Senator BAUCUS. You are not opposed to our severance tax, are you?

Mr. BRESSLER. No, I am not. I am not taking a position on that. I get in enough trouble without taking a position on severance taxes. Senator BAUCUs. I know it is tough to give the present worth. It is very difficult for the reasons you mention. Still, you do have 12 billion tons of strippable coal. Even if coal is only $1 a ton-

Mr. BRESSLER. That is debatable, though, because of the feature-

Senator BAUCUS. I know, given some percentage

Mr. BRESSLER. Well, no, it is the feature in which our ownership occurs because of the checkerboard pattern of the land grant. If you were ready and willing to mine that coal today, I think you would find that most people would say that is not in a minable fashion because you cannot develop an efficient mine plan where you have to mine every other section.

Senator BAUCus. Is it BN's position that there are no continuing obligations of any kind rising out of the Northern Pacific land grant?

Mr. BRESSLER. Continuing obligations?

Senator BAUCUS. Yes.

Mr. BRESSLER. No, we do not recognize any continuing obligations.

Senator BAUCUS. Just for the record so we are clear where we are starting from, it is the BN's view that there are no continuing obligations-

Mr. BRESSLER. I think it is not just our view but that of all the people in the Congress who have looked at it over time. I think you know that it has been reviewed fairly extensively. I have not personally read the committee reports on those. I have read within the year a thesis written by a well-known Montanan by the name of Theodore Schwinden, who concluded the same thing, that the public received fair value for the bargain that was struck.

Senator BAUCUS. There are others who take the view. But, as you know, there are many, including some in this room, who are probably going to testify this afternoon, who have a contrary view. I am just trying to help them out by finding out what your view is today at this moment.

Mr. BRESSLER. That is our view.

Senator BAUCUS. Thank you very much.

In your view, did the BN merger have any adverse effects whatsoever on the financial condition of the Milwaukee, notwithstanding Mr. Martin's useful presentation?

Mr. BRESSLER. My perspective on that, again, is limited because of my relatively short period of time. I guess I would ask either Dick Grayson or Frank Farrell if they wish to make a comment about it.

Mr. GRAYSON. I think that the Milwaukee's fate, as Albro recited, was pretty well put in place before 1970. They were having troubles trying to suffer through. Had it not been for the prosperity of all of us through the period of World War II, they probably would not have made it that long. They simply could not be competitive. They did not put the money into the railroad to provide the physical plant that could make them competitive on a transcontinental

basis. Maybe they will make it now where they are, and I certainly hope that they do in a reduced system.

Senator BAUCUs. Do you think the BN merger furthered the decline, hastened the decline in any way?

Mr. GRAYSON. I would think that the reverse would be true because out of the Northern Lines merger came some traffic conditions and trackage rights conditions which gave them some new markets. It was designed to help them; they got pretty well what they wanted. So, I certainly

Senator BAUCUS. I was asking because you were here, I am quite confident, when the Assistant Attorney General testified. He said that he felt that, yes, it did have an adverse effect. It may be in some technical way. The result of his department's study was that it was nothing that was actionable but probably had, at least as I recall, some technical violations, is what he said. One could infer from that that those violations were detrimental to the Milwaukee, I do not know. I am just curious. I do not think you are going to find yourself liable to any action by admitting some adverse effect on the Milwaukee. I am just curious if honestly, in your view, the merger had some adverse effect on the Milwaukee Road.

Mr. GRAYSON. Well, to the extent that better routes produce better service that the public benefited from and that traffic flowed to the BN, I think, theoretically you could say that that would have had an adverse effect. But I believe what Mr. Baxter said was that, except for a few isolated cases which were technical in nature, they found no violations of any of the conditions that were imposed by the Commission in the Northern Lines case, on which, I think Frank Farrell will tell you, we spent over 35,000 pages of evidence.

Senator BAUCUs. Does BN plan to sell its air freight forwarding operation to Pittston in order to raise money to acquire an oil company?

Mr. BRESSLER. That is what I call a loaded question, Senator.
Senator BAUCUS. Loaded but widely reported.

Mr. BRESSLER. We have signed a letter of intent to sell our air freight forwarding company to the Pittston Co. That is correct as reported. The transaction has not been consummated yet, but we expect it to be so.

We are selling it simply because the buyer valued that business more than we did. We thought it was a good price for it.

Senator BAUCUS. Is BN shopping for acquisitions?

Mr. BRESSLER. I would not say that we are shopping. We are certainly looking. I have made no secret of the fact that we are looking, for instance, in the resource-related area. As an example, you cited the acreage that we have on which we own mineral rights. The practice in the company up to the last year or so has been that we were a royalty owner rather than an operator. I happen to think it is advantageous for us to be in a position to explore some of that property ourselves. We think it is going to be more profitable for us. It is very difficult in these days to build an organization to do that. The kinds of people that are required are in demand by many other companies. I think it is a well-known fact that it is cheaper, easier, and faster to acquire an existing organization than it is to try to build one.

Senator BAUCUS. Is BN considering selling any portions of its transportation business?

no.

Mr. BRESSLER. Other than the air freight forwarding company,

Senator BAUcus. I am not going to wake up some morning and find that you sold the railroad?

Mr. GRAYSON. Last night on the-

Mr. BRESSLER. Did you hear that rumor? No, I have not heard that rumor. No.

Senator BAUCUs. For a year or so there have been rumors in BN territory that BN might go into the coal slurry pipeline business. Has the BN changed its position from firm opposition to coal slurry legislation to some other position with respect to coal slurry legislation?

Mr. BRESSLER. I am glad you asked that question because I think, again, there has been some confusion on what that position has been. My position is this. Other things being equal and if a coal slurry line is the lowest-cost producer of transportation, then indeed that is what we should have. I think in the question of other things being equal, you have to take into account that the part of the country, in particular the Powder River basin and eastern Montana, involved, the question of water for slurry becomes an overriding concern. On the other hand, I have suggested to some of our operating people because I am so interested in seeing the export of some of our coal, we have a problem of, in terms of cost, moving coal over the Cascades.

If you start to look at where is the most desirable place to have a coal-export facility, ultimately we believe that coal will move in the same size ships that oil perhaps does. This requires deep water. Therefore, it seems advantageous, if you can, to develop a coalexport facility on Puget Sound, which has deeper water than the Columbia River. But there is a cost tradeoff there at present. Simply, we have said, well, what would be the possibility of bringing the coal by rail to some point where water is not of great concern? Perhaps the Columbia River. Put it in a slurry line. Maybe that is the way to move it.

I think there are other very interesting ideas about it; so far they are just ideas. I have talked with the Mitsui Co., as an example, who has some interesting ideas about how to convert the moisture content in Powder River Basin coal into methanol and to utilize a coal-methanol type of a mixture.

Again, we have no opposition to lines of that kind if they make good economic sense. Where we do have concerns is in the case where special privileges, in our view, are being asked such as to operate as a private carrier as opposed to a common carrier, which we are. We also have concerns where that situation overlays where large investment has already been made in rail facilities to haul coal.

I take the position that this country needs the lowest cost transportation that we can have to move those very vital commodities. We do not need redundant transportation systems, particularly if they have to be built on the basis of some additional privilege.

Senator BAUCUS. That is interesting to know. It has always been my impression that BN has been very much opposed to coal slurry

legislation. I now hear you saying that you are more open to it, depending upon the circumstances.

Mr. BRESSLER. I think historically, though, the BN early on had an equity position in the so-called ETSI coal slurry line. It goes back a number of years.

Mr. GRAYSON. I think what we are really saying, too, Senator, is that we all ought to play from the same rule book. The right of Federal eminent domain is one which we oppose vigorously. Again, the right of a private carrier, cream skimmer, taking what you want and leaving the rest to the railroad, is what we are opposed to. Otherwise, there is no reason why they could not be out there building a coal slurry line today.

Senator BAUCUs. I appreciate your earlier statement, Dick, when you said that the BN is not now trying to retire or alter the old land grant bond indentures. Is that being contemplated, though, for the future?

Mr. BRESSLER. We have looked at those indentures in the past and periodically look at it. The problem, as I understand it from the indenture, there is no call provision on those bonds. So, that is the particular impediment even if we wanted to retire the bond issue. They are pretty good rates, you know, 3 percent due in 2047. Senator BAUCUs. Again suggested in Business Week, is BN considering or acting on an approach that involves depositing cash or other collateral with the bond trustee in order to free BN from bond restrictions?

Mr. BRESSLER. There is an enormous amount of speculation. I think it was fueled at the time of the holding company formation, that somehow we had a problem with those bonds that we had to solve one way or another. So, there has been a lot of speculation in the markets. Those bonds are traded on the New York Bond Exchange. You see articles similar to the one that you cited in Business Week. The fact remains that, because of the vast investment that has been made in recent years in those Northern Pacific railroad lines, we have established credits, if you will, with the trustee toward which we can apply these proceeds from the resources. We expect that that will not be a problem for several years.

Senator BAUCUS. What is going to happen in several years?

Mr. BRESSLER. Maybe there will be a problem. I do not know. We are not that far-seeing. It is not a current problem.

Senator BAUCUs. Are you at all worried that in building up cash and forming a holding company that you might be setting BN up for acquisition?

Mr. BRESSLER. Oh, periodically there are rumors about that we might be the target of an acquisition. I do not think that it is necessarily just because we have some cash that would make it so. I think we are regarded as a pretty good property. But, to my knowledge, nothing has ever materialized in that regard.

Senator BAUCUS. I appreciate your testimony, all of you, very much. I know all of you have tough jobs ahead of you, particularly you, Fred, in these times of high interest rates and the housing industry and such declining. You are doing a good job in maintaining what employment level you can. It is tough enough with Plum Creek. Bruce, too, I know the tough job you have managing mineral parts of the company. I think it is unlikely Congress is going +

repeal the 2c prohibition on railroad leasing. I appreciate your company's efforts to export products, too. I think that is very important not only to our State but to the country generally as we enter new economic times down the road.

I appreciate your testimony. Again, Dick, thanks for coming.

I will submit additional questions in writing that you can then respond to in writing.

Mr. BRESSLER. We appreciate your interest, Senator.

Senator BAUCUS. Without objection, that will be made a part of the record.

The hearing will now recess for lunch until 1:15.

[Whereupon, at 12:30 p.m., the committee recessed, to reconvene later the same day.]

AFTERNOON SESSION

[Whereupon, at 1:20 p.m., the subcommittee resumed, Senator Max Baucus, chairman of the subcommittee, presiding.]

Senator BAUCUs. The hearing will come to order.

Our next witness is Dr. Ed Sattler, assistant professor, department of economics, Bradley University.

Dr. Sattler, we appreciate the time you have taken to come and help us this afternoon. Please proceed in any manner you wish.

STATEMENT OF DR. EDWARD L. SATTLER, ASSISTANT PROFESSOR, DEPARTMENT OF ECONOMICS, BRADLEY UNIVERSITY Dr. SATTLER. I would like to first thank the committee for inviting me to appear today on what I feel is a very important matter. I would like to speak specifically to the question of the formation of a holding company and its potential impact upon the railroad subsidiary. Mr. Bressler, in the Annual Report for Burlington Northern, Inc., 1980, noted that the holding company would allow the Burlington Northern holding company to provide greater objectivity in future decisionmaking. I think this is a very honest statement, that the holding company provides a means for the Burlington Northern to increase its earnings, possibly in spite of the railroad. I will expand on these comments a little later. The annual report further states that, "While the corporate rate of return on equity has improved to 9.7 percent in 1980, the cost of capital is from 12 to 15 percent" and that 9.7 percent, by the way, includes the railroad and all of the other activities. Historically, the railroad rates of return on equity have been well below the 9.7 percent.

Mr. Bressler further noted that there are two short-term goals for the holding company, and he expanded on these this morning. The first is to improve the efficiency and financial health of the railroad; the second is to expand investments in resource activities so that a better balance is achieved between transportation and resource activities.

At this point, I think it would be a good idea to review the history of the holding company movement, to see how the Burlington Northern fits into the holding company movement.