11. If the Commission ascertains that other carriers and their service have been adversely affected, will you support Commission action to require the merged railroads to take action to eliminate or offset the losses?

As indicated in response to previous questions, a

distinction must be made between the impact on "competition" and "competitors." It is the former that is of primary concern. If a proposal would adversely affect other carriers so as to

substantially lessen competition, such a consolidation would be disapproved or approved subject to conditions.

Once a

consolidation has been consummated, there is little likelihood of reversing it. For that reason, the Commission carefully

scrutinizes the competitive impact before taking action on any consolidation proposal. If the Commission subsequently

Indemnification

determined, contrary to prior expectations, that the consolidation had adversely affected other carriers, resulting in inadequate service, consideration of the action to be taken would be determined on a case-by-case basis. The action would not take the form of indemnification to be paid by the merged system to compensate the affected carrier for its losses. conditions to approval of consolidations can be anti-competitive by requiring the consolidated carrier to subsidize carriers who are no longer able to compete effectively in the marketplace. Indemnification conditions proposed after consummation are just as anti-competitive and are subject to grave legal obstacles. Moreover, it must be stressed, however, that in many instances, service from other modes provides an effective alternative to rail service.

12. Do you

believe major mergers should be approved before audits have been made of previous major consolidations?

Our responses to question 10 and previous follow-up questions address this issue. Basically, since major consolidations all contain factual information unique to that particular consolidation, little would be gained by delaying consideration of one consolidation until audits of a previous one are completed. Moreover, such, audits themselves would be highly suspect due to changing economic and competitive situations. Finally, the

existing statutory time frames established for Commission action once a consolidation application has been filed would preclude the Commission from delaying action on an application until any sort of meaningful audit could be conducted.

In enacting the Staggers Act, Congress accepted the general contention that there will be a capital shortfall in the industry of between $16 billion and $20 billion. The Commission has authorized large railroad systems to be controlled by holding companies. If revenues derived through mergers are passed to holding companies for investment in non-transportation projects, the capital shortfall of the railroad industry could well be increased.

13. What conditions do you believe should be attached to mergers, or what other steps do you believe should be taken, to assure that benefits of mergers are retained in the railroad industry to foster sound, economic conditions in transportation and to benefit the shipping public?

As mentioned in my prepared statement, the Commission normally would impose conditions in a consolidation proceeding only if it is shown that essential services or competition would be affected by the consolidation. Generally, the Commission will

impose conditions on a consolidation only if the condition is designed to enable shippers to receive adequate service, would not pose unreasonable operating or other problems for the consolidated carrier, and would not frustrate the ability of the consolidated carrier to obtain the anticipated benefits.

With

The imposition of conditions involves a balancing test-weighing the potential benefits to the public and other carriers against the possible harm to the public and the applicants. regard to steps other than conditioning a consolidation, the Commission considers whether the benefits the applicants hope to achieve could be realized by some means other than the proposed consolidation that would result in less potential harm to the

public.

With regard to the issue of holding companies, this has been addressed previously in our prepared statement and responses to earlier questions. As mentioned, the Commission's Bureau of Accounts does examine the subsequent performance of consolidated carriers as well as affected carriers as a part of the general oversight of the financial condition of the railroad industry.

In your letter to me of March 31 you requested that I furnish you further information about a recently-concluded Antitrust Division investigation of the Burlington Northern Railroad and that I also provide you with some specific recommendations for limiting the authority of administrative agencies to confer antitrust immunity. Because other agencies within the Administration should be consulted before I reply to your latter request, this letter responds only to your request for information about the investigation of the Burlington Northern. My answer to your second request will be sent to you soon as it has been reviewed within the Administration.

as

As I indicated during my testimony before the Judiciary Committee on March 26, the Antitrust Division's investigation of the Burlington Northern ("BN") began in the early part of 1980, after we received certain information indicating that the BN, in an alleged attempt to prevent the Chicago, Milwaukee, St. Paul & Pacific Railroad (the "Milwaukee") from continuing to provide rail service in the states of the Northern Tier, might have deliberately violated the merger conditions imposed by the ICC in its Northern Lines merger decision. Because we feared that documentary evidence relevant to this matter might be destroyed as a result of a settlement agreement between the BN and the Milwaukee in a pending ICC proceeding, we immediately sent letters to the chief executive of the BN and the Milwaukee's trustee in bankruptcy asking them to preserve such documents voluntarily. Shortly thereafter Civil Investigative Demands (CID's) seeking literally hundreds of thousands of documents were sent to both the BN and the Milwaukee. As I explained in my testimony, many of the documents produced in response to these CID's were later. reviewed by staff attorneys in the Department of Justice, who also conducted a number of interviews with shippers and former employees of both the BN and the Milwaukee. These attorneys

also carefully analyzed the

Northern Lines Merger proceeding and the various decisions of the Interstate Commerce Commission relevant to that proceeding.

BN

BN

As the investigation proceeded, these staff attorneys focused their inquiry in four areas: (1) possible violations of the ICC's merger conditions, (2) possible intimidation of shippers, (3) possible BN refusals to cooperate with the Milwaukee, and (4) alternative explanations for the Milwaukee's financial collapse. Each of these topics is discussed below.

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1. Possible BN Violations of the Merger Conditions

The merger conditions that the BN was suspected of violating were the cumulative product of two ICC decisions--the "First Report" in which the Commission disapproved the proposed Northern Lines merger, and the "Second Report" in which the Commission reversed itself and allowed the merger to proceed. In the First Report the ICC found that a merger between the Great Northern and the Northern Pacific (the "Northern Lines") would drastically lessen competition between those railroads in area extending from Minneapolis/St. Paul, (the "Twin Cities") across the Northern Tier of states, to the Pacific Coast. */ In its Second Report, however, the Commission concluded that "a properly conditioned merger--with a substantially strengthened Milwaukee--will actually enhance competition in the area and will be consistent with the public interest, notwithstanding elimination of such competition as exists between the two lines. Thus, approval of the merger eventually turned on the fact that the conditions imposed by the Commission were expected to strengthen the Milwaukee as a competitior to the BN.

of the conditions imposed by the ICC, the most important from a competitive perspective were conditions 23 and 24, which were designed to correct serious structural deficiencies in the Milwaukee's route system. Before the merger, one of the Milwaukee's main lines ran from Chicago, through the Twin Cities, across the Northern Tier, to the Pacific coast.

*/ See 328 I.C.C. 460.

**/ 331 I.C.C. at 271; see also id. at 273, 275. In the course of its opinion, the Commission rejected the Department's contention that "reliance upon the strengthening of the CNW [Chicago & North Western] and Milwaukee as competitors to a merged Northern Lines would be a baseless ground on which to approve the merger." Id. at 275. Despite the Justice Department's appeal in this case, the Supreme Court affirmed the ICC decision and agreed with the ICC that a properly conditioned merger would strengthen the Milwaukee's competitive potential. 396 U.S. at 516.

Milwaukee had originally hoped this line would permit it to compete with the Northern Lines for transcontinental traffic. However, because the line stopped a few miles short of Portland, Oregon, the Milwaukee lost any chance to compete meaningfully for transcontinental traffic originating in, or destined to, Portland. A shipment originating in Portland, bound for Chicago, for example, would have to originate on one of the Northern Lines. Furthermore, the originating railroad would not voluntarily interchange any portion of this traffic to Milwaukee, and the originating carrier therefore would haul the traffic the entire distance to Chicago.

A similar problem beset Milwaukee on westbound movements. A shipper in Chicago, seeking to send traffic to Portland, would have the option of originating his traffic on either the Milwaukee or the Northern Lines. If he chose the Northern Lines, his shipment could travel directly to Portland without interchange. If he chose the Milwaukee, however, the shipment would have to be interchanged to the Northern Lines at some point before Portland. In most such cases, the Northern Lines insisted that such a westbound movement be interchanged no further west than the Twin Cities. Thus, the Milwaukee could take the movement only from Chicago to the Twin Cities before interchanging with the Northern Lines for delivery in Portland. Such a movement represented a "short haul" for the Milwaukee, and deprived it of the opportunity to earn substantial revenue.

In fact, even if the traffic from the east was destined to a point short of the coast, but still located on the Northern Lines, the same problem would arise. If the shipper in Chicago was sending traffic via the Milwaukee to a receiver located on the the Northern Lines in Billings, Montana, the shipment still had to be interchanged with the Northern Lines at the Twin Cities. The Milwaukee could not haul the traffic to a junction further west of the Twin Cities, such as Miles City, Montana, before interchanging with the Northern Lines. Again, Milwaukee was "short hauled," and deprived of substantial revenue. Finally, the fact that the Milwaukee did not reach Portland deprived it of connections with the Southern Pacific (SP) and the Union Pacific (UP). This meant it was precluded from participating in the extensive north-south traffic along the

west coast.

In its First Report, the Commission took cognizance of the severe limitations under which the Milwaukee labored:

The limitations on Milwaukee's routes west of Twin Cities and Sioux City, together with the fact that Milwaukee is short hauled at the Twin Cities gateway on a large volume of traffic, has severely