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[Senate Hearing 106-1098]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 106-1098
 
                  OVERSIGHT HEARING ON THE STB'S MORA-
                   TORIUM 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

                       U. S. GOVERNMENT PRINTING OFFICE
79-321                          WASHINGTON : 2000
___________________________________________________________________________
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                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                  DANIEL K. INOUYE, Hawaii
CONRAD BURNS, Montana                JOHN B. BREAUX, Louisiana
OLYMPIA J. SNOWE, Maine              BYRON L. DORGAN, North Dakota
BILL FRIST, Tennessee                RICHARD H. BRYAN, Nevada
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
JOHN ASHCROFT, Missouri              MAX CLELAND, Georgia
SAM BROWNBACK, Kansas

                            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

  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.
    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 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.
    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.
    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 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.
    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.
    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 so-called ``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 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, 
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.
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    \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.
    \2\ The 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 (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).
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    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.
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    \4\ The 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.
    \5\ We fully understand that our mandate is to protect competition, 
not particular competitors.
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    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\
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    \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 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).
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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 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.
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    \7\ We 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.
    \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.
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    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.
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    \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.
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    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 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.
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    \10\The 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.
---------------------------------------------------------------------------
    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.
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    \11\ We 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.
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    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 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\
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    \12\ For 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.''
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    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.
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    \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.
    \14\ We 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.
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    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 competitive 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\
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    \15\ The 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.
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    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 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 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 consolidation 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 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.
    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 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 forty-some 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 injunctive-type 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 furthermore, 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 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?
    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 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.
    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.)
                            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 cram-down 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 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-to-rail 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 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.
---------------------------------------------------------------------------
    \1\ Re-regulation would cost UP nearly three-quarters of a billion 
dollars in annual operating revenues.
---------------------------------------------------------------------------
    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 re-regulation. 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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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 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.
                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 particular, 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 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 premium 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, post-consolidation 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 disruption 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.
    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--
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 intra-industry 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.
    Table No. 2 shows that the railroad industry has been in the throes 
of a long-term, 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 unit-cost 
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.
    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\
---------------------------------------------------------------------------
    \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).

    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\
---------------------------------------------------------------------------
    \2\ ``FTC to Get Tough on Merger Reviews.'' By James V. Grimaldi, 
Washington Post, page E1, February 17, 2000.
---------------------------------------------------------------------------
    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.
    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 
short-term 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 interests 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.
    ARC stands ready to work with the members of this Board in support 
of such pro-competitive, consumer-oriented changes.

            Table No. 1. Downsizing of the Railroad Industry
                           (Class I Railroads)
------------------------------------------------------------------------
                                        Miles of                 No. of
                 Year                  Road Owned    No. of    Employees
                                          (000)     Railroads    (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)
----------------------------------------------------------------------------------------------------------------
                                                                            Number of    % Ton-Miles Carried By
                                  Year                                      Railroads    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)
------------------------------------------------------------------------
                                  Operating     Railroad      ``Real''
             Year                Expense Per    Inflation    Expense Per
                                  Ton-Mile    (1998 = 100)    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.

                Table No. 4. Increasing Railroad Traffic
                           (Class I Railroads)
------------------------------------------------------------------------
                                                                Revenue
               Year                      Tons Originated       Ton-Miles
                                           (Millions)         (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 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 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, 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)
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)
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.
    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 recently-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 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. 
Sec. 721(a) and Sec. 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. Sec. 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 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.

                                
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