THE HISTORY, MAKING, AND BREAKING OF PAPER BARRIERS BY JOHN D. HEFFNER, JOHN D. HEFFNER PLLC WASHINGTON, D.C.

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1 THE HISTORY, MAKING, AND BREAKING OF PAPER BARRIERS BY JOHN D. HEFFNER, JOHN D. HEFFNER PLLC WASHINGTON, D.C.

2 An Early short line locomotive In the Beginning. Once upon a time all railroads were short lines starting with the Baltimore & Ohio Railroad running from Baltimore to Ellicott City, MD

3 PAPER BARRIER A contractual commitment between a seller or lesser of a railroad line and a newly created short line or regional railroad that discourages the transferee carrier from interchanging traffic with any railroad but the transferor.

4 PAPER BARRIER EVOLUTION No barriers (short lines formed from the bankrupt eastern carriers, as well as the Rock Island, Milwaukee Road a going out of business sale) Geographic barriers (Conrail and early CSX/Seaboard/Chessie sales; generally small transactions with limited geographic scope) Early Paper Barrier Sales (Burlington Northern, Illinois Central, etc., some involving major rail line transactions)

5 PAPER BARRIER EVOLUTION (cont d) More complex transactions Norfolk Southern Thoroughbred Leases, a barter arrangement Union Pacific Lease transactions with traffic diversion tables

6 PAPER BARRIER RATIONALE Line would not have been sold but for the paper barrier Preserves the competitive status quo Pre- Existing Conditions Allows sale or lease of lines for a nominal price

7 PAPER BARRIER RATIONALE (cont d) Allows a short line to concentrate its energies and capital on rehabilitating deteriorated trackage and improving service rather than financing assets. Reflects the extreme difficulty many short lines have had in financing a railroad acquisition Establishes an ongoing business venture that has many of the characteristics of a franchise

8 Lend Lease Transaction

9 Other Peoples Money

10 Franchise Transaction

11 The Renaissance Of Short Line Railroads

12 STB PAPER BARRIER CHRONOLOGY 1998 Senate Commerce Committee holds hearings; STB initiates proceeding to study issue; docketed as Ex Parte No. 575 April 17, 1998, STB issues decision on issue, declines to take action in light of proposed Railroad Industry Agreement ( RIA ) which our next speaker will address December 21, 1998, Western Coal Traffic League ( WCTL ) asks STB to eliminate unreasonable paper barriers, those that last more than 5 years, limit interchange even if they don t reduce traffic to seller, or provide seller with excessive benefits

13 STB PAPER BARRIER CHRONOLOGY (cont d) March 2, 1999, STB declines to grant WCTL petition; wants to see if RIA provides adequate relief March 21, 2005, WCTL renews its petition to the STB, complains that RIA is inadequate because it does not prescribe remedies for pre-existing traffic and does not provide a remedy for adversely affected shippers

14 STB PAPER BARRIER CHRONOLOGY (cont d) October 30, 2007, STB issues decision concluding that interchange commitments are best considered on a caseby-case basis; STB declines to issue a rule prohibiting the enforcement of existing interchange agreements; STB suggests a higher level of scrutiny for commitments that ban interchange or those that continue in perpetuity May 29, 2008, STB issues final rules on interchange commitments; rules require disclosure of any interchange commitment limitations or restrictions and provides a mechanism for affected parties to obtain copies

15 PAPER BARRIER LITIGATION

16 PAPER BARRIER LITIGATION STB Docket No , Albany & Eastern Railroad Company v. Burlington Northern and Santa Fe Railroad Company A complaint proceeding initiated by AERC, a class III railroad, against BNSF in 2003 challenging a restriction on its ability to interchange with the Union Pacific Railroad as an unreasonable practice. Complaint dismissed by AERC with prejudice in BNSF is currently suing AERC in Federal Court for damages for diverting traffic.

17 PAPER BARRIER LITIGATION (cont d) STB Docket No , Entergy Arkansas, Inc., Et Al v. Union Pacific Railroad Company and Missouri & Northern Arkansas Railroad Company, Inc. A complaint proceeding filed by a coal shipper and a coal burning utility company challenging the legality of the paper barrier imposed on the 1992 lease of lines from the Union Pacific Railroad to the Missouri & Northern Arkansas Railroad Company ( M&NA ), a RailAmerica and former Rail-Tex regional railroad subsidiary. Seeking access to BNSF, the complainants argued that the paper barrier acted as a de facto ban on interchange with BNSF, was an unreasonable practice under the ICC Termination Act, and was an unauthorized pooling agreement. UP argued that it had previously provided exclusive service to Entergy before the commencement of the lease and never would have entered into this lease without preserving for itself this revenue stream.

18 PAPER BARRIER LITIGATION (cont d) The Board found that the shippers had sought relief under the wrong statutory provision and directed them to refile their complaint under a provision allowing the Board to establish a through route and rate division. The Board held an oral argument last Fall The matter is still pending.

19 And now to the United States Senate

20 S. 2889, the Surface Transportation Board Reauthorization Act of 2009, the Rockefeller Bill This is a work in progress which our next speaker will address

21 S. 2889, the Surface Transportation Board Reauthorization Act of 2009, the Rockefeller Bill (cont d) Insofar as paper barriers are concerned, the bill forbids the Board from approving a railroad line sale or lease transaction if the agreement contains interchange restrictions that are unreasonable or not in the public interest, allows parties to challenge existing paper barriers, and where a paper barrier is found to be in violation of the Act and cannot be brought into compliance allows the Board to set terms for the short line or regional purchaser or lessee railroad to buy out the paper barrier or allows the parties to terminate the agreement

22 Short line railroad paper barrier remedies Seek waiver of paper barrier by request to individual class I railroad Seek waiver under RIA Our next speaker will address these remedies

23 Some final thoughts Don t Ask Don t Tell Be Careful What You Wish for You Might Get It One more bit of advice: What s good for the goose is good for the gander

ARTICLE/OP-ED PIECE FOR RAILWAY AGE By John D. Heffner, Attorney with Strasburger & Price, LLP

ARTICLE/OP-ED PIECE FOR RAILWAY AGE By John D. Heffner, Attorney with Strasburger & Price, LLP The United States Court of Appeals for the District of Columbia Circuit is currently considering two significant