SIOUX FALLS, S.D.-- The federal Surface Transportation Board Wednesday issued a decision for the largest railroad project it has ever approved, the $1.5 billion, reconstruction of the Dakota, Minnesota & Eastern Railroad across Minnesota and South Dakota and extending 262 miles to Wyoming's Powder River Basin, according to the Argus Leader.

The decision ends four years of scrutiny, including a two-year environmental review, of the merits of the proposal to haul Wyoming coal to Midwest power plants.

Although the STB requires the railroad to spend a maximum $173.5 million to mitigate environmental impacts of the 1,095-mile project, DM&E CEO Kevin Schieffer called the decision to go ahead "sweet words for us. They have been long awaited, endlessly debated, and, starting tomorrow, they will be much celebrated."

In another victory for DM&E, the STB did not require any bypasses but mandated overpasses in Rochester and Pierre.

Engineer Dan Forssman, of Huron, has worked for the railroad a decade. "It is a very good deal for the employees," he says of the STB decision. "You hear something good like this and everybody gets excited. Personally, I can't wait to run coal trains."

Schieffer says the railroad hopes to begin construction next year and to start hauling coal by 2005. In its projections on the financial ability of the railroad to undertake the project, the STB assumes the DM&E could haul 40 million tons of coal in 2005. That would rise to 100 million tons by 2010 and would return the railroad a net profit of $180.6 million annually, according to the STB record of decision.

Schieffer says the project will create 5,000 construction jobs and as many as 3,000 permanent jobs.

Plans for litigation

But the project has attracted opponents from Minnesota to Wyoming, and many of them say the STB ruling simply sets out the roadmap for litigation. Sam Clauson, head of the South Dakota Sierra Club, says DM&E opponents in South Dakota and Wyoming will meet Saturday with Richard Streeter, a lawyer with the Washington, D.C. law firm Barnes and Thornburg, to determine their legal strategy. Clauson says a lawsuit will be filed within 60 days in federal court and will probably focus on shortcomings in the environmental review and concerns whether the project will meet Clean Air Act standards in pristine areas in South Dakota.

"We are really unhappy with the (way the STB safeguards) Class I airshed standards at Badlands National Park. Basically, that represents a part of our case. There is no way this thing was built to meet those standards," Clauson says. About 10 different groups of landowners affected by the new DM&E construction and other opponents are affiliated with the legal challenge led by the Sierra Club, according to Clauson.

The new rail line would run west 10 miles north of Badlands National Park before turning south and crossing the Cheyenne River and eventually heading west, 12 miles south of Hot Springs.

From there, the new rail curves under the Black Hills into Wyoming, about 20 miles south of the town of Newcastle. The line then runs west in a line north of the Red Hills and the Rochelle Hills into the Powder River Basin.

The STB chose the route because it would avoid sensitive environmental areas as much as possible, particularly the Cheyenne River and Badlands National Park. The route would cross 39 miles of Forest Service land, compared with 52 miles in alternative routes, and would convert 1,886 acres to rail line right of way, compared with 2,516 in the other routes. It also would mean the loss of 49 acres of wetlands, opposed to 102 acres lost in the DM&E's preferred route. The STB's choice of route is expected to disturb 1,838 acres that have been determined to likely have fossils, and another 116 acres managed by the Forest Service known to hold fossils.

Late last year, Harvey White Woman, a spokesman for the Oglala Lakota Tribe, said the tribe may sue the DM&E, claiming the new rail line that will skirt the northwest corner of the Pine Ridge Reservation violates the 1868 Fort Laramie Treaty. White Woman said it may also threaten Indian graves and archeological sites

Wednesday, Schieffer said of the Oglalas "this is a tough issue for them. I understand that." But he also said he believed treaty law had been thoroughly litigated and no precedent has been established that could be the foundation of a treaty violation lawsuit.

In Rochester, Minn., the Mayo Clinic has emerged as a formidable DM&E foe. DM&E tracks run near the Mayo Clinic, and clinic officials fear what the impact will be there when three daily, slow moving DM&E trains now increase to a maximum 37 high-speed trains after the Powder River Basin project is complete. Mayo Clinic spokesman John Murphy said Wednesday a physician-led committee is reviewing the STB decision and will issue a formal statement by next week.

"The needs of our patients come first. That is the primary value we are looking at."

Schieffer says he's prepared to do legal battle with the clinic. "Whether it will be lengthy, we will see."

He says that while the DM&E strives to be "good corporate citizens and work with our neighbors," the reconstructed railroad will have an impact on those it passes near.

"You cannot make a train disappear," he says. "The cloaking device exists only on 'Star Trek.' "

Negotiations ahead

The STB ruled the railroad did not have to construct bypasses around Pierre, Brookings and Rochester, although it must build an overpass in Pierre and two in Rochester. Those communities must be consulted in the design and cost of the overpasses, the STB says. But it dismissed a DM&E concern the communities would veto any overpass proposal in an effort to kill the project

"We are confident that DM&E and the affected communities will work together and adopt reasonable plans to implement the grade crossing separation conditions in a timely fashion. ... But if they do not, DM&E could bring that to our attention in the environmental oversight process, and, if it has taken reasonable steps to work with Pierre and Rochester but the communities are uncooperative or unreasonable ... DM&E could seek appropriate redress, including modification of the conditions," the STB wrote.

Schieffer called that a significant aspect of the decision. He says of the whole document, "we can live with it, even though we didn't agree with it all." But he pointed out the DM&E still disputes the STB's authority to impose environmental mitigation on the railroad's existing right-of-way. While the railroad has no plans to file legal action, Schieffer says, if it ends up in court, "we reserve the right to challenge that" part of the ruling.

To build its project, the DM&E also will have to evade a South Dakota law that requires it to secure legislative approval before it could impose eminent domain to acquire land for the new rail line.

"For this project, that needs to be fixed. I am confident it can be fixed," he says. He intimated a solution is already in the works. "Give me a couple of days and I can talk about that one," he said.

Phone calls to Gov. Bill Janklow's spokesman Bob Mercer Wednesday on the eminent domain issue were not returned.

The STB decision was widely hailed by South Dakota Congressional representatives.

"While there are still several hurdles to clear, today's announcement brings to close a regulatory process that has lasted almost four years," Senate Majority Leader Tom Daschle says. "At a time when many in South Dakota are struggling, the thousands of jobs this project would mean for South Dakota would be a tremendous benefit. (Sen) Tim Johnson and I will work with the communities that have concerns about this project, and I hope we can address these as we move forward."

Johnson spokesman Bob Martin said "Tim is pleased by the ruling today by the STB, and the project can finally move ahead."

While Schieffer says the DM&E intends to seek private funding to build the line, Pierre Mayor Gary Drewes says that community is trying to secure federal funding for the railroad for a bypass around Pierre and Fort Pierre. Martin says Johnson "will entertain any request from any community with financing issues," but he added a caveat. "The federal budget is going to be very tight next year." Rep. John Thune lauded the STB for bringing the whole, drawn out DM&E issue closer to resolution.

"Supporters and opponents alike have requested and deserve a decision," he said. "Today's decision removes much of the uncertainty on this proposal. "We stand to gain new jobs and a new route to transport our grain and products like ethanol. The DM&E proposal will also help meet our energy needs by transporting coal from the Powder River Basin to generation plants," Thune said. "At the same time, I will work with the affected communities to ensure safety concerns are addressed."

Rail lines 'worn out'

Schieffer has consistently maintained the Powder River Basin project is necessary to create enough volume on the line for the DM&E to rehabilitate one of the oldest, most decrepit railroads in the country.

"This is a 150-year-old railroad, and it is worn out," he said. The STB's decision, he claims, "saves this railroad. It not only saves it. It catapults it into the 21st century."

While the DM&E has not yet secured agreements with either coal mines or power plants, Schieffer pointed out energy companies were the first to call for new rail service into the Powder River Basin.

"I am extremely confident on the marketing side of this," he says.

While the STB ruling frees the DM&E from building any imposed bypasses, both Schieffer and Drewes say discussions are still ongoing for a Pierre bypass. Such a bypass meets Schieffer's first condition. "It solves more problems than it creates," he says.

The DM&E's predecessor, the Chicago & North Western, sold off much of its right-of-way in Pierre and Fort Pierre years ago, "and our business development took place on that right-of-way," Drewes says. "We have millions of dollars of facilities, convention centers and private enterprise built up within 50 feet of those tracks.

"There will be a huge detriment to that type of business," if high-speed coal trains replace slow local freights, he says.

A bypass would cost an estimated $100 million. But the STB-ordered overpass and other mitigation would cost the railroad more than $60 million.

"It does not sound like we are quite as far apart," Drewes says. "Plus, we believe we can show efficiencies by using a bypass for the railroad, too."

That is why Pierre is pursuing federal funding for a bypass.

While Schieffer says he will investigate prospects for federal financing, "we are not out looking for the government to build this for us."

Looking for help

With its STB permit in hand, the railroad will now begin courting equity partners. These will likely come from the energy, transportation or construction industries, according to Schieffer. But he adds "I have been getting calls from areas where I wasn't expecting them. I do not know ultimately who we will partner with."

The collapse of Enron "puts energy assets in play," he says. "There are interesting opportunities to match them up with a transportation project," but he said he did not believe ripples from Enron's failure would have a large impact on the DM&E financing.

Any equity partners must ensure the future of the DM&E employees and the existing shippers, Schieffer says. Beyond that "You want a good strategic fit with the partners where the strategic interests are all aligned. The last thing you want is diverging interests."

Whether new equity partners will take control of the DM&E from the existing shareholders, largely railroad pension funds, remains to be seen.

"Frankly, I am less concerned with control than with whether the interests line up. If it is XYZ pension fund or XYZ energy company that controls the DM&E, it will not change significantly how this project is developed," Schieffer says.

At the same time the DM&E has been shepherding its Powder River Basin project through the regulatory process, the railroad may also have been negotiating to acquire the I&M railroad to the east and south. As part of the reconstruction, the DM&E will build a connection between its line and the I&M at Owatonna, Minn. That will give DM&E grain shippers access to Iowa grain processors and Chicago grain markets served by the I&M, Schieffer say. While he declined to confirm rumors the DM&E was angling to acquire the I&M, he said "it would not change the flow or dynamics of the Powder River Basin project - if it were being considered."