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We have submitted our full statement for the record. I have a short statement that I would like to read with your permission. Senator BAUCUS. That would be fine. In fact, that would be great. Mr. KRUEGER. We are here today at your request to discuss the Interstate Commerce Commission's jurisdiction over and monitoring of railroad companies, including the acquisition of the Burlington Northern Railroad by a holding company, ICC's ability to review merger applications despite staff reductions, and ICC's preparation and use of postmerger studies.
Under the Interstate Commerce Act, ICC does not have jurisdiction over the acquisition of a single rail carrier by a noncarrier, such as a holding company. ICC's jurisdiction applies only when a holding company is acquiring control of at least two carriers, or where a holding company already controls one carrier and seeks to acquire another. ICC has ruled that a rail system comprised of a number of rail carriers but operated and managed as a single system would be considered a single carrier, called the single system doctrine.
ICC applied the single system doctrine when deciding that it did not have jurisdiction over Burlington Northern's creation of a holding company in 1981. The holding company was formed to own both transportation and nontransportation companies and assets.
ICC was requested to exert its jurisdiction over the proposed holding company on the basis that it did involve the acquisition of at least two carriers. In its June 5, 1981, decision however, ICC denied the petitions stating that Burlington Northern's formation of a holding company met the single system doctrine.
Subsequently, ICC's decision was appealed and in February 1982, the U.S. court of appeals upheld the single system doctrine. The court stated that ICC's interpretation was not necessarily the one the court would adopt but that it was not unreasonable.
ICC also determined that its approval was not required for the proposed merger of the Colorado and Southern Railway Co. with the Burlington Northern Railroad. ICC decided this merger was exempt from its jurisdiction because it was within the corporate family. This is also consistent with ICC's single system doctrine.
In a 1977 report to the Congress, ICC stated that the opportunity exists for holding companies to make use of the railroads' assets to the possible detriment of the railroads. ICC's report indicated that it would conduct audits of rail carriers' records to identify transactions which might have a significant adverse impact upon the railroad.
ICC's activities in this area, however, appear limited. It monitors holding company railroad-related transactions through audits of railroad records and reviews of accounting and security reports. However, the audits of railroad records are only conducted every 2 to 3 years. In addition, the accounting and securities reports do not provide sufficient information to identify many of the holding companies' railroad-related transactions.
ICC officials told us that they do not monitor all holding companies' rail-related operations because of staff limitations, the redirection of policy toward less regulation, and the fact that no abuses have been identified under the current monitoring system. ICC officials also stated that, even if an abuse was identified, they beli
that they do not have the authority to terminate or restrict the transaction because the single carrier holding companies are exempt from their jurisdiction.
We believe that ICC needs to monitor all holding companies' railrelated operations because the opportunity for abuse does exist. It needs to monitor such transactions to identify possible abuses in sufficient time to take appropriate action, including asking the Congress to increase its authority, if necessary.
In the area of staff reductions, ICC's overall staff has decreased by 512, or about 25 percent, since fiscal year 1979. The ICC office responsible for assisting in its merger analysis has been reduced from 92 to 52 since 1979. However, despite the staff reductions, ICC officials believe that sufficient staff exists to adequately review proposed mergers primarily because the staff from several of their offices actually assist in analyzing mergers, a number of the office's duties have been recently reduced or eliminated, and the number of major merger cases which require a full review is limited.
The director of that office, however, said that, if the ICC becomes unexpectedly flooded with merger proposals, it would contract out for specific studies rather than compromise the quality of its work. Dealing with postmerger studies is my next subject. During Senate hearings in June 1979, before the subcommittee on antitrust, monopoly, and business rights, former ICC Chairman O'Neal testified that ICC was responsible for analyzing postmerger data and that it was in the process of contracting for such a study with Princeton University.
Senator, in response to your request, we inquired in November 1981 whether that study referred to by the Chairman had actually been done. ICC informed us that the study had not been performed and we relayed this information to you by letter dated December 2, 1981. Subsequently, ICC said that in spite of its earlier statements to us, it had found the study, which it then made available.
That study, however, did not accomplish ICC's original goals of determining whether the benefits of the mergers reviewed were realized nor provided information that could be projected to other mergers. According to the official responsible for the study, the scope was reduced because of data limitations.
ICC officials acknowledge that properly conducted postmerger studies may provide useful information for developing its merger policies. However, because mergers are not similar, they question whether the results from a completed merger can be used to assess the potential impact of a proposed merger. They also question whether such a study can produce conclusive findings.
Attorneys in ICC's Office of Proceedings stated that postmerger studies could be submitted as evidence during current merger proceedings. Since each merger is different, however, evidence from postmerger studies could easily be challenged on the grounds that the mergers were not sufficiently similar for comparison.
We believe postmerger studies could assist ICC's reviews of proposed mergers, either by developing methods for data analysis or by highlighting policy issues. However, any benefit to be derived from postmerger studies must be weighed against their cost and the possibility that the studies may not produce usable results. Mr. Chairman, this concludes my short statement.
Senator BAUCUs. Thank you very much, Mr. Krueger. Before I ask you some questions, I would like now to proceed to Chairman Taylor.
Without objection, we will insert Mr. Krueger's prepared statement.
[Material referred to follows:]
UNITED STATES GENERAL ACCOUNTING OFFICE
WASHINGTON, D.C. 20548
FOR RELEASE ON DELIVERY
OLIVER W. KRUEGER, ASSOCIATE DIRECTOR
COMMUNITY AND ECONOMIC DEVELOPMENT DIVISION
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
THE INTERSTATE COMMERCE COMMISSION'S JURISDICTION OVER
RAILROAD HOLDING COMPANIES AND EVALUATION OF
PROPOSED RAIL MERGERS
MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE:
WE APPRECIATE THE OPPORTUNITY TO BE HERE TODAY AT YOUR
REQUEST TO DISCUSS THE INTERSTATE COMMERCE COMMISSION'S (ICC'S)
MERGER STUDIES TO ASSESS PROPOSED MERGER APPLICATIONS.
ICC HAS LIMITED JURISDICTION OVER ACQUISITION
UNDER THE INTERSTATE COMMERCE ACT, ICC DOES NOT HAVE JURIS-
ENTITY AT THE TOP AND DOES NOT OTHERWISE ALTER THE OPERATIONS
OF THE AFFILIATED CARRIERS.
ICC APPLIED THE SINGLE SYSTEM DOCTRINE WHEN DECIDING THAT IT DID NOT HAVE JURISDICTION OVER BURLINGTON NORTHERN, INC.'S CREATION OF A HOLDING COMPANY IN 1981. THE HOLDING COMPANY WAS FORMED TO OWN BOTH ITS TRANSPORTATION AND NON-TRANSPORTATION COMPANIES AND ASSETS.
THIS WAS TO PROVIDE GREATER FLEXIBILITY IN FINANCING NON-TRANSPORTATION BUSINESS ACTIVITIES INVOLVING THE ISSUANCE OF SECURITIES TO DEVELOP NATURAL RESOURCES OWNED BY THE
RAILROAD AND ITS SUBSIDIARIES.
ACCORDING TO AN ICC STUDY, THIS
IS A COMMON REASON FOR FORMING HOLDING COMPANIES.
ICC WAS REQUESTED TO EXERT ITS JURISDICTION OVER THE PROPOSED FORMATION OF THE BURLINGTON NORTHERN HOLDING COMPANY ON THE BASIS THAT IT INVOLVED THE ACQUISITION OF AT LEAST TWO CARRIERS. IN ITS JUNE 5, 1981, DECISION, ICC DENIED THE PETITIONS STATING THAT BURLINGTON NORTHERN, INC.'S, FORMATION OF A HOLDING COMPANY FITS WITHIN THE SINGLE SYSTEM DOCTRINE. ICC SAID THAT BURLINGTON NORTHERN, INC., OPERATES ALL OF ITS COMPANIES--BOTH RAIL AND NON-RAIL TRANSPORTATION SUBSIDIARIES--AS AN INTEGRATED TRANSPORTATION SYSTEM
UNDER ITS DIRECT CONTROL AND MANAGEMENT. ICC CITED SPECIFIC EXAMPLES THAT SHOWED BURLINGTON NORTHERN OPERATES AS A SINGLE SYSTEM.
ICC'S DECISION WAS APPEALED. IN FEBRUARY 1982, THE U. S.
COURT OF APPEALS FOR THE EIGHTH CIRCUIT UPHELD THE SINGLE SYSTEM
IN ITS DECISION.
ANOTHER TRANSACTION INVOLVING BURLINGTON NORTHERN WHICH ICC DETERMINED WAS NOT WITHIN ITS JURISDICTION AND THEREFORE DID NOT REQUIRE ITS APPROVAL WAS THE PROPOSED MERGER OF THE COLORADO