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79–321 PDF 2002

S. HRG. 106–1098

OVERSIGHT HEARING ON THE STB’S MORATORIUM ON MAJOR RAIL MERGERS AND

15-MONTH RULEMAKING PROCEEDING ON

FUTURE MERGERS

HEARING

BEFORE THE

SUBCOMMITTEE ON SURFACE TRANSPORTATION 

AND MERCHANT MARINE

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

MARCH 23, 2000

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

JOHN MCCAIN, Arizona, Chairman 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

SLADE GORTON, Washington 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

JOHN ASHCROFT, Missouri 

BILL FRIST, Tennessee 

SPENCER ABRAHAM, Michigan 

SAM BROWNBACK, Kansas 

ERNEST F. HOLLINGS, South Carolina 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

RICHARD H. BRYAN, Nevada 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

MAX CLELAND, Georgia 

MARK BUSE, Republican Staff Director 

MARTHA P. ALLBRIGHT, Republican General Counsel 

KEVIN D. KAYES, Democratic Staff Director 

MOSES BOYD, Democratic Chief Counsel 

SUBCOMMITTEE ON SURFACE TRANSPORTATION

AND MERCHANT MARINE 

KAY BAILEY HUTCHISON, Texas, Chairman 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

OLYMPIA J. SNOWE, Maine 

BILL FRIST, Tennessee 

SPENCER ABRAHAM, Michigan 

JOHN ASHCROFT, Missouri 

SAM BROWNBACK, Kansas 

DANIEL K. INOUYE, Hawaii 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RICHARD H. BRYAN, Nevada 

RON WYDEN, Oregon 

MAX CLELAND, Georgia 

(III)

C O N T E N T S 

Page 

Hearing held on March 23, 2000 ............................................................................ 1

Prepared statement of Senator Hollings ................................................................ 7

Statement of Senator Hutchison ............................................................................ 1

Prepared statement of Senator Inouye .................................................................. 7

Statement of Senator Lott ...................................................................................... 18

Prepared statement .......................................................................................... 19

Prepared statement of Senator McCain ................................................................. 6

Statement of Senator Rockefeller ........................................................................... 2

WITNESSES

Morgan, Hon. Linda J., Chairman, Surface Transportation Board ..................... 8

Prepared statement .......................................................................................... 8

APPENDIX

Beam, Bruce A., Chairman, Consumers United for Rail Equity, Washington, 

DC, letter dated March 31, 2000, to Hon. Kay Bailey Hutchison .................... 27

Davidson, Richard K., Chairman and CEO, Union Pacific Corporation, prepared statement ................................................................................................... 28

Duff, Diane C., Executive Director, Alliance for Rail Competition, Washington, DC, letter dated March 30, 2000, to Hon. Kay Bailey Hutchison ....... 34

Goode, David R., Chairman, President & CEO, Norfolk Southern Corporation, 

prepared statement .............................................................................................. 42

Krebs, Robert D., Burlington Northern Santa Fe Corporation, prepared statement ...................................................................................................................... 43

Snow, John W., Chairman and CEO, CSX Corporation and CSX Transportation, Inc., prepared statement ......................................................................... 47

Tellier, Paul M., President and Chief Executive Officer, Canadian National 

Railway Company, prepared statement ............................................................. 48

Response to written questions submitted by Hon. John F. Kerry to: 

Linda J. Morgan ............................................................................................... 27

(1)

OVERSIGHT HEARING ON THE STB’S MORATORIUM ON MAJOR RAIL MERGERS AND

15-MONTH RULEMAKING PROCEEDING ON 

FUTURE MERGERS 

THURSDAY, MARCH 23, 2000

U.S. SENATE, SUBCOMMITTEE ON SURFACE TRANSPORTATION AND

MERCHANT MARINE, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:30 a.m., in 

room SR–253, Russell Senate Office Building, Hon. Kay Bailey 

Hutchison, Chairman of the Subcommittee, presiding. 

Staff members assigned to this hearing: Charlotte Casey and 

Ann Begeman, Republican Professional Staff; Carl Bentzel, Democratic Senior Counsel; and Debbie Hersman, Democratic Professional Staff. 

OPENING STATEMENT OF HON. KAY BAILEY HUTCHISON,

U.S. SENATOR FROM TEXAS 

Senator HUTCHISON. Thank you for coming. I’m going to call the 

hearing to order because we do have votes at 11 o’clock, and unfortunately there will be two votes; so we’ll get as far as we can and 

then I hope we’ll be able to come back, because this is very important and very significant. 

I called the hearing today because of the announcement made by 

the STB that it would impose a 15 month moratorium on any 

merger activity while it rewrites the rules that are applicable to future mergers. This is clearly a major decision. 

I have read the Board’s notice in the case and I believe the STB 

is rightly concerned about the factors to be considered in a merger. 

I also believe that Burlington Northern and Canadian National 

have been put in limbo, which could affect their willingness to 

make infrastructure investments, and could affect their business 

projects. 

I convened the hearing because I believe very strongly that Congress has a role to play here. In fact, I think part of the reason that 

you are having to reassess the factors is because Congress has not 

given sufficient guidance. Sitting on the sidelines will not do. We 

are witnessing a rapid consolidation in the rail industry, as you 

said in your statement, and the number of Class I railroads has 

gone from sixty-three in 1976 to seven today. 

2

The Board is looking at a situation that in a short time would 

result in the number of major railroads being reduced to perhaps 

two or three. 

Service problems have erupted because of past mergers. There is 

less competition because of these mergers. I know firsthand the 

service meltdown that occurred in Houston following the Union Pacific-Southern Pacific merger, and some have estimated that this 

service disruption cost businesses across America $1 billion. 

In the face of this, I do not think a straight reauthorization will 

pass muster with the majority in Congress. Congress must tackle 

the competitive issues that have resulted from consolidation when 

we reauthorize the STB. 

There are many proposals on this. I have offered my own proposal in Senate bill 747; first and foremost to make it the policy 

of the STB to promote rail competition. My bill would also ease the 

plight of captive shippers by addressing the so-called bottleneck 

issue; simplify rate case complaints; and codify the Board’s elimination of product and geographic competition in rate cases. 

If Congress had adopted the standard to assure competition, the 

Board may not have had to invoke its moratorium. 

We may also have to be creative in our thinking to determine if 

today’s smaller railroads will be able to remain viable competitors. 

We must be cognizant of the needs of the major railroads to remain 

profitable. As you have pointed out, Ms. Morgan, this is essentially 

because they carry a need to invest nearly $1 billion in capital to 

keep their rail infrastructure sound for the future. 

This is a challenge to Congress and to the Board, to develop a 

workable proposal to incorporate all of these concerns and issues 

into legislation that can pass this year. It’s a tall order, but the 

STB’s actions have sounded an alarm and now is the time for Congress to get moving. 

I welcome Ms. Morgan to today’s hearing, and before I call on 

you, I’d like to see if any of the other senators would wish to make 

an opening statement. 

Senator LOTT. For now, Madam Chairman, I just want to thank 

you for having this hearing. Obviously it’s timely, and I know we 

do have two votes at 11 o’clock. So I’d like to withhold any comments at this time to hear the Chairman’s statement, and then 

when she completes that, I may have just a couple comments I’d 

like to offer. Thank you. 

Senator HUTCHISON. Thank you. 

And I turned to you because you were first, but I appreciate your 

showing the deference to the Major Leader. Senator Rockefeller? 

Senator ROCKEFELLER. Thank you, Madam Chairman. I do not 

want not to withhold my statement, and please forgive me for that. 

Senator HUTCHISON. I suspected that you wouldn’t. 

OPENING STATEMENT OF JOHN D. ROCKEFELLER IV,

U.S. SENATOR FROM WEST VIRGINIA 

Senator ROCKEFELLER. It’s been a remarkable couple of weeks for 

Linda Morgan, for the STB and for the railroad industry. It’s very 

interesting that the result of the 150 witnesses that Linda Morgan 

listened to, it was the first time that the STB and the railroad industry both agreed that the railroad industry was in severe crisis 

3

and that things are not working. That was the testimony, and that 

is the underlying aspect of the ruling. 

I would like to make three points, and I will also have more 

questioning. First, I want to commend Linda Morgan and the STB 

Board for making a really bold decision on the 15 month moratorium on railroad mergers. I commend you for that, and I think it 

was excellent. 

This was not an easy step to take; Burlington Northern and Canadian National have gone to court, as everybody always does, to 

seek a stay of the STB decision. The Board is likely to end up in 

litigation over the question. I’m not a legal expert I can tell you, 

but I certainly believe that you do have the legal authority reflected in the statutes to mandate the protection of the public interest and prevent irreparable harm, as they say. 

Chairman Morgan noted in her own written comments that this 

was a tough decision, but she said, quote ‘‘the current problems facing the rail sector are so extraordinary that an unprecedented response is necessary.’’ Close quote. As Ms. Morgan and many of my 

colleagues know, I’ve held that view now for 15 years. 

I want Ms. Morgan and the Board to know at the outset how 

glad I am that we are together on this, and now I think we have 

to get on with it. 

Secondly, I want to not yet share publicly a letter which I want 

to give to you, Madam Chairman, after I get a few more signatures 

during the course of the next couple of votes; but the gist of it will 

be that we have a choice here, we can say ‘‘Oh, we’ve got a 15 

month moratorium and then let’s just let the time go by and see 

what happens,’’ or we can decide that the railroads have spoken 

very clearly about what they believe to be the condition of the railroad situation; the STB has spoken very clearly; and that we need 

to go ahead and do our work in Congress as the chairman herself 

suggests in her own very strong opening statement. 

We cannot dump our work in Congress as we have done for years 

on the STB, when the STB is claiming it doesn’t have the authority 

to do what the Staggers Act in fact called for. We’re not talking 

about overhauling the Staggers Act, we’re talking about a modification, and that is all. 

Finally, I would point out that the underlying current debate 

seems to be based on an assumption that we are headed into the 

next round of mergers, and that the industry must inevitably settle 

into just two transcontinental railroads. I believe that is the direction that we are headed, from 50 to 2 in the sixteen years I have 

been in the Senate. 

I want to be very clear in my own remarks that I, for one, am 

not prepared to accept that assumption, and will fight that assumption with every ounce of strength I have. 

Already, recent mergers have concentrated 90 percent, Madam 

Chairman, of rail freight revenues into four hands: UP, CSX, NS 

and BNSF, and consolidation doesn’t seem to have brought any of 

the promised consumer and financial benefits. 

Based on recent stock prices, CSX and NS are worth less now 

than what they paid for Conrail 3 years ago, so that was not a very 

good business decision perhaps on their part. But merger mania 

has its own internal chemistry. 

4

Mergers are supposed to result in growth, yet rail mergers have 

been accompanied by losses of more business to trucks. I don’t 

think that was the purpose of all of this. Customers, employees and 

financial markets have lost faith in the industry, have lost all faith 

in the industry, the railroad industry, something I have not seen 

in any other industry in the time that I have served on this committee which, as I indicated, is now 16 years. 

More than anything else, my experience with rail service in West 

Virginia makes me extraordinarily leery of having only two transcontinental railroads in this country. As recently as this month, I 

have been trying to facilitate a new dialog between chemical companies in West Virginia and the railroad to which they are captive, 

that being illegal under the Staggers Act. 

The railroad has said, literally said, Madam Chairman, to these 

companies recently: ‘‘The only way you’ll ever get competitive rail 

service and rates is through government intervention.’’ I repeat 

that: The railroads say ‘‘Take a hike, we’re doing nothing for you, 

we don’t care what your situation is, we will only respond to congressional legislative action.’’ So it is that action, now more than ever I think that has to be 

called for. I think that is monopolistic behavior, I think that is outrageous behavior, it infuriates me, it is terrible for my state. There 

is an arrogance in the delivery of the message which is something 

I’ve heard before but I’ve never heard it so continuously, and it is 

something which as I say is flat out monopolistic. With the enormous advantage that the American Railroad Association has in 

keeping itself under the radar screen while doing great damage to 

many shippers all across this country, and passing out a lot of 

money. 

Well, that is not the kind of dialog I had in mind, Madam Chairman, and I’m sorry about the length of the statement, but you can 

tell that I am not going to stop until I have finished it. 

All rail customer captivity may not be as big a problem, for example in Texas, as it is in West Virginia. Some 90 percent of West 

Virginia chemical plants are captive shippers, and in Texas it is 50 

percent. And there is a big difference between 50 percent and 90 

percent, but then on reflection is there really that big a difference? 

Senator HUTCHISON. Well, I think captive shippers are a real 

problem, and I don’t think the percentages do make a difference. 

Senator ROCKEFELLER. What you indicated in your opening statement, I thought, was very, very strong. 

So 50 percent is too many, and if there were two railroads in this 

country you’d be at 90 percent in a very short time. So all I try 

to do is make my point: I implore my colleagues to join with some 

of us, an effort to try at last once and finally to do some legislative 

remedy for this absolutely disgraceful, under the radar screen, 

well-financed operation which is devastating the economy of my 

state, which has just slipped to number 50 in per capital income. 

Senator Hutchison, Senator Byron Dorgan, Senator Burns, others and myself have been asking for legislative action and we have 

waited a long time, we really want it. We cannot simply leave this 

up to the STB. That is what we do. And this 15 month moratorium 

cannot be another excuse for us to do that. 

I thank the Chairman for indulging me. 

5

Senator HUTCHISON. I thank the Senator for his statement, and 

I want to say that you and I disagree on the remedy but we agree 

that something must be done to solve some of the captive shipper 

problems and the bottleneck problems; and I think the 15 month 

moratorium means we need to get in and do our jobs in providing 

Congressional guidance. 

Senator ROCKEFELLER. And Madam Chairman, if you and I and 

others want to address the bottleneck problems, we are going to do 

enormous service to competition in this country. 

Senator HUTCHISON. Senator Kerry, did you have an opening 

statement? 

Senator KERRY. Just very, very brief if I may, Madam Chairman. 

Let me thank you first of all for this opportunity, and I welcome 

Ms. Morgan here. I, like my colleague, just heard a brief earlier 

comment before I was visiting briefly with the Leader in support 

of your decision. I just want to express my support also for the decision that you have made, which I think is a very, very important 

one in order to get time to assess and to properly make some, create some structure for how these mergers may or may not occur in 

the future. I want to credit you with this thoughtful decision, I 

think it’s a good one that you’ve taken. 

We really need to update the standards. The profound implications of the downstream effect of these mergers is much more significant than people have allowed for. It has the capacity for great 

disruption, as you know. You’ve heard from a lot of people, 150 witnesses, and I think Massachusetts was one of those who commented and supported the moratorium, so we’re grateful for that. 

Let me just raise one other issue, if I may quickly. The willingness of the STB to modify or even break collective bargaining 

agreements in order to effectuate a rail merger which is known in 

the industry as cram-down strikes me as being inherently, fundamentally unfair. 

Now I know the Supreme Court has affirmed the right to do it, 

but having a right to do something doesn’t necessarily make it good 

policy. And it seems to me it is clear that while the right exists, 

there’s no mandate that you do this; there’s no requirement that 

this be the practice. 

I would simply remind you that you are talking about our fellow 

citizens here, you are talking about people. People who are at a 

place in their lives, and in the economy where it is not as easy to 

make a transition, particularly in a world where we are having 

great difficulty providing some of the means to facilitate that transition—ongoing educational opportunities, transitional assistance 

and other kinds of things. 

So what happens is, the cram-down practice has a profound impact on workers; some of them lose their seniority, others are 

forced to spend a lot more time away from home and family in 

order to work under conditions that are particularly disagreeable 

and complicated. But that is what they have to do because the size 

of the work area gets significantly increased. Others find wages 

significantly altered, and so they suffer financially at a time when 

other pressures have already existed on the economy in terms of 

wage appreciation measured against other increases. The gap is 

6

really growing in our economy, between people who are touching 

the new economy and people who aren’t. 

I want to change the law that allows that. Now Senator Crapo 

has a bill, and I’m cosponsor with him of the bill, that would address the problem; but the STB can remedy the situation by itself 

in the rulemaking. I simply want to call that to your attention, that 

you can make mergers work without breaking worker’s contracts, 

or even by showing, I think greater sensitivity to the existence of 

those contracts in the process. The rulemaking process, as you 

focus on the merger, provides you with a ready-made opportunity 

to do that and I hope that you will consider in fact ending that 

practice in the course of this, and we can continue a dialog on that. 

I thank you for listening, and Madam Chairman, I thank you for 

the time. 

Senator HUTCHISON. Thank you. 

[The prepared statement of Senator McCain follows:]

PREPARED STATEMENT OF HON. JOHN MCCAIN,

U.S. SENATOR FROM ARIZONA

Thank you. When I was approached on Monday about holding an oversight hearing to consider the Surface Transportation Board’s March 17th decision on rail 

mergers, I quickly consented. The Board’s decision is bold and unprecedented. As 

such, it deserves Congressional oversight. 

This morning’s hearing was requested to discuss the STB’s decision concerning future mergers. I also recognize other issues beyond the scope of the Board’s merger 

moratorium may be raised. 

But first, I want to commend Chairman Morgan and Commissioners Burkes and 

Clyburn for holding their hearings earlier this month on major rail mergers and the 

present and future structure of the rail industry. I have always supported the 

Board’s efforts over the years to initiate these types of information-gathering proceedings and I’m confident the multi-day hearings provided very useful information. 

I hope that the hearings also provided yet another wake up call to the railroad 

industry that many rail customers, quite simply, are not satisfied with the service 

they are receiving. This message has been delivered on other occasions and in other 

forums and as I have said before, I urge both the industry and shippers to work 

on ways to resolve these serious service gaps. 

I also want to remind my colleagues on the Committee that I am not opposing 

additional hearings. At no time have I denied any request by Committee members 

to hold hearings on the Board or rail and shipper issues. Just like I did when I was 

approached about today’s hearing, I will agree to members holding as many hearings as they deem necessary. All the members need to do is to specifically request 

a hearing, as Senator Hutchison did Monday. 

Today, we will hear testimony from Chairman Morgan. But I caution the members to understand that Chairman Morgan will be under certain constraints in her 

ability to respond to certain questions. The Board’s decision is under appeal with 

the D.C. Circuit Court and as such, we must understand her position. 

According to the reports I have seen, the Board’s decision to place a 15-month 

moratorium on the consideration of any rail mergers was based in large measure 

on the many comments expressed during its hearings. During the 15-month merger 

freeze, a Federal rulemaking to create new merger standards will be established 

that will guide how the Board will review the merits of future merger applications. 

Again, according to the reports I have seen, some groups are very pleased with 

the Board’s announcement while others are clearly not. This morning’s hearing 

should provide the Board with a welcomed opportunity to further elaborate on the 

factors which led it to initiate the moratorium and to discuss what types of revisions 

it feels are needed in its merger application consideration procedures. 

Let me conclude by reiterating my strong support for reauthorizing the Board. In 

the Senate, bipartisan compromises are always necessary to pass needed legislation 

and it is quite clear that none of the pending bills as currently drafted have the 

support necessary for passage. The bills have wide ranging provisions and policy 

goals and I remain hopeful that all the interested parties will meet to iron out their 

differences. 

7

I look forward to hearing from Chairman Morgan and appreciate her accommodating the Committee’s scheduling this hearing on such short notice.

[The prepared statement of Senator Hollings follows:]

PREPARED STATEMENT OF HON. ERNEST F. HOLLINGS, U.S. SENATOR FROM SOUTH CAROLINA

As many of you know, Linda Morgan served as counsel for the Surface Transportation Subcommittee for eight years and then as General Counsel for the Full Committee for seven years. During that time, I found Linda Morgan to be one of the 

most erudite and thorough professionals. She is smart, she cares about the issues, 

and she knows how to respond to the pressures of overseeing our surface transportation industries at the Surface Transportation Board. 

I would like to commend the Surface Transportation Board on its recent decision 

to consider downstream effects on overall railroad competition and service issues as 

part of future merger proceedings. Recently, the Board took the time to listen to 

four complete days of testimony on the state of the rail industry, and on the impact 

of previous mergers. I think that no one out there can deny that the rail industry 

has experienced significant change in the years after passage of the Staggers Act. 

Given the problems with service on recent rail mergers, and the poor financial status of the stock of railroad companies, I think it is important to review the landscape from a broader perspective. 

While the Surface Transportation Board has plenary statutory authority to approve or deny any merger application, I believe that it is appropriate for the Board 

to consider cumulative impacts, crossover and downstream effects. Considering the 

number of mergers that has occurred in recent years and the ensuing service problems it is clear the STB has many challenges before it. 

In December, the Canadian National Railway Company (CN) and the Burlington 

Northern Santa Fe Corporation (BNSF) announced their plans to file a merger application with the Surface Transportation Board. While we all may have different 

positions on the proposed merger, I feel that it is prudent for the Board not only 

to address the current state of the railroad industry, but the future landscape as 

well. 

Linda Morgan has done a lot of heavy lifting during her tenure as Chairman of 

the STB, and she has a lot of heavy lifting yet to do. I want it to be known, however, 

that she has my full confidence and support. I look forward to her testimony this 

morning.

[The prepared statement of Senator Inouye follows:]

PREPARED STATEMENT OF HON. DANIEL K. INOUYE, U.S. SENATOR FROM HAWAII

I would like to commend the Chairwoman for holding a hearing on the Surface 

Transportation Board’s decision to review existing merger rules in light of the massive industry consolidations in the past twenty years. In addition, I would like to 

thank Chairwoman Hutchison for her leadership and her quick attention to this 

major development, which was announced only last week. 

I would like to applaud the Surface Transportation Board for its recent efforts to 

address prospective rail consolidations and the future of the railroad industry. Earlier this month, the Board held a four day hearing on the state of the rail industry. 

During this hearing the Board heard testimony from many parties on the impact 

of previous mergers and the potential issues that could arise with future mergers. 

The rail industry has experienced significant change in the years after passage of 

the Staggers Act. Given the service problems following recent rail mergers and the 

poor financial status of the stock of railroad companies, I think it is important to 

review the landscape from a broader perspective. 

In December, the Canadian National Railway Company (CN) and the Burlington 

Northern Santa Fe Corporation (BNSF) announced their plans to file a merger application with the Surface Transportation Board. While we all may have different 

positions on the proposed merger, I feel that it is prudent for the Board not only 

to address the current state of the railroad industry, but to look forward in an effort 

to anticipate future problems or issues. 

I support the Board’s decision to consider downstream effects on overall railroad 

competition and service issues as part of future merger proceedings. Considering the 

number of mergers that has occurred in recent years and the ensuing service problems, I believe that it is appropriate for the Board to consider cumulative impacts 

and crossover and/or downstream effects. 

8

I am pleased to welcome Chairman Morgan back to the Commerce Committee. As 

many of you know, Linda Morgan worked on the Committee for fifteen years prior 

to her appointment as Chairman of the STB. During the time that I worked with 

Linda Morgan, I observed her keen intellect, attention to detail and her commitment 

to the issues. I have great respect for her abilities and I am confident that she 

knows how to respond to the pressures of overseeing our surface transportation industries at the Surface Transportation Board. I look forward to her testimony this 

morning.

Senator HUTCHISON. Chairman Morgan. 

STATEMENT OF HON. LINDA J. MORGAN, CHAIRMAN,

SURFACE TRANSPORTATION BOARD 

Ms. MORGAN. Thank you very much. 

I am appearing today at the request of this Subcommittee. When 

I was notified on Monday that there would be a hearing and that 

I would be the only witness, I was told that I would be here to answer questions regarding the March 17th decision on rail mergers. 

I have submitted a short, written statement summarizing that decision, to which I have attached a copy of the full decision. 

I ask that all of that be submitted into the record in full. 

[The prepared statement of Ms. Morgan follows:]

PREPARED STATEMENT OF HON. LINDA J. MORGAN, CHAIRMAN,

SURFACE TRANSPORTATION BOARD

My name is Linda J. Morgan, Chairman of the Surface Transportation Board 

(Board). I am appearing at the request of the Subcommittee to discuss the decision 

served by the Board on March 17, 2000, in STB Ex Parte No. 582, Public Views 

on Major Rail Consolidations. For the record, I am including a copy of the Board’s 

decision with my written statement. 

Background 

The Board’s proceeding in STB Ex Parte No. 582 was triggered by the filing of 

a notice on December 20, 1999, that the Burlington Northern and Santa Fe Railway 

(BNSF) and Canadian National (CN) intended to file an application, on or shortly 

after March 20, 2000, seeking Board approval to bring their railroad systems under 

common control. Given the aggressive consolidation and associated disruptions that 

had occurred in the railroad industry during the past several years, and the likelihood that the BNSF/CN proposal would set off yet another full round of major rail 

consolidations, the Board issued an order on December 28, 1999, waiving the socalled ‘‘one case at a time’’ rule for the BNSF/CN proceeding and stating that, if 

the BNSF/CN proceeding went forward, the Board would consider not only the direct impacts of that combination, but also evidence of the cumulative impacts and 

crossover effects that would likely occur as other railroads developed strategic responses in reaction to the proposed combined new system. In addition, given the 

prospect of significant further consolidation within the railroad industry, and the 

Board’s concern that the railroad industry and the shipping public have not yet recovered from the service disruptions associated with the previous round of mergers, 

the Board issued an order on January 24, 2000, opening the STB Ex Parte No. 582 

proceeding to obtain public views on the subject of major rail consolidations and the 

present and future structure of the North American rail industry. 

The March 17 Decision 

As part of the STB Ex Parte No. 582 proceeding, the Board took written and oral 

testimony from all sectors associated with the rail industry, including large and 

small rail carriers; large and small shippers representing various commodity groups; 

intermodal and third party transportation providers; rail employees; state and local 

interests; financial analysts and economists; and Members of Congress (including 

Members of this Committee) and other federal agencies. The overwhelming weight 

of the testimony, particularly the testimony taken over the 4 days of oral hearings, 

was that, at a minimum, the Board’s merger policy must be reexamined—and must 

be reexamined now—before any new major mergers are processed. The Board 

agreed, concluding in its March 17 decision that the rail community is not in a position to now undertake what will likely be the final round of restructuring of the 

9

1 In particular, The Burlington Northern and Santa Fe Railway Company and Canadian National Railway Company filed a notice of intent to file, on approximately March 20, 2000, an 

application seeking Board authorization under 49 U.S.C. 11323–25 and 49 CFR part 1180 for 

a major transaction (referred to as the BNSF/CN transaction) under which the two railroads 

would be brought under common control. 2The six are: The Burlington Northern and Santa Fe Railway Company (BNSF); Union Pacific 

Railroad Company (UP); CSX Transportation, Inc. (CSX); Norfolk Southern Railway Company 

(NS); Canadian National Railway Company (CN); and Canadian Pacific Railway Company (CP). 

Two smaller U.S. Class I railroads (Grand Trunk Western Railroad Incorporated and Illinois 

Central Railroad Company (IC)) are affiliated with CN. A third smaller U.S. Class I railroad 

Continued

North American railroad industry, and that current Board rules are not appropriate 

for addressing the broad concerns associated with reviewing transactions that may 

well produce two transcontinental railroads. 

In reaching the March 17 decision, the Board recognized that the Government is 

not in the business of drawing railroad maps, and that this agency is not attempting 

to do so in this proceeding. The Board also recognized that the law it administers 

generally contemplates private initiatives that are then subjected to regulatory scrutiny. But the Board is required to take actions and to fashion regulations that advance its mandate—under which it is to approve mergers only to the extent consistent with the public interest, and under which it is to promote a safe and sound 

rail system that runs smoothly and efficiently to provide service for rail customers— in a manner that is consistent with the overall rail transportation policy established 

by Congress. The Board found that it would be impracticable to try to act on a final 

round of mergers while in the process of developing new merger rules, and that such 

an approach would also be disruptive to the rail system and to rail service that remains well below acceptable levels in many areas. The disruption would go far beyond the specific interests of BNSF and CN and the carriers that compete with 

them; it could irreparably damage the entire industry, to the detriment of the interests of shippers, rail employees, and the national economy and defense. 

Thus, in the March 17 decision, the Board announced that, over the next 15 

months, it would initiate and complete a proceeding that will provide new merger 

rules. To permit the development of the new rules, and to ensure that the industry 

has had the opportunity to fully recover from service problems associated with recent mergers without the distractions associated with consideration of additional 

mergers, the Board decided that it could best maintain the status quo by ordering 

a suspension of all merger activity, categorized as major rail transactions, until 

after the final merger rules are issued, or a total period of 15 months. 

Activity Stemming From the March 17 Decision 

The Board is currently preparing an advance notice of proposed rulemaking 

(ANPR) to institute the process of reexamining its merger rules and policy. The 

Board expects to issue the ANPR to the public by April 6, 2000 (within 20 days of 

the March 17 decision). 

BNSF, CN and the Western Coal Traffic League have appealed the Board’s March 

17 decision to the Court of Appeals for the District of Columbia Circuit. Also, BNSF 

has filed with the Board a petition for an administrative stay pending judicial review of the Board’s decision. 

This concludes my testimony. As I stated earlier, I am including a copy of the 

Board’s March 17 decision, which fully explains the action taken by the Board. I 

will try to answer any questions that you may have regarding the March 17 decision, given the constraints that the pending agency and court proceedings impose 

on me at this time. 

SURFACE TRANSPORTATION BOARD DECISION

STB Ex Parte No. 582

Public Views on Major Rail Consolidations 

Decided: March 16, 2000

Overview 

This proceeding was triggered by a notice filed on December 20, 1999, indicating 

that another major railroad merger application was imminent.1 The railroad industry has consolidated aggressively in recent years; now that Consolidated Rail Corporation (Conrail) has been divided between CSX and NS, only six large railroads 

remain in the United States and Canada.2 In an order issued on December 28, 

10

(Soo Line Railroad Company) is affiliated with CP. A fourth smaller U.S. Class I railroad (The 

Kansas City Southern Railway Company (KCS)) remains independent but has entered into a 

comprehensive alliance with CN and IC. 3 Canadian National Railway Company, Grand Trunk Western Railroad Incorporated, Illinois 

Central Railroad Company, Burlington Northern Santa Fe Corporation, and The Burlington 

Northern and Santa Fe Railway Company—Common Control, STB Finance Docket No. 33842, 

Decision Nos. 1 & 1A (STB served Dec. 28, 1999) (published in the Federal Register on Jan. 

4, 2000, at 65 FR 318). 4The merger provisions of 49 U.S.C. 11324 direct the Board to consider the public interest 

in general and, in particular, the adequacy of transportation to the public; inclusion of other 

rail carriers in particular mergers; and financial, employee, and competitive issues. The rail 

transportation policy of 49 U.S.C. 10101, which guides us in our regulatory activities, directs 

us, among other things, to promote safety, efficiency, good working conditions, an economically 

sound and competitive rail transportation system, and the needs of the public and the national 

defense. 5We fully understand that our mandate is to protect competition, not particular competitors. 

6 In particular, within 20 days, we will issue an advance notice of proposed rulemaking 

(ANPR) suggesting areas in which new merger rules can be developed addressing the concerns 

that have been raised. (We are not in a position to propose specific rules at this time because, 

while several parties raised broad issues of concern, specific rule changes were not the focus 

1999,3 we stated that, if the BNSF/CN proceeding went forward, we would consider 

not only the direct impacts of that combination, but also evidence of the cumulative 

impacts and crossover effects that would likely occur as other railroads developed 

strategic responses in reaction to the proposed combined new system. Additionally, 

given the prospect of significant further consolidation within the railroad industry, 

and our concern that the railroad industry and the shipping public have not yet recovered from the service disruptions associated with the previous round of mergers, 

we opened this proceeding to obtain public views on the subject of major rail consolidations and the present and future structure of the North American rail industry. 

As part of this proceeding, we took written and oral testimony from all sectors 

associated with the rail industry: large and small rail carriers; large and small shippers representing various commodity groups; intermodal and third party transportation providers; rail employees; state and local interests; financial analysts and 

economists; and Members of Congress and other federal agencies. Certain parties 

expressed support for a radical overhaul of the entire regulatory scheme; some parties expressed support for a ‘‘business-as-usual’’ approach to rail regulation in general and rail mergers in particular; still others took the view that no more rail 

mergers should be permitted under any circumstances. But the overwhelming 

weight of the testimony, particularly the oral testimony, was that, at a minimum, 

our merger policy must be reexamined—and must be reexamined now—before any 

new major mergers are processed. Because we conclude that the rail community is 

not in a position to now undertake what will likely be the final round of restructuring of the North American railroad industry, and because our current rules are 

simply not appropriate for addressing the broad concerns associated with reviewing 

business deals geared to produce two transcontinental railroads, we agree. 

We recognize that the Government is not in the business of drawing railroad 

maps, and we are not attempting to do so in this proceeding. We are also aware 

that the law that we administer generally contemplates private initiatives that are 

then subjected to regulatory scrutiny. But we are required to take actions and to 

fashion regulations that advance our mandate—under which we are to approve 

mergers only to the extent consistent with the public interest, and under which we 

are to promote a safe and sound rail system that runs smoothly and efficiently to 

provide service for rail customers—in a manner that is consistent with the overall 

rail transportation policy established by Congress.4 Not only would it be impracticable for us to try to act on a final round of mergers while we are in the process 

of developing new merger rules, it would also be disruptive to the rail system and 

to rail service that remains well below acceptable levels in many areas. The disruption would go far beyond the specific interests of BNSF and CN and the carriers 

that compete with them; 5 it could irreparably damage the entire industry, to the 

detriment of the interests of shippers, rail employees, and the national economy and 

defense. 

Therefore, through this decision, we are announcing that, over the next 15 

months, we will initiate and complete a proceeding that will provide new merger 

rules. To permit the development of the new rules, and to ensure that the industry 

has had the opportunity to fully recover from service problems associated with recent mergers without the distractions associated with consideration of additional 

mergers, we will maintain the status quo by ordering a suspension of all merger 

activity, categorized as major transactions, until after the final merger rules are 

issued, or a total period of 15 months.6

11

of our hearing.) We will provide a total of approximately 60 days for comments and replies to 

the ANPR, and then, within an additional 120 days, we will issue a notice of proposed rulemaking (NPR). We will provide a total of 100 days for comments, replies, and rebuttal with respect to the NPR, and then, within an additional 150 days, we will issue final rules (a total 

of approximately 15 months from now). 7We have also recently approved CN’s application to control IC, but that transaction, which 

is largely end-to-end, has not yet been fully implemented. 

Background 

As indicated, our hearing was triggered by the announcement that BNSF and CN 

seek to merge. This announcement came as the rail sector and the shipping public 

have been struggling to recover from the disruptions associated with the most recent 

round of mergers. Those consolidations regrettably have been accompanied by a 

number of serious service problems, and, while service levels have shown improvement in certain areas, overall, service is clearly not where it should be. Promised 

customer benefits have not yet been fully realized, and carrier relationships with 

customers, rail employees, and local communities have been strained. The performance of railroad stock market equities has been trending downward since the service 

problems developed in the East, taking a particularly sharp turn downward immediately after the BNSF/CN merger proposal was announced. If it continues, the 

downturn in the stock value, reflecting a loss of investor confidence, could threaten 

the capital investment that is needed by the rail industry to ensure that service improvements and growth can be sustained. 

BNSF and CN have argued that their consolidation proposal should be examined 

on its own merits now, because it is a good one that will produce benefits for the 

shipping public. But regardless of the merits of the BNSF/CN proposal standing 

alone, many parties expressed concern that, if the BNSF/CN proceeding goes forward, that proposal will not go forward alone. Indeed, the Class I railroads have 

clearly stated that they would find it necessary to respond in kind, and there is a 

substantial possibility that, absent decisive action on our part, in the very near future, we will likely be left with the prospect of only two large railroads serving 

North America. We at the Board, like members of the shipping public, are seriously 

concerned about the competitive consequences of this level of industry restructuring, 

and, in any event, about whether it would be in the public interest at this time, 

while the industry is still recovering from service difficulties and other disruptions 

associated with the last round of major rail consolidations. And so we held a hearing 

to help us address the important issues relating to major rail consolidations and the 

present and future structure of the North American railroad industry. 

At the hearing, several significant themes kept recurring. We heard from Members of Congress, federal and state government agencies, shippers, and employees 

about poor service; the threat that another round of proposed mergers would further 

degrade service; and the need to let some time pass so that railroads, their employees, and their customers can catch their breath before the industry embarks upon 

what will likely be the final round of mergers. We heard from shippers and Members of Congress about the threat that another round of mergers would pose to competition in the industry, and we heard from a significant number of participants 

about the need for new rules to govern future mergers. We heard from Department 

of Transportation Secretary Rodney Slater that the BNSF/CN transaction should 

not be reviewed under a ‘‘business as usual’’ approach. And we heard from railroads 

and from members of the financial community about the financial instability of the 

industry, which could be further threatened by a new round of major mergers. We 

will discuss each of those issues. 

The Testimony 

1. Service Instability. Rail mergers are pursued to increase efficiency and to improve service. At least at the beginning, however, service disruptions have accompanied the implementation of recent large mergers, and many shippers have experienced substantial adverse impacts in connection with the last round of mergers, beginning with the combination of the BN and SF systems, proceeding with the UP 

acquisition of the Southern Pacific (SP) system, and ending with the acquisition and 

division of Conrail by CSX and NS.7 The overwhelming testimony at our hearing 

indicated that the shipping public has still not recovered from those disruptions. 

Shippers described the problems that they faced, and that many continue to face, 

as a result of their inability to obtain reliable service. Railroad chief executive officers (CEOs) involved in the last round of mergers testified how difficult merger implementation can be, even with the best planning and with the experiences of prior 

mergers to guide them. Small railroads testified that their ability to participate in 

the transportation business has been threatened by poor service. A senior rail equity 

12

8 Representatives of investment firms that are advising the applicants in the BNSF/CN proceeding (who also do not want what they describe as reregulation) pointed out that there is no 

way to know definitively what is driving rail stock prices downward, and that the drop in rail 

stock prices could simply be related to many of the same factors that are depressing the stocks 

of companies in other ‘‘old economy’’ industries. We do not doubt that the drop in rail stock 

prices is attributable to many sources, but it is clear that the current service disruptions and 

the announcement of the proposed BNSF/CN transaction have played a role. We believe that 

the potential for further disruption that would accompany the initiation of a final round of mergers at this time concern investors, who do not currently view railroad mergers as a positive because, overall, these mergers have not yet produced the good financial results that were promised. 9 Clinton Miller, testifying on behalf of the United Transportation Union (the largest railroad 

union), alluded to both employee dislocations and service disruptions in support of his request 

for a hold on further mergers. Mark Filipovic of the International Association of Machinists expressed the view that recent mergers did not produce what was promised for railroads, shippers, 

or employees. Michael Wolly, representing three unions, requested a hold on further mergers 

until the issues associated with employee dislocations are resolved. And a number of the representatives of rail employees expressed concern about the fact that, under the BNSF/CN proposal, a major U.S. railroad would become foreign-controlled. 

research analyst whose firm is not representing any railroad in the newly initiated 

round of rail merger negotiations reported on a survey that he had conducted of 

large institutional investors that he advises. He testified that poor service is partially responsible for the lack of investor confidence in the railroad industry, and 

that many investors do not want further mergers at this time, nor do they want 

the legislative changes (which they view as reregulation) that they fear further 

mergers will precipitate.8 And the regular service performance reports provided by 

the railroad industry indicate that, while service is improving on some fronts, overall, it is still below where it needs to be. 

That is why many of the shippers testifying—both large and small—asked us not 

to permit any further mergers at this time, and certainly not without a change in 

the way in which we evaluate mergers. Similar sentiments were expressed by Members of Congress, representatives of small railroads, and representatives of railroad 

employees.9 Even the CEOs of the large eastern railroads stated that initiation of 

a new round of mergers would require them to focus on structural and management 

changes necessary to protect their own positions in the market, rather than on improving their below-par service. In short, in light of the service issues attending 

prior mergers and looming over future mergers, we heard widespread concern that 

any major consolidations at this time would not be in the national interest. 

2. Competitive Issues. For several years, parties involved with the railroad industry have engaged in debate over competitive issues. Many shippers are of the view 

that prior consolidations have left large railroads with too much market power, and 

they seek various remedies to ‘‘level the playing field.’’ In our hearing, there were 

repeated expressions—even from shippers with substantial market power, such as 

United Parcel Service and General Motors—of the view that the rail industry is becoming too concentrated. 

Various remedies were suggested to address this concern about concentration. 

Some shippers asked us to revisit the issues that we studied in-depth 2 years ago 

in our proceeding in Review of Rail Access and Competition Issues, STB Ex Parte 

No. 575. They would like us to change the rules in a variety of ways so as to promote more rail-to-rail competition throughout the industry. But short of a complete 

overhaul of the existing regulatory system (which the financial analysts and economists testifying at the hearing suggested could introduce an additional level of uncertainty and risk into the industry, thereby harming shippers by lowering aggregate rail investment below those levels necessary for railroads to maintain and improve service), a significant number of shippers stated that we need to adopt new 

merger rules to ensure that competition will not be curtailed further in the event 

that the industry seeks to merge itself into a duopoly. 

3. New Merger Rules. Thus, for a variety of reasons—some related to service, some 

related to competition, and some, such as those expressed by Transportation Secretary Slater and representatives of rail employees, related to safety—there was 

substantial support at our hearing for a broad review of and revision to the rules 

governing major rail mergers. We agree. 

Our existing merger policy guidelines were adopted by the Interstate Commerce 

Commission soon after passage of the Staggers Act of 1980. At that time, good government required a merger policy that, while recognizing the importance of competition, would encourage railroads to formulate proposals that would help rationalize 

excess capacity in the industry. 

The goals of that merger policy have largely been achieved. It does not appear 

that there are significant public interest benefits to be realized from further 

13

10The CEOs for BNSF and CN have stated that there is no reason why their merger should 

necessarily instigate any responsive action by any other railroad. But recent history shows otherwise; indeed, the UP takeover of the SP was a response to the BNSF merger. And CEOs of 

the other major railroads have stated that they would look to future mergers of their own as 

strategic responses to the BNSF/CN transaction. Indeed, Richard Davidson, CEO of UP, stated 

that his company strongly considered a merger with CP as a response to the recent CN takeover 

of the IC, but ultimately concluded that it would be better off focusing on issues other than 

mergers under the circumstances prevailing at that time. Given the size of the BNSF/CN transaction, we have no reason to doubt the assertions of the CEOs of the major railroads that if 

it goes forward, they would have no choice but to seek their own merger partners, and that in 

a short time, we could be faced with the prospect of a North American duopoly. 11We should note that the representatives of the Departments of Agriculture and Defense expressed the view that we should permit no major mergers at this time. Moreover, Transportation Secretary Slater urged us to make numerous and potentially complex changes to our 

merger rules that, if they are to be applied evenly to all future mergers, could not be practically 

effected in the middle of individual merger proceedings. 

downsizing or rationalizing of rail route systems, as there is little of that activity 

left to do. Looking forward, the key problem faced by railroads—how to improve 

profitability through enhancing the service provided to their customers—is linked to 

adding to insufficient infrastructure, not to eliminating excess capacity. 

The testimony convinces us that our rules need to be reexamined. Given the current transportation environment, and with the prospect of a transportation system 

composed of as few as two transcontinental railroads, we may wish to revisit our 

approach to competitive issues such as the ‘‘one-lump theory’’ and the ‘‘three-to-two’’ question; downstream effects; the important role of smaller railroads in the rail network; service performance issues; how we should look at the types of benefits to be 

considered in the balancing test, and how we monitor benefits; how we should view 

alternatives to merger, such as alliances; employee issues such as ‘‘cramdown;’’ and 

the international trade and foreign control issues that would be raised by any CN 

or CP proposal to combine with any large U.S. railroad. As Transportation Secretary 

Slater pointed out, the sheer size of these potential new mergers poses unique risks 

and leaves no margin for error: if these mergers were to fail, or lead to service problems, the effects could be devastating for both the rail industry and the shippers 

that depend on rail service. We must be sure that our merger review process takes 

these risks into account. 

Discussion and Conclusions 

Accordingly, we have concluded that we must revisit our merger rules, and that 

in the meantime we must maintain the status quo by directing large railroads to 

suspend merger activity pending the development of new rules. We understand 

those parties that argue that each case should be viewed on its own merits without 

regard to the prospect of future consolidation, but we cannot close our eyes to the 

fact that the mere consideration of any major merger now would likely generate responsive proposals that, if approved, could result in a North American duopoly.10

Before proceeding down that path, we must make sure that we have the appropriate 

guidelines in place to assure that we can properly assess and fully protect the public 

interest in each individual case. 

In their oral testimony, the CEOs of BNSF and CN recognized the argument that 

certain new requirements may need to be imposed on future merger proposals, but 

nevertheless urged us to proceed with consideration of their merger proposal now, 

developing any new requirements in the context of their application proceeding. We 

realize that administrative agencies can choose to develop new rules either by rulemaking or in individual adjudications, but in choosing which course to take, we consider what makes sense. Here, it simply makes no sense to attempt to develop new 

merger rules in the middle of what could likely be the final round of major railroad 

mergers.11 New merger rules will be a major undertaking, and we will not know 

what the rules will look like until the process is over. Yet, under the BNSF/CN approach, we could be reviewing merger proposals involving at least four, and possibly 

all six, of the large North American railroads before we have had an opportunity 

to reexamine and reformulate our merger policy. The evidentiary filings in such 

cases are massive, and yet none of the parties would know what they would be expected to show until new rules are formulated. And then, at the end, once the rules 

are known, it is not only possible, but quite likely, that the merger process would 

have to start all over again. Thus, while BNSF and CN may see some benefit to 

themselves from such a procedure, the process would be inherently uncertain, could 

lead to substantial instability in the industry, and thus does not represent good government. 

There are very serious risks associated with proceeding with individual merger 

proposals at this time, before we have new rules in place. The disruption that has 

14

12For example, a Credit Suisse First Boston Corporation rail stock analyst, in a March 6, 

2000 note to investors, stated that our hearing might ‘‘provide some upside for the stocks if it 

appears that the risk of industry consolidation will be pushed further into the future by the 

Surface Transportation Board.’’ Another analyst, from ING Barings, in a March 14, 2000 note 

to investors, predicted that the Board would impose a merger moratorium, and that, as a result, 

‘‘the industry is full of many buying opportunities,’’ including the shares of BNSF. A March 13, 

2000 report by a J.P. Morgan analyst expressed the view that ‘‘rail stocks would react positively 

to’’ what the analyst believed was a likely ‘‘mid-term’’ (up to 2 years) hold on further mergers. 

A Donaldson, Lufkin, and Jenrette rail analyst, in a March 14, 2000 note to investors, explained 

that rampant pessimism has resulted in rail securities that ‘‘are selling at near recessionary levels. It is a reversal of some of this pressure that is exactly what we’d expect if we are allowed 

to gain some sense of the regulatory and structural outlook for the industry as a result of last 

week’s STB hearings.’’ A Morgan Stanley Dean Witter stock analyst, in a March 8, 2000 note 

to investors, suggested that a decision by the Board to delay the merger process would remove 

some near-term uncertainty and lead to near-term strength in a number of railroad stock prices, 

including those of BNSF and CN. Finally, the Chairman and CEO of Wasserstein, Parella & 

Co., in a March 10, 2000 letter to Chairman Morgan, explained that his firm ‘‘feels strongly that 

allowing the proposed merger to proceed would place the entire industry in jeopardy,’’ since ‘‘the 

specter of another round of rail mergers [at this time], which Wall Street is convinced this transaction will precipitate, will accelerate the flight of capital’’ from the industry. He concludes that 

the prospect of moving forward with the BN/CN transaction at this time ‘‘is a serious threat 

to the industry’s financial health, well being and long-term prospects.’’ 13 BNSF and CN also argue that delay will defer the public benefits, such as new single-line 

service, associated with their merger. But there are various alternatives to merger that can approximate those benefits. Indeed, CN and its partner IC currently participate in an alliance with 

KCS, a smaller Class I carrier, that provides all parties many of the benefits of a merger. We 

note that both General Motors and United Parcel Service (two of the largest customers of CN 

and BNSF), which would presumably reap the largest benefit from the new single-line service 

these railroads promise, have testified in no uncertain terms that they do not want a merger 

to go forward at this time, as has KCS, whose CEO stated that the carrier would not survive 

as an independent carrier if the BNSF/CN proposal is implemented. 14We note that the BNSF merger, which was characterized by many, when it was initially 

proposed, as a manageable ‘‘end-to-end’’ merger, had its own share of integration problems, and 

there was some testimony at the hearing concerning service issues on the CN/IC system, which 

has not yet been fully integrated. 

beset the railroad industry in connection with the last round of mergers could reach 

unprecedented levels. Carriers whose management should be focused on fixing their 

service problems would instead be fixated on finding merger partners, defending 

their proposals, and responding in the regulatory arena to other carriers’ proposals. 

Investors, who have forsaken the railroad industry in favor of businesses that they 

have come to believe may have more favorable future prospects, could devalue the 

industry further. And railroads could find it more difficult to finance the capital improvements necessary to provide the better service that is key to their financial revitalization. In short, the already fragile rail industry could be further destabilized. 

We understand BNSF/CN’s view that holding up their merger application proceeding would itself be viewed negatively by the financial markets as creating uncertainty. We disagree, as we do not see how anything could be more uncertain than 

moving forward without appropriate rules in place at the beginning to govern the 

proceeding, particularly at a time when uncertainty already surrounds the rail sector. Furthermore, investors have come to view rail mergers in a less than positive 

financial light, and we can see proceeding with the BNSF/CN proposal at this time 

as only adding to that negative environment. In this regard, we should note that 

there is clearly sentiment within the financial community—from those analysts who 

closely followed our hearing—that a delay in merger activity, while new rules are 

developed, would tend to reduce uncertainty for rail investors, help to stabilize rail 

financial markets, and provide an impetus for increasing rail share prices.12

Notwithstanding the serious potential public harms that could result from going 

forward, BNSF and CN argue that they will suffer if consideration of their merger 

proposal is delayed.13 Unless they expect to escape the new rules that will apply 

to everyone else, however, and to hold other mergers at bay until their own is completed, we do not see how their transaction will not be adversely affected by the disruption that it would produce throughout the industry. BNSF and CN suggest that 

it is not fair to ‘‘penalize’’ them for the failures of others.14 But our action here addresses industrywide concerns that involve all railroads (including BNSF and CN), 

and in any event, should not in any way be construed to be punitive. 

Under 49 U.S.C. 11324, we must consider the public interest in addressing rail 

mergers, taking into account, at a minimum, adequacy of transportation to the public; including other rail carriers in the area involved; competitive effects; financial 

impacts on the involved carriers; and impacts on employees. In addition, the rail 

transportation policy set out in 49 U.S.C. 10101 directs us, among other things, to 

promote safety, efficiency, good working conditions, an economically sound and comVerDate Apr 24 2002 06:38 Oct 03, 2002 Jkt 079321 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\79321.TXT SCOM1 PsN: CAROLT
15

15The legislative history accompanying section 721(b)(4) explains that the provision ‘‘explicitly 

authorizes the [Board] to issue unilateral emergency injunctive orders to prevent irreparable 

harm. This power has been asserted and used by the [Interstate Commerce Commission] in the 

past, although not specifically granted by statute. The Committee intends to confirm the scope 

of the former ICC power in this regard. . . .’’ H.R. Rep. No. 311, 104th Cong., 1st Sess. 124 

(1995). 16 Accordingly, for the reasons expressed herein, we hereby suspend the ‘‘Notice of Intent to 

File’’ filed in Canadian National Railway Company, Grand Trunk Western Railroad Incorporated, Illinois Central Railroad Company, Burlington Northern Santa Fe Corporation, and 

The Burlington Northern and Santa Fe Railway Company—Common Control, STB Finance 

Docket No. 33842, until such time as new merger rules have been promulgated and the period 

set forth in this Decision has expired. 

petitive rail transportation system, and the needs of the public and the national defense. For the reasons we have discussed, we believe that we can best advance all 

of these objectives by promptly initiating a rulemaking proceeding to adopt new 

rules, as appropriate, and providing a short period for parties to adjust to the new 

rules before proceeding with merger proposals. This approach should provide a degree of stability for what is now a very fragile industry and permit vital public interest issues to be addressed on an evenhanded basis for all merger proposals. To 

go forward with any individual merger proceeding in the meantime would be unfair 

to customers, carriers, employees, and affected communities, and would disrupt and 

distract the industry to the detriment of all of the public interest concerns that we 

are charged with advancing. 

We recognize that our action here is unprecedented. But these are not ordinary 

circumstances, and we see no way of adequately protecting the public interest short 

of the steps we have outlined here. Congress has directed us to take such actions 

as are necessary to carry out our statutory mandate, 49 U.S.C. 721(a), and has expressly authorized us to take injunctive-type action to prevent irreparable harm, 49 

U.S.C. 721(b)(4).15 After considering all of the circumstances, as elucidated through 

our extensive hearings, we find that changes in our merger regulations are necessary now and that no major rail merger proposals should be filed, or will be considered, until new merger rules have been established.16

This action will not significantly affect either the quality of the human environment or the conservation of energy resources. 

It is ordered:

1. Class I railroads are directed to suspend activity relating to any railroad 

transaction that would be categorized as a major transaction under 49 CFR 

1180.2, pending development of new rules by the Board, as outlined in this decision. No filings relating to such a transaction will be accepted for 15 months. 

2. This decision is effective on the date of service.

By the Board, Chairman Morgan, Vice Chairman Burkes, and Commissioner

Clyburn. Chairman Morgan, Vice Chairman Burkes, and Commissioner Clyburn 

commented with separate expressions. 

VERNON A. WILLIAMS, 

Secretary. 

Chairman Morgan, commenting: 

This decision has been one of the most difficult ones that I have had to make 

since becoming a member of the Surface Transportation Board and the Interstate 

Commerce Commission before it. The Board’s action here directing the suspension 

of all rail merger activity for a period of time is particularly difficult for me because, 

as my record demonstrates, I do not believe that the government should intervene 

into free market processes without a very good reason for doing so. And I also believe that parties should get fair and expeditious consideration of matters brought 

to the Board. But the current problems facing the rail sector are so extraordinary 

that an unprecedented response is necessary. Given the financial and service instability that exists in the rail sector as a result of the most recent round of major 

railroad consolidations, I cannot in good conscience allow further actions to occur 

that I believe would run the risk of creating more disruption and instability to the 

clear permanent detriment of the Nation’s transportation system, rail employees, 

rail customers, and communities across the country. 

In this regard, once I decided that a time-out from mergers was necessary, I proposed a 2-year waiting period before merger applications could be filed. I firmly believe that a period of that length is necessary to accomplish all of the goals set forth 

in the Board’s decision. A lesser time, in my opinion, will simply block the BNSF/

CN proposal without fully achieving the immediate and lasting stability for which 

I am striving by taking this unprecedented action. Nevertheless, although a 2-year 

16

period would do more to allow a thorough reexamination of our merger rules and 

would permit the rail sector to adapt to those rules and achieve a firm level of stability before processing any more major rail consolidation proposals, overall our action here is clearly on the right track. 

While certain interests have favored moving forward with the proposed BNSF/CN 

transaction when filed, many others have been opposed to moving forward with any 

further consolidation at this time, and certainly not until our merger rules are revisited. In balancing all of these concerns in determining what action would be in the 

greater public interest here, I have focused on the long-term, as well as short-term, 

effects of our actions, and on my concern about what would be for the greater good 

of all railroads, rail customers, rail employees and communities across the country. 

In view of the instability in the rail sector, the great risk of further harm from continued instability and disruption, and the need to promote the greater public good, 

it is my strong belief that processing mergers at this time and for a significant period thereafter would not be in the public interest. 

Vice Chairman Burkes, commenting: 

This decision sets in motion a 15-month rulemaking proceeding to reevaluate the 

Board’s merger guidelines and imposes a suspension on all major merger activity 

during this period. This upcoming proceeding will be extremely important. Much 

has changed in the railroad industry in the nearly twenty years since the majority 

of our current rules were established. I believe that it is long past time to step back 

and revisit those standards. 

The BNSF/CN merger announcement may have triggered this proceeding, but it 

is long since overdue. However, it is unfortunate that it was not held prior to their 

announcement. Consequently, in addition to substantive merger rules issues, the application and timing of a rulemaking proceeding have also become issues. 

In this proceeding, we have established a 15-month period to develop new merger 

rules. Although this is almost double the period of time associated with the Board’s 

last two major rulemaking proceedings (Ex Parte Nos. 627 and 628), the issues here 

are significant and complex and will require additional time. Although this proceeding could be completed in a much shorter time period, 15 months should be 

more than adequate for a thorough review of our merger rules. 

Several parties have argued for a longer suspension period or moratorium, i.e., 

two or more years. I believe this would be much too long of a period of time. After 

we have issued our final merger rules, there would be a minimum of an additional 

year before any additional major railroad mergers could be approved. Moreover, the 

evidence indicates that railroad service has started to improve after the disruptions 

resulting from the past mergers and it is clear that those problems started long before the BNSF/CN announcement. In addition, a longer period could add to uncertainty for shippers who are considering building or relocating facilities or planning 

to enter into long term contracts. 

In terms of application, I believe that the new railroad merger guidelines should 

apply to the proposed BNSF/CN merger and all future major railroad mergers. I 

also believe that, in fairness to BNSF and CN, and to all parties, it is important 

to resolve these issues in a timely manner. 

Commissioner Clyburn, commenting: 

I stated in my opening remarks to Ex Parte 582 that this proceeding could be a 

defining moment concerning rail consolidation issues. Four full days of listening intently to comments from all sectors of the rail industry has only strengthened this 

belief. We have heard testimony from large railroads, small railroads, large and 

small shippers of all types of commodities, rail labor, economists, government agencies and Members of Congress. While diverse ideas regarding how the Board should 

address future consolidations emerged from the testimony, it was abundantly clear, 

however, that the time has come for a thorough review of the Board’s current merger rules. Some did suggest that we proceed with future consolidation utilizing the 

same regulatory framework that currently exists, while some others have suggested 

that we ‘‘take a breath’’ and impose a moratorium on filing merger applications for 

two years, three years, or an indefinite period of time. 

It is clear to me that the rail industry has changed dramatically within the past 

twenty years since the passage of the Staggers Rail Act of 1980. Rail consolidations 

have created a new paradigm in which we must now operate. Therefore, I support 

the Board’s decision to institute the 15 month rulemaking process to revise our 

merger rules and suspend major merger transactions during this time. Others have 

called for longer periods of time to attempt to address uncertainties—real, perceived, 

or otherwise. However, my support of the 15 month suspension is based solely on 

what I believe to be an appropriate time frame in which the Board Members and 

17

staff can address, appropriately, the plethora of complex issues the industry currently faces without unnecessarily suspending merger applications. I believe our approach is a reasonable one.

Ms. MORGAN. I will now make a few brief comments about the 

March 17th decision before I take questions. 

That decision follows 4 days of hearings beginning on March 7th, 

with over 150 witnesses from all segments of the rail sector and 

from various branches of government. It focused on the issue of 

major rail consolidations. 

The decision found that the rail industry is poised to move toward the final phase of consolidation. We concluded that the current merger rules are not appropriate, given the level of concentration that is likely to result if the next round of mergers is carried 

out. 

For that reason, and because a new round of mergers at this 

time will aggravate the difficulties that the industry is already 

having in connection with the last round of mergers, the decision 

suspends for 15 months the filing of major rail consolidation proposals pending a reexamination of our rail merger rules. 

The Board has pending before it two petitions to stay this decision, and the decision has been appealed by three parties to the 

U.S. Court of Appeals, D.C. Circuit. The Board is working on an 

advance notice of proposed rulemaking regarding changes to our 

rail merger rules, which will be issued by April 6th. 

The decision itself is quite clear and speaks for itself, and I am 

proud of that decision. It would not be appropriate for me to engage 

in extensive dialog about it, given the suits in court and the fact 

that there are matters in deliberation at the Board pertaining to 

the decision. However, there are a few comments I wish to make 

about the decision. 

First, there are those who argue that what we did by suspending 

merger activity was extreme and unnecessary. The Board’s action 

was unprecedented, but bold action was necessary given the extraordinary circumstances presented to the Board and the decision 

lays that out in detail. 

Secondly, there are those who question the Board’s authority to 

have done what it did by suspending merger filings while the merger rules are being examined. In response, what I would say is that 

the Board believes very strongly that it has the authority to do 

what it did, and the decision is clear on that point. 

Thirdly, there are those who argue that we should have handled 

the BNSF/CN merger while we reexamined our merger rules. The 

Board believes that it made no sense to consider new merger rules 

while considering what could be the final round of major rail consolidation. The Board also believes that the risk of creating more 

instability in an already unstable rail sector was too great. The decision lays all this out in detail. 

Fourth, there are those who have argued that the decision was 

issued to protect railroads from competition. Our decision was 

clearly made to protect the broader public interest. The decision 

lays that out clearly. 

As the decision clearly points out, the totality of the record compiled focused on clear concerns about the state of rail service and 

competition today, and about the negative impact of further conVerDate Apr 24 2002 06:38 Oct 03, 2002 Jkt 079321 PO 00000 Frm 00021 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\79321.TXT SCOM1 PsN: CAROLT
18

solidation on service and competition. The Board’s March 17th decision responds to those concerns in a responsible, forceful, and appropriate manner. 

The Board strongly believes that the greater public interest is 

served by a suspension of merger filings for 15 months pending reexamination of our rules. 

In closing, let me say that I did not want to have to make this 

decision, and my commenting opinion clearly reflects the difficulty 

in making it. But in my 6 years at the Board and the ICC, we have 

been faced again and again with new challenges and we have always stepped up to the plate and done what was necessary. 

I am proud to say that we met the challenge here and acted responsibly here. I am not sure how much I will be able to say today, 

but I am happy to answer any questions that you might have. 

Senator HUTCHISON. Thank you, Chairman Morgan. 

Before I start, the Majority Leader would like to make a statement or ask a question. 

STATEMENT OF HON. TRENT LOTT,

U.S. SENATOR FROM MISSISSIPPI 

Senator LOTT. Thank you, Madam Chairman. I wanted to give 

our friend and a person that’s very familiar with this room an opportunity to make her statement first, and to hear from other Senators briefly. But I want to thank you again for having this hearing 

and I want to thank the members of the Board for being here today 

and for the important work that you do. 

I certainly believe that deregulation of the railroad industry in 

1980 turned the industry around. It went from a patchwork of 

undercapitalized, inefficient small railroads to a strong network of 

robust railroads in the space of a dozen years or so. More recently, 

though, I have become concerned that as the railroads become larger, the mergers become more complex and difficult. 

In the short term, it appears to me that the mergers have 

drained the financial resources of the railroads and, as others have 

already noted, they have eroded service gains and efficiencies at 

various points in the railroads’ service system. 

I am concerned that the industry as a whole needs to be cautious 

in proceeding to the next round of mergers, certainly in the near 

term. The railroads have lost traffic during this post-merger service 

period due to breakdowns, and remaining customers have borne 

the brunt of some of the problems that have come from this. 

Now, I think the situation is going to sort itself out as the railroads digest the previous mergers over the past 5 years. I certainly 

don’t believe that we need to permanently end mergers; I have always felt that on a general basis, if mergers make good business 

sense, generally speaking, the government should be cautious 

about intervening. 

But I do think we have to look at it broadly. I take railroad 

issues very seriously from both a national perspective as well as a 

Mississippi perspective, and the railroad industry is very important 

in my state. 

So as the Board considers the narrow benefits to the requesting 

parties of the next proposed merger, I think that they certainly 

must also consider the probable response of the rest of the industry 

19

and its overall impact on the industry and, very importantly, on its 

customers. 

That is why I joined several members of this committee in commending the Board for its December decision to take a broader perspective on the effects of the railroad mergers when reviewing future mergers; and that’s why I support the Board’s recent decision 

on the moratorium. I believe the unanimous decision by all the 

members was the correct one, and I compliment you for your 

thoughtful approach to a difficult issue. 

On the overall STB reorganization issue, I have cosponsored Senator McCain’s bill. I think we need to be careful about rushing to 

a legislative solution to what can probably be handled by the industry itself and by the efforts of the Board. But I know the chairman 

of this Subcommittee is very interested in this area and has some 

proposals she would like for us to consider. I have the utmost respect for her, and quite often problems in her state are similar to 

the problems in my own state. I look forward to working with the 

Board in the future and with this committee to encourage the 

health of this industry and ensure that we maintain strong commercial railroad and Amtrak service in this country. 

Thank you, Madam Chairman, for allowing me to enter these remarks in the record. I do have a very brief statement I’d like to 

be included in the record in its entirety at this point. 

Senator HUTCHISON. Without objection. 

[The prepared statement of Senator Lott follows:]

PREPARED STATEMENT OF HON. TRENT LOTT, U.S. SENATOR FROM MISSISSIPPI

Good morning. I’d like to thank Chairman Hutchison for chairing this hearing and 

Chairman Morgan for appearing before the Committee to discuss the Surface Transportation Board’s recent decision. 

I believe the deregulation of the railroad industry in 1980 turned that industry 

around. It went from a patchwork of undercapitalized, inefficient, small railroads to 

a strong network of robust railroads in the space of a dozen years or so. 

More recently though, I’ve become concerned that, as the railroads became larger, 

the mergers became more complex and difficult to execute. In the short term, this 

has drained the financial resources of the railroads and eroded the service gains and 

efficiencies they built up through previous mergers. I am concerned that the industry as a whole is not healthy enough to undertake another round of mergers in the 

near term. The railroads lost traffic and their remaining customers were stressed 

by rail service breakdowns as a result of the past several mergers. 

Now, I believe this situation will sort itself out as the railroads digest their mergers of the past five years. I certainly don’t believe we need to permanently end further railroad mergers. I don’t take Government intervention in the marketplace 

lightly, but I take railroad issues very seriously from both a national perspective 

and a Mississippi perspective. I believe the industry has now reached the stage 

where, as the Board considers the narrow benefits to the requesting parties of future proposed mergers, it also must consider the probable response by the rest of 

the industry, and the overall impact on the industry and its customers. 

That is why I joined several of my Commerce Committee colleagues in commending the Board for its December decision to take a broader perspective on the 

effects of railroad mergers when reviewing future mergers. That is why I support 

the Board’s recent decision to impose a 15-month moratorium. I believe the unanimous decision by the Board was the correct one. I complement the Board for its 

thoughtful approach to a difficult issue. 

I cosponsored Chairman McCain’s straightforward STB reauthorization bill because I saw the rush to legislate specific service improvements as short-sighted. The 

railroad industry should be given time to fix its service problems. I believe the 

Board’s moratorium will help in this regard. Legislating prescriptive service requirements would only reduce the industry’s ability to fix its service problems on its own 

and impose inefficiencies and unnecessary costs throughout the railroad system. 

20

I thank Chairman Hutchison, again, for her interest in this Nation’s rail service 

concerns. I look forward to working with her to address these concerns. Also, I 

thank Chairman Morgan for her continued good stewardship of the Surface Transportation Board and willingness to discuss this issue with us today.

Senator HUTCHISON. I want to thank the Leader for the statement and say that I think that the important thing here is balance. 

We wall want to have healthy railroads, because having heavy railroads creates competition in transportation. 

I also think we need to protect competition in the railroads to 

make sure that the shippers are not gouged in the future. So I 

think a balance is what is needed, and I hope that the Leader will 

work with us to make sure that Congress has set the guidelines to 

keep competition as a factor in any future mergers. 

Senator LOTT. That’s why I added that last ‘‘but I look forward 

to working with the Subcommittee chairman,’’ because I know her 

views and I share a lot of her concerns and desires to make sure 

that the service to the customers is also considered in this whole 

process. 

Senator HUTCHISON. Thank you. Thank you for attending. 

I would like to start the questioning, Ms. Morgan. 

Senator DORGAN. Madam Chairman, I wonder if I might make 

just a very brief statement. 

Senator HUTCHISON. Yes, I’d be happy for you to make a statement, and then we will go to the Senators in the order in which 

they arrived. 

Senator DORGAN. Thank you, and I’ll be mercifully brief. 

Senator HUTCHISON. That would be merciful. 

Senator DORGAN. That was my intention. Thank you. 

Let me say that I think the action by the Board was bold and 

it was action that I supported; and as you heard from the Majority 

Leader, there seems to be wide support for the action; and perhaps 

for different reasons, but nonetheless wide support. We have had 

our differences, I have had my differences with the Surface Transportation Board but this is an action that is supportable; and I 

think incidentally it’s my impression and it’s not of great note that 

I think you have the authority to do this, and I have every expectation you will prevail in court. 

The period of time during which this moratorium will be in place, 

however, should not be viewed by anyone as a period in time in 

which some of us will go away; we fully intend to continue to push 

on these other issues. 

It is true that we all want a healthy rail industry in this country. 

This country needs a healthy rail industry. It is also true that we 

need fairness for shippers. And frankly, I would say to the Majority 

Leader, there is not a lot of room left for mergers, you know; we 

are about merged out in this industry. 

I don’t know how many additional mergers could be accommodated in any event, without obliterating virtually every semblance 

of competition that exists; and our market system works only when 

there are competitive elements and of course monopolies produce 

monopoly pricing which injures shippers. 

This is a long, steady circle that all of us continue to move in; 

but I did just want to say that I want to work with the Subcommittee chairman, with the chairman of the full committee, and 

21

the Majority Leader and others, and I want to work with my 

friends who have joined in cosponsoring the Rail Shipper Protection 

Act. We have people on both sides of the aisle here in this committee, and it’s our intention even during this moratorium, to continue to push that legislation. We hope very much we get a hearing 

on it and be able to have a vote and move that legislation, even 

during this moratorium. 

The moratorium itself, of course, deals with the question of conditions under which future mergers might be evaluated. But again, 

let me finish by saying I don’t—there’s not much room for additional mergers in this industry; this industry has gone from fortysome Class I railroads to about seven or eight, and there’s not 

much room left for additional mergers. 

Thank you, Madam Chairman, for your courtesy. 

Senator HUTCHISON. Thank you, Senator. 

Chairman Morgan, I want to start with the basic decision to impose the moratorium. What was your legal authority for imposing 

the moratorium and how will you make sure that there is a fairness to all sides in the handling of this merger? What are the potential factors that will be considered for future mergers. 

I ask that because I am well aware of the problems with the 

most recent merger. Clearly this hurt all of our states, and I think 

the caution is certainly justified. On the other hand, now we have 

all of the other railroads coming in and asking for the moratorium, 

and I want to make sure that we are playing fair with everyone. 

Ms. MORGAN. First of all, let me say that all of the questions that 

you are asking will be extensively litigated, and so I will try to 

present my case in such a way that I will be able to win this case 

on appeal as we go forward. 

First of all, let me say with respect to our authority, on page 10 

of the decision we discussed that; we believe we have authority 

under a section of the statute that allows us to provide injunctivetype relief, where there is irreparable harm. The decision goes into 

great detail as to what we consider in this case to be irreparable 

harm; and we felt very strongly that given our authority to promote the public interest as it relates to rail mergers and the rail 

sector in general, that we did have the authority to institute a suspension of merger filings for 15 months. 

Now with respect to fairness, clearly that is always an element 

in any decision that the Board makes, and we were presented with 

a situation in which we had a hearing record that clearly raised 

many concerns about future consolidation and the impact that it 

would have on service and competition. We were presented with a 

record in which people very clearly wanted new merger rules before 

we move forward, as we move forward. At the same time we had 

notification that there could be a filing regarding another merger 

proposal. 

The question I think you are asking is why did we suspend merger activity in order to do our reexamination of merger rules? And 

the Board felt very strongly that it would not make sense to proceed ahead with what could be the final found of rail consolidation 

before you had rules in place. And that furthermore, processing 

what could be the final round of consolidation while you were working on new rail merger standards also did not make sense; and furVerDate Apr 24 2002 06:38 Oct 03, 2002 Jkt 079321 PO 00000 Frm 00025 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\79321.TXT SCOM1 PsN: CAROLT
22

thermore, the instability that could be created by processing rules 

and processing what could be the final round of rail mergers was 

not a risk that we wanted to undertake, given the instability that 

already existed in the rail sector. 

Senator HUTCHISON. Let me just followup quickly and ask, why 

15 months? Is that absolutely necessary before you take up the 

pending merger? Do you need to have that long a time to set the 

standards? 

Ms. MORGAN. Again, I can assure you that the time period of 15 

months will be litigated quite heavily. I myself was in favor of a 

2-year moratorium as opposed to a 15 months’ suspension. The consensus on the Board, however, was 15 months, which was the time 

that all three of us agreed would allow us to do merger rules. We 

also agreed that a suspension of merger activity, as I indicated previously, would be appropriate while we were processing our examination of new merger rules. 

Senator HUTCHISON. Last question on this round. What guidance 

do you think you need from Congress, or do you think you have 

enough authority to set a different standard? 

Ms. MORGAN. What I would say to that is that I believe we have 

the authority to do what we have done here, very clearly. I believe 

we have the authority to proceed ahead with a reexamination of 

our merger rules. Whatever we ultimately decide in that proceeding, we will feel confident that we have the authority to decide. 

That will be taken to court, and if a court decides that we didn’t 

have the authority to do what we did, then we’ll have a different 

situation. 

But at this point we are proceeding along, using the authority 

that we have, and feel very strongly that we have that authority, 

and we will continue to use the authority we have as we move 

ahead. 

Senator HUTCHISON. But do you think you have the authority to 

factor in competition, for instance, without congressional action? 

Ms. MORGAN. Well, that clearly will be part of the examination 

of our merger rules. When we put out our advance notice of proposed rulemaking by April 6th, in that will be discussions about 

various issues that were presented to us during our 4 days of hearings, and we will put that out for comment and I’m sure that issue 

will be one of those issues discussed, and we will take the comments and see where we go from there. 

Senator HUTCHISON. Senator Lott? 

Senator LOTT. I will pass. 

Senator HUTCHISON. Senator Rockefeller. 

Senator ROCKEFELLER. Chairman Morgan, as you know when 

Senator Dorgan and I testified before, at the marathon 4 day procedure you had to go through, I pulled out a thick book with my 

usual massive orange-yellow-green-red-pink-purple underlinings 

that I had done for exactly this same subject in 1987, and none of 

the issues had changed. I could have used that briefing book for 

any current discussions. 

I read partly to you a letter that I wrote then to Chairman 

Heather Gradison of the ICC, and two of the specific requests in 

that letter were for the ICC at that time to quote, ‘‘assure that captive shipper rate reasonables process is not so complex, costly and 

23

time-consuming in that it fails to provide protection intended by 

Congress and assure the commission is discharging its responsibility to preserve and provide competitive railroad transportation 

alternatives.’’

I am just curious, and I want to phrase this in a way that you 

can answer it: Not based upon your future judgment, but based 

upon what you heard at these 4 days of hearing from 150 people. 

How would you characterize the current level of competition 

among Class I railroads? As being sufficient, too little, too much? 

No. 1. Did you hear from witnesses what they think is the appropriate number of Class I railroads for North America to ensure 

competition, financial health, and/or efficient railroad transportation? 

Ms. MORGAN. Well, let me try to answer that. I have here the 

transcripts of the 4-days of hearings, and I brought them with me 

because I wanted people to understand that this was a lot of testimony that you are asking about. I will try to answer your question, 

but there’s a lot in there, and we spent a lot of time looking at each 

and every piece of testimony that was submitted. 

The second point I want to make before answering your question 

is that these hearings were on major rail consolidations. So in 

terms of broader issues outside of the issue of rail consolidations, 

there is testimony in there, but that was certainly not the focus of 

the hearing. 

With respect to the testimony we received, I think a couple of 

things came out of it which we reflect in our decision here; and 

that is a concern about service and about competition, and particularly as we move forward, grave concerns about service and competition. That is why this decision was issued, to reflect the concerns that had been raised and the care and the caution that was 

advised as we move forward. 

Senator ROCKEFELLER. Was that based upon the fact of mergers 

in and of themselves? What they do to competition, to bottlenecks, 

to whatever; or were some of those comments coming from people 

who were simply complaining about the state of the situation, as 

I am. 

Ms. MORGAN. Well again, I think the focus of the hearing was 

on mergers, and where we are as far as mergers. So the comments 

focused on how people felt about mergers to date and how people 

felt about mergers going forward. 

Now we did get some testimony that reflected the broader interests——

Senator ROCKEFELLER. That is what I am asking about. 

Ms. MORGAN. —and those are obviously some of the individuals 

that you are reflecting; but that was focused in the context of the 

discussion of mergers. 

Senator ROCKEFELLER. When you say that bottlenecks and that 

massive, massive problem which is so devastating across America 

will be a part of your proposed rulemaking considerations I hear 

that, and of course in the hearing of it it sounds to be good. The 

question is, how important do you think that is, and to what depth 

will you take that as a consideration, while you consider mergers 

and other things? 

24

Ms. MORGAN. Well, again, these issues are under deliberation at 

the board. We are working on an advance notice of proposed rulemaking that will address the issues that were raised at the hearing. 

One of the issues raised at the hearing of course was bottlenecks 

and how that would be addressed in the context of the review of 

future mergers. I do not want to avoid your question. It is in deliberation; it will be an issue, it was an issue raised in the hearings. 

I’m sure that it will be an issue raised as we move along. 

How it will be ultimately resolved I cannot tell you because obviously the resolution of these matters will be based on the record 

that we accumulate as we go from the advance notice of proposed 

rulemaking to the proposed rulemaking, to the final rules. 

Senator ROCKEFELLER. When you hear that, what I said in my 

opening testimony, that a railroad executive told some chemical 

companies in West Virginia quite recently that there would be no 

increase in competition, no change in competition, no move away 

from captive shipping, no change in pricing absent Federal legislation. Do you find that a surprising statement? Do you find that a 

true statement? What is your reaction to that? 

Ms. MORGAN. Well, I can’t speak to the truth of it because I 

didn’t hear it myself, but I presume it was said, so I presume whoever reported it is being truthful. I certainly don’t like the tone of 

that, I’m surprised by it; but I can’t say any more than that. 

Senator ROCKEFELLER. Thank you, Madam Chairman. 

Senator HUTCHISON. Senator Dorgan. 

Senator DORGAN. Madam Chairman, I understand there’s a vote 

underway, I think to be followed immediately by a second vote. So 

let me just ask a brief question in sort of the direction that Senator 

Rockefeller asked. 

Can you give me your subjective evaluation of the state of competition in the railroad industry today in the United States? 

Ms. MORGAN. My subjective. Well, we have approved several 

mergers, as you know; you and I may not have agreed on those——

Senator DORGAN. Did not. 

Ms. MORGAN. I certainly did not approve mergers that I felt were 

anticompetitive. There are those out there who may feel that that’s 

the case, but I as a decisionmaker did not feel that that was the 

case. Having said that, I believe we are now entering another 

round, a heightened round, a very serious round that could raise 

different issues as it relates to competition, and I think the Board 

has responded to those concerns appropriately. 

Senator DORGAN. Is it your feeling that competition is diminished 

in the last dozen years or so in the railroad industry? In other 

words, is competition still a healthy, wholesome element in that

industry, or is the element of competition diminished in that

industry? 

Ms. MORGAN. Well, let me answer that two ways. First of all, 

again with respect to the mergers for which I was responsible, I believe that we did not diminish competition with those mergers. 

Now you and I will likely disagree on that, but that is what I

believe. 

Now, having said that, there are shippers who are quote ‘‘captive’’ unquote. There have been captive shippers for a while, and 

25

I think the effort that you all have undertaken is to try to provide 

some sort of competition for captive shippers. 

I do not believe—and again we may disagree on this as well— that the mergers that we approved in the past created captivity. As 

a matter of fact, we wanted to make sure that service to shippers 

did not go from two carriers to one carrier. So I do not believe that 

we created captivity, nor do I believe that those mergers diminished competition. 

I think though where you’re coming from is there are captive 

shippers that have been there, that will be there, and is there 

something we need to do to address that? And I think that’s what 

your legislation effects. 

Senator DORGAN. Yes, and also the fact that while there are captive shippers, and that’s a fact of life, there is not an effective remedy for them. It’s one thing to be a captive shipper; it’s quite another thing to have an avenue with which you can use to redress 

grievances. 

But as you know we have not in recent years had a circumstance 

where a captive shipper can adequately complain and receive some 

satisfaction from the complaint. In fact, in one of our hearings a 

year or two ago we talked about the Montana case that took 16 

years? Captive shippers are captive with—there’s no door out of 

that room. 

That’s enough; I don’t want to ruin the day here. I came to say 

that I thought the decision you made was a bold decision. 

Ms. MORGAN. That’s all right. 

Senator DORGAN. But I thought the decision you made was a 

bold decision, I think it’s appropriate. I think a study of mergers 

and their impact on this country and the rules by which we make 

judgments about mergers is very important at this point. We have 

much more to do. 

I just want to finally say again, some viewed your decision with 

elation saying, ‘‘Well, that’ll stop those folks that want to do a captive shippers bill.’’ That’s not the way we view the decision. We still 

intend to push our legislation here in the Congress even as you 

proceed with the moratorium. Thank you. 

Ms. MORGAN. May I just—and you and I have had dialogs on this 

in the past, and I and the rest of this committee have had this on 

three occasions prior to this. 

I understand your concern about access to the process for captive 

shippers, particularly as it relates to rate cases. And I continue to 

process them, simplify the process as best I can. I communicated 

to this committee in December 1998 that the small rate cases perhaps could be handled differently, and I would need some sort of 

authority to handle them differently; and I don’t want anyone in 

the room to think that this is not something I’m sensitive to. I have 

worked on it as best I can. 

Rate cases are complicated, but we have tried to streamline 

them; shippers have won some rate cases. The 16 year old case is 

one that I’m sorry had been there 16 years, but when I got to the 

Commission I did resolve it. And I will continue to try to expedite 

as best I can. 

Senator HUTCHISON. Thank you. I’m going to try to end this so 

that we can vote and not make you wait for 30 minutes. 

26

I would just like to say first of all that in my STB reauthorization bill, we do deal with the small shippers’ complaints and expedite the procedure, which I think would be very helpful. I just hope 

that Congress will do its part in giving you the legislative authority 

you need on the key issues that have been raised this morning. 

Secondly, I am going to call on the railroad industry and the 

shipping industry to try to be helpful to Congress in fashioning an 

STB reauthorization bill that does produce, if not a win-win for 

both groups, at least a partial win for both groups that would alleviate the necessity for the Board perhaps to have the 15 month 

moratorium. 

Having said that, I want to say to you that you have I think been 

very deferential to Congress; you have tried in your dealings not 

to overstep your authority. I think we need to do our part to give 

clear guidelines, and I would just finish by saying that in my view, 

what we need is balance. The key word is balance. We need relief 

for captive shippers, we need competition, and we need a healthy 

railroad industry. 

So those are my goals. I feel like I am an honest broker; in my 

state I have shippers, I have railroads. I want all of them to thrive 

and prosper and create new jobs for our country. So that’s where 

I’m coming from, and I just hope that we can get the parties together, hammer something out, and give the necessary guidelines. 

With that, I want to thank you for coming. 

Senator HUTCHISON. There has been a statement submitted by 

Rob Krebs, the CEO of Burlington Northern Santa Fe, which I’m 

going to put in the record. [Refer to Appendix.] 

I am also going to leave the record open for 5 days so that anyone else who wants to put a statement in the record may do that. 

I don’t want to in any way have only one statement, and the only 

reason that I asked you to be the only witness is because I didn’t 

feel that we needed to hear from the parties. But Mr. Krebs has 

asked for this; I will give it to him, but I will give everyone else 

the right as well to see his statement and to submit statements. 

So we will have—let’s see, today is Thursday—5 days including 

today should give people time to respond if they so choose. [Refer 

to Appendix.] 

With that, I will adjourn the hearing, and thank you very much, 

Chairman Morgan. 

(Whereupon, at 11:20 a.m., the hearing adjourned.) 

(27)

A P P E N D I X

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. JOHN F. KERRY TO

LINDA J. MORGAN

Question 1. Can we get assurances from you today that you will address the cramdown issue as you consider the new merger rules? 

Answer. The Surface Transportation Board (Board) issued an Advance Notice of 

Proposed Rulemaking (ANPR) on March 31, 2000, instituting the proceeding in STB 

Ex Parte No. 582 (Sub-No. 1) in which the Board proposes to revisit its rules for 

major rail consolidations. In the ANPR, the Board specifically requested comments 

on the concerns of rail employees, including their suggestions that the Board require 

railroad merger applicants to agree to forgo any effort to ‘‘cram down’’ post-merger 

changes in collective bargaining agreements under the auspices of 49 U.S.C. 

11321(a) and/or 11326, and/or under the auspices of Article I, Section 4 of the 

Board’s standard New York Dock labor protective conditions. Thus, the Board will 

consider the cram-down issue as part of its merger rule review.

Question 2. Do you believe that the authority of the Surface Transportation Board 

regarding cram-down can be properly addressed with new merger rules? 

Answer. Because the issue you raise is now subject to the STB Ex Parte No. 582 

(Sub-No. 1) rulemaking proceeding pending before the Board, it would be inappropriate for me to comment on that issue at this time. As I testified before the Subcommittee, however, I do support a legislative solution to the problem of cram 

downs in railroad merger proceedings.

Question 3. To your knowledge, is there any governmental agency other than the 

STB that has the authority to undermine collective bargaining agreements? 

Answer. Congress passed a unique statutory scheme providing for the implementation of major rail consolidations and protection for adversely affected rail employees. In doing so, Congress recognized that, when larger railroads consolidate, the 

individual collective bargaining agreements (CBAs) and protective arrangements 

into which the merging railroads entered earlier are not always compatible. The law 

that the Board administers provides for the imposition of the so-called New York 

Dock conditions upon such transactions. The New York Dock conditions provide: 1) 

substantive benefits for adversely affected employees (including moving and retraining allowances, and up to 6 years of wage protection for employees dismissed or displaced as a result of the consolidation); and 2) procedures under which carriers and 

employees are to bargain to effectuate changes to their CBAs if necessary to carry 

out the transaction, with resort to arbitration and, as a last resort, limited Board 

review, if bargaining is not successful. Additionally, in 1991, the Supreme Court 

confirmed that the law provides that agency approval of a consolidation automatically overrides all other laws, including obligations under a CBA, to the extent necessary to permit implementation of the approved transaction. To the best of my 

knowledge, these statutory provisions are unique to the rail industry, which is otherwise subject to the Railway Labor Act with regard to collective bargaining. 

CONSUMERS UNITED FOR RAIL EQUITY, 

Washington, DC, March 31, 2000. 

Hon. KAY BAILEY HUTCHISON, 

Chairman, Subcommittee on Surface Transportation and Merchant Marine, 

Committee on Commerce, Science and Transportation, 

United States Senate, 

Washington, DC.

Dear Chairman Hutchison:

On behalf of the members of Consumers United for Rail Equity (C.U.R.E.), I 

would like to express our appreciation for the oversight hearing that you held on 

March 23rd regarding the Surface Transportation Board’s (STB) recent decision to 

28

issue a 15 month moratorium on rail mergers and the STB’s proposed rulemaking 

proceeding to address possible modifications to its regulations governing proposals 

for major rail consolidations. 

As you know there has been a significant amount of interest expressed in this 

issue. The hearings that the STB held in early March attracted close to 150 witnesses and the STB received statements from twice that number of interested parties. Rail customers, like those represented by C.U.R.E., are concerned about the 

consolidations occurring in the rail industry and the impact that these consolidations are having on competition in the industry. 

We encourage the Committee to schedule a series of hearings on these important 

issues to build upon the record established in the March 23rd oversight hearing. 

Much of the testimony received by the STB earlier this month focused on concerns 

that rail customers have with rail service. For those entities that have no option 

but to ship by rail, this is a very serious concern. We believe that increased competition in the rail industry will help to address many of these service problems. Additional hearings will help the members of the Committee determine the best way to 

address the concerns of rail customers while considering the best policy for our nation regarding rail mergers and consolidations. 

C.U.R.E. would welcome the opportunity to participate in further hearings the 

Committee may schedule. 

Sincerely, 

BRUCE A. BEAM, 

Chairman. 

PREPARED STATEMENT OF RICHARD K. DAVIDSON, CHAIRMAN AND CEO,

UNION PACIFIC CORPORATION

Thank you for giving Union Pacific the opportunity to present our views on the 

Surface Transportation Board’s (STB) decision to suspend Class I rail mergers for 

15 months while it writes new merger rules. 

My career in the railroad industry began 40 years ago. I started out as a brakeman and worked my way through the ranks to the position I hold today. I have been 

with this industry when it was on the brink of bankruptcy as well as when it was 

in its renaissance period. In short, I have seen its many ups and downs, but I’m 

not sure I have seen a situation like we have today. This is a critical and dangerous 

time for the railroad industry, and we are clearly at a major crossroads. Which path 

we take will dictate not only our future, but also the future of many of our customers and the regions we serve. That is why we support the Board’s decision to 

suspend mergers for 15 months as well as the development of new rules that will 

govern all future consolidations. 

I sat through all four days of the Board’s hearings on the rail industry, and sadly, 

I wasn’t surprised by what I heard. Many of our customers are frustrated with service—from all railroads—that they consider to be inadequate. Moreover, to a person, 

our customers will tell you that large railroad mergers have exacerbated these problems. Service problems followed all of the big mergers of the 1990s. I am sorry to 

say that perhaps the worst followed our merger with the Southern Pacific. However, 

none of the mergers were immune to problems, not even the BNSF merger or the 

CN/IC merger, as the STB’s hearing record indicated. Union Pacific’s problems are 

well behind us now. We turned the corner in the spring of 1998, and our performance levels are equal to or better than pre-merger levels. Even so, our customers 

are not ready for more mergers. They want better service. Customer after customer 

testified to this at the Board’s hearings. Companies like General Motors, United 

Parcel Service, Huntsman Chemicals, Hampton Lumber, Arizona Grain, Ball-Foster 

Glass Container Co., Superior Lumber, Westvaco, and many, many more told the 

STB we need a time out on rail mergers to give the industry a chance to stabilize 

and work on service. (By way of example the GM and UPS testimony is attached.) 

It is understandable that service problems have led to a call for no more rail 

mergers. What is worse, and more alarming, is that this last merger announcement 

has poured gasoline on the fires of those who want to re-regulate the industry. 

Mergers have not created a single ‘‘captive’’ shipper, or reduced in any way rail-torail competition where it existed prior to a merger. Still, there are groups who believe mergers have reduced competition, and are using the service disruptions as leverage to change our regulatory structure to their benefit. Re-regulation, competitive access, open access, forced access—whatever name you care to use—it is nothing more than a governmentally imposed revenue shift from one industry to another. Yes, it will reduce rates, but it will cripple our industry, and require us to 

29

1 Re-regulation would cost UP nearly three-quarters of a billion dollars in annual operating 

revenues. 2 At the time of the STB’s hearings, railroad stocks had lost approximately $15 billion in 

value, or 25%, since the BNSF/CN merger announcement. 

shrink our networks, cut service, and lay-off employees.1 There will be some very 

large shippers that will initially benefit, but everyone will ultimately suffer as we 

lack the ability to invest in our system. 

We heard about this too at the STB’s hearings. Investment bankers like Morgan 

Stanley Dean Whitter and Goldman Sachs, as well as world-renowned economists 

such as Nobel Prize winning Kenneth Arrow all testified about the perils of re-regulation. Their testimony was very clear; the financial community does not favor reregulation. The Staggers Act created the appropriate balance providing protections 

for shippers while allowing the railroads to price differentially. Their message to the 

Board was, among other things, don’t change the balance of power between shippers 

and railroads. Doing so will drive the capital markets away from the rail industry. 

Since the rail industry reinvests on average 19% of its earnings, the lack of capital 

will make it virtually impossible for the rail industry to ever earn its cost of capital 

or provide the level of investment necessary to give the quality service our customers’ demand. 

I know the BNSF and the CN will say we are afraid of competition or that we 

want to delay their merger while we prepare one of our own, but this is far from 

true. Under other circumstances, UP would not be very concerned about the BNSF/

CN merger. We do not expect this merger to have a major effect on our ability to 

compete, and we know we can compete effectively with a combined BNSF/CN. In 

fact, we considered the possibility of a Canadian merger ourselves, but we decided 

that proposing a big merger would be irresponsible because of the risk of re-regulation and because our customers would not want a merger. We think any big merger 

would be unwise and dangerous in today’s environment. Of course, if BNSF/CN 

were to be approved, that would have a destabilizing effect and force us to take a 

fresh look at mergers. 

Yes, today we are at a crossroads. The announcement of the BNSF/CN merger has 

created tremendous instability in the rail industry. Our customers are irate that we 

would even contemplate more mergers, the threat of re-regulation has been increased, and this lack of stability has caused all of our stock prices to sink dramatically.2 As a result, we believe the Board’s decision was appropriate and responsible—not radical or ill conceived as the BNSF or CN would have you to believe. 

The Board has a tremendous undertaking before it. Trying to determine what is 

right for the rail industry and the shipping community it serves will be a complex, 

time-consuming task. Rushing to conclusions is not the order of the day, caution and 

prudence are. I think Secretary Slater said it best when he said, ‘‘There is no room 

for error.’’ We also believe the Board has the authority to take this type of action, 

and we will be full participants as this case winds its way through the legal system. 

Does Congress have a role? Yes it does. When the STB is reauthorized, Congress 

must also decide what path to take. Again, we would urge caution, not a rush to 

judgment based on short-term service problems. We would also urge Congress to 

take the path toward stability and viability, and not the path toward access and 

the financial stress and instability it would cause.

BEFORE THE SURFACE TRANSPORTATION BOARD

Ex Parte No. 582

Public Views on Major Rail Consolidations 

Summary of Statement on Behalf of United Parcel Service, Inc. 

I. Introduction 

United Parcel Service, Inc. (‘‘UPS’’) welcomes the opportunity to participate in this 

important public hearing on major rail consolidations. UPS commends the Board for 

convening this nationwide forum. 

UPS has a vital interest in the present operations, and future direction, of the 

North American rail industry. UPS is the largest corporate customer of intermodal 

rail services in the United States. Since the 1960s, railroads have moved UPS packages over long distances (more than 500 miles) as an alternative to highway movement by truck. In 1999, we spent approximately $680 million on intermodal rail 

services. UPS is also in the forefront of the rapid evolution of logistics and global 

30

supply chain management. The role of railroads in this evolution is critically important. 

Due to our large intermodal presence, UPS experienced the considerable difficulties, and shouldered the enormous costs, caused by prior major rail consolidations. 

We also have learned a few lessons. 

II. Any Benefits are Costly, Disruptive and Delayed 

Rail carriers justify mergers on two bases: (i) lower rates; and (ii) better service. 

Our experience has been: (i) no lower rates result; and (ii) rail service is seriously 

problematic for an extended two to three year post-merger period. Incompatible rail 

systems, equipment shortages and confused personnel all contributed to the congestion. Unfortunately, the congestion did not remain isolated among the individual 

railroads merging, but spread across the entire rail network. UPS has found that—

only after this prolonged post-merger period—service does return to, or slightly exceeds, pre-merger service levels. For what is ultimately achieved, the cost to UPS 

of rail consolidations is extremely high. 

UPS’s system relies on hundreds of trucks and trains arriving at a sorting center 

as scheduled. Disruptions and delays caused by rail consolidations required UPS to 

take every possible measure to ensure its service commitments to its shippers. Due 

to rail mergers over the past four years, UPS has diverted trailers from the rails 

to the roads. During the summer of 1999, for example, after exhausting all possibilities of having eligible union employees drive these unanticipated truck loads, over 

700 union employees were turned into tractor trailer drivers. Additionally, UPS was 

forced into short term use of subcontractors on an emergency basis. Such disruptions caused a strain in labor relations. Absent such subcontracting, UPS would not 

have met its service commitments during the merger consolidation period. 

Late trains also caused UPS to extend the duration of sorting operations, to add 

Saturday sorts, and to pay substantial overtime. UPS has tried to reschedule on a 

daily basis placement of trailers on trains to ensure as much as possible early departures and the avoidance of congestion. For all these reasons, the cost to UPS of 

providing service during a rail merger soared dramatically. 

Due to UPS’s relationship with the railroads, they made significant efforts to accommodate UPS’s service needs. However, notwithstanding these efforts, UPS still 

lost customers due to the substantial rail service disruptions caused by the mergers. 

III. Lessons Learned From the Past 

1. The nationwide rail system undergoes severe and costly disruptions when 

major rail consolidations occur. 

2. Significant costs are imposed on shippers like UPS to address these disruptions 

so that service commitments are not irrevocably jeopardized. 

3. Rail carriers need a minimum two-to-three year period to digest a merger before service returns to the pre-merger level. 

IV. Guidance for the Future 

1. Consistent with the Board’s notice, UPS takes no position on the proposed 

BNSF/CN merger. However, UPS would like to acknowledge the efforts BNSF has 

taken to improve its service levels. 

2. UPS’s fundamental concern is that if the proposed BNSF/CN merger is consummated, it will trigger mega-rail mergers of an unprecedented size and scope. 

3. Disruptions across the entire rail system from any such mega-mergers will be 

innumerably worse than anything yet experienced. Digestion will take substantially 

longer, and at a much greater cost, than previous mergers. 

V. Recommendation 

The integrated nationwide rail system is still digesting the June 1999 Norfolk 

Southern/CSX carve up of Conrail. UPS, for example, was forced at times to divert 

up to 50% of the traffic, previously handled on the rails by Conrail, to trucks due 

to the delays and disruptions caused by the integration of Conrail into the Norfolk 

Southern/CSX operations. Clearly, any additional consolidation of the industry appears premature. Based on past experience, and without commenting on the merits 

of any such merger, no further rail consolidation should be contemplated until June 

2002 at the earliest. 

31

BEFORE THE SURFACE TRANSPORTATION BOARD

STB Ex Parte No. 582

General Motors Corporation 

Statement on Rail Consolidation 

General Motors Corporation (‘‘GM’’) is one of the largest shippers in North America. GM produces over five million cars and trucks a year in North America and 

ships approximately 24,000 per day. In addition to its engine and component plants, 

GM has 31 vehicle assembly plants at 29 locations throughout North America. GM 

spends over $4 billion annually for transportation services, and $1.2 billion of that 

is for rail-related service. GM is totally dependent on reliable, economical transportation service, both for the delivery of an enormous volume of parts and materials 

used in production and assembly, and for the delivery of its finished vehicles and 

other products to market. 

GM appreciates the opportunity to appear before the Board to offer its perspective 

on the structure and performance of the North American railroad industry. At the 

outset, GM states that it favors competition over regulation and supports competition in all forms, including service-oriented competition. In a market in which competition occurs on the basis of service, better service will win a firm more business. 

GM’s view is that deregulation of the railroads has served the economy well; however, as this statement illustrates, the railroads have not sustained a level of service 

performance that meets the reasonable requirements of customers like GM. Competition certainly provides the railroads the incentive to attain this service level, but 

GM’s experience is that rail consolidation has recently been associated with deterioration of the railroads’ service performance. The Board should challenge the railroads collectively to raise their standard of performance for all shippers. 

In recent years, the declining quality of rail service has forced GM to switch to 

higher-cost alternative modes of transportation in North America. In the last year, 

the amount of rail service GM purchased was approximately $270 million less than 

it purchased in 1997; this was largely because merger-related problems made it necessary for GM to switch from rail to costlier truck transportation. In 1997, for example, 70% of GM’s outbound vehicle shipments were by rail. GM would have held to 

or increased that level of usage if we could have relied on rail for our requirements. 

Unfortunately, over the last two years the percentage of vehicle shipments that 

move by rail has been reduced by 7 percentage points to 63% of the outbound total. 

GM has had no choice but to substitute other modes at premium cost in response 

to unreliable rail service. 

As the largest manufacturer in North America, GM has designed state-of-the-art 

systems for efficiently moving parts to the point of assembly and for quickly moving 

finished vehicles to consumers. For example, GM has invested extensively in the establishment and operation of ‘‘just-in-time’’ (‘‘JIT’’) manufacturing methods, in which 

parts are delivered to the right place on the production line at precisely the right 

time, minimizing inventory and handling costs, among other benefits. JIT is far 

more than a delivery system—it is an entire production process of which shipping 

and receiving are only a part. Two components are essential to this process: one 

component is parts suppliers who consistently build to schedule. The other component is consistent transit. JIT production is not possible without stability of parts 

delivery, and stability of parts delivery is not possible without reliable transportation service. 

Another time-and-transportation sensitive system is GM’s Fast-to-Market initiative to deliver new cars and trucks to customers promptly. Reliable transportation 

service is essential to the success of this program, just as it is to ITT manufacturing. 

GM’s requirement is for fast, flexible and reliable service across the national network. 

Obviously, no system such as JIT production or Fast-to-Market can function properly if the rail delivery of parts is reliable only 70% of the time, but 70% reliability 

has been GM’s recent experience with rail delivery of parts. This poor level of reliability results from a variety of failures, including late deliveries, missed connections, deliveries to incorrect locations, and unavailability of rail cars to receive product when scheduled. 

The facts clearly demonstrate that the railroads have failed to live up to their customers’ reasonable service expectations. Premerger representations and expectations 

that the railroads could avoid disruptions have not been met, and specified benefits 

of consolidations have taken entirely too long to be realized; so-called ‘‘short-term’’

dislocations of transactions have become entirely too lengthy and costly. In parVerDate Apr 24 2002 06:38 Oct 03, 2002 Jkt 079321 PO 00000 Frm 00035 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\79321.TXT SCOM1 PsN: CAROLT
32

ticular, GM has experienced significant disruptions and overall service deterioration 

from the 1995 Burlington Northern/Santa Fe consolidation, the merger of the Union 

Pacific and the Southern Pacific systems in 1997, and the 1999 division of the Conrail system between Norfolk Southern and CSX Transportation. 

The BNSF consolidation was the least harmful to GM, in part because it serves 

the fewest GM facilities; however, BNSF’s own data shows that customer service deteriorated or at best was unimproved in the first three years following its consolidation. Although the BNSF consolidation did not significantly disrupt the inbound flow 

of material to GM’s manufacturing and assembly facilities, bottlenecks and delays 

did adversely impact the outbound shipment of vehicles. 

The UP/SP transaction caused an unprecedented degree of disruption, uncertainty 

and cost for GM, in both inbound and outbound transportation. The total costs incurred by GM as the result of poor railroad performance following that transaction 

exceeded $100 million. Because the UP/SP failed to function effectively, GM lost production at plants, was forced to purchase trucking and air charter services at a premium, experienced delays of rail cars in transit for the transloading of components, 

and was required to acquire additional returnable shipping containers to correct the 

imbalance created in GM’s normal use of such containers. 

These custom-designed containers and racks warrant a general comment without 

reference to any specific rail consolidation. They have been developed by GM for the 

safe and effective transportation of many kinds and shapes of parts, from engines 

to body panels. The containers not only protect the parts in transit, but also are 

moved directly to the assembly line as an integral part of the JIT assembly process. 

These containers are required for transporting the parts to the assembly plants, but 

also must be returned efficiently and reliably to the locations where they are needed 

for parts shipment; without the containers available, GM must ship parts in less 

efficient, more costly expendable packaging or not ship parts at all. A number of 

recent rail consolidations have created disruptions and delays in the return of these 

containers. And in the past year, scheduled container returns by rail have failed to 

arrive on time as frequently as they have arrived on time—in other words, across 

the board, this critical service is reliable only 50% of the time! 

As the result of the UP/SP consolidation, in August 1997 GM was required to establish its own rail operations control center, operating seven days a week in order 

to make up for the lack of information available from the railroad about GM’s shipments and vehicle locations. Examples of problems handled by the operations control center include the failure of rail cars to arrive at plants as scheduled and the 

resultant buildup in inventory of outbound vehicles, the failure of parts to arrive 

at the right plants, and the delay and ‘‘loss’’ of vehicles in transit. Other extraordinary measures that needed to be taken with respect to the outbound delivery of 

vehicles included the creation of off-site storage areas, the holding of vehicles at origin and intermediate points, the double handling of vehicles (which exacerbated 

transit quality hazards), and the devotion of extensive resources to the tracking of 

vehicles. 

One noteworthy example of disruption of GM’s shipment of finished vehicles by 

the UP/SP merger involved Mexican assembly plants. Unable to secure reliable rail 

transportation across the border following that transaction, GM resorted for the first 

time in its history to the use of ocean-going vessels to move vehicles assembled in 

Mexico to the United States: between August 1997 and July 1999, sixty-two shiploads were made to the east coast ports of Jacksonville, Florida and Brunswick, 

Georgia; and forty-one shiploads were made to the west coast ports of Port Hueneme 

and Benicia, California. And to reach the ships, GM was required to truck vehicles 

600 miles to the west coast of Mexico and 500 miles to the east coast. This ocean 

transportation necessitated by the UP/SP consolidation imposed a premium cost 

(that is, above normal rail cost) of approximately $20 million on GM. 

The adverse effects caused by the division of Conrail between Norfolk Southern 

and CSX Transportation have also been significant. GM has been required to operate its control center seven days a week to deal with the problems created by failures in the railroads’ information systems. The cost of operating the control center 

alone in connection with the Conrail division has already exceeded $1 million and 

is continuing to mount. In addition, GM has been forced to arrange extraordinary 

and costly substitute transportation whenever rail performance failures have occurred. These substitutes have included 248 special trains, 30,000 truckloads of finished vehicles, and thousands of additional air charters for parts to keep the assembly plants operating. The additional truck transportation alone has cost over $15 

million to date. Suppliers of materials like metal stampings, fascia and plastic parts, 

which were already expensive to ship by rail, have now switched away from rail to 

even more expensive truck delivery service simply because of the inconsistency and 

33

unreliability of rail transit times. Such increased trucking costs for parts are now 

becoming imbedded in GMs’ cost structure. 

One example of this diversion occurred at GM’s vehicle assembly plant in St. Therese, Quebec, which obtains metal stampings—door and rear-end panels—from two 

major suppliers in Indiana. Shortly after the Conrail division, the plant could no 

longer depend on rail service for parts delivery. Rail service has now deteriorated 

to the point that no rail shipments of these parts, which are otherwise ideally suited 

to rail transport, are being made; these Indiana suppliers are using trucking exclusively in order to meet the St. Therese assembly plant’s needs. GM must pay a pre- mium for this trucking, of course, which has been about $1.4 million to date. 

Another illustration of costs incurred as the result of the Conrail transaction involves engines for GM’s Lansing, Michigan assembly complex, which produces some 

of GM’s best-selling cars. The engines come from a plant in Mexico. Within days of 

the June 1999 Conrail division, rail service for the shipment of these engines from 

Mexico became so unreliable that GM had to switch to trucking the engines, including their specialized containers, from Mexico to Lansing. The freight penalty incurred as a result was $1.3 million as of December. It is, of course, better to incur 

the premium cost of trucking than to incur the greater penalty of a plant shutdown, 

but reliable rail service is the correct and most cost-efficient answer. GM continues 

to run test loads on the railroad to see if a return to rail is warranted, but so far 

it is simply too risky to the Lansing plant operations to consider relying on rail delivery of these engines. 

Outbound shipments have also been adversely affected by the Conrail division. 

Particularly noteworthy is the added delay. GM has experienced a 20% increase in 

the number of vehicles that are in transit at any given time—in the transportation 

pipeline, so to speak. Furthermore, over the last three years, the weighted average 

vehicle transit time has increased to an all-time high, due mainly to deteriorating 

rail service. The increase in vehicle transit time is totally incompatible with GM’s focus on faster delivery of finished vehicles to customers, and it has an adverse effect on goodwill and sales. During a time when overall productivity in our country 

is increasing, this deterioration in the time it takes the railroads to deliver a vehicle 

is unacceptable. 

Rail inefficiencies have adversely affected GM’s work force as well. The truck 

docks at plants are more congested where the more reliable truck service must be 

used instead of unreliable rail service, which heightens safety risks to employees. 

Also, movement of parts from trucks to the assembly lines results in the increased 

use of fork lifts in the aisles of plants, which increases safety concerns. And, more 

overtime has been required to deal with transportation disruptions. These effects 

must be counted along with the societal burdens imposed when truck transport is 

used to replace rail transport which has failed to provide satisfactory service. 

In advance of recent rail consolidations, the railroads have offered general assurances of benefits; examples are that the acquisition of particular lines or operations 

would reduce delivery times, eliminate congestion, improve rail car turn-around, 

and improve overall trip transit time and car utilization. Such benefits have not 

been promptly forthcoming following most recent rail consolidations; rather, postconsolidation dislocations have lasted for years. 

An assurance was given to GM in connection with the UP/SP consolidation that 

delays in and out of Mexico would be few and far between because alternative 

routings would be available after the transaction. As noted above, however, the disruption of service following the UP/SP consolidation forced GM to resort to trucking 

and ocean shipping in order to get vehicles from Mexico to the United States. This 

example offers a striking illustration of both the failure of consolidating railroads 

to deliver benefits of a transaction and the kind of adverse impact that consolidation 

has had on GM. On the basis of GM’s experience, unless there are substantial advances in railroad information technology, improvements in the allocation of human 

resources, and detailed operational planning on the part of the railroads, it is naive 

to believe that any future consolidation alone will result in better rail service. The 

railroads’ record of failure to provide improved service makes GM wary of any future assurances. 

Although long-term efficiency gains have been achieved in some rail consolidations, a high price has been paid by GM and others as the result of ‘‘short-term’’

dislocations and inefficiencies such as those described. In GM’s view, the length of 

such ‘‘short-term’’ post-merger adjustment periods has grown entirely too long, and 

the effects have grown too severe to be tolerated. In the UP/SP merger, for example, 

the so-called ‘‘short-term’’ inefficiencies persisted for at least three years. No shipper, including GM, should have to accept a substantial risk of repetition of these 

post-merger scenarios. GM ships approximately 24,000 vehicles a day—including the 

first day following any rail merger—and it cannot willingly accept years of disrupVerDate Apr 24 2002 06:38 Oct 03, 2002 Jkt 079321 PO 00000 Frm 00037 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\79321.TXT SCOM1 PsN: CAROLT
34

tion and uncertainty in order to reap the promise of long-term benefits of rail consolidations. 

GM favors competition and disfavors any movement toward re-regulation of the 

railroads. Our opinion is that the public interest has generally been well served 

since rail deregulation. Nevertheless, GM expects reliable service from its transportation service providers. And GM would buy more service from the railroads if the 

railroads could bring their level of reliability up to reasonable levels—on-time service at least 90% of the time would satisfy our industry’s requirements. Not only 

would the improved service gain the railroads more business from GM and others, 

but the increased business volume would strengthen their financial viability. 

The marketplace demands speed, quality and reliability from GM as conditions of 

its own competitiveness. As a shipper, GM must also demand speed and reliability 

from its transportation service providers. Service competition among rail transportation providers is vital to GM, and GM believes that the competitive market should 

motivate the railroads to improve their level of service performance. What was acceptable performance two years ago, by definition, will be noncompetitive in today’s 

and tomorrow’s marketplace. GM submits that a minimum standard of service 

should prevail throughout the railroad industry. The Board should challenge the 

railroads to focus their efforts to bring industry-wide performance up to levels which 

will meet the reasonable needs and expectations of their customers and which will 

support North American economic growth. Rail consolidations must not detract from 

the achievement of this goal. 

GM’s view of the future of the rail industry is not one of mergers, less competition, more regulation, and an industry focus diverted from customer service. Rather, 

we would expect the industry, individually and collectively, to focus their leadership 

energy and resources on providing transportation service that meets and exceeds 

our expectation for speed, flexibility and reliability. It is our view that this is a collective challenge, one that requires the current rail providers to work together in 

the interest of customer service. There is little value in ‘‘pockets of excellence’’ when 

the customer view is of total network performance. 

ALLIANCE FOR RAIL COMPETITION, 

Washington, DC, March 30, 2000. 

Hon. KAY BAILEY HUTCHISON, Chairman, 

Surface Transportation Subcommittee, 

Committee on Commerce, Science and Transportation, 

U.S. Senate, 

Washington, DC

Dear Madam Chairman:

Pursuant to the Subcommittee’s hearing on March 23, 2000 reviewing the Surface 

Transportation Board’s Ex Parte 582 decision to impose a 15-month moratorium on 

rail mergers, I would like to submit the Alliance for Rail Competition’s (ARC) testimony from that proceeding and this letter for inclusion in this Subcommittee’s official hearing record. 

Since 1980, national rail transportation policy has featured competition as a 

prominent element of regulatory responsibilities, but competitive issues have clearly 

taken a back seat to other considerations. The very purpose of having economic regulation is to control an industry in such a way that its behavior will resemble that 

of a competitive industry. However, in the case of rail policy, something is obviously 

amiss. The kinds of service problems documented over the past five to ten years 

could never have prevailed in competitive industries, nor would they likely have 

been tolerated in other industries subject to economic regulation such as electric 

utilities or telecommunications. Furthermore, in competitive industries, individual 

companies do not price similar services so that they make an infinitesimal margin 

on some business while pricing other business at more than twice the level of costs. 

The members of ARC have long believed that Congress must act to address rail 

policies as a whole if we ever expect true market-based competition among rail carriers to be reintroduced to the industry. The issues that have been the subject of debate before Congress for the last several years must be resolved to address the industry as it is currently composed, regardless of whether and/or when additional rail 

mergers may be considered. Then, should any further consolidation or other structural changes occur in the rail industry at anytime in the future, our national rail 

policy must be dynamic enough to evolve along with the industry. That is the only 

way that we can ensure that adequate levels of competition are available to all rail 

customers. 

35

Adequate competition and, in the absence of such, effective regulation, would go 

a long way toward resolving rail customers’ concerns. Unfortunately, this has never 

been the centerpiece of regulatory interpretation for rail mergers or any other element of rail policy, and as a result, we have a highly concentrated rail industry 

where the handful of remaining carriers rarely competes against each other. Although we applaud the Board for undertaking a merger policy review, that review 

alone cannot and will not resolve concerns about already poor rail service, monopoly 

pricing and discriminatory practices. We do question why such a lengthy timeframe 

is necessary for undertaking such a review when previous rulemakings have been 

completed in as few as six months. Extending this process for the purpose of providing rail customers with a ‘‘breather’’ is unlikely to have much effect since rail 

customer confidence will never return to the rail industry so long as rail carriers 

are allowed to freely exercise their growing monopoly power. 

It is for this reason that, as you so eloquently stated in your remarks at the 

March 23rd hearing, the Board’s actions on this front should not—and must not— preclude the Congress from acting to redirect rail policy interpretation toward developing more rail-to-rail competition. While we will likely participate in the Board’s efforts to review and possibly modify merger policy, ARC remains committed to 

working with you and the other members of the Commerce Committee to review rail 

policy as a whole and to find the balanced solution for how to best bring more competition to the rail industry through legislative action. 

If you have any questions about ARC’s testimony, please feel free to call me. 

Thank you for the opportunity to submit this information into the official hearing 

record. 

Sincerely, 

DIANE C. DUFF, 

Executive Director.

Attachment 

Statement of the Alliance for Rail Competition 

BEFORE THE SURFACE TRANSPORTATION BOARD

STB Ex Parte No. 582

Public Views on Major Consolidations 

March 7, 2000

The Alliance for Rail Competition (ARC) commends the Surface Transportation 

Board (STB) for initiating this review of major railroad consolidations and the 

present and future structure of the North American railroad industry. For the past 

several years, ARC has represented the diversity of the rail customer community 

before Congress and the Board, pressing for significant pro-competitive changes to 

rail policy in recognition of the dramatically different appearance of today’s rail industry compared to that which previously existed. Our organization and its mission 

have been defined by rail customers who have had growing concerns about deterioration in service performance, increases in rail transportation costs, monopolistic 

railroad behavior in both pricing and service, and the inability of captive rail customers to get either competitive choices among major rail carriers or adequate regulatory protection from monopolistic behavior. 

Without any further consolidation activity among the remaining rail carriers, these 

issues would continue to be of tremendous concern to rail customers. However, the 

December announcement that Burlington Northern and Santa Fe Railway (BNSF) 

and Canadian National Railways (CN) intend to merge has raised the stakes. The 

subsequent reactions from other Class I railroads and from this Board make it very 

clear that the next merger to be approved—regardless of the merger partners—will 

inevitably cause a domino effect, the outcome, in all likelihood, being a two-railroad 

system throughout North America, with extension of each system’s monopoly power 

over that which is exercised today. 

That is a frightening proposition considering that in today’s system of two major 

eastern and two major western railroads, there is little true competition among carriers for a significant portion of their business and that economic regulation has not 

been sufficiently revised to compensate for what has become an exponentially increasing competitive void. 

So long as today’s configuration remains in existence, the opportunity to address 

these problems with changes in the interpretation of existing rail policy is possible. 

However, should today’s Class I rail industry undergo any further consolidation—

36

regardless of who the merger partners might be—rail policy, and the rail system 

itself, would require more far-reaching changes than those considered by ARC to 

date. No major merger—whether it’s the proposed BNSF-CN merger or two other 

Class I carriers—should be considered without system-wide changes to rail policy 

that would address what has now become an extensive record of customer complaints and widespread dissatisfaction. In other words, merger conditions that apply 

only to the merging carriers will not address the breadth of concern, and would 

most likely put one carrier at a significant disadvantage to the few remaining carriers. We need no further imbalances. 

If this Board refuses to recognize that policies set 20 years ago, applied in an environment significantly different from the one we face today, are inadequate, the 

legislative debate over policy will undoubtedly move away from the problems with 

regulatory interpretation we have been trying to address—such as whether a customer should be allowed to get a rate over a segment of a movement, or whether 

a customer could choose between two carriers in a terminal area where both those 

carriers operate—and move toward a more comprehensive public interest debate 

about how to best open the access to the railroads’ track structures and related 

plant so as to reintroduce universal competition. At this moment, a debate over pervasive access is not one that rail customers generally, or ARC specifically, relishes 

entering. Nonetheless, the prospect of further consolidations among any of the remaining major rail carriers without adoption of system-wide policy changes would 

leave rail customers with little choice. These are options that the Alliance for Rail 

Competition will continue to study thoroughly so we are prepared to enter such a 

debate should the need arise. 

* * * * *

Status of the Rail Industry 

The discussion of downstream impacts of mergers must be based upon a brief review and assessment of the current composition and behavior of the rail industry. 

A. Four Mega-Railroads Overwhelmingly Dominate Railroad Traffic and Offer Extremely Limited Transportation Choice To Customers 

The first basic element of this foundation is the increasing concentration of market power among Class I railroads. As shown in Table No. 1, attached to the end 

of this statement, the number of railroads has steadily declined throughout the 20th 

century, while at the same time, the percentage of traffic handled by the four largest railroads has steadily increased. Even since the Staggers Act—legislation which 

was to encourage and rely on market competition—the number of Class I railroads 

has declined by over 80% to just seven today, with four of those railroads dominating the industry. In fact, the four largest railroads handle 95% of Class I railroad 

ton-miles, and undoubtedly control an even greater percent of the traffic. Thus, 

many rail-dependent customers are faced with either no choice of carriers, or a limited choice between two railroads. While, in the short run, a two-carrier choice 

might provide some competitive advantages to some, basic economic theory holds 

that in the long run, oligopolists and/or dual monopolists decide that an activity 

such as competitive (marginal) pricing is self defeating because it will be matched 

by the other supplier. Thus, a conscious parallelism of action results with customers, 

such as railroad shippers, having little or no choice of prices and service levels. 

Another concern in regard to the increased concentration of railroad market power 

is that two railroads will comprise a majority in votes over such centralized intraindustry matters as car-repair billing rates, interline agreements, accounting rules, 

and policy positions. For example, even though shippers now supply more than half 

of all railroad cars, the railroad industry already requires private car owners to 

agree to be bound by the AAR Interchange Rules as a prerequisite to private car 

operation, and those rules are effectively set by the remaining Class I railroads. Individualism can be lost in a two-railroad collective that is adorned with significant 

assets, strong financial means, and inordinate staying power. The result is an uneven regulatory arena between railroads and their non-collective, rail-dependent 

customers. 

B. Cost Savings of Mergers Have Been Overstated 

The second element of any objective assessment must acknowledge that railroad 

cost savings attributed to mergers have been significantly overstated. Such an acknowledgment will provide the proper perspective to prospective claims of merger 

savings, and allow regulatory determinations to be made on the basis of more credible estimates of economic efficiencies versus the adverse impact of less railroad 

competition. 

37

Table No. 2 shows that the railroad industry has been in the throes of a longterm, downsizing trend. Quite simply, the industry was substantially over-built, and 

the miles of road owned and number of employees would have been significantly reduced even without mergers. Mergers were not responsible for crew reductions from 

four or more personnel down to two on-train employees. Mergers were not responsible for the elimination of cabooses. And mergers were not entirely responsible for 

the abandonment of light-density lines and related service. There is no dispute that 

railroad mergers have resulted in the realization of certain economies of scale and, 

to an even greater degree, density, but this is only one component of railroad unitcost reductions. At the same time, the shrinkage of railroad competition associated 

with mergers has had an adverse impact on rail-dependent customers in the form 

of higher rates, and especially, service deficiencies. 

C. Service Deficiencies and Price Distortions 

The purpose of economic regulation is to control an industry in such a way that 

its behavior will resemble that of a competitive industry. Something is obviously 

amiss in regard to railroad regulation because the kinds of service deficiencies 

which have been documented over the past five years or so, following large mergers 

of Class I railroads, could never have prevailed in competitive industries. Furthermore, in competitive industries the individual companies do not price similar services so that they make an infinitesimal margin on some business while pricing other 

business at more than twice the level of costs. This is not to say that differential 

pricing is not practiced by virtually all businesses in the United States, but rather 

to suggest that the span of profit margins in the railroad industry is much wider 

than in industries in competitive markets. 

What is of major concern to rail-dependent shippers is that the railroad mergers 

were supposed to correct service deficiencies, rather than exacerbate them. Yet, we 

hear from railroad executives that the service problems are to be blamed on satiated 

yards and terminals. But, (rhetorically speaking), isn’t this a railroad management 

problem? After all, consider the cost savings enjoyed by railroads as shown in Table 

No. 3. Railroad unit costs have declined dramatically over the past 60 years. Even 

since 1980, as Table No. 3 shows, ‘‘real’’ (constant-dollar) costs have declined by 63% 

from 5.32 cents per ton-mile to 1.98 cents per ton-mile. At the same time, as Table 

No. 4 shows, railroad traffic, measured in ton-miles, increased—going from 919 billion ton-miles in 1980 to 1.4 trillion ton-miles in 1998. With such enormous savings 

and constant traffic growths, why is there not enough capacity at terminals to adequately handle the traffic? Whose fault is this? Why do rail-dependent customers 

have to suffer? Adequate competition and, in the absence of such, effective regulation, would have gone a long way in ensuing adequate railroad service standards. 

This is not a matter of inadequate railroad earnings. The railroad industry has not 

been short of capital for many years. 

D. Economic Regulation Has Not Compensated for the Growing Competitive Void 

Some of the regulatory problems resulting in railroad pricing and service deficiencies are fairly obvious to rail-dependent customers. Maximum rate proceedings 

tend to go on for many years and are enormously costly and time consuming. The 

railroad revenue-adequacy determination has little, if any, credibility as both debt 

and equity capital is readily available to allegedly revenue-inadequate railroads. 

And such measures as stand-alone costs, the Uniform Rail Costing System, and the 

cost of capital are laden with complexities, judgments, and questionable data. In 

short, there is no effective regulatory backstop for most rail-dependent customers. 

This portion of the assessment is clearly supported by the outcome of the General 

Accounting Office analysis completed last February. According to their extensive 

surveying of rail customers, more than 70% noted that time, complexity and costs 

of filing complaints with the STB were such a barrier to regulatory intervention 

that they generally didn’t even consider it to be an option. Similar findings were 

the result of an analysis completed by the American Enterprise Institute and Brookings Institute in December of 1999. 

Experience with Mergers 

In considering further consolidation in the rail industry, it is impossible to ignore 

rail customers’ recent experiences with other recent mergers that were supposed to 

offer tremendous improvements in service. In and of themselves, mergers are neither inherently good or bad. Their desirability depends on their impact on their customers and their benefits to society. In turn, the impact on customers depends on 

the economic characteristics of the merger, the level of railroad competitiveness in 

the marketplace, and the ensuing merger conditions established by the STB. 

38

1 Inquiry Concerning the Commission’s Merger Policy Under the Federal Power Act: Policy 

Statement, III FERC Stats. & Regs. Para. 30,044, at 30,123 (1996). 2 ‘‘FTC to Get Tough on Merger Reviews.’’ By James V. Grimaldi, Washington Post, page E1, 

February 17, 2000. 

The customer is the focus for most other federal regulators as they evaluate a proposed merger. For example, consider the policy of the Federal Energy Regulatory 

Commission:

‘‘Rather than requiring estimates of somewhat amorphous net merger benefits 

and addressing whether the applicant has adequately substantiated those benefits, we will focus on ratepayer protection. The merger applicant bears the burden of proof to demonstrate that the customer will be protected. This puts the 

risk that the benefits will not materialize where it belongs—on the applicants.’’1

As another example, Federal Trade Commission Chairman Robert Pitofsky recently announced a tightening of merger reviews. While this tightening is not being 

characterized by the FTC as a ‘‘dramatic shift’’ in policy, Pitofsky has noted that 

the FTC’s actions are intended to ‘‘make transparent’’ agency procedures as they 

apply to divestiture proposals. These provisions include provisions that ‘‘would allow 

certain ‘crown jewel’ assets of a company to be seized if the company fails to make 

good on an FTC consent decree.’’ 2

Unfortunately, no similar level of attentiveness to customer impact has been demonstrated in railroad merger situations. In fact, history shows us that, in the case 

of railroads, neither consumer protection nor competitive interests have been the litmus test for federal approval. Rather, the financial benefits to the railroads in question appeared to be the determining factor. In addition, there has never been an effort to assess a rail merger’s impact on customer service measures after the transaction has been complete. In the October 19, 1998 issue of Traffic World, former ICC 

general counsel Fritz Kahn wrote:

‘‘The proponents of railroad mergers and acquisitions can be counted on to 

contend that their proposals will lead to improved transportation—better service and reduced costs—and, just as surely, the agency can be counted on to accept uncritically the railroads’ assurances. The question, however, is whether 

the railroads’ representations have been realized. Have the railroad mergers 

and acquisitions yielded the better service and reduced costs, and hence, lower 

rates which were the premise of the ICC’s or STB’s approval of the transaction? 

The STB doesn’t know, just as the ICC didn’t know. Neither one of them ever 

has studied the effects of a railroad merger or acquisition approved by it.’’

Nonetheless, a cursory review of the last several mergers clearly demonstrates 

that the projected benefits that supported proposed—and approved—mergers, generally have not been realized. 

In summary, the rail customer’s experience has been that railroad mergers have 

traditionally and consistently been proposed as being the panacea for all ills. Projected benefits typically range from huge cost savings to substantially improved 

service, and sometimes include the enhancement of competition. It is not surprising 

that, given such expectations, railroad customers often support such mergers, only 

to be disappointed with the ensuing reality. But then, another proposed merger 

comes along and the cycle is repeated. What occurs is that the expectations of the 

‘‘next’’ merger outweigh the disappointments of the past merger. When a railroad 

virtually guarantees that the benefits from a proposed merger will provide shippers 

with the type of service they require, it is difficult to deny railroads the opportunity 

to fulfill their stated intentions. Yet, as previous merger opportunities have now 

come and gone, it has become clear that there is a significant gap between expectations and results. This gap can be illustrated by comparing the projected benefits 

of such mergers with the state of the railroad industry that currently exists. The 

following three examples demonstrate the point. 

1. The merger of the Burlington Northern (BN) and Santa Fe (SF) railroads in 

mid–1995 was based on projected annual savings of $450 million in operating and 

administrative expenses, and the realization of another $110 million in operating income on new revenue to be earned. After increasing its offer for the SF from $2.6 

billion to just over $4.0 billion, BN reiterated the advantages of the merger which 

included: single-line service to all four major West Coast ports; the merging of Santa 

Fe’s market strength in intermodal with BN’s coal, grain and commodities traffic; 

and, administration efficiencies that will, among other things, allow the elimination 

of some 2,750 jobs. At the same time, BNSF was saddled with significant new debt 

that ultimately would have to be passed on to customers. 

39

2. The merger between the Union Pacific (UP) and Southern Pacific (SP) railroads 

was consummated in September of 1996. UP claimed that the merger would ‘‘provide dramatic service improvements to shippers, greatly strengthen western rail 

competition, and help position American industry to be fully competitive domestically and internationally in the 21st Century.’’ The merger was somewhat of a defensive action, as SP Chairman Anschutz acknowledged: ‘‘A combination with UP 

was inevitable for SP, after BN and Santa Fe agreed to merge.’’ More specifically, 

the expected benefits of the merger were identified in the 1996 annual report of the 

Union Pacific Corporation (UPC), as follows:

The benefits flowing from this consolidation are multifold: routes will be shortened, often dramatically, congestion will be eliminated; and traffic flows will become more efficient on every major western corridor. The total annual operating 

income benefit to Union Pacific could reach more than $820 million by the year 

2001.

UPC went on to tout the expectation of improved on-time performance for shippers, 

much faster transit times, expanded single-line service, significantly reduced operating costs, shorter routes, better equipment and more reliable service, a significant 

reduction in congestion and delays, faster and more dependable intermodal service, 

stronger rail competition in the West, and specialized use of parallel routes to improve traffic flow, transit times and reliability. 

This Board does not need to be educated about the aftermath of this merger, but 

during its implementation, even UP President Ron Burns stated: ‘‘many shippers 

are experiencing unprecedented problems with service provided by our railroad.’’ At 

one point, Dr. Bernard Weinstein of the University of North Texas estimated the 

economic impact of that service crisis exceeded more than $2 billion in the state of 

Texas alone, and that was long before service in the West improved. 

3. The acquisition of Conrail by the CSX and Norfolk Southern (NS) railroads 

went into effect on June 1, 1999. While some cost savings were expected to be realized from the joint acquisition in spite of a $20 billion acquisition premium, there 

were two major favorable expectations: (1) improved service to shippers due to increased direct-line competition between two railroads, and (2) traffic diversion from 

motor carriage. It’s worth noting that as CSX and NS increased their respective bid 

prices for Conrail, the anticipated benefits were ‘‘recalculated,’’ and magically, as the 

price of the acquisition increased, so did the anticipated benefits. Instead, rail customers have experienced system-wide service problems on both CSX and NS that, 

despite promises to the contrary, continue to this day. In some regions, such as Buffalo, service has been so bad that customers have been forced to shift production 

to other regions. Reports of rail customers being forced to divert rail traffic onto 

motor carriers would support the notion that the carriers have not only failed to 

take truck traffic off the road, but have more likely contributed to at least a shortterm increase in truck traffic. 

Representatives of both CSX and NS have acknowledged their troubles and, despite having two years to prepare, both carriers have chalked up their problems to 

‘‘poor planning’’ and the fact that they ‘‘didn’t anticipate their customer’s needs.’’ Despite the system-wide service problems, both CSX and NS are in the process of increasing their rates, and cite shortages of track and equipment as providing the opportunity for them to do so. 

* * * * *

It is important to note that the recent CN merger with IC has been identified as 

having ‘‘gone off without a hitch.’’ However, this statement cannot be applied to 

operational changes required by the merger, as those changes didn’t begin until approximately two weeks ago. In fact, a key computer switchover has been postponed. 

In some previous mergers, service problems didn’t begin to be evident for as long 

as six months. Thus, no one can legitimately classify the relatively small CN-IC 

merger as an indication that mergers in this highly concentrated market can still 

be done without harming service or competition. 

Merger Policy Recommendations 

In considering any merger from this time on, the Board would more appropriately 

serve the public interest by responding to broader fundamental questions: What 

does our national economy require of its railroad system? How does the merger in 

question impact the ability of the rail system as a whole to meet the national need? 

What policy changes are necessary to ensure that the nation’s rail system is best 

positioned to live up to those requirements? Answering those kinds of questions 

would more appropriately focus this Board on protecting and forwarding the interVerDate Apr 24 2002 06:38 Oct 03, 2002 Jkt 079321 PO 00000 Frm 00043 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\79321.TXT SCOM1 PsN: CAROLT
40

ests of the consumers of railroad services—who provide the reason that railroads 

exist at all. 

Thus, sound public policy toward future railroad mergers should be based on the 

following principles: 

1. A Viable Freight Railroad Industry is in the Public Interest 

Freight railroads are a national asset which have the ability to provide relatively 

low-cost, energy-efficient, and environmentally benign transportation service. Further, these railroads have a duty to serve all of their customers, without whom railroads would cease to exist. The best means for ensuring the railroad industry’s viability is to encourage rail carriers to compete among themselves, as well as with 

other modes of transportation. Competition is the engine that drives the free enterprise system. It pressures suppliers (railroads) to be efficient and can help railroads 

grow traffic. 

2. The Net Impact on Customers Should be the Key Merger Criterion 

Even where economies of density are expected to be realized, railroad mergers 

should not be approved if the prospective cost reductions are offset by adverse service and/or rate impacts on railroad customers due to a diminishment of competition. 

3. Competitive Access is the Preferred Protection for Customers 

Railroad customers can be protected from the adverse effects of mergers through 

additional competitive access to captive customers served by the merged railroad, 

and/or by implementing effective economic regulation. Competitive access is preferable to regulation because it motivates carriers to be responsive to customer 

needs. Competitive access would benefit railroads in that the incumbents: (1) could 

charge adequate user fees, (2) would experience traffic growth, and (3) would in turn 

realized newly-found economies of traffic density. 

4. Railroad Customers Need Safe Harbor Protection 

In the absence of effective railroad competition, economic regulation is necessary 

to insure that service is adequate and freight rates are reasonable. Opening access 

and economic regulation is not an either-or choice; they are parts of a whole. 

5. Railroad Mergers Are Not the Only Way to Lower Operating Costs 

Traffic growth is a key to economies of railroad track density. Aside from traffic 

growth, railroads can reduce costs through a wide variety of managerial and technological means. Railroads have controlled their costs by eliminating inefficient service, reducing crew sizes, changing operating and work rules, and employing new 

technology. 

6. Post-Merger Performance Must be Closely Monitored 

The STB shall establish procedures to measure post-merger performance and 

should issue an annual report of its findings for a period of ten years. 

7. Where Desirable Adjustment will be Made 

When railroad mergers cause unanticipated adverse impacts on customers, the 

situation can be rectified post-merger, by opening competitive access and/or making 

economic regulation more effective. 

* * * * *

ARC fully understands that the remedy for defective railroad markets is to be 

partially found in legislative change. However, the extent of that legislative remedy 

will be largely determined by the actions—or lack thereof—of this Board in reviewing further consolidations. ARC also believes that the present railroad market distortions would not have occurred if an adequate public policy regarding mergers 

would have been developed and followed. It is not too late; the time to begin the 

change is now, and the STB has the power and authority to start the process. Thus, 

it is ARC’s firm belief that the STB should undertake the following four steps before 

even considering any further major rail consolidations, again, regardless of the 

merger partners: 

1. Adopt a merger policy similar to that advocated in this statement. 

2. In light of the market power held by today’s rail system configuration, re-examine the issues of so-called ‘‘bottleneck’’ rates and decisions relating to access in terminal areas. 

3. Change the revenue-adequacy criterion to a simple measure of ‘‘allowable return-on-equity,’’ similar to the public utility industry, and 

4. Work with rail customers and Congress to develop an appropriate method for 

providing protections for small captive shippers that can be passed into law. 

41

ARC stands ready to work with the members of this Board in support of such procompetitive, consumer-oriented changes.

Table No. 1. Downsizing of the Railroad Industry 

(Class I Railroads) 

Year Miles of Road

Owned (000) 

No. of

Railroads 

No. of

Employees (000) 

1907 230

1916 254

1920 2,148

1929 230 162 1,661

1980 165 36 458

1985 146 23 302

1990 120 14 216

1995 108 11 188

1998 101 9 178

1999 7

Source: Association of American Railroads, Railroad Facts (annual publication) and Railroad Transportation, 

A Statistical Record, 1911–1951. Interstate Commerce Commission, Statistics of Railways in the United States, 

For The Year Ended 1929, 1930 and annual reports. 

Table No. 2. Increasing Market Concentration Within the Railroad Industry 

(Class I Railroads) 

Year Number of

Railroads 

% Ton-Miles

Carried By

Four Largest

Railroads 

1929 162 23%

1940 134 27

1950 129 25

1960 109 25

1970 73 34

1980 36 43

1985 23 47

1990 14 66

1995 11 69

1998 9 87

1999 7 95

Source: Association of American Railroads, Analysis of Class I Railroads (annual publication). Interstate 

Commerce Commission, Statistics of Railways in the United States, For The Year Ended 1929, 1930. 

Table No. 3. Declining Railroad Operating Expenses 

(Class I Railroads) 

Year 

Operating

Expense Per

Ton-Mile 

Railroad

Inflation

(1998 = 100) 

‘‘Real’’ Expense

Per Ton-Mile 

1939 1.04 cents 3.2 32.5 cents 

1980 2.75 51.7 5.32

1985 2.74 1 67.9 4.04

1990 2.37 81.4 2.91

1995 1.99 2 93.4 2.13

1998 1.98 3 100.0 1.98

1 2.85 cents adjusted for $809 million of special charges taken as operating expenses. 

2 2.12 cents adjusted for $1.7 billion of special charges taken as operating expenses. 

3 2.02 cents adjusted for $520 million of special charges taken as operating expenses. 

42

Table No. 4. Increasing Railroad Traffic 

(Class I Railroads) 

Year 

Tons

Originated

(Millions) 

Revenue

Ton-Miles

(Billions) 

1929 1,339 447

1955 1,396 624

1970 1,484 765

1980 1,492 919

1985 1,320 877

1990 1,425 1,034

1995 1,550 1,306

1998 1,649 1,377

PREPARED STATEMENT OF DAVID R. GOODE, CHAIRMAN, PRESIDENT & CEO,

NORFOLK SOUTHERN CORPORATION

My name is David R. Goode and I am Chairman, President and Chief Executive 

Officer of Norfolk Southern Corporation (‘‘NS’’). I welcome this opportunity to comment in support of the critical and important decision issued by the Surface Transportation Board (‘‘STB’’) on March 17, 2000 in Ex Parte No. 582, Public Views on 

Major Rail Consolidations. In that decision, the STB announced the commencement 

of a rulemaking proceeding to develop new standards and procedures for railroad 

mergers and suspended the processing and consideration of major rail consolidation 

proposals for 15 months in order to give the STB and the rail industry a much-needed respite from further rail merger activity while those new rules are being promulgated. 

The STB deserves the thanks of all of us who are part of the rail industry and 

who are concerned about the difficulties and challenges facing our Nation’s railroads, our customers, our employees, and the many others whose lives are affected 

by and intertwined with our industry. As this Committee knows full well, the past 

several years have been difficult and challenging ones for the railroad industry, as 

we have struggled to implement major mergers and consolidations of rail systems 

both in the East and the West. We at Norfolk Southern have been challenged in 

our assimilation of the substantial portion of Conrail we began to operate last June. 

I am happy to report that we have made great progress toward providing the fast, 

efficient and reliable transportation service our customers need and deserve. Still, 

we have much more to do to achieve fully the promised benefits of the Conrail transaction and to deliver these benefits to our customers and our stockholders. The STB 

decision provides valuable time to accomplish that goal without the disruptions, uncertainty and necessary loss of focus that another round of major rail consolidations 

would inevitably bring. 

The STB recognized what we and our customers, our employees, and our partners 

need most: time—time to make our service the best that it can be; time to develop 

with our interchange partners cooperative and reliable interline services to obtain 

maximum advantage from the existing North American rail network; and time to 

restore the confidence of investors in the industry. 

During the four days of hearings held by the STB earlier this month, the Board 

received testimony from more than 150 witnesses, including myself and the CEO’s 

of the other major North American railroads. The Board heard an overwhelming appeal from all sides—from railroads, from government agencies, from ports and municipalities, from large automobile manufacturers to small agrarian interests, and 

from chemical shippers to one of the industry’s largest intermodal customers 

(UPS)—for a breather from further rail merger activity. The Board obviously listened, and it courageously acted by finding that the public interest required a respite from rail merger activity while it modernized and revised its rail merger regulations. I am convinced this is a valuable pause, which will enable us to concentrate 

our efforts on improving service and improving the financial health of the industry. 

We need that time and I will do my part to see we use it wisely. 

In short, Norfolk Southern believes that the STB’s actions were entirely consistent 

with its broad public interest mandate and were fully supported both by the record 

compiled in its Ex Parte No. 582 proceedings and by the Board’s experience. We look 

forward to participating in the Board’s rulemaking to revise its merger regulations 

and look forward to continuing our efforts to improve the quality and reliability of 

43

our transportation services, develop cooperative arrangements with our interline 

partners and enhance our overall financial results. 

PREPARED STATEMENT OF ROBERT D. KREBS, BURLINGTON NORTHERN SANTA FE CORPORATION

On behalf of Burlington Northern Santa Fe Corporation, I appreciate the opportunity to present this testimony for the record of this oversight hearing. 

I offer these comments as you evaluate the manner in which the Board is carrying 

out the mission entrusted to it by Congress, particularly in the area of considering 

private sector proposals for mergers and consolidations. 

As the Surface Transportation Board has stated, its decision to initiate its Ex 

Parte Proceeding on Public Views on Major Rail Consolidations was spurred by the 

announcement that Burlington Northern Santa Fe and Canadian National intend 

to file an application with the Surface Transportation Board seeking approval of the 

common control of The Burlington Northern and Santa Fe Railway Company and 

the railroad companies controlled by the Canadian National Railway Company. In 

announcing its intention to hold hearings on Major Rail Consolidations, the Surface 

Transportation Board noted that it was aware that, in the wake of the filing of the 

BNSF/CN notice of intent, there has been a great deal of speculation that the strategic responses of the remaining North American carriers . . . will lead to a new 

round of major railroad consolidations. Much of the speculation referred to by the 

Board was spurred by our railroad competitors, a number of which had recently engaged in railroad mergers that resulted in serious service problems that affected not 

only their customers, but users of adjacent systems and other railroads, as well. 

These competitors even went so far as to take out an advertisement in the Wall 

Street Journal, the Washington Post, the Journal of Commerce, and Traffic World, 

which consisted of an Open Letter to Railroad Customers from four railroad CEOs. 

The gist of the letter was that they were not ready for another railroad combination, 

because, unlike BNSF and CN, they had not yet put their houses in order following 

their own mergers. Remarkably, despite their professed lack of readiness to enter 

into merger transactions of their own, they threatened to initiate their own mergers 

if our combination were to go forward. 

In the four days of hearings before the Board on Public Views of Major Rail 

Transactions, numerous shippers and shipper organizations, such as the National 

Industrial Transportation League, shortline railroads and municipalities, leading 

economists and members of the investment community, the Secretary of Transportation, and other stakeholders testified that they thought a moratorium would be 

a bad idea. In addition, much of the testimony presented in those hearings focused 

on the service problems associated with other railroads mergers (and not with the 

way BNSF or CN had managed our own mergers), and many of the witnesses stated 

that they thought our merger would enhance competition and service to shippers. 

Despite these facts, the Board nonetheless accepted the anti-competitive, self-serving arguments of our competitors, ordering an unprecedented 15-month moratorium 

on major rail consolidation filings and activities, and suspending the BNSF/CN proceeding. It is inexplicable that the Board would believe that it has the extraordinary 

power to block the filing of our control application and yet believe itself powerless 

to block the merger of applicants who could not implement a merger effectively 

without creating a service crisis. 

The Board’s decision is illegal and in clear violation of the policies and terms of 

the ICC Termination Act. 

We have filed a petition for judicial review of the Board’s radical decision in the 

United States Court of Appeals for the District of Columbia Circuit. We also have 

petitioned the Board to stay its decision pending judicial review. 

The Board’s moratorium decision is inconsistent with both the policies and the 

plain terms of the ICC Termination Act and, for that reason, cannot stand. The decision contravenes the Board’s statutory authority and duties. In the ICC Termination 

Act, Congress addressed the long history of interminable ICC merger proceedings 

by imposing strict deadlines on the acceptance and review of rail merger control applications. These deadlines were intended to further the Congressional policy favoring pro-competitive rail consolidations and to reduce the delays in achieving merger 

benefits that had characterized ICC practice. 

In our view, the moratorium simply cannot be squared with the law-governing 

merger and control proceedings. As Chairman Morgan herself noted in her confirmation hearings before this Committee just a few months ago, ‘‘[w]hen market conditions motivate two class I railroads to want to merge, our statute tells us to review 

the proposal presented to us, applying certain statutory standards, and to approve 

44

the merger if it is in the public interest.’’ Testimony of Linda J. Morgan, Hearing 

On Reappointment, Sen. Committee on Commerce, Science, and Transportation, 

Sept. 28, 1999. Even if the moratorium could be squared with applicable law, it 

could not survive judicial scrutiny because the procedures used by the Board in deciding to issue it were grossly improper and unfair. 

We have a number of complaints about the Board’s procedures in imposing the 

moratorium, which we set forth in our stay petition. These procedural flaws are serious matters, because the essence of our complaint is that the Board’s moratorium 

constitutes a pre-judgment on the merits of our application and, as a Board member 

noted in the closing comments at the end of the Ex Parte No. 582 hearing, ‘‘not to 

decide is, in fact, to decide.’’ 3/10/00 Tr. at 225. Because the economy and our competitors will not stand still during the pendency of the moratorium, a fifteen month 

delay in the filing and processing of our application would irreversibly deprive both 

our shippers and stockholders of the benefits that our combination would have provided if not so delayed, and could preclude us from going forward with the combination at all. 

The Board’s decision, which vaguely directed railroads ‘‘to suspend activity relating to any railroad transaction,’’ also is striking because it could be interpreted as 

preventing a wide variety of protected discussions, the pursuit of judicial review, 

and even this testimony here today. If, interpreted so broadly by the Board, the decision would clearly be an overbroad and flagrantly unconstitutional prior restraint 

on the exercise of First Amendment rights. 

Needless to say, we are extremely disappointed with the Board’s moratorium decision. By accepting the self-serving arguments and threats of our competitors this decision pre-judges our application before that application was even filed and subject 

to review. As I recently stated, if the Board’s decision were to survive judicial review, it would penalize BNSF and CN—the two major railroads who are taking care 

of their customers—because of the failures of other railroads whose mergers have 

resulted in debilitating and costly service failures for shippers. 

If given the opportunity to go forward with our combination application, we would 

prove that our combination will be in the public interest and would offer our customers unparalleled service. Over the past four years, BNSF has spent about

$9.5 billion to improve its network, locomotive and car fleet, and to build and expand terminals and intermodal facilities. These investments, which would not have 

been possible had the ICC not approved the merger of Burlington Northern Railroad 

and The Atchison, Topeka and Santa Fe Railway Company in 1995, have enabled 

BNSF to provide customers with on-time service year-to-date in the 94% range—

a superb performance that is the best that I’ve seen in this industry. A combination 

with CN would further enhance our service and provide our owners with better financial performance. 

Therefore, we are frankly puzzled about how the STB could so radically and

unfairly change the rules and deny us the forum established by law, to have our 

case heard in accordance with the deadlines established by Congress in the ICC Termination Act. Based on the existing criteria for approving rail mergers, our combination passes with flying colors. In fact, we have indicated that we are prepared 

to raise the bar ourselves to ensure that there would be no service disruption resulting from our combination and that greater competition would be injected into the 

industry. 

The STB should not be permitted to stop a good merger in its tracks because of 

concerns about bad mergers coming down the road. And our competitors should stop 

frightening shippers with threats that, if our combination is not halted, they will 

carry out their own ill-considered mergers, once again saddling their customers (and 

ours) with service crises and breakdowns. 

In conclusion, we hope that the Board will take the reasonable course, issue a 

stay of its moratorium, and permit our application to be filed and reviewed pending 

judicial review. If not, we are confident that the result of that judicial review will 

be the overturning of the Board’s radical moratorium decision. And we appreciate 

the opportunity to offer for the record our views about the Board’s precipitous and 

ill-considered moratorium decision. 

BNSF NEWS RELEASE

BNSF’s Krebs Says STB Moratorium Will Prevent BNSF and CN—Rail

Industry’s Best Service Providers—From Giving Shippers Even Better 

Service 

FORT WORTH, Texas, March 17, 2000—Burlington Northern Santa Fe Corporation 

(NYSE: BNI) (BNSF) Chairman and Chief Executive Officer Robert D. Krebs said, 

45

in response to today’s Surface Transportation Board announcement, that, ‘‘We are 

extremely disappointed with the STB’s decision to impose a 15-month moratorium 

on proposed rail consolidations. We have reviewed the decision, and while Chairwoman Linda Morgan’s action may be well-intentioned, as it stands, it has the effect 

of denying our proposed combination with Canadian National Railway Company 

(CN) before receiving our application and giving it a proper review.’’

Krebs pointed out that, ‘‘If the STB decision survives judicial review, the result 

of the STB’s decision is to penalize BNSF and CN, the two major North American 

railroads who are taking care of their customers, because of the failures of other 

railroads whose mergers have resulted in debilitating and costly service failures for 

shippers.’’

During the four-day hearing held last week by the STB to consider the future 

structure of the rail industry, Krebs said, ‘‘There was no clear consensus for imposing a moratorium. In fact, there was significant support from the Secretary of 

Transportation, shipper associations such as the National Industrial Transportation 

League, numerous individual shippers, short line railroads and municipalities for 

BNSF and CN to file their common control application without delay.’’

Krebs indicated that ‘‘BNSF will thoroughly review today’s decision to determine 

what appropriate legal action we can take. If Chairwoman Morgan’s radical decision 

stands, the effect would be something unheard of in any industry: For a period of 

15 months, industry participants will be denied the opportunity to realize service 

and efficiency improvements that a carefully conceived and well executed combination can provide shippers, shareholders, employees and the public.’’

Krebs said that ‘‘Over the past four years, BNSF has spent about $9.5 billion to 

improve its network, locomotive and car fleet, and to build and expand terminals 

and intermodal facilities. These investments have enabled BNSF to provide customers with on-time service year-to-date in the 94 percent range—the best rail 

transportation service I’ve seen in my 34 years in the industry. We believe a combination with CN is the next step to providing our customers with even better service and our owners with better financial performance.’’

‘‘It is hard to believe that a federal agency can change the rules and deny us a 

forum, established by law, to have our case heard. Based on all existing criteria for 

approving rail mergers, our proposed combination passes with flying colors. We have 

indicated that we are prepared to raise the bar ourselves to ensure that there is 

no service disruption and that greater competition is injected into the industry,’’

Krebs noted. 

Through its subsidiary, The Burlington Northern and Santa Fe Railway Company, headquartered in Fort Worth, Texas, BNSF operates one of the largest rail 

networks in North America with 33,500 route miles of track covering 28 states and 

two Canadian provinces. 

North American Railways, Inc. and CN have filed a registration statement on 

Form F–4/S–4 with the Securities and Exchange Commission (SEC) in connection 

with the securities to be issued in the combination. This filing also includes the 

proxy statement for the shareholders’ meetings to be held for approval of the combination. Investors should read this document and other documents filed with the 

SEC by CN, BNSF, and North American Railways, Inc. about the combination because they contain important information. These documents may be obtained for 

free at the SEC’s Web site, www.sec.gov. Other filings made by BNSF on Forms 10–

K, 10–Q and 8–K may be obtained for free from the BNSF Corporate Secretary’s 

office. For information concerning participants in BNSF’s solicitation of proxies for 

approval of the combination, see ‘‘Certain Information Concerning Participants’’ filed 

by BNSF on Schedule 14A under Rule 14a–12. 

SELECTED EXCERPTS FROM WITNESSES WHO TESTIFIED BEFORE THE SURFACE

TRANSPORTATION BOARD AND COMMENTS FROM THE JOURNAL OF COMMERCE

Here we hasten to note, though, that we do not believe a moratorium is the right 

response. 

(The Honorable Rodney Slater, U.S. Secretary of Transportation—March 7, 2000)

We are disappointed that the Board ordered a 15-month suspension of all merger 

activity, including a proposed consolidation of the Burlington Northern Santa Fe/

Canadian National Railroads. 

(The Honorable Rodney Slater, U.S. Secretary of Transportation—Press Statement—

March 17, 2000)

46

First, it would be a huge mistake if the Federal Government were to take on a central economic planning role for railroads that would dictate and regulate the timing 

of when corporate transactions in the rail industry could even be considered. No 

other industry in the U.S. has to receive the government’s permission to propose a 

corporate transaction. In addition, from a practical standpoint, undue delay or the 

enactment of a ‘‘moratorium’’ on when transactions should even be considered can 

be tantamount to a denial of a transaction, without the benefit of an actual and fair 

hearing on the merits of a proposal. 

(Robert Krebs, Chairman/CEO, BNSF—March 7, 2000)

A fair hearing delayed is a fair hearing denied. For that reason, our railroad opponents hope that you will delay a fair hearing on our combination, at least until they 

feel they are more ready to respond to it. They would prefer not to tighten their 

operations with an eye towards increasing efficiency; delay will free them from the 

need to meet our new efficiencies with new efficiencies of their own. That is protectionism on its face, and you ought to reject it as such. 

(Paul Tellier, President/CEO, Canadian National Railway—March 7, 2000)

This is why I believe strongly that the proposed merger should not be subject to 

any sort of moratorium. The public interest would be served better by a complete 

airing of the issues surrounding a major combination such as is being proposed. The 

League stands ready to fully participate in the merger process. To cut short the legitimate merger process would be a mistake, we believe. 

(Ed Emmett, President, The National Industrial Transportation League—Letter to 

STB Chair Morgan—March 14, 2000)

But’s it’s a little ironic that the railroads who have botched their mergers the most, 

now don’t want the two that did pretty well in theirs to go forward. There is a certain irony in that. 

(Ed Emmett, President, The National Industrial Transportation League)

The STB has an important role to play here. That role should not be to frustrate 

a beneficial merger and deny benefits to its proponents and their customers due to 

a fear of ‘‘downstream effects’’ from others. Such a miscarriage of justice would deny 

basic economic freedom to the proponents of the merger. BNSF and CN and customers supporting the merger should not be penalized for the difficulties of others. 

This is a basic issue of fairness and due process . . . The BNSF and CN merger 

should not be held hostage to the ability of other railroads to participate in mergers 

of their own at the same time. 

(J. Reilly McCarren, President and CEO of Wisconsin Central—March 8, 2000)

A more restrictive approach to the analysis of consolidation, considered in isolation 

of other factors, would likely diminish the willingness of companies to engage in 

such combinations, even in circumstances where such combinations would be in the 

interest of the railroads, their customers and employees and the public. 

(Robert S. Kaplan, Goldman Sachs—March 7, 2000)

The government should not delay making decisions on real-world transactions. Such 

delays are more likely to harm consumers and producers, and hinder innovation by 

deferring the benefits of ‘‘good’’ consolidations. . . . Regulators cannot, however, determine when capital markets will find opportunities for efficiency gains—these opportunities come and go . . . the Board should encourage competition; it should not 

allow any competitor to delay the introduction of increased efficiency and competition while that competitor resolves its current problems. 

(Robert W. Hahn, AEI-Brookings STB—March 9, 2000)

It is hard to see why the difficulties of some railroads in implementing the improved 

connections that should have come with consolidation should be used to prevent others from achieving these gains. To allow this argument would have perverse incentives; service failures would be rewarded by shelter from competition. 

(Kenneth Arrow, Professor Stanford University—March 8, 2000)

STB policy follows one of the basic tenets of antitrust/competition policy: protecting 

competition, not competitors. As long as competitive alternatives are preserved, then 

the STB lets market forces determine where in the system there are efficiencies to 

exploit, and lets shareholders and business decision-makers suggest both the scope 

and timing of such transactions . . . The STB should avoid letting rail industry 

players dictate the pace of action of their competitors. 

(Joseph Kalt, Amy Candell, Kennedy School of Government)

47

Capital-intensive, mature industries are undergoing consolidation. Railroads, steel, 

aluminum, chemicals—you name it—are under pressure to use their capital more 

efficiently. A merger that increases the density of traffic on rail lines is one way 

of accomplishing that. Neither the STB nor any other government agency can 

change that for long. 

(The Journal of Commerce—March 1, 2000)

I am in favor of allowing the BNSF/CN merger to go forward. This combination will 

give numerous shippers and communities on the C&G and throughout a significant 

portion of Mississippi more efficient access to some of the longest, single line service 

in North America. 

(Roger D. Bell, President and CEO, Columbus and Greenville Railway—March 8, 

2000)

Delaying the benefits of a good transaction is not in the interests of anyone, other 

than competitors. 

(Robert Grossman, Chairman and President, Emons Transportation Group, Inc.—

March 8, 2000) 

PREPARED STATEMENT OF JOHN W. SNOW, CHAIRMAN AND CEO,

CSX CORPORATION AND CSX TRANSPORTATION, INC. 

Thank you for the opportunity to present this statement for the record on behalf 

of CSX Corporation and CSX Transportation, Inc. 

I wholeheartedly support the Surface Transportation Board’s (the ‘‘Board’’) very 

important, bold and correct decision in Ex Parte No. 582, Public Views on Major 

Rail Consolidations, to suspend for 15 months any activity that would be characterized as a ‘‘major transaction’’ by the nation’s Class I railroads pending development 

of new rules by the Board. 

This decision is a strong recognition by the STB that a BNSF/CN merger, or any 

other rail merger, is not in the public interest at this time. 

While a longer pause would have been preferable, the Board’s action clearly reflects the unstable nature of the industry and the overwhelming concern expressed 

by rail customers, railroad employees, the financial community and the public—all 

of whom are critically dependent upon a financially strong and stable freight rail 

system. 

By proceeding with a rulemaking at this time, the Board has accomplished two 

very important things. It has recognized the need, first, to assess and update the 

standards by which mergers are reviewed by the STB given the current state of the 

nation’s freight railroad industry, and second, to apply those standards to any future rail mergers in an orderly and rational way. To redefine merger standards 

while at the same time considering merger applications would invite chaos. 

Many public officials, including members of this Committee, have voiced strong 

support for the Board’s decision noting the unstable nature of the nation’s freight 

rail system and the need for a period of calm, free from the diversion of an ill-timed 

merger. I too share those sentiments and firmly believe that the Board’s decision 

gives the industry the opportunity to focus on resolving merger-related service 

issues, and effectively bringing recent rail mergers to a successful conclusion for the 

benefit of our customers and the public. 

It should be noted that the Board arrived at its decision after having conducted 

an exhaustive review of the issue, which included several hundred statements from 

shippers, rail labor, financial analysts and public officials, as well as a four-day 

hearing during which the Board heard from more than 160 witnesses. The overwhelming majority acknowledged the industry’s instability and the need for a respite from merger activity. Large customers like United Parcel Service and General 

Motors were clear in their positions. In fact, a vice president with UPS suggested 

during the four-day hearing that no new mergers be considered until at least 2002. 

These companies, along with Wall Street, recognize that any merger at this time 

would have very negative consequences. Much-publicized rail congestion and delays 

resulting from recent rail mergers in the eastern and western U.S. have shaken customer confidence. A merger at this time would only add to the current instability 

and result in more ill timed mergers. Railroad attention would be diverted from the 

main task at hand—that of fixing the existing system. Finally, the industry would 

be destabilized even further by an almost-certain return to greater government regulation. 

The net effect would be a stranglehold on our efforts to rebuild the country’s railroads by destroying our ability to raise the necessary capital to maintain the health 

of the industry and restore shipper and investor confidence. 

48

We must put the country’s railroads on a stronger financial footing if we are going 

to be in a position to make the capital infusions necessary to give shippers what 

they need most—reliable rail transportation. I believe the Board’s decision paves the 

way for achieving that goal. 

As I stated in my testimony before the Board during the March 7 hearing, ‘‘Before 

we decide to take any giant steps, we should finish what we have started, learn the 

lessons of our mistakes, and only then proceed. . . . Collectively, we owe it to our 

customers, our employees, our shareholders and the public to get this one right.’’ It is because of this that CSX has filed in opposition to the two stay requests filed 

with the Board and will seek to have the Board’s decision upheld in the Court of 

Appeals. 

On behalf of CSX, I thank you for the opportunity to submit this statement for 

the record. 

PREPARED STATEMENT OF PAUL M. TELLIER, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, CANADIAN NATIONAL RAILWAY COMPANY

Madam Chairman and Members of the Subcommittee:

On behalf of the Canadian National Railway Company (CN) and its affiliates, I 

appreciate the opportunity to submit this testimony for the record of the Subcommittee’s March 23 hearing on the Surface Transportation Board’s (STB’s) railroad merger moratorium policy. 

The STB’s policy with respect to mergers of the largest railroads, the Class I carriers, is a matter of the utmost importance to CN, and we commend the Subcommittee for its examination of this important issue. Given recent events, CN is 

in a unique position to comment on the STB’s merger policy and the Board’s re- cently-imposed 15-month moratorium on new rail mergers. After providing a brief 

description of our situation, CN would like to comment on two major aspects of the 

Board’s recent activities in this area. 

General Background 

On December 20, 1999, CN and The Burlington Northern Santa Fe Railway Company (BNSF) filed at the STB a notice of intent to file, on approximately March 20, 

2000, an application seeking STB authorization to bring our two railroads under 

common control. This combination will afford competitive transportation advantages 

to our customers at lower cost and enhance the safety and efficiency of our operations—without service disruption, without additional corporate debt, without interfering with the operations of our connections, without adverse effects on the environment, and with minimal impact on employees. This essentially end-to-end transaction is good for shippers, competition, the economy, and the shareholders of CN 

and BNSF. 

Shortly after we filed our notice of intent, the STB issued an order on December 

28, 1999, announcing that, in the course of our control proceeding, the Board would 

break with its long-standing precedent of reviewing each merger case on its own 

merits, and instead would consider not only the direct impacts of our combination 

but also evidence of ‘‘the cumulative impacts and crossover effects that would likely 

occur as other railroads developed strategic responses in reaction to the proposed 

combined new system.’’ Later, on January 24, 2000, the STB initiated its STB Ex 

Parte No. 582 proceeding, Public Views on Major Rail Consolidations, to examine 

these consolidations and the present and future structure of the North American 

railroad industry. The STB’s notice of this hearing said nothing about the possibility 

of a moratorium, but it did say that the hearing would not result in any prejudgment of the CN/BNSF transaction. 

Earlier this month, the STB conducted four days of hearings in the STB Ex Parte 

No. 582 proceeding. During the hearings, many witnesses supported a reexamination of the STB’s merger rules. However, there was no clear consensus for imposing 

a moratorium on STB consideration of rail merger applications. In fact, the only 

unanimity in support of a moratorium came from the major competitors of CN and 

BNSF. If people had known beforehand that the STB would seize upon a moratorium as a result of this hearing, the STB may have heard a lot more opposition to 

that concept. Even so, most witnesses filing statements or letters, or testifying in 

person at the hearings, supported proceeding with consideration of the merits of the 

CN/BNSF transaction without delay. For example, Secretary of Transportation Rodney Slater stated that any type of STB-imposed moratorium on consideration of our 

transaction would be inappropriate. Shipper associations (such as the National Industrial Transportation League), short line railroads, municipalities, academics, and 

a majority of individual shippers, also supported prompt consideration by the STB 

49

of the CN/BNSF application. In addition, more than 200 shippers wrote to the STB 

in support of fair and prompt consideration of our transaction. 

Despite this support for moving forward, the STB issued a decision on March 17 

imposing a moratorium for 15 months on activity related to mergers of Class I rail 

carriers and announcing the initiation of a rulemaking proceeding to consider new 

rail merger rules. By taking this action, the STB suspended its review of the proposed CN/BNSF combination, without allowing us to file our formal application or 

make our case on the merits. 

CN wishes to raise concerns about two aspects of the Board’s activities. 

Moratorium on Class I Railroad Mergers 

When it initiated the STB Ex Parte No. 582 proceeding, the Board declared, ‘‘we 

intend no prejudgment of the yet-to-be filed BNSF/CN application.’’ Yet, without receiving our formal application, or giving any consideration to the merits of our proposed transaction, the STB last week precluded any consideration of our application 

by refusing to accept Class I merger filings for 15 months and suspending the notice 

of intent filed by CN and BNSF. 

The STB’s purported authority to take this action was 49 U.S.C. § 721(a) and 

§ 721(b)(4). The first allows only those regulations for ‘‘carrying out’’ the STB’s statutory duties, such as holding proceedings to consider transactions. The second is intended to allow the STB to issue injunction-like orders to prevent irreparable harm 

in specific matters, such as a rate reasonableness hearing. It was never intended 

to authorize general orders, like the moratorium order, freezing the competitive 

structure of the rail industry. That is a power that Congress did not give to the 

Board, explicitly or implicitly. The STB, in issuing this order, has repudiated its 

statutory duty under 49 U.S.C. § 11323–5 to promptly review the CN/BNSF consolidation proposal. In failing to attend to its duties, it has committed a legal error. 

Under current law and STB regulations, we are entitled to a decision on the merits 

of our proposal within 16 months of the date we file our application, which the moratorium improperly prevents us from doing. 

The STB’s decision is not only unauthorized by Congress, it is also a de facto 

amendment or rescission of the STB’s regulations, applied retroactively to prevent 

the filing of the CN/BNSF application and a subsequent decision on the merits by 

the STB. The decision’s illegality is compounded by its blatant unfairness. 

We maintain, therefore, that the Board lacks the statutory authority to impose 

this moratorium. On March 17, CN and BNSF filed notices of appeal with the U.S. 

Court of Appeals for the District of Columbia Circuit, and we have filed with the 

STB a petition for a stay—pending judicial review and prior to seeking, if necessary, 

a judicial stay pending that review—of the Board’s decision. We intend to vigorously 

pursue all avenues available to us under applicable law. 

The STB repeatedly cites the service problems of the rail industry. However, the 

mere pendency and hearing of the CN/BNSF application will not threaten irreparable harm to railroad service or contribute to further service problems. This will 

only happen if railroad executives ignore their own problems, and if the Board then 

fails to make them remedy such problems. Over the longer term, the Board could 

consider future potential service problems during its consideration of the downstream effects of the CN/BNSF combination, as it already announced that it intended to do. 

In any event, the STB has the power, by proper application of the public interest 

standard, to prevent future mergers from happening before the prospective merger 

partners are ready to implement them without significant risk of service problems. 

It makes no sense to hold up good mergers, like the CN/BNSF combination, out of 

a misconceived notion that the STB is powerless to stop bad transactions. 

Prolonged Proceeding on New Merger Rules 

In its decision last week, the Board also announced that it would institute an approximately 15-month proceeding to consider new merger rules. Given the record 

that has been developed in the STB’s recent STB Ex-Parte No. 582 proceeding, as 

well as in the course of the STB’s consideration and oversight of recent rail mergers, 

it is unclear why such a lengthy process is necessary. 

The Board’s schedule for a reevaluation of its merger rules is considerably longer 

than the time periods allotted for other recent major STB proceedings, including 

STB Ex Parte No. 627, Market Dominance Determinations—Product and Geographic Competition, and STB Ex Parte No. 628, Expedited Relief for Service Inadequacies, both of which addressed significant rail policy issues. 

Further, in its March l7 decision, the STB expressed its concern about uncertainty 

and instability in the railroad industry as part of the rationale for new merger 

rules. If such uncertainty and instability do indeed exist, the Board should feel even 

50

more compelled to move expeditiously to reexamine its merger rules, so that rail 

carriers, their customers and employees, and the financial markets will know what 

to expect in the future with respect to the structure of the rail industry. 

A prolonged rulemaking proceeding, combined with the 15-month moratorium on 

consideration of Class I rail mergers, will do nothing to strengthen the competitive 

viability of the railroad industry. Rather, it will have the opposite effect. The U.S. 

economy is dynamic and the transportation sector must continue to grow and redefine itself to meet new market challenges. Rather than allowing railroads to become 

more efficient and effective competitors—both intermodally and intramodally—the 

Board’s March 17 decision will reduce competitive pressures and, hence, reduce incentives to improve service and keep prices down. In protecting railroads that would 

have to face the increased competition that would result from the CN/BNSF combination, the STB is not doing the job that Congress intended. 

In sum, CN strongly disagrees with the STB’s March 17 decision, which we believe exceeds the scope of the Board’s statutory authority. The STB’s decision deprives CN and BNSF of our statutory right to a prompt and fair hearing. It is also 

contrary to the public interest in efficient rail transportation. In fact, if the STB’s 

consideration of our proposed transaction does not proceed, the public benefits of the 

CN/BNSF transaction, which could be in excess of $500 million annually, will be either delayed or lost forever. 

Thank you again for the opportunity to submit this statement for the record. We 

stand ready to assist the Subcommittee as it considers this vital issue.

Æ