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refers to BN's rail operations as a "cash cow", and reports that even veteran BN Railroad officials fear the railroad "cow" will be "milked" to promote the holding company's plans for diversification.
We should point out to the committee that the reported plans of the BN are not without precedent. In 1977, the ICC studied the use of holding companies in the context of the rail industry and found that billions of dollars worth of rail assets have been siphoned from railroads by their holding companies.
In the case of the BN, using the railroad as a cash cow for diversification means that shipper dollars are going into assets that shippers receive no benefit from. This is particularly bad when the commodity profits come from coal, because high coal rates defeat national energy goals, and also defeat basic consumer interests, since most coal shippers are utilities, and the utilities' customers, the general public, will end up picking up part of the tab for BN's corporate acquisitions. In addition, the holding company can pressure the railroad to increase captive coal rates-a policy that BN did institute after the formation of the holding company. Finally, with the railroad as a cash cow for diversification, less moneys are available to maintain and keep up the rail network.
In response to these perceived problems with the holding company, the League asked the ICC in May of 1981 to prevent its formation pending ICC review and approval. In response, the ICC said it could not review the matter because it lacked jurisdiction. However, in February of this year, the 8th Circuit reversed the ICC's decision, and hopefully, the Commission will now decide to review the merits of BN's corporate reorganization on remand, though after listening to Chairman Taylor today, I do not know how far we will get.
In addition, at its annual winter meeting this year, the league passed a resolution endorsing the efforts of the Water Transport Association and others to prevent the holding company from stripping the railroad of its land grant holdings.
Finally, the league would support legislative initiatives designed to insure that railroad holding companies not channel away resources earned or owned by the railroad in a manner inconsistent with the interest of users of the rail network.
On behalf of the league, I would like to again thank the committee for the opportunity to appear before it today.
Senator BAUCUS. Thank you.
[The following was received for the record:]
JOHN H. LESEUR
ON BEHALF OF THE
WESTERN COAL TRAFFIC LEAGUE
Mr. Chairman and Members of the Committee:
Thank you for extending an invitation to the Western Coal Traffic League to appear and participate in today's hearings on rail mergers and the foundation of the Burlington Northern Holding Company. I am an attorney with the law firm of Slover & Loftus, and our firm acts as counsel for the League.
By way of background, the Coal League is comprised of utilities and industry that purchase and receive coals mined west of the Mississippi River. Appended as Exhibit A to my testimony is a listing of the members of the League. Overall, League members received over 20 million tons of coal last year, and paid a total of approximately 351 million dollars in rail freight charges. All members of the Coal League receive their coal by rail, and much of this tonnage is transported over the lines of the Burlington Northern Railroad Company. In view of the magnitude' of the freight charges assessed against League members, and their dependence upon coal to meet the needs of their customers, the League has been active in the principal proceedings before the Interstate Commerce Commission and the federal courts involving rail coal rates and rail service matters.
My testimony this morning will focus on one issue that the League believes affects both coal rates and coal transportation service BN's formation of a holding company.
THE FORMATION OF THE HOLDING COMPANY
Pursuant to the management proposal submitted and
approved by BN's stockholders on May 14, 1981, ownership of the
BN Railroad was transferred to a holding company. BN candidly admitted in the Proxy Statement accompanying the management proposal that the sole purpose of this corporate restructuring was to promote the development of its non-transportation resources while avoiding ICC securities regulation:
The Interstate Commerce Act requires the
Management believes that development of the
Separately, BN's then-President and Chief Executive
Officer, Richard Bressler, wrote a letter to each ICC Commissioner on January 28, 1981, stating that formation of the holding company would "not in any way detract from our efforts to provide the necessary personnel and facilities to meet the needs of all our rail shippers." Mr. Bressler went on to underscore BN's belief that it was important "that each of our separate lines of business stand on its own feet!" (A copy of this letter is attached as Exhibit B to my statement).
Because of the League's serious apprehensions over the effect that the BN's restructuring plan would have on its coal service operations, the League requested the ICC, on May 5, 1981, to take action to prevent the formation of the holding company until it was formally approved by the ICC (see Exhibit C). Sub
sequently, the ICC denied the League's request, as well as petitions filed by other interested parties, on the grounds that it lacked jurisdiction to consider the legality, or public interest factors, involved in BN's holding company proposal. As this Committee is well aware, the formation of holding companies to own major railroads has been a most controversial subject in recent years, and has been carefully analyzed by the ICC. In 1977, the ICC issued a comprehensive study of the holding company issue. See Railroad Conglomerates and Other Corporate Structures: A Report to Congress as Directed by Section 903 of the Railroad Revitalization and Regulatory Reform Act of 1976. Therein, the Commission concluded:
Id. at 73.
The history of conglomerates in the railroad
The Commission's conclusion that the parent holding company has the power to "strip its subsidiary railroad of valuable assets" is real and apparent in the case of the BN.
THE BN's CASH COW
As discussed above, BN formed its holding company to accelerate its growth in non-transportation areas, but at the same time told the ICC that each of its separate lines of business would "stand on its own feet." However, recent reports in the financial press indicate that BN is taking a different tack. For example, the March 8, 1982 edition of Business Week reports that BN management is attempting to raise a billion dollars for purposes of targeting oil and lumber interests for "Marathon Oil-Type" corporate takeovers. The principal source for generating the funds needed for these capital intensive
the railroad! Thus, Business Week observes that BN's rail operations are starting to "throw off cash," that BN is
becoming "a massive cash machine" and that the "cash cow" to be milked for these non-rail investments is the railroad:
BN's cash flow is expected to run roughly
(The Business Week article is attached as Exhibit D).
It is expected that funds for the payment of
Id. at 5.*
THE CONSEQUENCES OF USING THE RAILROAD
Using the BN railroad as a "cash cow" to fuel the appetites of its parent holding company, particularly where the cash is coming from captive coal shippers, causes numerous adverse consequences to the shipper and public interests: Exploitation of Captive Coal Shippers
The boom in western coal traffic has come about because utilities and industry responded to the national need to reduce the use of oil and natural gas as a source of electrical power by turning to low sulfur western coal. Since the principal mining areas of this coal are usually located hundreds, or thousands of miles from industrial and utility centers, the only feasible method of transporting these coal volumes is by rail. Thus, western carriers exclusively serving coal origins or destinations
The ICC's 1977 Conglomerates study has previously observed that "in pursuit of diversification or for other purposes, [holding companies] have used the [cash] dividends to obtain funds from railroads free of interest costs or the obligation for repayment." Id. at 21. Transfers of non-cash assets by dividend from railroads to holding companies were also found to be commonplace. See id. at 29-34. Conversely, BN's Proxy Statement flatly asserts "Holding Company will not assume any of the debt obligations of Railroad as a result of the merger. Id. at 7.