headed their way? Not exactly. The April 24, 2006, Rochester Post-Bulletin reported: “An idea to route trains carrying coal from Wyoming through Iowa to avoid Rochester is ‘a screwball proposal, and it’s not going to happen.’ That’s what Dakota, Minnesota & Eastern Railroad President Kevin Schieffer told Iowa residents late last week during a ‘rolling meeting’ on the Iowa, Chicago & Eastern Railroad line.” If the coal trains are not headed to Iowa, then are they going through Rochester and on to Winona? Not exactly. The August 31, 2006, Huron Plainsman reported: “Schieffer said the upgrades would add eight to 12 trains a day through Rochester—not 34, an earlier projection used by project opponents.” Yet, in a story published in the September 30, 2006, Rochester Post-Bulletin, Mr. Schieffer claimed that a new “independent” study showed that if DM&E’s proposed PRB expansion plan becomes reality, only three coal trains will move through Rochester each day. So if the coal trains are not going through Rochester, then are they going to the Black Hole of Chicago through Iowa after all—if the STB PRB coal ban ever gets lifted? Not exactly. DM&E’s November 8, 2006, Environmental Appendix claims that its acquisition of IMRL will result in so few—if any—additional coal trains thundering through Iowa that it will produce “insignificant environmental impacts”.

Almost a decade after DM&E filed its application with STB, it is essentially telling us that it will be actually sending very few coal trains anyplace. If that’s true, how can the railroad hope to repay a $2.3 billion loan from the taxpayers of America, in addition to securing private sector financing for the rest of a project that it estimates to cost between $6 billion and $7.1 billion?

Glossary

BNSF: Burlington Northern Santa Fe
CP: Canadian Pacific
DM&E: Dakota, Minnesota & Eastern
EA: Environmental Analysis
EIS: Environmental Impact Statement
FRA: Federal Railroad Administration
IC&E: Iowa, Chicago & Eastern
IMRL: I&M Rail Link
PRB: Powder River Basin
STB: Surface Transportation Board
UP: Union Pacific
USDOT: United States Department of Transportation