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Milwaukee's withdrawal

from

the

Northern Tier was the almost

continual unprofitability of its western lines (the "Pacific Coast Extension").

The Pacific Coast Extension (PCE) was built early in this century at a cost of $250 million--$205 million more than originally expected. This extraordinary cost increase continually handicapped the Milwaukee. In fact, industry analysts believed that this 1,771-mile line, together with its branches, never secured sufficient density to earn a market rate of return on investment. */ Likewise, the special master appointed by the reorganization court to report on the Milwaukee asserted that the PCE never even produced a sufficient return to service the debt of its construction. **/ Once it became saddled with this costly burden, the Milwaukee's financial condition deteriorated quickly until, in 1925, went into receivership. The ICC found that the construction of the PCE was the chief cause of this bankruptcy. ***/ The carrier emerged from bankruptcy in 1928. However, it labored under continual annual deficits until 1935, when it again collapsed into bankruptcy. This time, it did not emerge from bankruptcy for ten years.

it

The costs of the Pacific Coast Extension had a financially devastating effect on the railroad in the 1970's as well. Although the Milwaukee managed to show positive rail net income in five of the ten years preceding the Northern Lines merger, this was achieved in part by postponing necessary maintenance for its tracks and equipment. A special master reported to the reorganization court that the Milwaukee survived the 1960's (and until 1977) "only through an increasingly extensive

*/

Conant, "The Future of the Milwaukee Road," 45 ICC Practitioner's Journal 280-281 (1977-1978).

/ Report of Special Master, Milton H. Gray, including Findings of Fact, Conclusions of Law, and Recommendations, on the Trustee's Application for Abandonment of the Pacific Coast Extension, at 4 (February 29, 1980) (hereinafter Special Master).

131 I.C.C. 615, 668. See also Richard B. Ogilvie, Trustee of the Property of Chicago, Milwaukee, St. Paul and Pacific Railroad Co.--Abandonment--Portions of Pacific Coast Extension in Montana, Idaho, Washington, and Oregon, ICC docket AB-7 (Sub-No. 86) at 4 (served January 30, 1980) (hereafter PCE Abandonment).

PCE Abandonment at 7.

program of deferring such maintenance."

The eventual result of this program of deferred maintenance was worsened (i.e., slower) service, and this gradually caused shippers to turn to the only alternative to the Milwaukee--the BN. Worthington L. Smith, then the Milwaukee's President, testified about this dilemma before the ICC:

[0]ur failure on a day-to-day basis to function in a
manner attractive to shippers who had the ability to
choose competitively between us and the BN has
resulted in the problem of lessened traffic which, in
turn, reduced Our ability to produce the kind of
system which would attract increased traffic. ** */

Similarly, the Commission noted that the foregone maintenance in the 1960's and 1970's caused the Milwaukee's freight service time between Chicago and Seattle to jump from 53 hours to 130 hours. *** */ Likewise, the Milwaukee's transit time between St. Paul and Tacoma in 1980 was 87 hours, 45 minutes, while the BN ran the comparable route to Seattle in 48 hours, 40 minutes. Not only did this slower service drive away time-sensitive shippers, it caused a lower return Milwaukee's equipment (because the cars made fewer trips per year) and forced the company to rent other equipment, thereby further increasing its costs. Eventually, the burden of the PCE once again became too great for the Milwaukee to bear and, as you know, in 1977 the Milwaukee was, for the third time in this century, forced to seek protection under the bankruptcy

laws.

on

In sum, the Department's investigation of the Burlington Northern's competitive behavior toward the Milwaukee failed to disclose any evidence of possible antitrust violations. Although there was some indication that the BN might have committed isolated breaches of some of the ICC-imposed merger conditions, the effect of any such violations on the financial standing of the Milwaukee was de minimis. Nor was there any material evidence that the BN intimidated shippers or otherwise violated the antitrust laws. Instead, our investigation disclosed that the Milwaukee's financial plight was essentially due to the Pacific Coast Extension's lack of profitability.

I hope that the foregoing information about Department's investigation will be of assistance to you.

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you requested that I a recently-concluded

In your letter to me of March 31 furnish you further information about 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 as soon as it has been reviewed within the Administration.

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

This is a petition for review of a decision of the Interstate Commerce Commission. On April 30, 1981, several labor unions representing Burlington Northern employees filed a petition with the Interstate Commerce Commission requesting that Burlington Northern Inc. (BN), then a common carrier, be prevented from transforming itself into a holding company. The request was based, in part, on the allegation that BN had misled the Commission in an earlier proceeding in which the Commission had unanimously approved the merger of Burlington Northern and the St. Louis-San Francisco Railway Company. See Burlington Northern, Inc.-Control and Merger-St. Louis-San Francisco Railway Company, 360 I.C.c. 788 (1980), to which we shall refer as the "merger order." Petitioners also claimed that formation of the holding company violated the merger order and that authorization by the Commission was required under various provisions of the Interstate Commerce Act, 49 U.S.c. $S10101 et seq., before the holding company could be formed. On June 5, 1981, in the decision we are now asked to review, the Commission denied appellant's petition. The Commission found that BN had not violated the merger order and that the holdingcompany transaction was not one which required the approval of the Commission. Great Northern Pacific & Burlington Lines, Inc. -Merger, etc.-Great Northern Railway Company, I.C.C.

(1981). This petition for review followed.

The petitioners urge the following arguments: (1) that the Commission erred when it found that the formation of the holding company did not violate the merger order; (2) that the Commission erred when it determined that certain bond indentures did not forbid the formation of a holding company; and (3) that the Commission erred in holding that the Interstate Commerce Act did not give it jurisdiction to approve or disapprove the formation of the holding company.

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

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