Senator BAUCUS. Thank you very much.

As I understand you, you are basically saying you feel that landgrant assets should be used to promote rail service and that formation of holding companies can harm rail shippers. I am wondering if you have any specific proposals or ideas that would help insure that holding company transactions are properly monitored by the ICC, that is whether the ICC can accomplish this task with its present 2- to 3-year audits or whether something more is needed in order to determine whether the land-grant assets actually do help promote rail service in the case of a holding company.

Mr. FOGARTY. Mr. Chairman, we definitely feel that the ICC should maintain the jurisdiction and keep a close monitoring power over the actions of holding companies, particularly as it pertains to the possible moving of assets away from the railroad.

Senator BAUCUs. Would you propose any examination procedures or any kind of additional proposals that the ICC should undertake in order to determine that?

Mr. FOGARTY. Yes. The only thing that came to our attention just a short time ago, as I understand it, there was a ruling made that the Burlington Northern no longer has to in their annual report define the cash flow of their line companies. We feel that this would be an aid in insuring that the assets from the land grants are returning to the railroads in the proper form.

Senator BAUCUS. We have lots of witnesses here. Our time is running on. Do you have any other comments that you want to make, Mr. Williams?

Mr. WILLIAMS. No, Senator.

Senator BAUCUs. Thank you both very much.

Our next witness is Mr. William Baxter, Assistant Attorney General for the Antitrust Division of the Justice Department.

General, I appreciate your coming today. I know you are a very busy man.

Without objection, your prepared statement will be inserted into the record.

As you know, I have been somewhat concerned about the lack of competition now in rail service in Montana, particularly with the demise of the Milwaukee. As you proceed, I would appreciate it if you keep that in mind. Maybe you can address that point as best you can. I appreciate your coming today and please proceed.

STATEMENT OF WILLIAM F. BAXTER, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, U.S. DEPARTMENT OF JUSTICE, ACCOMPANIED BY ELLIOTT M. SEIDEN, CHIEF, TRANSPORTATION SECTION, ANTITRUST DIVISION

Mr. BAXTER. Thank you, Senator.

I have submitted a formal statement which reviews the activities of the Antitrust Division and our practices with respect to rail mergers. As you know, applications to consummate rail mergers are submitted to the Interstate Commerce Commission. They are not covered by the antitrust laws. We do not receive the kind of data that we would normally receive through Hart-Scott-Rodino filings. Rather, we receive a copy of the application. The statutes pro

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vide that we may intervene, and we often do, in rail merger situations. Then, of course, we have the benefit of the filings that the companies and intervenors may make. It is through that procedural vehicle that we review the consistency with antitrust policy of any particular rail merger.

We do not, of course, have final say. Our position is one of arguing our point of view on the competitive aspects to the ICC. But we do have statutory appeal authority. There have been occasions when we have used that.

Rail mergers can be categorized roughly into those mergers which are primarily end-to-end and those mergers which are primarily parallel. Those categories, in a very rough sense, correspond to two antitrust categories, to which I have often addressed myself: horizontal and vertical arrangements. parallel rail mergers correspond roughly to arrangements that antitrust lawyers would think of as horizontal and end-to-end mergers correspond roughly to arrangements that we would think of as vertical.

End-to-end rail mergers are somewhat more likely than most industrial vertical arrangements to give rise to problems, however, because an end-to-end rail merger can give rise to a diminution of what we sometimes call source competition or market competition. The typical situation would be where each of the two railroads carries widgets and is the only source of widgets to the point where they meet end to end. Under those circumstances, essentially, the competition between the two roads and in providing widgets at the point of junction might be significantly lessened even by an end-toend merger so that there is no assurance that an end-to-end merger will not lessen competition. But, more typically, the mergers that are substantially parallel do so.

The Antitrust Division and the Interstate Commerce Commission over the years have not always seen eye to eye on the competitive aspects of rail mergers. The merger that is of focus here today was one of those where we did not agree. The BN was formed by a merger among the Northern Pacific, the Great Northern Railway, and the Chicago Quincy & Burlington. The first two of those railroads were, of course, the principal northern tier carriers, and the merger between them eliminated a very substantial amount of competition. We opposed that rail merger and, indeed, appealed its approval by the Commission but were unsuccessful.

The Commission's approach in that case, as it has been in a number of cases, was to attempt to use the desirability of the merger to the parties in an effort to strengthen other carriers, sometimes competitive carriers but sometimes carriers which, in the view of the Commission, just needed strengthening and perhaps to cure problems that had nothing to do with the merger at all. We have long thought that was an unwise way to use so-called protective conditions. We were delighted when the Commission very recently announced that not only would it no longer impose conditions of that kind in rail mergers, but that it would review conditions previously imposed under those circumstances. We think that is a highly desirable development.

In the particular case of the northern lines merger, the ICC imposed several conditions that were intended to strengthen the Milwaukee Road and turn the Milwaukee Road into an effective north

ern tier carrier. In the very short run, they were successful. They provided a through connection to the west coast and to the Canadian railways in the Far Northwest for the Milwaukee which it had not previously had. The Milwaukee's traffic did, as a result, pick up for awhile. But the Milwaukee had been so undermaintained over the years and it was so financially weakened that it really could not take advantage of the additional traffic effectively. There were very slow speed restrictions on a very large part of its roadbed which was badly deteriorated. In a development which, I think, should not have come as a great surprise to anyone, the Milwaukee went into bankruptcy and ceased to be an effective competitor, leaving us with the unfortunate situation that the two strong roads are now merged and do have a position of substantial market power across the northern tier.

All of that, as I say, occurred over the very vocal protest of the Antitrust Division.

At a subsequent point in time, I believe in January of 1980, we first received complaints to the effect that the condition of the Milwaukee was being impaired by conduct of the Burlington Northern in violation of the protective conditions that the ICC had imposed. We investigated those complaints very, very thoroughly. We sought and received enormous quantities of documents both from the BN and from the Milwaukee. Thousands of documents were brought back to Washington and studied very, very carefully by the Division.

The result of that investigation, I have to tell you, was that, although we found a few isolated instances where one could argue that there had been a technical violation of the protective conditions, there did not seem to be any systematic or deliberate pattern. Rather, the pattern, seemed to be one of careful compliance with the conditions. The violations which we were able to find were limited to a handful of instances, and were technical in their nature. It was very, very clear that the instances of violation had no causal relation to the failure of the Milwaukee. Accordingly, that investigation was closed in December of 1981.

That is where we are today, Mr. Chairman, with respect to the BN. I would be happy to elaborate on any points in my statement that are of interest to you or to answer other questions that you may have.

I have brought my expert with me, Mr. Elliott Seiden. I do not purport to be an expert on rail mergers. I am sure that between the two of us we will give a good shot at answering such questions as you may have.

Senator BAUCUS. Thank you very much, Mr. Baxter. You in your statement very briefly touched upon the difference between end-toend mergers and parallel mergers. I am wondering whether you see any more parallel mergers occurring in the future or are they a thing of the past?

Mr. BAXTER. I think it would be rash to say that they are a thing of the past. One would not want to stop all parallel mergers. Indeed, most mergers have some parallel aspects and some end-toend aspects. Quite frequently a merger which has some parallel aspects will nevertheless give rise to very substantial efficiencies. The difficulties, the anticompetitive features can largely be removed by

giving other parallel carriers trackage rights with other arrangements of that type.

I do not mean to suggest we have seen the last of railway mergers with parallel features.

Senator BAUCUS. Do you tend to see more end to end in the future than parallel?

Mr. BAXTER. I really do not have enough information to make a pronouncement on that. Let me see if Elliott would like to comment on that.

Mr. SEIDEN. Mr. Chairman, it certainly seems to be the trend that we have seen in the last several years. The trend has been away from parallel mergers. There have been some notable parallel merger attempts that have not been particularly successful, most notably the Penn Central. The trend has been, throughout the seventies, after the northern lines case for the rail companies to look at end-to-end mergers, not parallel ones. Whether that trend will continue remains to be seen. But, based on the experience of the last 12 years at least, the trend seems to be away from rail companies looking at parallel mergers.

Senator BAUCUS. I am interested in what the Department's policy is or ability is to study the after-effects of merged railroads. Could you describe the Department's review procedures of merged railroad performance?

Mr. BAXTER. We have no active program of studying postmerger behavior or the economic consequences of rail mergers. We will study the proposed merger very carefully, take a position on the proposed merger; but, if the merger goes through, we at that point would not continue to make any systematic observation of the behavior of the parties unless some reason was brought to our attention why we should believe that a new violation of the antitrust laws, which might take the form of a violation of protective conditions, was occurring. In the case of the BN, for example, if we had found a systematic and deliberate violation of the protective conditions, that behavior might well itself have constituted an attempt to monopolize within the meaning of section 2 of the Sherman Act. Then, of course, we would have brought a case to bring that conduct to a halt.

Senator BAUCUS. Do you think that either the Department or the Commission should conduct a greater postmerger analysis? Do you think it would be beneficial or not?

Mr. BAXTER. Senator, I am unable to tell you how carefully_the Commission observes postmerger behavior or the quantity of resources the Commission puts into that effort. As a consequence, I would have no basis for forming an opinion whether the Government in some aggregate sense should be devoting more resources to that than it is. But we devote essentially no resources.

Senator BAUCUS. Is the information that is provided to the Department in a merger application sufficient? You mentioned you do not get the Hart-Scott-Rodino information. Does the Department feel it should have more information?

Mr. BAXTER. The information we receive in the application quite often would not itself be totally sufficient to enable us to form a final judgment, but it is enough to let us form a preliminary judgment. Then we have the benefit of additional information during

the course of the proceedings, the information contained in filings by parties. So, the procedure, taken as a whole, we do not view as inadequate, given the starting premise that rail mergers should be exempted from the Sherman Act, and left in the hands of the Commission to be judged in accordance with its rather vague public interest standard. On prior occasions the Antitrust Division has testified that rail mergers should be taken out from under the ICC and subjected to section 7 of the Clayton Act like any other merger. I have not reviewed that point of view recently but I know that that is a point of view the Antitrust Division has taken in the past.

Assuming that rail mergers are essentially to be left with the ICC, we see no substantial procedural defects of the present mechanism.

Senator BAUCUS. For the record, what kind of information would be available, the kind of information if the Hart-Scott-Rodino application were furnished? I would like just a brief summary of what additional information that would entail.

Mr. BAXTER. In a Hart-Scott-Rodino filing, we get a fair amount of information about the company, the nature of its activities, the volume of its activities in various markets.

I do not mean to suggest that the initial Hart-Scott-Rodino filing traditionally gives us enough information to reach final judgments on mergers. What is significant about the Hart-Scott-Rodino approach is that it affords us an opportunity to make a further request for information after we have had an initial burst of information that enables us to form tentative judgments about where problems are likely to show up.

I simply intended to point out that the procedures here are quite different than with most industrial mergers.

Senator BAUCUs. With the recent Department budget cutbacks, I am curious how much your rail merger staff has been cut back in the last couple of years and what anticipated levels you see in staff in this category.

Mr. BAXTER. We have taken the reductions pretty much evenly across the board. Mr. Seiden's section is likely to have lost one or perhaps two lawyers. Elliott?

Mr. SEIDEN. Not yet.

Mr. BAXTER. He is doing well.

Senator BAUCUs. Could you tell me how many professional staff has your shop lost, Mr. Seiden?

Mr. SEIDEN. Presently, the Transportation Section is composed of 24 staff attorneys, a chief and an assistant chief, for a total of 26 attorneys, and approximately 16 support people, including paralegals and secretaries. The section has over the last 4 years or so been right around the 40-person level, and it is there now.

Senator BAUCUS. Do you feel you have sufficient personnel in this area?

Mr. BAXTER. Yes, I do, Senator. I would also add to Mr. Seiden's statement that Transportation, like the other sections of the Antitrust Division, has access to our staff of economists. We work very closely with some economists who are specialized experts in transportation matters. So, we have that resource as well.

I do not feel that the present level of budget or staffing at the Antitrust Division is impairing our effectiveness.