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The Commission has recently revised its procedures governing railroad consolidations. In a decision dated February 19, 1982, in ex parte No. 282, sub-No. 3, Railroad Consolidation Procedures, we revised the informational requirements for rail carriers seeking authority to consolidate. We also incorporated the new time limits for consideration of merger applications contained in the Staggers Rail Act of 1980, as well as other changes necessitated by that legislation.
The Commission recognizes the problems that can be caused by undue delay in the consideration of rail merger applications. Therefore, we are committed to an expedited timetable for such consideration. Our commitment to expeditious yet thorough analysis of merger applications is demonstrated by the fact that we anticipate that final decisions will be rendered in all of the currently pending merger applications well before the statutory deadlines mandated by the Staggers Act.
Although the Commission has experienced staff reductions as a result of budgetary constraints, we do not believe this will affect our ability to review merger applications.
The Commission has been considering four major rail merger proposals. I would like to provide the committee with a brief status report of these proceedings.
In December of 1980, the Norfolk Southern Corp., a noncarrier holding company, filed an application for control of the Norfolk & Western Railway Co., and the Southern Railway Co. Yesterday, the Commission issued a final decision approving the merger, approximately 15 months before the original statutory deadline.
Union Pacific Corp. is a noncarrier holding company which controls the Union Pacific Railroad Co., among other interests. The Union Pacific Co. has filed applications to bring the Missouri Pacific Railroad Co. and the Western Pacific Railroad Co. under its control. This proposal has generated considerable controversy and has resulted in several extensive requests for trackage rights by competing railroads as a condition of the merger. The Commission is required to issue a final decision no later than April 15, 1983. Once again, we are hoping to issue our decision before the statutory deadline.
The last two mergers before the Commission relate to the efforts of Guilford Transportation Industries, Inc., (GTI), a noncarrier holding company, to put together a regional rail system in the Northeast. GTI presently controls the Maine Central Railroad Co. GTI has filed an application for approval to control the Boston and Maine. The Commission must issue a final decision on the application by April 26, 1982.
GTI's application for approval to control the Delaware and Hudson Railway Co. is contingent upon approval of GTI's acquisition of the Boston & Maine Corp. A final decision in this case is due by July 28, 1982. Oral hearing in this proceeding began on March 22, 1982.
As a general rule, the Commission has not conducted comprehensive, ex post evaluations of rail mergers. In the studies which we have conducted, the Commission has encountered a number of difficulties with postmerger analysis, because there are so many nonmerger related variables which can affect a carrier's performance.
For example, the state of the economy, availability of capital, and changes in Government policy and regulation can all affect projections made by carriers during merger proceedings.
In addition, benefits from railroad mergers may not become evident for some time. Therefore, a considerable period must elapse after consummation of a merger before a final conclusion can be reached regarding the impacts of the merger. Obviously, this delay reduces the usefulness of any postmerger study.
In addition, the findings and conclusions in a postmerger analysis cannot realistically be utilized for future Commission action since the facts in each case differ so greatly. Therefore, it appears that the cost of comprehensive postmerger analyses in terms of our resources may far outweigh any benefits. However, the Commission's Bureau of Accounts does examine the subsequent performance of merged carriers as a part of the general oversight of the financial condition of the railroad industry.
An issue that I know is of great concern to members of this committee and particularly to you, Senator, is the formation of holding companies in the railroad industry and the potentially harmful effects this could have on rail service to the shipping public. As you may recall, section 903 of the Railroad Revitalization and Regulatory Reform Act of 1976 directed the Commission to conduct a study to determine the effects, if any, that the diverse railroad corporate structures have on effective transportation, intermodal competition, revenue levels, and any other pertinent aspects of national transportation. The results of this investigation were submitted to Congress in 1977 in a report entitled, "Railroad Conglomerates and Other Corporate Structures." In general, the report stated that the conglomerate structure has in the past and continues to have the potential of separating assets from railroad subsidiaries.
The report expressed concern that railroad noncarrier resources and income had been divorced from the railroads in many cases without adequate compensation. On the whole, the study did not find any substantial benefits to the carrier subsidiaries in terms of improved profitability, maintenance, or modernization of the railroads which resuited directly from the formation of holding companies.
I should mention at this point that the railroad conglomerate report has not been adopted by the present Commission.
Since issuance of the report to Congress in 1977, the Commission has not initiated any major investigation into holding companies and their effect on their rail carrier subsidiaries, but our auditors do routinely investigate transactions between carriers and their affiliated companies during regular audits of railroads. The Commission's Bureau of Accounts will be monitoring such activity more closely, I can assure you, and the Bureau will inform us periodically of its findings.
Since most holding companies have been designated by the Commission as noncarriers, the Commission does not have the authority to prescribe reporting requirements. However, the Commission does have the authority to initiate an investigation of holding companies relating to their management of rail carriers under their control. This authority includes permission to obtain information
from such holding companies that the Commission deems necessary to carry out the investigation.
Although the Commission's power of inquiry under these provisions is broad, the statute only gives us the power to inquire into and report. The Commission does not have the authority to take any substantive regulatory actions, should such an investigation reveal abuses.
I might add that draft legislation has been submitted in the past which would give the ICC greater authority in this area, but no congressional action was taken. I believe the last time that was done was in 1975.
Because of the committee's particular interest in the Burlington Northern Railroad, I would like to conclude my testimony by providing a short summary of the Commission's consideration of the BN's corporate restructuring which resulted in the formation of a holding company. As you know, early in 1981, BN's board of directors announced its intention to form a holding company in order to attain greater flexibility in the development of its nontransportation assets. The Commission received three petitions requesting that we exert jurisdiction over this transaction; these petitions were denied in a decision dated June 5, 1981.
Under section 11343 of title 49, United States Code, the Commission has jurisdiction over an acquisition of control by a person that is not a carrier only if control is sought over at least two carriers. I think that has already been pointed out. Although the Burlington Northern controls a number of carriers, all of the carrier operations are conducted as part of a single integrated system under the direct control and management of the Burlington Northern.
For over 25 years, the Commission has held that it does not have jurisdiction over a noncarrier's acquisition of control of a single integrated rail system even if the system is comprised of separate corporations. The single system doctrine was applied to the Burlington Northern case and the petitions were denied.
On February 17, 1982, the U.S. Court of Appeals for the Eighth Circuit held that the Commission's reliance on the single system doctrine was not unreasonable. Although the decision stated that this interpretation is not the only possible one, the court deferred to the Commission's view of its own governing statute, especially since this construction has been consistently adhered to over a long period of time. However, the court remanded the case to the Commission for further findings on the issue of the Burlington Northern's interest in several terminal companies.
The matter is presently under review by the Commission. I expect a decision soon regarding the action to be taken following remand.
That concludes our summary statement. I would be glad to try and respond to any questions that you might have.
Senator BAUCUS. Thank you, Mr. Taylor. I appreciate your testimony very much.
Without objection, your entire prepared statement will be insert
[Material referred to follows:]
STATEMENT OF REESE H. TAYLOR, JR.
March 26, 1982
Mr. Chairman and Members of the Committee:
I appreciate this opportunity to testify before you today to share with you the Interstate Commerce Commission's policies regarding railroad mergers and to discuss our activities in this area. Let me begin by saying that the Commission shares your concerns regarding the effects of rail restructuring on the financial viability of our nation's rail system and the maintenance of essential rail services to the shipping public. Today, I will be discussing the Commission's policies and procedures in the rail merger area, the status of pending merge applications, and the Commission's views regarding the holding company corporate structure which has now been adopted by most of
the Nation's railroads.
MERGER POLICY AND PROCEDURES
I would like to begin my testimony by outlining in general terms the Commission's policy in the area of railroad mergers. The following discussion relates to the policy and procedures applied to major mergers those involving at least two class I
The Interstate Commerce Commission encourages private industry initiative that leads to the rationalization of the Nation's rail facilities and reduction of its excess capacity. One means of accomplishing these ends is rail consolidation. However, the Commission does not favor consolidations through the exercise of managerial and financial control if the controlling entity does not assume full responsibility for carrying out the controlled carrier's common carrier obligation to provide. adequate service upon reasonable demand. Furthermore, the Commission does not favor consolidations that substantially reduce the transporta
tion alternatives available to shippers unless there are substantial and demonstrable benefits to the transaction that cannot be achieved in a less anticompetitive fashion. Our analysis of the competitive impacts of a consolidation is especially critical in light of the congressionally mandated commitment to give railroads greater freedom to price without regulatory interference.
The Commission's consideration of any major merger application is governed by the criteria prescribed in our enabling statute, as well as the rail transportation policy. The criteria which must be considered in examining a proposed transaction are: (1) the effect of the proposed transaction on the adequacy of transportation to the public;
(2) the effect on the public interest of
including, or failing to include, other rail
(3) the total fixed charges that result from the proposed transaction;
(4) the interest of carrier employees affected
by the proposed transaction; and
(5) whether the proposed transaction would have
In order to determine whether a transaction is in the public interest, the Commission must perform a balancing test
the potential benefits to the applicants and the public against the potential harm to the public. This balancing test is applied on a case-by-case basis. In the process of reaching a final decision, the Commission considers whether the benefits which 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.
There are many benefits which can result from rail consolidation. If the resulting carrier is a financially sound competitor better able to provide adequate service, then both the carrier and the public can benefit from the transaction.