Probably the most important issue before the ICC and the courts as they reviewed the merger was whether or not the only remaining railroad providing service on the Northern Tier, the financially-weak Chicago, Milwaukee, St. Paul and Pacific Railroad (the "Milwaukee"), would be able to provide sufficient competition to the new Burlington Northern. One of the ways that the Commission chose to confront this issue was to impose certain conditions on the merger that were intended to make the Milwaukee a stronger competitor. The Department argued that these conditions were inadequate to cure the merger's anticompetitive effects, but our arguments

both the ICC and the Supreme Court. **/

were rejected

at

As many of you know, within a few years following the merger the Milwaukee found itself unable to compete effectively with the Burlington Northern. In December 1977, Milwaukee filed a petition in bankruptcy and its operations were taken over by a bankruptcy trustee. Subsequently, the trustee found it necessary to terminate many of the Milwaukee's services including, most importantly, the service to the Pacific coast that was supposed to provide a competitive check on the Burlington Northern. As a result, the Burlington Northern is today the only carrier providing rail service in a large number of transportation markets in the northwestern United States.

**/ 396 U.S. 516. See also Great Northern Pacific & Burlington Lines Inc.--Merger-etc.--Great Northern Ry et al., 331 I.C.C. 228, 275 (1967).

Despite the fact that we were unsuccessful in persuading the ICC to disapprove the Northern Lines merger, the Department of Justice has had Occasion to inquire into whether the Burlington Northern adhered to the conditions that the ICC had imposed on the merger in an attempt to reduce its anticompetitive impact. In the early part of 1980, we learned of accusations that the Burlington Northern had deliberately contributed to the bankruptcy of the Milwaukee by, among other things, intentionally violating certain ICC-imposed merger conditions. These conditions essentially (1) opened eleven gateways on the Northern Tier on a reciprocal basis, / (2). granted the Milwaukee certain trackage rights in the states of Washington and Oregon, **/ (3) required the BN to handle the Milwaukee's movements in and out of Billings, Montana, and (4) prohibited the BN and the Milwaukee from imposing "dual basis" switching charges at their common service points. **

*/ This condition gave shippers the option of having their shipments interchanged between the BN and the Milwaukee at any one of eleven points without paying extra charges.

**/ These trackage rights were designed to give the Milwaukee direct access to Portland, Oregon, and to Sumas, Washington, an important point of interchange with the Canadian rail system. ***/ See Great Northern Pacific & Burlington Lines, Inc.-Merger, etc.--Great Northern Railway Co. et al., 331 I.C.C. 228, 356-58 (1967). Although the Department regarded these conditions as procompetitive, we felt, as previously noted, that their impact would be insufficient to offset the merger's anticompetitive effects. Id. These particular conditions are now largely moot Milwaukee has recently abandoned service at locations to which they applied.

at

275.

because the most of the

If the BN systematically violated these conditions to harm the Milwaukee, such conduct could well have constituted a violation of the prohibition against monopolization found in Section 2 of the Sherman Act. / Accordingly, upon learning of these accusations, the Department opened a civil investigation into the competitive conduct of the Burlington Northern.

In the course of this investigation, ve sent Civil Investigative Demands (CID's) to both the Burlington Northern and the Milwaukee calling for the production of a substantial number of documents. Burlington Northern alone produced several hundred thousand documents in response to our CID. Two Department attorneys travelled to the headquarters of the Burlington Northern and the Milwaukee to inspect these documents. The attorneys reviewed all these documents and requested that over 15,000 Milwaukee documents and 35,000 BN documents be sent to Washington for the staff's further inspection. In addition, Department attorneys interviewed shippers, former Milwaukee employees and former Burlington Northern employees to gather evidence relating to the Burlington Northern's conduct. Overall, the Department's records show that employees of the Antitrust Division spent approximately 2500 hours working on this matter and that the total cost of the investigation to the government was nearly $40,000. Both the Burlington Northern and the Milwaukee fully cooperated in the investigation.

/ 15 U.S.c. §2.

In December 1981,

approximately 18 months after the

investigation began, staff attorneys assigned to this matter recommended that the investigation be closed.

It was their

intent by the

conclusion that there was no evidence of an Burlington Northern to eliminate or handicap the Milwaukee as a competitor. While the staff did conclude that the Burlington Northern competed vigorously with the Milwaukee, they found no evidence that this competition was predatory or otherwise illegal. In making its recommendation, the staff also noted that although there were a handful of isolated instances where the Burlington Northern might have arguably committed minor violations of some of the merger conditions, the impact of any such violations on the Milwaukee was de minimis. The staff attorneys also observed that although some of the blame for the Milwaukee's collapse can be traced to the fact that the Northern Lines merger put the Burlington Northern in a superior competitive position, the merger was granted antitrust immunity by the ICC and cannot now be used as a basis for commencing an antitrust suit against Burlington Northern. On the basis of these conclusions, on December 16, 1981, in accordance with normal procedures the investigation was closed.

The Department finds it particularly unfortunate that the Northern Tier states are no longer served by competing railroads. The reason for this unfortunate occurence, however, is not illegal conduct by the Burlington Northern. Rather, the

basic cause was the Interstate Commerce Commission's decision to approve the Northern Lines merger. Of course, even if this merger had not been allowed, the Milwaukee still might have been forced into bankruptcy and required to abandon its western lines. However, if there had been no Northern Lines merger, there would today be at least two other carriers on the Northern Tier: the Northern Pacific and the Great Northern. The lesson to be learned from this experience, I believe, is that there are great dangers in granting regulatory agencies the authority to immunize mergers from the antitrust laws based on vague notions of the "public interest." Accordingly, I believe it appropriate to consider whether mergers in regulated industries should continue to be subject to review by such agencies under existing statutory requirements.

Mr. Chairman, this completes my prepared testimony. I would be happy to answer any questions from the members of the

Committee.

Senator BAUCUS. Our next witnesses appear as a panel. Mr. Oliver Krueger is Associate Director of the Community and Economic Development Division of the GAO. Mr. Reese Taylor, Jr., is Chairman of the Interstate Commerce Commission. Their testimony deals with the monitoring of rail mergers and holding companies, a matter that I think takes us to the heart of the issues that we are addressing today. Chairman Taylor and Mr. Krueger, I welcome you both to this hearing. Mr. Krueger, why don't you proceed first.

STATEMENTS OF A PANEL CONSISTING OF OLIVER W. KRUEGER, ASSOCIATE DIRECTOR, COMMUNITY AND ECONOMIC DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY BOB CRYSTAL, GENERAL COUNSEL'S OFFICE, GAO, AND JAMES BLUME, GAO; AND HON. REESE H. TAYLOR, JR., CHAIRMAN, INTERSTATE COMMERCE COMMISSION, ACCOMPANIED BY LOUIS E. GITOMER, ACTING DEPUTY DIRECTOR, SECTION OF FINANCE, ICC; JANICE ROSENAK, LEGISLATIVE COUNSEL, ICC; AND WILLIAM MOSS, BUREAU OF ACCOUNTS, ICC

Mr. KRUEGER. Thank you, Mr. Chairman.

I have with me this morning Mr. James Blume of the General Accounting Office, who is really in charge of most of GAO's work at ICC. I also have Mr. Bob Crystal at the far right, who is an attorney from our General Counsel's Office.