Mr. Chairman and Members of the Subcommittee:
I appreciate the opportunity to testify before you today, and, I appreciate your desire and willingness to take the time to understand the underlying facts in this situation. It is unfortunate that the information that has so far become public has sometimes been misleading, or just plain wrong.
I would like to begin by providing some history of Amtrak's relationship with the Massachusetts Bay Transportation Authority (MBTA), which is critical to any understanding of our current situation. Amtrak initially assumed responsibility for commuter services in the Boston metropolitan area in the mid-eighties when it became apparent that the Boston and Maine Railroad could no longer provide reliable service. Amtrak inherited a deeply troubled operation with deteriorating service. Over the next decade, Amtrak rebuilt and significantly expanded Boston commuter rail services to a point where it could function with a high degree of reliability and customer satisfaction. It is worth noting that at no time during the recent controversy has anyone suggested that the quality of service provided by Amtrak has been anything other than the highest standard.
In fact, in 1995, as part of the MBTA's sole source justification to the Federal Transit Administration (FTA), MBTA praised Amtrak services as being both highly reliable and cost effective. The FTA's own cost comparisons of commuter rail service around the country supported this conclusion; these unbiased cost studies have consistently shown Amtrak's commuter operation in Boston as being among the nation's most efficient, when measured on the basis of cost per vehicle mile.
As the end of Amtrak's current contract with the MBTA drew near, the MBTA expressed its intention to put the mechanical (equipment maintenance) component of the contract out for competitive bid, while retaining Amtrak for the transportation and engineering (infrastructure maintenance) components. At the very outset, Amtrak could have frustrated this process by adopting an all or nothing approach to its contract requirements. But we did not. In fact, we welcomed fair competition. We expressed our willingness to compete for mechanical services on a stand-alone basis and, if we were not successful, to work with whatever qualified firm the MBTA might select. However, we were always careful to emphasize that Amtrak would not expose itself to any financial risk based upon two contractors working side by side, or more importantly, to any safety risks if the MBTA selected a mechanical contractor which lacked the necessary experience or a trained workforce. We were also mindful of protecting Amtrak's own interests in both intercity rail services, as well as our planned introduction of high-speed rail at the very same time as the MBTA might be changing contractors. As you may know, Amtrak's own high speed rail services in the Northeast Corridor run over portions of the tracks owned by the MBTA.
After the MBTA selected Bay State Transit -- and despite our misgivings about the fairness of the MBTA's evaluation and negotiation process -- Amtrak continued to express its willingness to cooperate in the MBTA's planned transition to a new contractor. In November 1999, at the MBTA's request, Amtrak submitted pricing for transportation and engineering services and, at the same time, offered interim mechanical pricing, if the planned transition to Bay State took longer than anticipated. The MBTA, for its own reasons, never followed-up with Amtrak on our mechanical pricing offer.
During the winter months, Amtrak attempted to negotiate with the MBTA with respect to the terms and conditions upon which it would perform transportation and engineering services while working side by side with a new, and still untested, mechanical contractor. During this period, it became painfully evident that the MBTA had really not come to grips with the many difficult logistical and risk allocation issues that were necessarily implicated by its decision to work with two contractors in a complex, safety-critical environment. Despite Amtrak's efforts, the MBTA seemed unable to progress to conclusion a contract for transportation and engineering. At the same time, it had become clear that the MBTA and Bay State had failed in their efforts to recruit Amtrak mechanical services workers to Bay State, and Bay State also appeared unable to recruit an alternative workforce.
It was against this backdrop that the MBTA came to Amtrak in late March and asked for Amtrak's help. The MBTA essentially offered to extend Amtrak's existing contract for a fixed term (not a temporary arrangement to accommodate Bay State) in return for a reduction in Amtrak's price. Had the MBTA elected to negotiate with Amtrak in 1999 as part of the mechanical RFP process, the same savings it was now seeking would have been available at that time, but MBTA had instead chosen to negotiate exclusively with Bay State on the basis of an alleged $119 million five-year differential between Amtrak and Bay State. As Bay State's promise had now proven illusory, MBTA turned to a serious negotiation with a party that could perform.
Amtrak responded to MBTA's request by offering a significant reduction from its RFP mechanical pricing levels, further refinements to its transportation and engineering price, appropriate scope modifications which have no bearing on service quantity or quality, and slightly revised contract terms. A component of Amtrak's pricing offer was premised on efficiencies and productivity measures, which by their nature could not be realized immediately, but instead must be phased in over time. As the MBTA was seeking savings in the initial year of the contract as one of its highest priorities, Amtrak offered a reasonable reduction in the first year provided the contract was extended for three years so that Amtrak could be assured of meeting its budget projections and reasonable profit requirements over the life of the contract. In short, the pricing offered by Amtrak and agreed to by the MBTA for the first half of the three-year period could not be offered and would not be available on a short-term basis, and could only be available in the context of a three-year or longer arrangement. These pricing decisions and the three-year term required by Amtrak for the new MBTA agreement were decisions made by Amtrak management in the best interest of the company. Moreover, the requirement of a three-year term was not a point of contention or negotiation with the MBTA, which readily agreed to a three-year contract extension in the context of the reduced price.
Based on the negotiated price reflected in Amtrak's agreement with the MBTA, it is worth reviewing whether the MBTA is paying more to keep Amtrak than it would have paid with Bay State, and if so, how much. As you are aware, it is the conventional wisdom that the MBTA suffers a $119 million penalty (over 5 years) by continuing to contract with Amtrak for mechanical service. This is, quite simply, wrong. The differential between Bay State's mechanical pricing coupled with Amtrak's best offer for transportation and engineering, and the negotiated price actually achieved by the MBTA for all services from Amtrak is less than $21 million over the 3-year term. Amtrak's price for mechanical services was reduced significantly by negotiation, and Amtrak was able to offer still other reductions based on both the economies of scale and reduced risk of a contract for all services. Please see the attached schedule detailing the cost of each.
Even this $21 million differential is almost certainly overstated. This assumes that Bay State could have performed for its contract price without demands for change orders even after its key assumption, and MBTA's, about the availability of lower cost labor proved invalid. It assumes that the MBTA would not be required to pay any 13-C benefits, even with a significantly reduced workforce. And perhaps most importantly, it assumes that service to Boston commuters would not have suffered by virtue of an inexperienced mechanical contractor, and that there would be no adverse economic impacts by virtue of any diminishment in service quality.
I am generally aware of the evaluations conducted by the MBTA of the various offers presented as part of the original RFP process. I cannot comment on why the MBTA concluded as it did because we are not privy to the evaluation material reviewed. However, I can say with confidence that the MBTA's initial evaluation did not take account of Amtrak's negotiated price. This is, of course, a far better and more relevant indicator of our cost structure and the actual pricing available to the MBTA. In addition, it is apparent that the MBTA seemed to accept, at face value, the validity of the offers presented to the MBTA, even though none of the other proposers had Amtrak's knowledge as to the actual condition of the MBTA's equipment, or what is actually required to meet the service reliability objectives required by the MBTA. I very much doubt that any of the other proposers could have or would have succeeded in performing within the budgets required by their proposals.
As Amtrak has dealt with the Boston situation over the past year, we have tried to respect a number of competing interests and objectives, including our responsibilities to our customer, the MBTA, our responsibilities to our own passengers, and our own workforce, and our responsibility to the federal government, which has charged us with the mandate of operating self sufficiency. In my judgment, the best and perhaps the only way to reconcile these interests and objectives in this situation and all others is to conduct ourselves as any prudent business would -- with superior quality of service, priority on safety and fairness of price to our customers, with respect for the legitimate interests of our workforce, and with a constant focus on our bottom line so we can achieve operating self sufficiency. The decisions Amtrak made over the past year regarding the MBTA commuter contract were made by Amtrak management and its Board of Directors for compelling and appropriate business reasons and were fully consistent with the discharge of our responsibilities as mandated by law.
Thank you again for the opportunity to appear before you today. I would be glad to answer any questions you may have.
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