SPEAKERS CONTENTS INSERTS
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THE PROPOSED CSX-CONRAIL MERGER
PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Transportation and Infrastructure. Additional material pertinent to this transcript may be found on the web site of the Committee at [http://www.house.gov/transportation]. Complete hearing records are available for review at the Committee offices and also may be purchased at the U.S. Government Printing Office.
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTH CONGRESS
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NOVEMBER 19, 1996
Printed for the use of the
Committee on Transportation and Infrastructure
COMMITTEE ON TRANSPORTATION AND INFRASTUCTURE
BUD SHUSTER, Pennsylvania, Chairman
DON YOUNG, Alaska
WILLIAM F. CLINGER, Jr., Pennsylvania
THOMAS E. PETRI, Wisconsin
SHERWOOD L. BOEHLERT, New York
HERBERT H. BATEMAN, Virginia
HOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
SUSAN MOLINARI, New York
WILLIAM H. ZELIFF, Jr., New Hampshire
THOMAS W. EWING, Illinois
WAYNE T. GILCHREST, Maryland
Y. TIM HUTCHINSON, Arkansas
Page 3 PREV PAGE TOP OF DOCBILL BAKER, California
JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
PETER I. BLUTE, Massachusetts
JOHN L. MICA, Florida
JACK QUINN, New York
TILLIE K. FOWLER, Florida
VERNON J. EHLERS, Michigan
SPENCER T. BACHUS, Alabama
JERRY WELLER, Illinois
ZACH WAMP, Tennessee
TOM LATHAM, Iowa
STEVEN C. LaTOURETTE, Ohio
ANDREA SEASTRAND, California
RANDY TATE, Washington
SUE KELLY, New York
RAY LaHOOD, Illinois
BILL MARTINI, New Jersey
DAN FRISA, New York
TODD TIAHRT, Kansas
RICHARD H. BAKER, Louisiana
JAMES L. OBERSTAR, Minnesota
NICK J. RAHALL II, West Virginia
Page 4 PREV PAGE TOP OF DOCROBERT A. BORSKI, Pennsylvania
WILLIAM O. LIPINSKI, Illinois
ROBERT E. WISE, Jr., West Virginia
JAMES A. TRAFICANT, Jr., Ohio
PETER A. DeFAZIO, Oregon
BOB CLEMENT, Tennessee
JERRY F. COSTELLO, Illinois
PETE GEREN, Texas
GLENN POSHARD, Illinois
BUD CRAMER, Alabama
BARBARA-ROSE COLLINS, Michigan
ELEANOR HOLMES NORTON, District of Columbia
JERROLD NADLER, New York
PAT DANNER, Missouri
ROBERT MENENDEZ, New Jersey
JAMES E. CLYBURN, South Carolina
CORRINE BROWN, Florida
JAMES A. BARCIA, Michigan
BOB FILNER, California
EDDIE BERNICE JOHNSON, Texas
BILL K. BREWSTER, Oklahoma
KAREN McCARTHY, Missouri
FRANK MASCARA, Pennsylvania
THOMAS C. SAWYER, Ohio
GENE TAYLOR, Mississippi
Page 5 PREV PAGE TOP OF DOCJUANITA MILLENDER-McDONALD, California
ELIJAH E. CUMMINGS, Maryland
Konschnik, David M., Director, Office of Proceedings, Surface transportation Board, accompanied by Joseph Dettmar, Deputy Director, Office of Proceedings
Scammel, Glenn, Counsel, Subcommittee on Railroads, Committee on Transportation and Infrastructure
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Barcia, Hon. James A., of Michigan
Clement, Hon. Bob, of Tennessee
Cummings, Hon. Elijah E., of Maryland
Gilchrest, Hon. Wayne T., of Maryland
Molinari, Hon. Susan, of New York
PREPARED STATEMENT SUBMITTED BY A WITNESS
Page 6 PREV PAGE TOP OF DOC Konschnik, David M.
SUBMISSION FOR THE RECORD
Konschnik, David M., Director, Office of Proceedings, Surface Transportation Board, responses to questions from Rep. Gilchrest
Scammel, Glenn, Counsel, Subcommittee on Railroads, Committee on Transportation and Infrastructure, Special Laws Applicable to Conrail (Post-Privatization)
THE PROPOSED CSX-CONRAIL MERGER
TUESDAY, NOVEMBER 19, 1996
House of Representatives,
Committee on Transportation and Infrastructure,
The committee met, pursuant to call, at 10 a.m., in room 2167, Rayburn House Office Building, Hon. Bud Shuster (chairman of the committee) presiding.
he CHAIRMAN. The committee will come to order.
Page 7 PREV PAGE TOP OF DOC Before I make my opening statement, I want to note this is the 187th meeting of this committee in this Congress. Indeed, of the 333 laws passed by this Congress signed into law by the President, 44 have come from this committee. So one out of every eight pieces of legislation that has become law has come from this committee. So I want to certainly thank all of the Members on both sides of the aisle for making our committee such a productive committee. It is a bipartisan committee. That is the way it has been and that is the way it is going to be.
Now turning to the hearing we have before us today, the purpose of this hearing is to discuss the process the Surface Transportation Board employs in reviewing railroad mergers. We will be hearing from Mr. David Konschnik, who is the Director of the Office of Proceedings of the Surface Transportation Board. We will also be discussing the laws as they apply uniquely to Conrail. Mr. Glenn Scammel, majority counsel to the Subcommittee on Railroads, will be testifying on this topic.
This will be the first in what I expect to be a series of hearings focusing not only on the CSX and Norfolk Southern proposals to merge with Conrail, but more broadly on the whole issue of consolidation in the rail industry. It is important that this committee learn as much as possible about these proposals given the potential major implications they can have on America's transportation network. The three railroads are the largest freight mode, responsible for 1.3 trillion revenue ton miles, and indeed that is 8.7 percent higher today than it was just in 1994. The railroads were also responsible for 41 percent of freight revenue tonnage miles in 1995, and that is compared to 39 percent in 1994. Return on investment in 1995 was 7 percent.
Now these are stunning statistics when one considers the near peril that the railroads faced in the 1970s. At that time more than 20 percent of the industry's track was bankrupt. The railroads' return on investment was only about 3 percent.
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It was in this context that Conrail was created by Congress in order to salvage rail service in the Northeast. The Federal Government invested over $7 billion in Conrail in fact, and in 1987 the government sold its interest in a public stock offering. Gross proceeds of 1.65 billion were realized, which means taxpayers of America still have over a $6 billion investment in Conrail.
Now it is important to note that congressional action in 1980 with the passage of the Staggers Act was what was largely responsible for the renaissance of the freight rail service deregulating the railroad industry. There are many critical issues raised by the merger proposals, because Conrail was a successor to the bankrupt Northeast railroads in the 1970s. And, whoever inherits Conrail will have dominant control over rail transportation in the Northeast. This can certainly have significant implications not only for freight transportation but also for Amtrak and commuter transportation and indeed for railroad retirement.
There are many special laws relating to Conrail. There are laws on the books which are uniquely applicable to Conrail, and indeed these laws may cause confusion, unfairness or indeed some impediment to smooth rail service. Congress also is eminently involved with the fate of Amtrak and the Northeast corridor. Conrail is the principal freight operator on that corridor and has a relationship with Amtrak that is governed by special laws.
Now I have made no judgment as to whether legislation will be necessary. That decision will necessarily depend on our review of the existing law and on the issues relating to such laws that may be aired before the Surface Transportation Board, which has the responsibility in this area. Taxpayers, as I have emphasized, have a major investment in Conrail, over $6 billion net. Although Conrail has been privatized now for about 9 years, there certainly is concern that the public should at least not be harmed by any transaction involving Conrail.
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For example, Conrail's route system was originally designed by a Federal entity, the US Railway Association, which was created by Commerce. Indeed, Conrail is a creature of the Congress. The USRA had hoped for greater rail-to-rail competition in the Northeast, but it could not persuade other railroads such as the predecessors of the Norfolk Southern and CSX to provide the properties necessary to give more competition to Conrail. Their reluctance, given the near bankrupt state of railroading and indeed the bankrupt state of many railroads in the 1970s, is understandable; but the result was a Northeastern rail system that has less competition than USRA envisioned. This is something which we are very much concerned about.
We are also concerned about the impact on employees of any merger involving Conrail. Almost any merger is likely to have some adverse effect on employees of the merged railroads, and we have laws and the STB authority to address that. But there are some unique attributes to Conrail. The Federal Government made Conrail's employees a significant force among its stockholders by mandating that some of the original stock issued by Conrail had employees through an ESOP plan. That means that the employees can be affected here, not just in their jobs and earnings but as to their lifetime savings and investments for retirement, as well.
This committee has directed Amtrak to reduce its dependence on Federal subsidies. One way for Amtrak to do this is to make better use of its infrastructure. Perhaps we should be reexamining freight needs along the corridor and explore the options available to Congress that could help defray the Federal Government's investment in the corridor and in Amtrak.
Another area of concern is the effect that these proposed mergers and for that matter the cumulative effect of other recent mergers have on the financing of railroad retirement. The Burlington Northern Santa Fe and UPSP mergers have resulted in at least 6,000 fewer people on railroad payrolls. No one knows yet what impact these proposed mergers will have on the current railroad work force, but it raises a question about where the burden of financing railroad retirement will shift in a system that allocates financing on the basis of number of employees on the payroll.
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I am also very interested in the implications for the employees of Conrail. It is no secret that Conrail maintains locomotive and car repair shops in Altoona, Pennsylvania that employ a significant number of my constituents. The outcome for these employees and also Conrail employees across the system will be a major concern for us.
Another area of possible review is the benefits that will accrue to management as a result of the merger. Often in major corporate restructuring it is the managersthe executiveswho walk off with the lion's share of the benefits in the form of enhanced salaries, golden parachutes, and stock options worth millions of dollars. It would be a shame if these merger proposals resulted in the loss of jobs for many railroad workers oso as to line the coffers of a few highly placed executives.
In conclusion, I think there are many major areas that merit congressional oversight with regard to these two merger proposals with Conrail and indeed the entire consolidation of the railroad industry.
I certainly want to thank our witnesses for appearing today and look forward to this testimony, and I am pleased to recognize the distinguished ranking member of the full committee, Mr. Oberstar.
Mr. OBERSTAR. Thank you, Mr. Chairman. Thank you for a very comprehensive opening statement which I think well describes the state of play on this very significant issue. I want to compliment you also on the record of achievement in this committee during the 104th Congress.
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I had a much more extensive statement on what I thought was going to be our last meeting day just before the House adjourned, and I simply reiterate that we have had a splendid working relationship. We have had as a result of that relationship a very productive record of accomplishment which you have outlined, and that is a very significant result, to have more than 12 percent of all the bills enacted into law in the last Congress emerge from this committee. We do not need to have quite so many laws in the next Congress because we are going to have bills and resulting laws of far greater significance than any of those that we passed in the last Congress.
I think this hearing is entirely appropriate, and I commend you for calling the hearing and also want to support your statement and our understanding. This will not be the last but only the first of a series of inquiries into this matter.
It is important to inform Members about the standards and procedures that the Surface Transportation Board uses to evaluate rail merger applications including those situations where there are multiple carriers trying to acquire the same railroad. The hearing also gives us an opportunity to look at various Federal laws still in effect that apply solely or uniquely to Conrail and how such laws could become relevant to the implementation of any merger involving Conrail such as, for example, the requirement to maintain the headquarters in Pennsylvania.
For over 70 years the Interstate Commerce Commission was charged by the Congress with the exclusive authority to approve or disapprove rail mergers. That authority was largely transferred in its long established forum to the Surface Transportation Board; some adjustments, some changes of course, but unlike most industries the railroad mergers are evaluated under a different standard, a public interest standard rather than a strict competitiveness standard. If a merger is inconsistent with antitrust laws, that board can still approve it if they find that there are public benefits that outweigh the antitrust problems.
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They also can look deeper into issues on the matter of public interest in a way that the Justice Department does not do on a strict antitrust standard. Under the public interest standard the Surface Transportation Board has to consider the effect of the proposed merger on the overall adequacy of transportation for the public. They have to consider whether the operations of the other rail carriers in the same region should be addressed. They must look at the total fixed charges resulting from the transaction including an increase in interest payments and how much additional debt will be carried.
In this respect a review of merger is very similar to review of the fitness standard in air carrier purchases, mergers, acquisitions or new entrants, carriers in the aviation sector. The board is also required to look at the interest of rail employees and whether the transaction would have an adverse effect on competition among rail carriers in the region and in the national rail system.
As the chairman already outlined, the previous big merger of UPSP has already resulted in layoffs of several thousand employees. In this case, the case that we are examining today, I think we have to be very, very careful, very sensitive to the effect upon workers of this proposed merger. As a part of its approval of a merger, the Surface Transportation Board can impose conditions such as trackage rights to alleviate anticompetitive effects. That is a matter we must look at with some detail in the course of this and other proceedings.
In the past 2 years both the ICC and its successor Surface Transportation Board have approved two big mergers, Burlington Northern/Santa Fe and Union Pacific/Southern Pacific. That raised a great deal of concern among shipper groups, other railroads and among labor unions. Now we have Conrail, and there are the same questions. Deeper, they abound with greater fear and concern based on the experience that we have already gone through with the two other mergers. The question in my mind is how many mergers can the rail sector, can the shipping public, can the working public, sustain? How many more of these mergers can communities continue to endure without serious adverse effect upon their viability? Is it fair to the Nation's workers, shippers and public to allow further consolidation of Class I railroads?
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If this merger is consummated, the East Coast will be left with two instead of the current three Class I railroads. That would be CSX, Conrail, a new entity, and Norfolk Southern, a very different kind of competitor. CSX Conrail would be a mega integrated multimodal shipper with assets in the range of $14 billion and Norfolk Southern, a much smaller, more focused, principally rail-only carrier.
The new entity would be a very powerful competitor in the marketplace. They would be able to offer domestic and international consumers and customers rail, barge, truck, container, contract, logistic services. The newly created system would cover single line rail service through 22 States, 29,645 miles from Chicago to Boston, and New York to Miami, and all the way to New Orleans.
Would the Nation wind up with just a few major railroads as a result of this? Would this action trigger further mergers and further reduce competition in the rail sector? There is also a unique Federal national interest in this merger, as the chairman has very well outlined, and I will not go into those details.
The fact is though that all of us can remember the Pennsylvania Railroad, the New York Central Railroad and others that were all merged together to preserve jobs, community competitiveness, competitiveness among shippers, preserve a viable rail competition system on the East Coast. The public, through the action of the Congress, invested $7 billion to that public purpose.
Now these are questions that the Surface Transportation Board should be considering as they evaluate major rail mergers.
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I just have to observe that maybe this hearing would not be under way and this action might not be taking place if the UPSP merger had not been consummated or had been significantly altered. But once that mega merger took place, it was clear that others would follow. This is the first. Will it be the last? Should it be significantly altered? What do we do in the interest of competition, jobs, community competitiveness and a viable, competitive rail transportation system in the highly congested East Coast corridor?
This should be a very interesting hearing, Mr. Chairman. Thank you for calling it.
The CHAIRMAN. I thank the gentleman. Before we move to our witnesses, does anybody else seek recognition? The distinguished chairman of the subcommittee, Ms. Molinari.
Ms. MOLINARI. Thank you, Mr. Chairman. I will be very brief.
I just want to say that I am pleased to have the opportunity today to discuss the process that the Surface Transportation Board employs in reviewing the mergers of Class I railroads and the laws that apply specifically to Conrail. I think that you and the ranking member have outlined all the concerns that are on our minds right now as we move in this new age of consolidation.
Mr. Oberstar correctly stated the recent mergers of Burlington Northern Santa Fe, Union Pacific and Southern Pacific along with the current competing proposals, CSX and Norfolk Southern to merge with Conrail. It is clear that we have entered into a dramatic phase of consolidation over national rail network. This consolidation poses critical issues that are going to have significant impact on the Nation's railroad industry for generations to come. It is important that we all understand sitting at this side of the table clearly how the Federal merger process works and how all the many issues raised by the various merger proposals will be considered by the Surface Transportation Board, also what we know we will be hearing specifically about, how the laws apply to Conrail.
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The laws raise many significant issues when a merger is proposed, how a law that was intended to apply to Conrail alone will affect a post-merger entity in an area that I am very interested in learning about. These merger proposals are of particular concern obviously to those of us from the Northeast because Conrail was the successor to the bankrupt railroads of the Northeast. It has become the predominant carrier in our region. Indeed, outside of truck service, there really is no significant competitor to Conrail in the Northeast. This means that whichever carrier succeeds in merging with Conrail will control rail freight service in our entire area.
I want to make sure that the Surface Transportation Board process will take these considerations into account. Of course, lastly, Mr. Chairman, the role that you outlined in great detail in terms of what the role of this merger will be on intercity rail passenger service and the connections thereof are of great concern to us.
So we really appreciate this opportunity to have this historic opportunity ask these questions. Thank you.
[Ms. Molinari's prepared statement follows:]
The CHAIRMAN. I thank the gentlewoman.
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Mr. CUMMINGS. Mr. Chairman, thank you very much for convening this hearing, and thank you very much, Mr. Oberstar, for convening this hearing to investigate recent proposals by CSX and most recently Norfolk Southern Railroad to acquire Conrail railroad.
I must say that I have extreme concern for both these proposals and their implication for Maryland's economy, work force and passenger rail service. A Conrail CSX merger would leave several areas of the State of Maryland with a single Class I railroad which would seriously jeopardize the competitive edge of most of Maryland's business community including the Port of Baltimore, the backbone of our economy. The Port of Baltimore and Maryland shippers must maintain a competitive environment for railroad assets. Maryland must continue to be served by no fewer than two railroads that guarantee competitive access to central Maryland and the Port of Baltimore.
Further, I am also concerned for the significant loss of jobs that could result from the proposed mergers. The proposed two to one combination of railroads could affect hundreds if not thousands of jobs if Maryland industries and commerce are placed at a competitive disadvantage. A Conrail CSX merger would also result in a direct loss of employment to Maryland workers, as CSX has already indicated that train operations through western Maryland will likely be decreased. A Conrail CSX merger would have serious implications for Maryland commuters. With thousands of jobs leaving our bustling urban centers and relocating to the suburbs, often cross state lines, the Maryland commuter rail system, MARC, has become a vital transportation link for thousands of Maryland commuters. In fact my Washington staff and I rely on the MARC system to meet our transportation needs from Baltimore to Washington, DC. CSX will likely feel increased pressure to reduce if not eliminate MARC service on the Camden line with CSX anticipating increase in north-south freight movement.
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I must tell you that I was extremely disturbed when CSX canceled the run of the MARC Camden Yard baseball trains just before opening day last April. This decision may have been a boon for CSX's freight business but resulted in the significant loss of revenue to my city, Baltimore city.
Finally, I am extremely concerned about commitments to infrastructure improvements that must be maintained in Maryland. As you may know, both CSX and Conrail own railroad property throughout Baltimore city including railroad bridges as well as other bridges that carry vehicle traffic. These properties, many of which are located in residential neighborhoods, have fallen into disrepair, are a public nuisance and, most importantly, have become a threat to public safety. I hope that as the Surface Transportation Board reviews these mergers issues, public safety and good corporate citizenship are not left by the wayside.
Mr. Chairman, given the potential far-reaching consequences for the future of rail service in my State, it is my hope that as the Surface Transportation Board reviews this proposed merger and the issue of competition, it will take into account the severe competitive disadvantage the State of Maryland and its economy will be placed under. Further, as the board reviews the implications this merger will have on the public interest, I believe that it should look closely at the State of Maryland's potential job loss and the effect that the proposal will have on Maryland commuters who will be without a viable way to work.
I thank you, Mr. Chairman.
The CHAIRMAN. I thank the gentleman. All Members may put their statements in the record. If there are no further opening statements, the gentleman from Maryland.
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Mr. GILCHREST. Just very briefly, Mr. Chairman, I will submit my full statement to the record along with a number of questions.
It is my fear as a result of this potential merger that the competitiveness in all of Maryland but especially in the port area around Baltimore city will be affected. So the questions that I will submit to the record will deal with the calculation of revenue adequacy for all railroads and how the board factors revenue adequacy in the consideration of rail mergers.
I thank the gentleman.
[Mr. Gilchrest's prepared statement follows:]
The CHAIRMAN. I thank the gentleman.
Mr. BARCIA. Mr. Chairman, I have a statement which I have submitted for the record, and I also would like to indicate, I guess, support for the merger in terms of its economic impact in my home State of Michigan and the importance to the agriculture industry and commercial activity.
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The CHAIRMAN. I thank the gentleman.
Mr. BACHUS. Mr. Chairman, it is my understanding that this hearing is basically about the process and that it is limited to that. In that regard I would like to say these are some things I am concerned about. I would like maybe in your testimony either if you try to answerI know you have prepared testimony, but in dealing with the process I have got some
The CHAIRMAN. Would you speak into the mike, please?
Mr. BACHUS. Is it on? OK.
My first question is about the operating plan. I would like to know a little something about how much detail is in the operating plan. There have been a lot of questions today about whether a facility would close the effect on the employees retirement plans, whether service would be preserved. My question is this:
Is that going to be in the operating plan, how much detail and what period of time does that cover? I notice the income statements are for 3 years, but it did not say how long the operating plan covered what period of time.
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The CHAIRMAN. When we get into the questions, certainly the gentleman will be able to ask these questions.
Mr. BACHUS. But I want to point out three or four other things, and I will be brief. Second is about the ruling of the Surface Transportation Board, how much that displaces, say, the Pennsylvania law or other State laws interested in that.
You know, do you feel, the Surface Transportation Board, that you all can basically preempt all State laws?
The third question is, you have got 15 months under the present statute where the old ICC had 31 months. I want to know about whether this presents a problem.
And fourth, as the proxy fights go on, what effect does that have on your proceeding? Suppose that one of the competing interests gets control of the existing board of Conrail? Does that effect your decision? And could you grant all applications or no applications or one or the other? Those
The CHAIRMAN. I thank the gentleman.
Ms. BROWN. Thank you, Mr. Chairman.
Page 21 PREV PAGE TOP OF DOC Let me congratulate all of my colleagues on their reelection and extend my best wishes to those who will not be returning.
Mr. Chairman, thank you for holding the hearing today. I would like to stress, Mr. Chairman, that you will ensure that my colleagues stick strictly to the hearing topics and not stray into other issues that would be inappropriate for today's hearing, In particular the specific details of the merger. None of the parties involved in the merger have been invited to testify at today's hearing. As a result, it would be unfair for our questions or comments to stray from our narrow topic.
The CHAIRMAN. I thank the gentlewoman.
If there are no further requests, the Chair would note, before I recognize the witnesses, that the surface transportation personnel who will be testifying here are legally precluded from discussing the facts or merits of any specific proposal that may come before the board. Therefore, the testimony of the STB personnel and their responses to Members' questions will necessarily be limited to describing the general procedures and substantive standards that the STB applies in evaluating the rail merger applications.
Though they may be able to give historic examples of issues in past merger cases, they are not permitted to discuss the particulars of the current competing proposals by Norfolk Southern and by CSX to acquire Conrail.
With that, I am pleased to recognize the gentleman from the Surface Transportation Board. You may proceed as you choose.
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TESTIMONY OF DAVID M. KONSCHNIK, DIRECTOR, OFFICE OF PROCEEDINGS, SURFACE TRANSPORTATION BOARD, ACCOMPANIED BY JOSEPH DETTMAR, DEPUTY DIRECTOR, OFFICE OF PROCEEDINGS
Mr. KONSCHNIK. Mr. Chairman and members of the committee, my name is David Konschnik, and I am the Director of the Office of Proceedings at the Surface Transportation Board. I am joined today by Mr. Joseph Dettmar, Deputy Director of the Office of Proceedings at the board.
We are here at the request of this committee, following recent activity surrounding the possible merger of Conrail with another Class I railroad, to discuss the procedures for handling rail mergers at the board. My written submission and any oral presentation that I and my colleague may provide here do not necessarily represent the views of the three board members who, as the committee knows, may be called upon to vote upon future rail merger proposals.
This presentation sets out the statutory criteria and schedule for the board's consideration of applications for control or merger of two or more Class I railroads. Any new rail merger application is governed by the provisions of the ICC Termination Act of 1995, which I will refer to as the ICCTA.
Overall standards: Under the ICCTA, section 11324, the board shall approve a transaction that is consistent with the public interest. The board may, where warranted to alleviate anticompetitive effects, impose conditions upon its approval, including divestiture of parallel tracks or requiring grants of trackage rights or grants of access to other facilities. Any trackage rights and related conditions imposed to alleviate anticompetitive effects of the transaction shall provide for operating terms and compensation levels to ensure that the anticompetitive effects are indeed alleviated. The board may also require the inclusion of other carriers located in the area involved in the transaction if they apply for inclusion and the board finds their inclusion to be consistent with the public interest.
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In reviewing a rail merger proposal, the board must consider: first, the effect of the proposed transaction on the adequacy of transportation to the public; second, the effect on the public interest of including, or failing to include, other rail carriers in the area involved in the proposed transaction; third, the total fixed charges that result from the proposed transaction; fourth, the interest of rail carrier employees affected by the proposed transaction; and, fifth, whether the proposed transaction would have an adverse effect on competition among rail carriers in the affected region or in the national rail system.
The five areas required to be considered are the same as those enumerated in former section 11344, except that the fifth element now requires consideration of the adverse effects on competition among rail carriers in the national rail system as well as in the affected region. But applicable precedent has long included that aspect of the agency's analysis in rail consolidation cases.
Also new in the ICCTA is the explicit power to condition a merger on the requirement to divest parallel tracks and the explicit requirement that trackage rights and related conditions imposed to alleviate anticompetitive effects must provide for terms that ensure the alleviation of those effects. Although technically not applicable to the case, the board did consider these new provisions in its decision approving the Union Pacific-Southern Pacific merger and found that it has had the power to order divestiture and that these new provisions would not otherwise have changed the outcome of that proceeding.
Overall procedures: The schedule for processing applications has been changed by the ICCTA at section 11325. Once an application has been filed, the board has 30 days to publish notice in the Federal Register of its acceptance or rejection of the application. If the application is accepted, all evidentiary proceedings must be concluded within 1 year of publication of acceptance and the board must issue its final decision within 90 days after the conclusion of the evidentiary proceedings. Thus, the maximum time under the statute for processing an application is 16 months from the date of filing of the application to the date of issuance of a final decision. This contrasts with a total maximum processing period under the former law of 31 months, consisting of 30 days to publish acceptance, 24 months to conclude evidently proceedings and 180 days thereafter to issue a final decision.
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The regulations that govern mergers are published at Volume 49 of the Code of Federal Regulations Part 1180. Although these rules were established pursuant to the Interstate Commerce Act, rather than the ICCTA, they still apply, except to the extent that any provision is inconsistent with the new law. Of course, applicants may seek waivers from the requirements of these rules.
Thus, in accordance with these regulations, applicants must file a notice of intent to file an application between 3 and 6 months prior to filing the application. When the notice of intent is filed, the board is required to publish a notice in the Federal Register within 30 days. This notice provides a brief description of the transaction, a year to be used for impact analyses, and the approximate filing date.
CSX Corporation and Conrail Inc. filed a notice of intent on October 18, 1996, in which they indicated an intention to file an application no sooner than January 18, 1997, and no later than March 1, 1997. The board published notice of that filing on November 15, 1996. Norfolk Southern Corporation filed a notice on intent of November 6, 1996, indicating an intention of filing an application for control of Conrail on or before May 1, 1997. The deadline for the board's publication of that notice is December 6, 1996.
While the statute sets the outer limits for the board's processing of railroad merger applications, the practice for the past several years has been that the applicants propose a procedural schedule, the ICC, and now the Board, gets public comments on a proposed schedule, either the applicants' proposed schedule or the proposal as modified by the board, and, after considering the comments, the agency adopts a schedule for building the record and deciding the case.
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Under this process, the ICC established a schedule for the Union Pacific/Southern Pacific merger. A final decision granting the application in that proceeding was issued approximately 8 1/2 months after the application was filed. The Burlington Northern Santa Fe application for common control was approved by the ICC in a decision issued approximately 10 1/2 months after the application was filed and in less than 6 months from the time the proceeding was reinstituted under a new procedural schedule.
As noted earlier, both CSX and Norfolk Southern have filed notices of intent to file an application for a consolidation with Conrail. CSX has requested that the Board establish a procedural schedule which will provide for a final decision 8 1/2 months after the application is filed. The board has, within the past few days, published a notice in the Federal Register in STB Finance Docket No. 33220, CSX Corporation and CSX Transportation, Inc., Control and Merger, Conrail Inc. and Consolidated Rail Corporation, soliciting public comments on a 10-month procedural schedule.
Typically, during this prefiling stage, applicants submit a request for a protective orderto permit any necessary access to confidential materials, while at the same time providing protections for sensitive dataa petition for waiver of certain filing requirements, and a request for an informal staff opinion on a proposed voting trust agreement.
Competing applications. The railroad merger review process at the board is designed to handle either a single consolidation application or one or more competing applications in addition to the primary application. In late 1994 and early 1995, for example, it looked for a period of time as if there might be competing applications filed for the control of the Santa Fe, one by Burlington Northern, and one by Union Pacific. In fact, after Burlington Northern had filed its application to acquire control of the Santa Fe, the process was held in abeyance for a period of time to permit Santa Fe shareholders to vote on the Burlington Northern proposal. Once the vote to approve that proposal had occurred, Union Pacific withdrew as a competing bidder, a new procedural schedule was established, and the record-building and review process resumed.
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While Union Pacific might have filed a competing application in that proceeding, it did not. Because of the possibility of competing applications for control of Class I railroads, the statute, the pertinent regulations, and the actual schedules established in each proceeding all provide for filing and consideration of responsive applications.
A responsive application that seeks to acquire the property that is the subject of the primary application is called an inconsistent application. Under the statute and under the rules, inconsistent applications are due 90 days after publication of acceptance of a primary application. It is possible for both a primary application and an inconsistent application to be granted. It is also possible for both to be denied or for one to be granted and the other denied.
Interested parties may file narrower responsive applications. These include applications seeking trackage rights or other conditions to be imposed on a merger if it is approved. These are also due 90 days after the Board publishes a notice that it has accepted a primary application. Each responsive application is considered consolidated with the primary application. Records are built for each responsive application and a decision on it is reached at the same time as a decision is reached on the primary application.
In the past 20 years, railroads have filed inconsistent applications in a half dozen or so proceedings. These include competing applications by Rio Grande Industries and Kansas City Southern Industries for control of the Southern Pacific Transportation Company, competing applications by Soo Line Railroad Company, Chicago and Northwestern Transportation Company, Grand Trunk Corporation, the Chicago Milwaukee Corporation for the operational core of the Milwaukee Road in the context of a bankruptcy proceeding; and competing applications by Norfolk and Western Railway Company and Baltimore and Ohio Railroad Company on the one hand, and Grand Trunk Western Railroad on the other, for control of the Detroit, Toledo and Ironton Railroad Company.
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In some of these proceedings an inconsistent application was approved and prevailed over competing applications. In others it was not approved and did not prevail. In the decision-making process, the statutory criteria are applied to the evidence presented with respect to each application. Any merger-related applications, petitions and noticessuch as for trackage rights, abandonments, and constructionsare usually processed in accordance with the overall merger procedural schedule, by virtue of a waiver of or exemption from the otherwise applicable procedures and timetables. Likewise, the environmental review process occurs concurrently with the record-building and decision-making process under the overall merger procedural schedule.
Required information, general information. Each application must contain basic information, including a summary of the proposed transaction, a proposed time schedule for consummation, a statement of the purpose of the proposed transactionsuch as improving service, improving the financial viability of the applicants, eliminating excess facilities or attaining operating economiesand a statement of the financial arrangements. An application must also show how the proposed transaction is consistent with the public interest. This must include a statement of the effect on competition, the financial aspects of the transaction, including the effects of any increase in fixed charges, the effect on the adequacy of transportation service to the public, the effect on the applicant carrier's employees, and the effect on inclusionor lack of inclusionin the merger of other railroads in the territory. An application must also include geographical and environmental data.
Market analyses. Applicants are required to submit analyses of the impacts of the proposed transaction, both adverse and beneficial, on intermodal and intramodal competition or freight surface transportation in the regions affected, and nationally. The applicants must show the impact on the provision of essential services by applicants and other carriers. Applicants must address markets identified by the board. But also any others they deem relevant. Applicants have some flexibility in choosing the types and format for data submitted. Market analyses can focus on city pairs, interregional movements or movements through a particular point. They can also focus on a particular commodity or group of commodities.
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Operational data. Applicants are required to submit an operating plan that includes a summary of the proposed changes resulting from the transaction. This plan must include a statement of anticipated gains in service, operating efficiencies and other benefits. The plan should also include: (a) a statement of service patterns on the properties, including the proposed principal routes, proposed consolidations of main line operations, and the anticipated traffic density in general categories of traffic on all main and secondary lines in the system, with identification of yards expected to have a greater than 20 percent increase in activity; (b) if commuter or other passenger services are operated over the lines of applicant carriers, a statement of the anticipated impacts on these services; (c) a statement of anticipated equipment needs, including plans to acquire, retire, or improve use of equipment in relation to operating changes; (d) a description of the effect of any deferred maintenance or delayed capital improvements on road or equipment properties involved, including a schedule for eliminating deferrals and for carrying out rehabilitation as these relate to service improvements or operating economies expected to result from the transaction; and (e) traffic density charts for principal lines and for segments of lines between major freight yards and terminals.
Financial information. For merger transactions, applicants must submit a pro forma balance sheet giving effect to the transaction and a pro forma income statement giving effect to the transaction. The income statements must be provided for at least the first 3 years following consummation of the transaction.
Applicants must also identify sources and application of funds for the current year and a forecast of sources and application of funds for the year following consummation of the proposed transaction and for the years necessary to carry out the operating plan. If an applicant has agreed to assume liabilities with respect to incumbered properties, the properties and incumbrances must be identified.
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Other procedural matters. In recent rail merger proceedings, the record has closed with an oral argument before the Board. The Board has also held a public voting conference to discuss and vote on the issues presented. The board then has issued a final decision on the merits reflecting the vote at conference.
This concludes my written presentation. I would be happy to answer any questions that you might have.
The CHAIRMAN. Thank you very much. That was an absolutely excellent and very detailed outline and we very much appreciate it.
On page 7 of your statement, you outline the STB procedures for competing applications that are responsive to the original main application for railway merger. If one applicant is on unfriendly terms with the target company and other applicants are not, how does the STB ensure that the nonfriendly applicants have access to the necessary information to provide the kind of detail that STB regulations apparently require?
Mr. KONSCHNIK. Mr. Chairman, when this has occurred in the past, the Board has provided, or the ICC before the Board, provided an opportunity for a competing applicant or an inconsistent applicant to seek and obtain the necessary data to complete its application. To my knowledge this has not been a problem. Normally that information is readily obtained and provided. To the extent it is not, the Board can require and direct the party with the necessary information to make it available.
Page 30 PREV PAGE TOP OF DOC The CHAIRMAN. Thank you. You listed in your statement the very detailed operational data that each applicant has must provide about the proposed transaction. These included service patterns, including principal routes and anticipated equipment needs. I also understand that your regulations require information on the expected effect on employees and about the closure of any facilities.
After an applicant has applied that detailed plan to the agency and the application is approved, let us say, how does the STB ensure that the company that made these representations actually lives up to them?
And a related point: Can features of an applicant's operating plan be made legally binding by entering into so-called side agreements with shippers' communities and employees, et cetera?
Mr. KONSCHNIK. Mr. Chairman, to answer your last question first, quite often in some of our recent merger activity, recent merger decisions, the parties who agreed actually entered into contracts which would bind them to their assurances. In other instances the ICC or the Board has actually imposed those agreements as conditions to its approval of a merger.
In terms of how else we might ensure that representations are carried out, in recent cases what has occurred, there has been, in at least one proceeding, a reporting requirement imposed where parties are ordered to provide periodic reports of progress made in connection with providing service, providing competitive service. In other instances, the ICC in a number of proceedings has imposed or set up an oversight schedule for hearings at regular intervals off into the future. Other times there has been a less formal monitoring process where the agency staff would conduct some sort of monitoring to check after the fact to see that things were going as expected. And, lastly, we are always available for complaints and, sometimes if there is a problem, we hear first from a person who is adversely affected who will bring that to our attention.
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The CHAIRMAN. What is the recourse? What happens once you investigate it and you discover that company A indeed made representations to the Board, and then a year later you discover that indeed they have not fulfilled those representations to the Board, and it is very clear and flagrant? What recourse is there?
Mr. KONSCHNIK. Mr. Chairman, in my opinion, the Board would have the ability or the power to revisit that and to direct compliance or to seek some otherto impose some other appropriate remedy.
The CHAIRMAN. The merger?
Mr. KONSCHNIK. Well, I would not rule that out, but that is an extreme action.
The CHAIRMAN. Anything up to and including ruling out the merger.
Mr. KONSCHNIK. Speaking for myself, I think that is a possibility.
The CHAIRMAN. Good; I like your answer. Thank you.
Let me go further. You mentioned in your statement on page 2 that the projected income statementsI see my time is expired. I am going to require the 5-minute rule. I do have many more questions so everybody will get their chance. It is 5 minutes and then I will be back at you.
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The gentleman from Minnesota is recognized for 5 minutes.
Mr. OBERSTAR. Thank you, Mr. Chairman.
Mr. Konschnik, the law gives 16 months. The proposed schedule allows 4 months for evidence and 10 months to reach a final decision. How do you justify that shortened schedule?
Mr. KONSCHNIK. Congressman Oberstar, this is a proposal that we put out for public comment in order to come up with what we thought would be a realistic attempt at building a record and resolving the issues. In some of the recent proceedings there has been a lot of time up front for persons, and public entities to develop a position, and there has been much more time provided there.
From my perspective the sooner the evidence can be presented and analyzed, the more time my staff would have to look at that and to give good advice to the Board Members who have to make some very difficult decisions. And so I have to confess that I am an advocate of building in a little bit of additional time at the end for the necessary analysis that is critical in these important matters.
Mr. OBERSTAR. You would not necessarily be stuck with the 14 months? You could add further time?
Mr. KONSCHNIK. That is correct. We are soliciting public input. Depending on what that public input is, the Board Members will adopt a schedule, but this is a proposal.
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Mr. OBERSTAR. So I think in the UPSP merger, many of the parties, shippers, and unions complain that a compressed schedule for submission of evidence did not give them enough time to analyze the impact of the merger. And frankly, in reviewing that case I sympathize with their viewpoints. Very complex things like econometric models on these impacts, on merger impacts, just simply could not be accomplished because it was not enough time to do so. This is a very big merger, and I hope you will use all the time available rather than insist on some preordained, very limited time frame.
The ICC used administrative law judges from their own operation, from in-house administrative law judges. Now you do not have the funding for that under the STB structure. Is there a plan for the STB to appoint an administrative law judge, and if you do, will you follow the practice of getting such a person from another government agency?
Mr. KONSCHNIK. Yes, Congressman, we do expect to need an administrative law judge, to seek and obtain an administrative law judge. Judges have been most helpful in recent proceedings to handle discovery. We will seek and obtain a judge. The judge will be from another government agency, but I can't identify, I don't know at this point, where that judge will come from.
Mr. OBERSTAR. Both the ICC and the STB set precedents of sorts tonot to consider the possible impact of the pending merger proposal on future potential mergers or the possibility that this merger might engender by its outcome other mergers. It ought to be obvious from the history of the past 3 years that Burlington Northern-Sante Fe led almost directly to the Union Pacific-Southern Pacific merger. And if you go the next step now with CSX and Conrail, then surely Norfolk Southern, at least if I were in their shoes, I would be looking to find a partner or partners with whom to merge.
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Will the Board consider such impacts in its current deliberations?
Mr. KONSCHNIK. Congressman Oberstar, our policy statement that is applied is just as you described it, that normally, given that we cannot predict the future, we look at the present situation and we look back to see what that tells us in terms of whether this particular transaction before the Board ought to be approved or is consistent with the public interest.
To the extent that there is a position that we ought to be looking forward, I expect that that position can be raised in the context of an ongoing proceeding and that will be given consideration by the board. A consideration, I think, given the current precedents, current policy would be to apply what we know today rather than what might happen tomorrow. But those are legitimate points and will be given consideration.
The CHAIRMAN. The time of the gentlemen is expired. The distinguished chairwomanthe chairlady of the Railroad Subcommittee, Ms. Molinari.
Ms. MOLINARI. Thank you very much, Mr. Chairmanguy, Chairguy.
The CHAIRMAN. Chairperson.
Ms. MOLINARI. Thank you. I have just a few what I think will be brief questions. What type of STB approval, if any, is needed if one or more of the parties to the proposed merger is part of a holding company that also controls other types of transportation, such as trucking companies and barge lands. Do you take that into account at all or no?
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Mr. KONSCHNIK. Congresswoman Molinari, that law changed with the ICCTA and there is no longer regulatory approval required for those sorts of intermodal control transactions. So my understanding of the law is that we would not and that is not within our jurisdiction.
Ms. MOLINARI. So that doesn't enter into it at all.
With regard to the STP procedures for competing applications affecting the same target carrier, does it make any real difference who files first in the sequence of applications?
Mr. KONSCHNIK. No, it doesn't. Our procedures provide for a primary application. An inconsistent applicant has an equal opportunity to compete and bothor if there are more than two competing applications, allwould be considered under the statutory criteria and all have a fair chance.
Ms. MOLINARI. Okay. Also on page 10 of your statement you mention that commuter rail and passenger rail impacts of a proposed merger have to be covered in the operating data of the applicant. Is the STP empowered to look at, say, how much, say for example, Amtrak depends on the facilities of a particular railroad and what that railroad's record of on-time Amtrak performance has been in making a judgment of the merger application?
Mr. KONSCHNIK. Those are the kinds of issues that sometimes do come up in the context of a merger proceeding. In my opinion, the Board has the power to look at those. In terms of the weight to be given, it all depends, really, on the evidence presented and how it relates to the statutory criteria.
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Ms. MOLINARI. So under most circumstances you would look at that criteria initially, then make a decision to go further?
Mr. KONSCHNIK. In most instances we would look at it if parties bring it to our attention. If Amtrak or commuter users, rail users or commuter rail companies present this as an issue, the Board would look at that.
Ms. MOLINARI. Thank you very much. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you. Mr. Cummings.
Mr. CUMMINGS. Thank you, Mr. Chairman. Mr. Konschnik, let me go back to a question asked by the Chairman. The Chair asked what recourse does the Board have if a railroad does not fullfill its promises under a merger agreement. And in your answer to that you said that one of the possibilities was to undo the merger; is that correct?
Mr. KONSCHNIK. That is correct.
Mr. CUMMINGS. After practicing law for 20 years, I understand that undoing a merger is not really that practical, I don't think. But if it is, tell me. Let's say, for example, a company has been merged for 7 or 8 years, and you have been following it and maybe they haven't been doing what they are supposed to do. To undo it, it would seem like that would be kind of difficult, wouldn't it?
Page 37 PREV PAGE TOP OF DOC Mr. KONSCHNIK. It certainly would be, Congressman Cummings, and it is an extreme remedy. I think it is one that is there. It is not one I would count on happening, but if circumstances warrant it, I think it is possible and mergers can be undone.
Mr. CUMMINGS. That leads me to my next question. Can you give us the more likely remedy imposed as a result of something orsomeone disobeying an order or an agreement or what have you? Something that you all have imposed, that is.
Mr. KONSCHNIK. What is more likely to occur in the context of a complaint is that if a merger has been approved and consummated, a year later a party, a person, comes in to say that there is a problem here, that if the applicants to the merger had done what they said they were going to do, this wouldn't have occurred. This warrants the Board taking a second look, either imposing a new condition, modifying its prior decision in some way. We could do that.
It may mean that there areit might have to do with service to a particular area, and what kind of service was expected. I can't point to many times when this has occurred, or any at this point. It is normally a threat that is there, and it has caused most merger parties in the past to either be able to explain adequately that they have not departed from the approval as given or that there is no need to impose some adjustment.
But as recently at the UP-SP merger proposal and decision by the Board, the Board included language that said we want to ensure that there will be continuation of competition in the West, and we want reports on that. And if we find that there is not continuation of competition between the remaining railroad competitors in that region, we will look at this, we can look at this, and we can order divesture.
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Mr. CUMMINGS. Let me ask you this: It is my understanding that the STB decision supersedes antitrust law. That is a tremendous amount of power. And I am just wondering what criteria is applied when reviewing rail mergers to ensure that a competitive environment is maintained.
Mr. KONSCHNIK. Congressman, we look atthere is often in any merger proceeding, there is a lot of evidence on the effects of competition. That is looked at in the context of all the elements that the Board considers. As indicated earlier by the Chairman or Ranking Member, the Board has the authority to approve transactions that would otherwise present antitrust problems if overall it is in the public interest.
This is one of the factors to be considered. It is a very important factor to be considered, but we look at other things in terms of are there efficiencies, what are the effects on employees, what are the effects on transportation services provided nationally or in a region.
And so the antitrust aspects are considered. You are correct, the antitrust laws are preempted to the extent the Board approves a merger transaction. But given the appropriate consideration, the Board can approve a transaction. Normally if there are anti-competitive effects, the Board will instead of simply approving it, will approve with conditions to alleviate those problems.
Mr. CUMMINGS. Thank you, Mr. Chairman.
[The prepared statement of Mr. Cummings follows:]
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The CHAIRMAN. I thank the gentleman. The gentleman's time has expired. The gentleman from Tennessee, Mr. Duncan.
Mr. DUNCAN. Thank you, Mr. Chairman.
Mr. Konschnik, how important a factor is the price that is offered? What I am getting at, the Journal of Commerce a few days ago had a headline that said the big question in the bidding war for Conrail is how high can they go? And it says with no other rail purchase desirable, NS and CSX are waging a deadly battle, leading analysts to ponder would one of them pay more than it can afford. Is that something the Board takes into consideration and would that be an important factor?
Mr. KONSCHNIK. Congressman Duncan, the Board looks at proposals that are brought to us and looks at all factors that are presented. When we build a public record, we pay great attention to the issues that parties raise. In any given merger proceeding, that can be an issue.
It has not often been an issue in past mergers where there are allegations about the level of price paid, whether it is too much or too little.
But in the context of any given merger proceeding, we would look at those arguments.
I can't say here, and since this may be a matter that is before the Board, exactly how that weighing would go. But just from thein general terms, it would be viewed perhaps from two angles: One of fairness to shareholders, is this too little inis there something that is unfair to shareholders that is part of this. That remains part of our responsibility.
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On the other hand, is it too much? Is the merged entity going to have so much debt or will it have paid so much that it can't continue to provide good service to the public. That is another potential issue. These are things that could come up. I don't know whether they will or not.
Mr. DUNCAN. That is something I was wondering about also, whether you would look at whether one side, because of connections they might have, might be paying too little. So it can cut both ways, and I am pleased to hear you say you could look at it in either direction.
Because we can't get into the specifics of the merger, I don't have any other questions at this time.
The CHAIRMAN. I thank the gentleman.
Mr. BARCIA. Thank you very much, Mr. Chairman.
Mr. Konschnik, I have one simple question. In your testimony, you referred to the data that somebody made available to the Board in a transaction application. I have concerns about the availability of rail service in my district in Michigan. To what extent will the committee be able to continue to review the data on pending transactions so we may comment on its effect on our constituents, on the availability of rail service in our home districts across the country?
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Mr. KONSCHNIK. Congressman, most information is publicly available. There has been information in most past mergers that has been subject to a protective order, because it is commercially sensitive or confidential for one reason or another. My understanding is that that is available to outside counsel and outside consultants in the context of party representatives, and my understanding is also that information can and would be made available to Members of the Committee with appropriate assurances to protect the confidentiality of that.
Mr. BARCIA. Just one follow-up brief question, Mr. Chairman. If in the event of track closures, would that also be available on the impact of tract closures on our districts.
Mr. KONSCHNIK. Abandonments?
Mr. BARCIA. Yes.
Mr. KONSCHNIK. Any abandonment proposal would be considered part of a merger proceeding or separately. In abandonment cases, I don't know that I can recall an instance where any abandonment data was confidential. As far as I know, it has always been publicly available and I would expect it would be in any abandonment related to any possible merger that might grow out of an acquisition or proposed acquisition of Conrail.
The CHAIRMAN. I thank the gentleman.
Page 42 PREV PAGE TOP OF DOC Mrs. Fowler.
Mrs. FOWLER. Thank you, Mr. Chairman. I appreciate your having this hearing today. I just have one question.
Mr. Konschnik, you mentioned in your statement on page 11 that the projected income statements found by each applicant have to cover at least the first 3 years after the transaction occurs. Is this also true of the operating plan and the detailed data in that plan about routes, services, facilities and employees? Does that cover that also?
Mr. KONSCHNIK. Congresswoman Fowler, there isn't a specific time limit, but what applicants are required to do and what they do in the merger proceedings is provide operating data for year 1, year 2, year 3, often more than that. It is not limited to 1 or 2 or 3 years and if the claim by merger applicants is that they will achieve all efficiencies in 2 years, for example, they might only need to provide operating data for 2 years. But normally, in order to present the best possible case and to present all of the information that they see as good and as supportive to the Board's approval of their application, they would come forward with operating and other data so that the Board could assess all of that to analyze whether or not this merger will produce all the public benefits that the applicants claim will be produced.
Mrs. FOWLER. They say you do have a requirement on the income statements for 3 years but on the operating it can be
Mr. KONSCHNIK. It is not specific. It normally is what would come in, but there is no specific year data requirement for operating data.
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Mrs. FOWLER. That wasn't clear from your statement. Thank you.
The CHAIRMAN. Thank you.
Mr. CLEMENT. Thank you, Mr. Chairman. Pleasure having you here today and your testimony, and I would like my statement to be accepted into the record as if read.
As you know, there are many people in this country that are very concerned about mergers and acquisitions. Many people in this country are concerned about the centralization of power and money and the lack of competition, and the lack of opportunity for various companies to provide services, period. And therefore, there was a lot of opposition previously to mergers and acquisitions, and I am sure you have already heard an outcry as well in this particular case.
Being a former Chairman of the Tennessee Public Service Commission, I have worked on instances such as this, and we would always consider service in a rate case, and what I want to know, how much emphasis is truly going to be placed on competition or the lack of competition and concern for the customers and employees of the various companies that are going to be affected by this so-called merger and acquisition?
Mr. KONSCHNIK. Congressman, the record is always developed by the positions of the parties. We seldom lack for strong positions and data from all persons who are affected or expect to be affected. The Board staff and Board Members do take a hard look at the effect on shippers, the effect on regions, the effect on competition. It is a major, major element in all of these merger proceedings, and I expect it would be in any proceeding that comes before us in connection with Conrail.
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Mr. CLEMENT. Let me ask you this about rail passenger service. There are a lot of people in this country that want to see rail passenger service, and I live in an area in Tennessee and in our region of the country we are truly underserved when it comes to rail passenger service. Is this an opportunity for our part of the country and for the United States to have more rail passenger service than they have now, knowing that a lot of freight railroads place a very, very low priority on rail passenger service because they make it very clear that is not where we make our money, that is not where we make our profits and we could care less about the communities and communities of interest when it comes to rail passenger service. That is not our problem. I have had various railroads tell me this, and it will bewill this particular Board take that into consideration when we talk about this merger and acquisition?
Mr. KONSCHNIK. Congressman Clement, the Board does consider the effect on passenger service. Again, as I have indicated in response to other questions, it is hard to say now what record will be developed, what information will come in regarding specific passenger services provided in various parts of a Conrail or CSX or Norfolk Southern system.
The effect on passenger service and the interest in passenger service by merger applicants will be considered. But in terms of what offers or proposals the applicants will make on that, that may be a key provision here in terms of what the applicants propose by way of improved passenger service. The Board would make a determination considering that in part.
I would say that in most rail merger proceedings of the past 5 or 10 years, the effect on passenger service has been considered. It has not been a major element in those decisions. What the future would hold, I am not sure.
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Mr. CLEMENT. I understand two applications can be made for mergers with the STB
The CHAIRMAN. If I may intercede, the gentleman's time has expired. We are under the five-minute rule and the gentleman will be recognized in the next round.
[Mr. Clement's prepared statement follows:]
The CHAIRMAN. Mr. Ewing.
Mr. EWING. Thank you, Mr. Chairman. Is there a possibility that your Board won't approve any merger in this situation?
Mr. KONSCHNIK. Yes, Congressman, that is a possibility. We look at the statute, and we could deny all proposals, whether it is one, two or more.
Mr. EWING. Is there any kind of a master plan for rail transportation in America that you look at when considering mergers?
Mr. KONSCHNIK. We do not. The Board reviews mergers that the marketplace brings before us or that applicants bring before us. The Board's role is not one of creating the national rail network or system, so we do not.
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Mr. EWING. Does that exist anywhere that you know?
Mr. KONSCHNIK. Not that I know, Congressman.
Mr. EWING. So that would be a policy, if at all, to be set by this Congress or some future Congress?
Mr. KONSCHNIK. Yes, sir, or I believe from some of thefrom the Staggers Act, or the 4R Act, there may be some responsibilities with the Secretary of Transportation I don't know that it has an activist role, but there is more of a role there for the Secretary of Transportation than for the Surface Transportation Board on that point.
Mr. EWING. You know of no plan that the department has either?
Mr. KONSCHNIK. That is correct, yes, sir.
Mr. EWING. Will you be considering what the different communities, and, of course, in a merger this large, there are an enormous number of communities and servers out there, they have the opportunity to submit for your consideration comments?
Mr. KONSCHNIK. Yes, they do, Congressman Ewing. They have that opportunity, and we always get a lot of public comments from individuals and from cities and towns and anyone who is affected by a proposed merger.
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Mr. EWING. I guess my concern, not having any experiences that some of my colleagues have sitting on boards, the trend in railroad mergers in America to mega railroads, very large railroads, I wonder if we are really looking into the future as we make these decisions approving these mergers as to where we are going to be with our transportation system down the road 5 years, 10 years or even longer and what really happens if theyif these mergers don't work out and we get in trouble. Because we have had a number of major mergers in the last few years, I think it has got to be of concern to the little businessperson around this country and to communities who depend on the rail for service.
The CHAIRMAN. I thank the gentleman.
Mr. EWING. Thank you, Mr. Chairman.
Ms. NORTON. No questions at this time, Mr. Chairman.
The CHAIRMAN. I thank the gentlewoman.
Mr. Bachus. Mr. Bachus.
Mr. BACHUS. Oh, I am sorry. You mentioned competitiveness and that under the statute
Page 48 PREV PAGE TOP OF DOC The CHAIRMAN. Speak into the microphone or turn on your microphone, please. We can't hear you.
Mr. BACHUS. Is it on now? Okay.
You mention competitiveness and level of service, and that under the statute, it has to be preserved at existing levels. How about increased levels of competition? Do you ever require increased levels of competition?
Let me give you an example. Let's say there is a city where one railroad has a monopoly in service. Do you ever go beyond preserving the existing competition and require that there is increased competition?
Mr. KONSCHNIK. Well, every merger proposal is different so the Board takes a fresh look at each one. What you raise as a question, I think, is answered in part by the Board's recent decision on UPSP because, as a matter of fact, what the Board did there in analyzing an agreement, a proposed agreement by the merger applicants, Union Pacific and Southern Pacific, with the BNSF to provide access tovia trackage rights and other means overparts of either the Union Pacific or Southern Pacific system. The Board approved the merger and imposed or accepted that offer of access to all of these other facilities but didn't stop there. The Board actually augmented that somewhat by providing some additional opportunities for BNSF to provide full competitive service in regions that were possibly going to suffer some loss of competition.
But the Board can look at and has looked at what is the state of competition over all before the transaction, what is the state after the transaction. It may not be specifically a point analysis. It may be a traffic flow analysis to make sure there is a sound competitor there to the merger applicants, and so I think that shows that that is a possibility.
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Mr. BACHUS. You mentioned that you have the ability to grant a particular railroad trackage right. How about a subdivision of existing trackage rights? Could you subdivide it between two different railroads?
Mr. KONSCHNIK. Yes. It depends on the context. It is kind of hard to look at that outside of a given factual situation. But assuming you have one of the merger applicants that has trackage rights over a line of railroad, the Board could, as a condition to approval of a merger, require that merger applicant to provide access to what rights it has over a line to a third party in order to provide competition.
Now there can be a tricky question in terms of who actually owns the rights over which the merger applicant already has trackage rights. If it is a non-applicant entity, the Board's authority is somewhat limited there because if we approve a merger, we can condition approval on the applicant's making things available, but normally would not require that of some third party who has nothing to do with this transaction other than the fact that they may own the property. We might not be able to reach that through the merger.
However, there are other remedies available by means of terminal trackage rights, terminal access, and in some instances there may be a contract that provides for this sort of sharing of facilities, in any event. So the actual terms of the contract may be relevant to the question as well.
The CHAIRMAN. I think the gentleman's time has expired.
Page 50 PREV PAGE TOP OF DOC Ms. Brown.
Ms. BROWN. Thank you, Mr. Chairman, and this is just a question on your opinion. It doesn't have to be factual. Can you tell me whether or not you think that a merger will be beneficial as far as the public interest is concerned, fix charges and railroad carrier employees, taking all of those factors into consideration, do you think that a merger will benefit the riding public when we consider cost conscious and right sizing and downsizing and all of these other elements?
Mr. KONSCHNIK. Congresswoman, I am not sure I understand the question. You say any merger orbecause I can't talk about any specific merger.
Ms. BROWN. In general, what we are discussing today but not specifically
Mr. KONSCHNIK. If the question is, can I see that a merger can be consistent with the public interest
Ms. BROWN. Yes.
Mr. KONSCHNIK. given consideration of employee effects and so forth, yes, clearly yes. But that is not based on any specific look at any particular set of facts. I think that the Board has found in the past, the ICC found in the past, and I think those decisions were correct, that those mergers were consistent with the public interest. All of those elements were considered and all of the relevant criteria were looked at. So I think mergers are approvable, but whether any particular merger should be approved, I don't know.
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Ms. BROWN. Thank you. That is the answer to my question.
The CHAIRMAN. I thank the gentlewoman.
Mr. LATOURETTE. Thank you, Mr. Chairman. And I have one question, and I will try to sort it out the best I can. It is complicated for me.
The ICC Termination Act ended the ICC's authority over certain stock transactions dealing with railroads. But what it did maintain, to my understanding, is the requirement that there be an agreement or assent by the shareholders of a to-be-merged railroad to be merged. And that law maintains its force, does it not?
Mr. KONSCHNIK. Yes, sir.
Mr. LATOURETTE. The question that I have and you cited in your testimony, the Sante Fe example, and my understanding in that case is you had a bid on Burlington Northern and the shareholders voted that they would accept that offer and Union Pacific withdrew their courting of the railroad after that bid took place. Has there been a history in the Board, an example where the shareholders of a corporation, of the railroad, are at odds with its board of directors or are at odds with the rules and regulations and laws governing the Board, are at conflict with the State's rules, regulations and corporate procedures? Has that situation been encountered by the Board in previous merger requests or is that too complicated to answer?
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Mr. KONSCHNIK. Some of those elements were present in the context of the bankruptcy proceeding in the mid-eighties involving the Milwaukee Road where among the four competing applications was an application by the shareholders of the Milwaukee estate. There were three railroad competitors and the shareholders ultimatethe ICC's responsibility there was to report to the bankruptcy court in terms of what applications merited approval and which ones didn't.
The ICC, at that point, actually approved two of the proposals, two applications, and denied two. One of the ones denied was the one by the shareholders. I don't know if that answers your question.
Mr. LATOURETTE. It does. Again, for my edification as we have further hearings, does the Board have the authority to approve a merger if the majority or the appropriate levelif a State has a different requirement for what a majority is? If a majority of shareholders don't consent to that merger, can the Board still approve that merger?
Mr. KONSCHNIK. The Board's approval is permissive, and it is possibleaside from any State laws, it is possible for the Board to consider an application, to find a merger consistent with the public interest and to approve it. It doesn't necessarily mean that the shareholders have toif there is necessary shareholder approval that is needed, this doesn't force that down on to shareholders. The shareholders still have, under the lawit is kind of like you need two things. One, you need approval from the Board and, two, you need shareholder approval, however that is defined.
Page 53 PREV PAGE TOP OF DOC And so my interpretation of that is that you could have that shareholder approval or vote before or after. The timing can be key here as well, because most Board proceedings go forward with knowing what shareholders have voted and what proposal is before the Board.
But in an instance where you have the potential for inconsistent applications, you might have one applicant that has some contractual arrangement or has shareholder approval. The Board could go through its review of several applications, and, let's say, the Board disapproved whatever proposal had shareholder approval, it blocks that, but it doesn't say necessarily what the next step is. It may be if there was some other proposal that was approved, by the Board then the parties with approval could seek whatever necessary approval they need from shareholders.
Mr. LATOURETTE. Thank you. Thank you, Mr. Chairman.
The CHAIRMAN. I thank the gentleman. The Chair would note all Members may submit their questions in writing, and I am sure that you would be pleased to attempt to answer them.
A couple of questions I would like to deal with. I want to be sure I understood your answers to Mr. Bachus. First, with regard to ordering the subdivision of an existing trackage rights, I understand that you say the STB can order the subdivision of trackage rights between two or more carriers, even though the track itself is owned by a third party.
Mr. KONSCHNIK. Mr. Chairman, what Imy opinion is that the Board can, but in terms of how it does, it all depends. First, if the entity that has trackage rights over a line of another railroad is a merger applicant, the Board can always condition approval of a merger on that applicant making whatever rights it has available to someone, to a third party or third railroad. There can be limitations on that in terms of what the contract may say between the owner and that merger applicant that has a right.
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And it may depend on whether the owner is a voluntary participant or if the owner has not appeared in the proceeding at all. The Board has limited authority over a non-applicant. So if the owner is a non-applicant that has had nothing to do with the proceeding, the Board might not be able to condition approval on that non-applicant, letting someone else
The CHAIRMAN. Would it be fair to say that if the owner of the tracks appears before the Board and either supported or opposed the position, this would carry weight with the Board?
Mr. KONSCHNIK. Yes, it would, Mr. Chairman.
The CHAIRMAN. Okay. I also want to make sure I understand another question Mr. Bachus was asking you. We talked about can the STB go beyond merely preserving the existing level of competition? In other words, can you look at a situation and say, in the existing circumstances, there isn't enough competition there and as part of this merger, we require that the competition over a particular line or lines be enhanced as follows?
Mr. KONSCHNIK. Mr. Chairman, I believe that the focus for the Board is on the level of competition that exists before and after a proposed merger. And I don't see that as limited to point analysis. It can be regional analysis, it can be traffic flow analysis and, indeed, in the example I was attempting to use in terms of the UP-SP, I think what the Board did there was attempt to ensure that there would be a real competitive presence in the form of BN-SF in the West to compete with UP-SP. And under those circumstances, I believe the Board can and indeed has probably increased the potential for and provided for increased competition in the West.
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The CHAIRMAN. I am interested in learning about the level of detail that the applicants are required to provide in their operating plans. Is it required that the applicant describe in its plans for each facility,each major facility that is. Or can applicants simply claim benefits for closing a certain number of facilities without identifying specifically which ones?
Mr. KONSCHNIK. If an applicant wants to get credits that accrue from closings or other changes, it is in their best interest to present as much detail as possible so the Board can consider that in weighing whether or not the proposal ought to be approved.
There are not specific requirements, other than that all plans ought to be divulged and should be given consideration. If in any given proceeding, aside from the required data, the Board finds that it needs further information from an applicant, that can be ordered.
The CHAIRMAN. Another question. The effects on the employees are a major consideration in any railroad merger, and I gather from your regulations you require information that is included in any merger application. I see my time is up, but can you briefly outline what the STB requires in the way of employee protection for personnel that are adversely affected by the merger?
Mr. KONSCHNIK. The Board requires that the New York Dock conditions be imposed unless there is some demonstration that some greater level of protection be imposed. New York Dock provides basically up to 6 years of protection in terms of separation allowances or displacement allowances.
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The CHAIRMAN. Would it be within the Board's right to require something other than New York Dock?
Mr. KONSCHNIK. Not less than, Mr. Chairman.
The CHAIRMAN. Not less than, but it could require more than?
Mr. KONSCHNIK. It could.
The CHAIRMAN. Thank you very much.
Mr. OBERSTAR. Thank you, Mr. Chairman. I think that last series of questions was a very important series and I appreciate, Mr. Konschnik, your responses. You are obviously well-prepared and well-informed. You have got a big job ahead of you here.
In merger proposals of this type, as we have learned from past experience, it has become practice for applicants to recruit dozens, maybe even hundreds of shippers to support the merger. But when you look more closely at those shippers, you find that most of them are ones who had monopoly service prior to the merger and would continue to have monopoly service after the merger. So they are unlikely to bear any adverse consequence from the merger.
How does the Board go about getting other viewpoints? You just sit there passively and accept whatever comes your way? Do you seek out the views of those who would suffer loss of competition, and then when you get their testimony give that testimony greater weight than those who were just captive shippers before and continue to be captive shippers after?
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Mr. KONSCHNIK. Congressman, I would hesitate to describe what we do as passively sitting there waiting for it to unfold. We provide an opportunity for interested persons, including shippers, to make their views known. From my experience, they do that. There are, I am sure, in any merger or proposal some persons who file in support or opposition who may have less of a stake in the outcome than others. But those who truly have a stake, have beenhave not been shy.
They have come forward. They have stated their positions. Whether there are some out there who have not, I don't know.
I cannot guarantee that anyone who is expecting to be affected or might be affected will come forward, but there is an opportunity. We normally have quite a few shippers who come in and raise questions. Some file responsive applications, some state their opposition.
Mr. OBERSTAR. Neither the staff nor the Board feel responsibility to reach out and seek out participants in the process who have not contributed? You wait for them to come forward on their own?
Mr. KONSCHNIK. Congressman Oberstar, I wouldn't rule it out, and in some proceedings in the past the Board has actually, or the ICC before the Board, has held local hearings; for example, for people in the various
Mr. OBERSTAR. If you looked at this docket as you go through the process and do the evaluation, you find that most of the shippers in a hypothetical case are captive shippers, those who were monopolywho had monopoly service prior and would continue to do so after the merger, and you found that the preponderance of evidence was from that category, you would then take it upon yourselves as Board or staff to seek out those who would be adversely affected by loss of competition? Do I interpret your answer to mean that?
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Mr. KONSCHNIK. I am having some difficulty understanding your question.
Mr. OBERSTAR. My question is, if the preponderance of evidenceif the preponderance of evidence in the case comes from those who are captive shippers, and you clearly see this, would the Board then feel a responsibility to seek out witnesses or testimony from those shippers who would suffer the loss of competition?
Mr. KONSCHNIK. But if I amCongressman, if I understand your question, you are saying if most of those who have appeared are captive and have stated their position, would we
Mr. OBERSTAR. They wouldit wouldn't make any difference to them whether the merger goes forward or not if they are captive shippers before or afterwards?
Mr. KONSCHNIK. I am sorry. I am a little slow. Sorry. The Board has not in general gone out to search for parties in proceedings. That is a possibility. I can't speak for what the Board might do in a future proceeding involving these railroads, but the normal procedure is that we provide the opportunity, and those who have a position come before us and state that position. We try to make that easy.
Admittedly, it sometimes is a quick time schedule because the statute doesn't provide a lot of time, and sometimes we have adopted a schedule that doesn't go out to the full range of what the statute will permit. Within the time frames, we believe we have a system where persons can represent their positions. I would not rule out the possibility of taking moresome more activist type of approach, but I certainly can't commit to that.
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The CHAIRMAN. Thank you, gentleman. The gentleman's time is expired. Does anybody else seek recognition?
Mr. BACHUS. I want to talk to you for a second about proxy fights if you have any shareholder dispute. You mention in the Burlington Northern-UP case you suspended the procedure for a period of time. Is that the normal response to a proxy fight or a shareholder dispute?
Mr. KONSCHNIK. No, sir, Congressman. It is not the norm. In that proceeding, the Commission, the ICC, then felt it would be wise toand in response to requests of interested parties, that the schedule be held up.
But normally in a proxy fight, the fighting occurs before an application is filed, and I would expect that that would be the situation in most instances.
If for some reason an application, or two or more, might be filed, and then there is a proxy fight, I would hope that we would not need to hold up a schedule for very long, for there isn't a lot of room in there. I would think that the Board would take whatever action is appropriate. From my perspective, a staff person's point of view with the clock running, I would like to be able to build a record and meet our deadlines.
Mr. BACHUS. Once you accept the application, it is 15 months or 16?
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Mr. KONSCHNIK. 15 from the acceptance of the application. A year for developing the record and 90 days to decide it.
Mr. BACHUS. Does a suspension increase that period of time or the clock keeps running?
Mr. KONSCHNIK. The clock keeps running, unfortunately. Again, I should say this is my point of view. If for some reason we got into that situation, I would reserve whatever opportunity the Board members might have in appropriate circumstances to try to buy additional time if that is appropriate. But my opinion is and, in the way we have looked at it in the past, the clock continues to run, and we still need to meet that deadline.
Mr. BACHUS. What if one of the competing railroads gained control of the target company's Board of trustees or gained control of the target corporation? Let's say before an application was approvednot approved, but before someonethe Surface Transportation Board granted the right to merge?
Mr. KONSCHNIK. The only way they could do that isboth competitors here have mentioned the use of a voting trust. It is possible for shares to be placed or corporations to be placed into a voting trust to insulate someone who is seeking Board approval for control from a violation of law while the case is pending, but assuming you have a voting trust set up, and one entity has gained controluses a voting trust and is not in control of the operating carrier but has the stockthe application review process would go forward but the game is not over. The Board still needs to render a decision, and the Board could decide to approve the application of the one that did not have the shares in hand or in the trust, and to disapprove the other. It could be either way.
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Mr. BACHUS. Even though, let's say, A got control of the target company's stock
Mr. KONSCHNIK. That is right.
Mr. BACHUS. You could still say A doesn't get it, B gets it?
Mr. KONSCHNIK. We wouldn't say B gets it. We would say A is disapproved, B is approved if they can now go out and do their deal. What happened in the Southern Pacific-Sante Fe transaction in 1986 or 1987, there actually had been a merger of the holding companies that took place. Ultimately the ICC denied the merger application and divesture was required, so the Southern Pacific had to be sold off to another entity subject to Commission approval at that time.
Mr. BACHUS. Let's say you grant the right of another railroad to merge with another railroad. It is my understanding that once there is an approved transaction, that the railroad acquiring the other railroad is exempt from State laws, antitrust, there is a displacement of the State laws. Would that include a State law that dealt with corporate structure or shareholder rights?
Mr. KONSCHNIK. Well, there is preemption of State and Federal antitrust law and preemption, to some extent, of State shareholder appraisal rights. Whether or not other State laws are preempted might very well depend on whether it was necessary to preempt those laws in order to effectuate the merger and act on the authority granted.
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The CHAIRMAN. The time of the gentlemen has expired.
Mr. BACHUS. Can I just saysuppose you found it was necessary to effect a merger. Do you feel like the Board has the right to displace a State law dealing with corporate structure or shareholder rights?
Mr. KONSCHNIK. I can speak in favor of the Board's preemption authority under those circumstances. In terms of the specifics, I have to confess I haven't given any real personal analysis to how that would work or whether that would be appropriate, but I think the Board does have the power to displace State laws that stand in the way of mergers being consummated.
The CHAIRMAN. I thank the gentleman. No further questions. We thank you for your testimony and now I recognize Ms. Brown.
Ms. BROWN. I have one question quick. How does the Board reviewwhat consideration does the Board give to a friendly merger as opposed to a hostile merger or takeover?
Mr. KONSCHNIK. Congresswoman Brown, the Board looks at both the same. We apply the statutory criteria to the proposal that is before the Board, and the Board would assess those elements in terms of how this affects transportation, how it affects employees, how it affects competition, et cetera, without regard to whether it is friendly or unfriendly it is really on equal footing.
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Ms. BROWN. Okay. Thank you.
The CHAIRMAN. I thank you.
Mr. OBERSTAR. Thank you, Mr. Chairman. Following up on my previous exchange, Mr. Konschnik, there are many shippers we have learned in the past, who are reliant on a railroad for a particular kind of service and who further, in a merger situation, fear that they would suffer retaliation if they took a public position in opposition to a proposed merger. What does the Board do? Are there procedures at the Board's disposition to protect such shippers from possible retaliation, to allow them to submit views without suffering retaliation?
Mr. KONSCHNIK. Congressman, I am not aware of any procedures, and I am not sure, as tempting as it sounds, that it would be a good idea, in part because we have on-the-record proceedingsany argument that is presented by an entity needs to be seen by opponents of that position so they can respond.
So if there were to be some opportunity for a shipper who is concerned about this, about potential retaliation, how that could be given appropriate consideration and weight without giving the offending railroad, if you will, the opportunity to address that without providing the identity, I just don't know how that works. I justthat is one that I don't see a ready solution to. I would hope and expect that parties who have a position would be willing to state them publicly.
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Mr. OBERSTAR. So would I, but we all know what the situation in the real world is, and they are very powerful pressures that may seem subtle but are not so subtle in reality.
But if I take your previous comment to heart that the Board would, in fact, if it saw an absence of balanced viewpoint, seek out additional testimony or evidence on the effective merger, then maybe this problem can be ironed out.
I do want to come back to a point I made at the outset and that is that I hoped that the Board would, in addition to all of the factors that it is considering, take into account the effect of this or any proposed merger on possible future mergers. That is, you consolidate power, economic power in one entity. There will be consequences in the marketplace. There will be effects upon other railroads and other shippers who are dependent upon other railroads. I think the Board must take into account the effect of its decision in this case upon other potential mergers that can further restrict competition. That is just a dictum from my side.
Mr. KONSCHNIK. Mr. Chairman, may I just respond? There was another thought I had in terms of how shippers might be able to get a position to the Board without necessarily revealing identity, and that would be through shipper organizations. We have a number of organizations that would represent shippers collectively or certain types of shippers, and that is always a mechanism that is available for putting forth those points of views.
The CHAIRMAN. I thank the gentleman very much for his testimony. All members may submit written questions. Again, I thank you very much and call upon Mr. Scammel, the majority counsel to our Railroad Subcommittee to take the chair for his testimony.
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Mr. Scammel, I don't believe we have any further opening statements, so you may proceed at will. Fire at will.
TESTIMONY OF GLENN SCAMMEL, COUNSEL, SUBCOMMITTEE ON RAILROADS, COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
Mr. SCAMMEL. Thank you, Mr. Chairman. I am the majority counsel, as you indicated, for the Railroad Subcommittee. My task here today is essentially to report on our search so far for laws that are uniquely applicable to Conrail. Most of these date back to the 1970s and early 1980s, when Conrail was either being established or on its way to obtaining a sound financial footing.
I want to stress at the outset that that list that has been distributed to you, the various laws, is not exhaustive. We, for example, did not include laws that had essentially one-time applicability for a particular transaction; for example, the transfer of the Northeast Corridor from Conrail to Amtrak. Rather, we were looking for laws that, should some transaction involving Conrail be approved, would still be on the books and may present issues of interpretation or application when a merger occurs. So with that, let me go briefly down the list of the ones that you have received copies of.
[The information follows:]
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Mr. SCAMMEL. I am sure you will be glad to know I intend to spare the committee a dramatic reading of the U.S. Code, and instead I am going to briefly summarize what each of these does. The first one on the list is a provision from the 3R Act in 1973. That is a preemption of State law, among other things on crew size, that pertains to Conrail and affects any State in the Northeast region. This is a departure from the normal rule of preemption for safety-related matters such as crew size. That is specified in title 49 of section 20106, which is the general standard for allowing States to regulate to the extent that they do not interfere with Federal rail safety regulations.
The second on the list is a protection against secondary picketing. This comes from the Northeast Rail Service Act of 1981. As the committee probably knows, under the Railway Labor Act, which applies only to railroads and airlines, persons who are engaged in a collective bargaining dispute are permitted to boycott or picket other Railway Labor Act employers who are not directly involved in the dispute. This is in contrast, of course, to the rules under the NLRB and the other Federal labor laws.
This provision here makes a specific exception only for Conrail. It says, in essence, that if Conrail, for example, has a strike, its employees may not utilize the normal secondary picketing option against a commuter railroad and, conversely, if a commuter railroad goes on strike, its employees may not secondarily picket Conrail. I should point out that in all of these provisions, since they named Conrail by name, there is one overarching issue when a merger goes through: Who is Conrail? That is, if Conrail has disappeared through some sort of merger, how is the interpreter going to apply the statutes in general?
Page 67 PREV PAGE TOP OF DOC The third on the list is the so-called flowback labor protection benefits. I will not try to go through the details of these. The committee dealt with this briefly in the context of the Amtrak bill. But in essence this was meant to set up a system by which people who had seniority both on Conrail and Amtrak have the right to switch between those two employers under certain conditions. Again this is specific to Conrail by name.
The fourth one is a remainder still on the books from the 3R Act which specifiesthis is title 45, section 741 (b)that Conrail has to have either its headquarters, its principal office, or the principal office of its main railroad operating subsidiary in Philadelphia. Again there may be some interpretive issue as to what that would mean after a merger took place.
The fifth on the list, and this is by far the longest provision, is one in the Privatization Act of 1986 which contained a long and detailed recipe for the composition of the Conrail board of directors. It also set up a process by which the government-appointed board of directors that were originally in charge of Conrail were to be phased out as part of the privatization. Therefore, most of this section is going to be irrelevant.
However, at the end of the section there is still general language which is not limited in time. I think this is paragraph (b) at the bottom of page 5, which could be read to limit whether a employee can also be a director except under certain limited circumstances. So again there may be an ambiguity as to how this would apply in the future to the persons who sought to be members of the board of directors.
Number 6 is perhaps the strangest of all. I understand this came about because Conrail was trying to acquire a particular bridge, but the way the statute is written, section 708 of the Staggers Act, it declares Conrail to be a Federal agency solely for purposes of obtaining surplus military property from the Department of Army. Presumably this was not intended to have a perpetual lifetime, but the way the statute is written it is still in effect.
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Finally, number 7 is the provision in title 49, section 24905(a) which makes Conrail, by name, a member of the Northeast Corridor Coordination Board to basically oversee dealings with Amtrak and the coordination of traffic and safety issues on the Northeast Corridor. That is of continuing applicability, and again it is one that names Conrail by name.
I think with this brief overview it should be clear that there are a number of statutory loose ends that the committee may wish to look at here, and we may well discover others in our research.
The CHAIRMAN. Thank you, Mr. Scammel.
With regard to the Conrail board of directors, could you explain some of the potential problems or the ambiguities that this provision may produce that remain in force after another railroad merges with Conrail? And also, is there any tangible evidence that this provision represents any kind of a problem for a future merger transaction?
Mr. SCAMMEL. Yes, Mr. Chairman; let me answer the second part of that first.
This entire section would have been repealed by the Amtrak bill that this committee and the House approved last year and that was included in the Amtrak bill at Conrail's request. So in terms of evidence that there is a possibility of a problem here, I would point to that.
Page 69 PREV PAGE TOP OF DOC The CHAIRMAN. So Conrail requested that this provision be removed, so it must have some meaning.
Mr. SCAMMEL. That is right, and it was done in the House-passed Amtrak bill but, as you know, the Senate never acted upon our bill and so the Amtrak reform did not become law.
As to the first part of your question, the continuing effect, as I mentioned, this last subparagraph limits persons who may be appointed directors if they are employees of the corporation. This could come into conflict with the earlier parts of the same statute, which at least originally made certain executives of Conrail members of the board on an ex officio basis. In other words, they automatically became a member of the board by virtue of being the CEO or the COO.
Therefore, there could be some ambiguity here as to how to interpret that. In addition, since this entire provision is written specifically for Conrail and any merger or most mergers contemplate a singleeventually a single board of directorsthere may be other problems in trying to integrate the Conrail board and structure with another company if this is still on the books.
The CHAIRMAN. Thank you.
With regard to secondary picketing, how might this cause problems in any potential merger?
Page 70 PREV PAGE TOP OF DOC Mr. SCAMMEL. Well, it could come up almost at any time during or after the merger, but the central problem is one of defining whether the statute still has effect and who it affects, because it is written specifically to apply only to ''Conrail''. If a merger occurs, for example, there could be an argument first that the statute does not cover anybody because Conrail has ceased to exist. There could be an argument that the statute now applies to the whole corporation into whom Conrail has been merged, meaning a much larger territory than present Conrail, or presumably there could be an intermediate argument that this rule, special rule about secondary picketing, only applies to routes or facilities that used to belong to Conrail.
So there is definitely potential for litigation here.
The CHAIRMAN. With regard to the Amtrak law that makes Conrail automatically a member of the Northeast Corridor Coordinating Committee, how does this play out if there is a merger?
Mr. SCAMMEL. Well, since it names Conrail by name and does not allow for other freight railroads to participate, depending upon what arrangements were eventually made for freight service in the merger, you could end up in a situation where either the freight railroadsdepending on how this statute were interpretedwere cut out of participating in a committee altogether, or some other participant, either a successor or partner or whatever of Conrail, could also be left out of participating in the process.
The CHAIRMAN. With regard to flowback, which is one of the provisions you identified in the rights of the employees, their seniority on both Conrail and Amtrak systems, how would this be affected?
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Mr. SCAMMEL. In this area this is a matter, of course, of labor management dealings, and we have some tangible track record on this as well, in that last year when the committee considered the Amtrak bill. There was an agreement reached between Conrail and its labor unions to propose a revision of the flowback provision identified earlier, and that of course did not happen because the Amtrak bill was not enacted. So we do have indications that the current setup may not necessarily fit with the current operation of Conrail, and that could be exacerbated if a merger was added on top of that.
The CHAIRMAN. With respect to one of the remaining laws on the books after the merger, if the merged company took some action that could be considered a violation of that law, how would that have to be resolved?
Mr. SCAMMEL. Well, in most cases, we are probably looking at an agency or court proceeding, or both. We might very well be setting up a situation where there is going to have to be litigation to settle a lot of these issues of statutory interpretation.
The CHAIRMAN. Thank you.
Mr. OBERSTAR. Thank you, Mr. Chairman.
Counsel, in your response to one of Mr. Shuster's questions, you said certain provisions might not apply because there could be a finding that Conrail has ceased to exist. Are there no provisions in the Conrail Act or in the ICC termination that provide for standard language that I have seen in many such situations, or its successors or assigns?
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Mr. SCAMMEL. You are right. There is a concept of corporate successorship and this happens, for example, when two merged companies come together and, for example, their labor contracts come with them as participants in that merger. But the problem here is that the laws we have listed in this list here are usually addressed either to a certain type of conduct or a certain type of corporate structure.
So it is not just that you are inheriting a property right or a contract from your predecessor company. That is the kind of thing that you say is usually covered by general rules of interpretation. Here you are dealing with things like a prohibition on secondary picketing, for example, that has no counterpart anywhere else; and yet if the company, Conrail, no longer exists, you don't have a ready definition of how you are going to apply that statute once they have merged with somebody else.
Mr. OBERSTAR. Does that concept then apply to point 4 in your summary paper here about the Conrail headquarters locationthat, quote, the principal office of the corporation or of its principal railroad operating subsidy shall be located in Philadelphia, in the Commonwealth of Pennsylvania?
Mr. SCAMMEL. Right. Certainly one way to finesse this would be to have the successor claim that since it was going to have its headquarters in Philadelphia, it doesn't matter whether it was called Conrail or something else. But on the other hand, if at some point in time the merged corporation were to not want to locate its principal headquarters there, then we may again have a legal-type issue over whether this is still of continuing force and effect once Conrail and the corporation has ceased to exist and therefore presumably ceased to have a principal office.
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Mr. OBERSTAR. Well, if I were an official of the city of Philadelphia, or the Governor of Pennsylvania, I would take a look at what happened at Burlington Northern when they did their merger prior to the Santa Fe, and those headquarters jobs in St. Paul just migrated south.
Mr. SCAMMEL. Your point is well taken.
Mr. OBERSTAR. It doesn't look like very solid protection for certain jobs, and much prestige of having corporate headquarters in your community, if that just can be abrogated by this transaction. A principal element of good faith in the original creation of Conrail would disappear. You cautioned us that ex parte communications would be prohibited, but theand that is wise counselbut the ICC Termination Act in section 11324(f) said that rail merger cases, quote, shall not be considered an adjudication, closed quote; and, further quote, ex parte communications shall be permitted in rail merger proceedings, closed quote, as long as the record is put in the docket. Are these contradictory statements?
Mr. SCAMMEL. No, they are not. The section you are referring to was a change made to the merger statute in the ICC Termination Act. It basically provides foreven the phrase ''ex parte'' is used for optional unilateral communications with one of the board members. The complaint in our ICC hearings by those who were advocating Justice Department merger jurisdiction was that the old ICC process did not allow for informal consultation while the merger was pending. So the way the new law reads, a party to a merger pending may, if one of the STB members chooses to employ this option, come in and discuss potential problem areas in the merger. However, that discussion has to in turn be memorialized and be made part of the record so that another party knows what went on and may respond to it. So it is a limited exception to the normal Administrative Procedure Act rules about ex parte communication. It would not apply though to, for example, situations wherelike today, where the board staff is appearing here, because this is something that is personal to the board members.
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Mr. OBERSTAR. Quick follow-up, Mr. Chairman. What is your counsel, then, to committee members, since from what I heard from this morning from a lot of members who have interest in communicating to the Boardshould they not; should they do so under certain circumstances; or should they have no reservation at all, because their views would be public views made a part of the record?
Mr. SCAMMEL. We are in a gray area as far as what is a proceeding, because I understand the STB internally treats a proceeding as being in existence the moment one of those notices of intent has been filed. And that has already happened because CSX has filedI guess both parties have filed a notice of intent, even though the record itself won't be generated, presumably, until February or so.
I would say the safest approach is to try toif you are going to try to talk about the merits of the proposal with the agencyis to try to do it in an on-the-record fashion. I mean, the standard procedures I have encountered, members have utilized when a merger is pending and when they are affected, is to communicate with the board by letter or whatever, and in some cases I have even seen instances where members have gone in and presented their own arguments at the oral arguments in front of the ICC.
So I think as long as you are playing on the record, there is really a wide range of member options to make their views known.
Mr. OBERSTAR. Thank you. I think that is very important to understand.
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The CHAIRMAN. I thank the gentleman.
Any other members have any questions? Mr. Bachus.
Mr. BACHUS. Thank you, Mr. Chairman.
Mr. Scammel, in the earlier panel we addressed some questions to them about the effect on employees and the closing of facilities. And you may have heard the response that there was no requirement, at least as I heard it, that they specify which facilities were being closed or the effect on employees.
You know, how would we determine the effect on employees if we didn't know what their plans were for termination of a certain number of employees or foreclosing of a specific facility, especially if the railroad is claiming a benefit from consolidation?
Mr. SCAMMEL. I think they are required, if I remember the regulations correctly, they are required toin the application, the applicant must state the anticipated effect on employees.
I think the issue that Mr. Konschnik was discussing was, assuming that you are going to have certain consolidations and closure of facilities, how general or how specific does the applicant have to be in his operating plan, and so forth, on those issues. And as I understood his response, it was that you have to identify the savings and so forth, but how specific you get is essentially a function of the individual record and what kind of response there is to the application.
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So I suppose if you assume an applicant who is overly general, the logical way to take that party to task would be for another party, whether it is the employees or somebody else, to come in and say, we need more specific information. So then the issue would be joined in front of the board and they could require additional follow-up from the applicant.
Mr. BACHUS. On these Conrail specific statutes that you have given us a list of, does the Surface Transportation Boardit could displace these statutes if it found it necessary for the merger?
Mr. SCAMMEL. That is my understanding. I mean, this has never come up before, but the way the merger statute reads as, Mr. Konschnik indicated, it says that once approval is granted, that displaces other Federal or State law to the extent necessary to carry out the transactions. So as you say, the legal issue would be, are these standing in the way of carrying out the transaction?
Mr. BACHUS. How could the current requirements for flowback rights of Conrail employees, how could that bewhy would that need to be changed for effective
Mr. SCAMMEL. In and of itself, it may not be. It may be possible to function under that provision, even with a successor of Conrail. What I was pointing out is that in that case, unlike these others, we actually had a joint labor-management proposal to supersede the current flowback rules with a different flowback rule.
Page 77 PREV PAGE TOP OF DOC Mr. BACHUS. It would be appropriate to ask the railroads, pursuing railroads, what their intention was.
Mr. SCAMMEL. Presumably the employees would also have an interest in that, yes.
Mr. BACHUS. How about the secondary picketing, how would this be a problem post merger?
Mr. SCAMMEL. Well, you have, as I indicated earlier, you have a scope problem in figuring out what the law applies to, because if you have, let us say, a commuter railroad strike, and there is a threat of secondary picketing against other freight railroadsand as I discussed generally that is legal in the Railway Labor Act. Well, then the issue could come up, well, there is this protection here for Conrail. Then the question is, who is Conrail, and geographically what is Conrail after a merger? Is it the lines that used to be Conrail? Is it Conrail's corporate successor? That is not really clear.
Mr. BACHUS. I have no further questions.
The CHAIRMAN. I thank the gentleman. I just have a few final questions.
Mr. CLEMENT. Mr. Chairman, excuse me, I have got some questions.
Page 78 PREV PAGE TOP OF DOC The CHAIRMAN. Oh, excuse me. I am happy to recognize the gentleman.
Mr. CLEMENT. Mr. Scammel, do the terms of the Conrail-CSX merger plan conflict with the Pennsylvania law intended to block takeovers of companies like Conrail that are headquartered in this State?
Mr. SCAMMEL. I don't pretend to be an expert on the Pennsylvania law, but my understanding is, just from the news accounts and so forth that I have read, that is under litigation right now in the Federal district court in Pennsylvania. The contention by Norfolk Southern is that Conrail is utilizing the Pennsylvania statute to proffer what Norfolk Southern claims is an inferior offer for the shareholders. The Pennsylvania statute, as I understand it, is a sort of most-favored-nation or most-favored-shareholder rule. That is, once a person has acquired 20 percent of the company stock, he has to offer the same price to all the rest of the shareholders, and that is seen as a deterrent to anything other than the uniform takeover prices for the stock.
As to whether it does or does not conflict with the Federal scheme of regulation, I would say probably both the judge in Pennsylvania and the STB are better equipped to answer that than I am. And if I understood Mr. Konschnik earlier, he was saying that, in general, not with reference to Pennsylvania but just in general, these State shareholder laws have to be looked at on a case-by-case basis and the STB would have to, if the issue came to them, would have to say this particular law does get displaced in order to effectuate the merger or this particular law over here does not. So I really don't have a ready answer for you on that.
Page 79 PREV PAGE TOP OF DOC Mr. CLEMENT. It is my understanding that Conrail has been exempted from having to receive ICC regulatory approval for the expedited abandonment of unprofitable lines. Would this same exemption continue if the merger were approved?
Mr. SCAMMEL. You are correct that they did have a very expedited process. The reason we didn't include that in our list was that that authority has ended. There was a specific time granted to Conrail to invoke this expedited process where they did not have to go through the normal ICC abandonment procedures, and my understanding is that window of time is expired. So even though the law is on the books, as I understand it, Conrail would not, or its successor would not be in a position to utilize that anymore.
Mr. CLEMENT. Mr. Scammel, are there any federal laws which require the Conrail board to give fiduciary consideration to the Norfolk Southern offer?
Mr. SCAMMEL. My guess is, and this is only as a layman, that you are into SEC territory here, which I don't pretend to know about, because generally things like alleged misrepresentations to shareholders, things of that sort, violations of fiduciary duty, are governed both by the SEC's statutes and rules that protect shareholders against misrepresentation and, derivatively in some cases, by State law. I honestly don't know how that would play out in this particular situation.
Mr. CLEMENT. Thank you.
The CHAIRMAN. I thank the gentleman, and I just have a few final questions, Mr. Scammel.
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First, many years ago, I was involved in U.S. Steel, and U.S. Steel had their corporate headquarters at that time in New York City. There probably were a total of 20 percent in New York City and several thousand people in the U.S. Steel Building in Pittsburgh.
Now, if one of the companies is successful in a merger and they make a commitment that the headquarters may be located in a certain city, to what extent are there assurances, particularly with this Conrail language that you referred to, that this may simply be a skeleton force of headquarters or may continue to be essentially the same kind of headquarters that now exists in Philadelphia?
Mr. SCAMMEL. I think that is a legitimate concern, Mr. Chairman, because you could get, as you say, a nominal principal office, you could put principal office on the door, but it wouldn't necessarily be in substance the principal office.
I think this points out and relates back to something that Mr. Konschnik was discussing with the committee about commitments and the merger process; that it is far more prudent for a party that has an interest, whether it is in the location of a headquarters or whatever aspect of the carrier, to try to get a binding commitment from the relevant party that spells out what those obligations are than to rely upon a very general representation that really is only going to be enforceable by complaining later to the STB that somebody didn't live up to their original bargain.
The CHAIRMAN. You outlined several of the ambiguities that would occur as a result of the statute as it relates uniquely to Conrail. Can these be cured by congressional action, by legislation; and, if so, might this be a proper course for this committee?
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Mr. SCAMMEL. I would say in most instances the only way you could alter these is by a new statute, a new law. And as far as when or how the committee could go about that, it would have a wide range of options. It could go into in it while the merger is still pending. It could do so after a merger is decided upon. That would be within its discretion.
The CHAIRMAN. Are you saying this committee could act to cure the ambiguities at any point leading up to before the merger or after the merger?
Mr. SCAMMEL. That is right.
The CHAIRMAN. Thank you very much. No further questions. This hearing stands adjourned.
[Whereupon, at 12:28 p.m., the committee was adjourned.]