[Senate Hearing 105-514]
[From the U.S. Government Publishing Office]
S. Hrg. 105-514
CONRAIL MERGER IMPLICATIONS
=======================================================================
HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
__________
SPECIAL HEARING
__________
Printed for the use of the Committee on Appropriations
Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate
______
U.S. GOVERNMENT PRINTING OFFICE
47-739 cc WASHINGTON : 1998
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
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ISBN 0-16-057123-5
COMMITTEE ON APPROPRIATIONS
TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington DALE BUMPERS, Arkansas
MITCH McCONNELL, Kentucky FRANK R. LAUTENBERG, New Jersey
CONRAD BURNS, Montana TOM HARKIN, Iowa
RICHARD C. SHELBY, Alabama BARBARA A. MIKULSKI, Maryland
JUDD GREGG, New Hampshire HARRY REID, Nevada
ROBERT F. BENNETT, Utah HERB KOHL, Wisconsin
BEN NIGHTHORSE CAMPBELL, Colorado PATTY MURRAY, Washington
LARRY CRAIG, Idaho BYRON DORGAN, North Dakota
LAUCH FAIRCLOTH, North Carolina BARBARA BOXER, California
KAY BAILEY HUTCHISON, Texas
Steven J. Cortese, Staff Director
Lisa Sutherland, Deputy Staff Director
James H. English, Minority Staff Director
------
Subcommittee on Transportation and Related Agencies
RICHARD C. SHELBY, Alabama, Chairman
PETE V. DOMENICI, New Mexico FRANK R. LAUTENBERG, New Jersey
ARLEN SPECTER, Pennsylvania ROBERT C. BYRD, West Virginia
CHRISTOPHER S. BOND, Missouri BARBARA A. MIKULSKI, Maryland
SLADE GORTON, Washington HARRY REID, Nevada
ROBERT F. BENNETT, Utah HERB KOHL, Wisconsin
LAUCH FAIRCLOTH, North Carolina PATTY MURRAY, Washington
TED STEVENS, Alaska
ex officio
Professional Staff
Wally Burnett
Anne M. Miano
Joyce C. Rose
Peter Rogoff (Minority)
C O N T E N T S
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Panel 1
Page
Opening remarks of Senator Shelby................................ 1
Statement of Senator Lautenberg.................................. 2
Statement of Senator Specter..................................... 4
Statement of Senator Mikulski.................................... 5
Statement of Senator Warner...................................... 6
Prepared statement........................................... 8
NEXTEA program................................................... 8
Statement of Governor Parris N. Glendening....................... 9
Prepared statement........................................... 11
Statement of Hon. Ed Rendell, mayor, city of Philadelphia........ 15
Statement of Hon. Bradley L. Mallory, secretary, Commonwealth of
Pennsylvania Department of Transportation...................... 17
Prepared statement........................................... 19
Statement of Hon. John J. Haley, Jr., secretary, State of New
Jersey Department of Transportation............................ 21
Prepared statement........................................... 22
Intention of two carriers to provide competition................. 25
Letter from Senator Specter...................................... 29
Letter from John W. Snow, chairman, president, and chief
executive officer, CSX Corp.................................... 29
Prepared statement of Senator Sarbanes........................... 30
Letter from Tom Murphy, mayor, city of Pittsburgh................ 34
Prepared statement of George Ellis, president, Pennsylvania Coal
Associa- tion.................................................. 34
Prepared statement of Paul D. Gilmore, president, Delaware &
Hudson Railway Co.............................................. 37
Statement of John W. Snow, chairman and CEO, CSX Corp............ 39
Prepared statement........................................... 40
Statement of David R. Goode, chairman and CEO, Norfolk Southern
Corp........................................................... 41
Prepared statement........................................... 43
Statement of Timothy T. O'Toole, senior vice president, law and
government affairs, Consolidated Rail Corp. (Conrail).......... 44
Prepared statement........................................... 45
Positive side of Conrail acquisition............................. 45
Panel 2
Statement of Linda J. Morgan, Chair, Surface Transportation Board 59
Prepared statement........................................... 61
Enforcement mechanisms........................................... 65
Panel 3
Statement of Hugh H. Welsh, Port Authority of New York/New Jersey 71
Prepared statement........................................... 73
Statement of Robert Scardelletti, international president,
Transportation Communications Union............................ 74
Prepared statement........................................... 76
Statement of Robert L. Evans, chairman, Railroad Transportation
Committee, National Industrial Transportation League........... 79
Prepared statement........................................... 81
Statement of George D. Warrington, President, Northeast corridor,
National Railroad Passenger Corporation (Amtrak)............... 83
Prepared statement........................................... 85
Statement of Michael Hawbaker, Glen O. Hawbaker, Inc., State
College, PA.................................................... 89
Material Submitted Subsequent to Conclusion of Hearing
Prepared statement of C. Alan Walker, president and chief
executive officer, Bradford Coal Co., Inc...................... 95
Prepared statement of Michael J. Sabia, senior vice president and
chief financial officer, and Gerald K. Davies, senior vice
president, marketing, Canadian National Railway Co............. 96
CONRAIL MERGER IMPLICATIONS
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THURSDAY, MARCH 20, 1997
U.S. Senate,
Subcommittee on Transportation
and Related Agencies,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 10:05 a.m., in room SD-192, Dirksen
Senate Office Building, Hon. Richard C. Shelby (chairman)
presiding.
Present: Senators Shelby, Specter, Lautenberg, and
Mikulski.
Also present: Senator Warner.
Panel 1
NONDEPARTMENTAL WITNESSES
STATEMENT OF HON. PARRIS GLENDENING, GOVERNOR, STATE OF
MARYLAND
Opening Remarks of Senator Shelby
Senator Shelby. The committee will come to order.
At today's hearing we will explore some of the issues
likely to be raised by the proposed acquisition of the
Consolidated Rail Corporation, better known as Conrail, by the
CSX Corp. and the Norfolk Southern Corp.
I scheduled this hearing at the request of Senator Specter,
who has strong concerns about the possible impact of this
proposal on the Commonwealth of Pennsylvania. Several other
States represented on this subcommittee might be affected as
well, such as my State of Alabama, Maryland, Missouri, North
Carolina, West Virginia, and so forth, and I expect that our
ranking member, Senator Lautenberg, will discuss his views on
the proposal's possible implications for New Jersey.
Congress created Conrail in 1973, following the
bankruptcies of seven private railroads. The Federal Government
began operating Conrail on April 1, 1976, and invested over $7
billion in taxpayers' funds to cover Conrail's capital and
operating needs.
In 1986, Congress voted to authorize a public stock
offering of the Federal Government's holdings of Conrail stock.
Ten years ago, in the spring of 1987, Conrail was
privatized in a process that produced $1.95 billion for the
Federal Government, $1.65 billion from a stock sale, and $300
million from the Conrail excess cash.
It is interesting to note that the current asking price for
Conrail is about $10.5 billion, an increase in value of 438
percent over the past 10 years.
Conrail is now the largest freight railroad in the
Northeast, operating an 11,000-mile rail freight network that
serves 12 States, the District of Columbia, and the Province of
Quebec. Conrail's 1995 revenue was $3.7 billion.
On October 15, 1996, Conrail and CSX announced a merger of
equals, that would have created a powerful strategic alliance
between the two railroads. The agreement called for Conrail's
shareholders to receive a combination of cash and CSX stock
value of $8.4 billion, or $92.50 per Conrail share.
Norfolk Southern then made a competing all-cash offer to
buy Conrail at a higher price, and Conrail shareholders
supported this approach.
This month, on March 3, Conrail's board approved a revised
agreement with CSX that would enable shareholders to receive
about $10.5 billion, or $115 per Conrail share, and permit CSX
and Norfolk Southern to negotiate a splitting up of the Conrail
system.
I understand that CSX and Norfolk Southern are now working
out the framework of a joint acquisition deal that will
basically partition the Conrail system. Once completed, the
details of this agreement will have to be approved by the
Surface Transportation Board [STB], which is the successor
agency to the Interstate Commerce Commission.
We will hear from Linda Morgan, Chairman of STB, later this
morning. The subcommittee will also be interested in hearing
how the STB reviews applications to approve railroad mergers,
both in terms of policy and in procedure.
At this point in time, none of us know the details of how
this merger proposal will be structured, when it will be filed
with the STB, or what a final package might contain in order to
satisfy the STB. Hopefully, once it is finalized and submitted
to STB, the end product will be an improved freight rail system
for the entire eastern and southeastern region.
I understand that significant rail service improvements are
possible by a streamlined, single-line service from the South
into Eastern markets. In my State of Alabama, and other States
in the South, this may present a unique opportunity to access
new markets faster, more efficiently, and without adding
congestion to all overcrowded interstate highways.
More competition and better quality service should enhance
rail traffic moving through the region and provide valuable
benefit to consumers. I look forward to hearing from our
witnesses today, and at this time I am going to recognize
Senator Lautenberg, the ranking member.
STATEMENT OF SENATOR LAUTENBERG
Senator Lautenberg. Thanks very much, Mr. Chairman. The
issue of rail competition in the Eastern United States is
critical to the economy of New Jersey and the entire mid-
Atlantic and northeast region, so I look forward to hearing
from our witnesses this morning.
I want to hear them discuss their views on the possible
purchase of Conrail by CSX, and the division of Conrail's
assets between CSX and Norfolk Southern.
As we hear this testimony, however, it must be remembered
that the precise impacts of this proposed purchase of Conrail
will very much depend on how its assets are divided.
Negotiations on this issue, I understand, are still ongoing.
To date, no applications or operating plans have been filed
with the Surface Transportation Board. As such, the testimony
today may lack some details, and in this deal, the devil is
obviously going to be in the details, so we cannot rush to
judgment.
There is a great deal of enthusiasm in my State regarding
the potential reintroduction of real rail competition into the
region, as well as the Ports of New York and New Jersey. Our
Newark, NJ, Port is the largest container port in the Eastern
United States, and it is one of the largest container ports in
the world; however, it has been served almost exclusively by
only one railroad, Conrail, since that railroad was created in
1976.
While the Federal Government sought to create a competitive
environment in the port at that time, these efforts went
unfulfilled. I have followed the issue closely. Since that time
I have been very active on the issue, not only as a Senator,
but I was formerly a commissioner of the Port Authority of New
York and New Jersey.
Back in 1984, 1985, I strenuously opposed efforts by
Norfolk Southern to purchase Conrail at that time. Not only was
the railroad being sold I thought too cheaply, but coming from
the corporate world, I was thinking of the public market place,
and thank goodness we did it.
The proposed arrangement appeared to encourage, at that
time, the bleeding of cargo and jobs away from the ports of New
York and New Jersey, and the arrangement did nothing to
encourage competition within the port.
Thirteen years later we find that our long-awaited goal of
competition in the port may finally be fulfilled. Competition
in the port holds the promise of more jobs, due to greater rail
traffic at more competitive grades. But in order for that to
happen, we must have serious competition that provides shippers
with a real choice.
CSX and Norfolk Southern are discussing a bold plan, with
the intention of going toe to toe in very promising markets,
and I want to encourage the division of Conrail's assets to
maximize competition.
As a highway safety advocate, I am also encouraged by the
prospect of moving some of our truck traffic off of our
interstates and major highways. It will cut congestion, reduce
pollution, and save lives; however, our railroads do not have
unlimited capacity. More than any other State, New Jersey's
commuter rail system is integrally linked with our existing
freight network.
Currently, just under 14,000 commuters a day travel over
lines owned and operated by Conrail. Conrail also operates over
lines owned by New Jersey Transit, that serve 11,500 commuters
a day.
New Jersey Transit is conducting studies and preliminary
design work on several new potential commuter rail lines, and
many of these new lines would be required to operate over
freight-owned railroad lines.
So I am interested in the impact of expanded freight
traffic on New Jersey's mass transit system, its commuters, and
its environment. In planning the division of Conrail's assets,
transit opportunities must be fully viewed. We accomplish very
little by moving truck traffic onto the rails, only to force
transit commuters back on the highways.
Finally, I want to raise the issue of rail safety. Recent
press reports indicate that there are plans being developed to
dramatically increase freight operations over Amtrak's
Northeast corridor. In 1987, I visited Chase, MD, the scene of
a crash between a Conrail freight train and an Amtrak passenger
train. That gruesome sight was one that no one could easily
forget. The Rail Safety Act of 1988 included provisions that I
advocated, that were intended to minimize freight traffic on
the Northeast corridor.
Now, many of the Nation's freight railroads argue that
high-speed passenger rail and freight traffic do not mix. If
that is true, then the question has to be asked: How can we
expand freight operations over the Northeast corridor at the
same time that Amtrak is procuring new high-speed train sets
for 150-mile-an-hour service over the corridor?
Moreover, Amtrak and the commuter railroads expect to
increase use of the corridor in future years. Train services
cannot be expanded over our Nation's busiest passenger rail
corridor if it will risk lives.
I feel that I must say that we can make the accommodations
that are necessary, and, again, it very much depends on how
committed the freight rail service is to participating fully
with passenger service. I am told by experts that they can
coexist, and I hope that is the case. I thank you very much,
Mr. Chairman, for the opportunity.
Senator Shelby. Senator Specter.
STATEMENT OF SENATOR SPECTER
Senator Specter. Thank you very much, Mr. Chairman, and
thank you for convening this hearing so promptly, within 2
weeks of the renegotiation of the Conrail-CSX merger, with the
new arrangement between CSX and Norfolk Southern.
I have been in this hearing room on many occasions in the
past one and one-half decades, and I have never seen it
standing-room-only, with so many corporate executives and so
many corporate counsel here. This is a unique hearing in this
Appropriations Committee hearing room.
I think that it is very important for the Congress to take
a very close look as part of our oversight function as to what
is happening in this transaction.
The Congress has been intimately familiar with Conrail,
with the events of the seventies, and the efforts of the
administration to sell Conrail to Norfolk Southern, which was a
hard-fought battle, involving very detailed hearings of the
Antitrust Subcommittee of the Judiciary. We finally stopped
that sale. They said Conrail could not survive as an
independent entity, and it did, and it flourished.
The issues here are of enormous importance nationally, in
terms of access to competitive shipping rates, and of extreme
importance to my own State, Pennsylvania. When we take a look
at just a few of the statistics, they are sort of overwhelming.
More than 8,100 Pennsylvania residents are employed by
Conrail. Conrail employees live in 64 of Pennsylvania's 67
counties, a tremendous economic impact on the State as a whole,
and especially heavy in Pittsburgh, Altoona, Harrisburg, and
Philadelphia.
When you take a look at the $31 million in State and local
taxes paid in Pennsylvania, it is obviously a major, major
impact, and $7 million in the Philadelphia wage tax alone, a
figure that makes our distinguished Mayor Rendell sit up and
take notice.
What I am looking for here is to monitor very closely to
see what the impact will be. When you have a contract between
Conrail and CSX, and then there is a new arrangement, there is
no one left that might appear to enforce Conrail's rights under
the original agreement. The shareholders were delighted with
the very high price, $115 a share paid, but I think it is
important to know that under the applicable law there are other
parties and interests with standing. The employees of Conrail
have standing because under the Federal law, the employees have
to be considered by the Surface Transportation Board, and under
the Pennsylvania Takeover Act, the Pennsylvania communities
have standing.
It may well be that this transaction will work out to the
benefit of the Nation and to Pennsylvania, and I think that has
to be determined.
But we have to note that these rail mergers, in the entire
history of Conrail, in the entire history of the industry, have
been very rough and tumble, and if we play by the Marquis of
Queensberry rules, that is fine, but I think it is very
important that the Congress and the Senators, whose States have
vital interests here, be very much on top of it, as it moves
through the process.
I have had a chance to discuss this matter at length with
David Levan, the CEO of Conrail, and John Snow, the CEO of CSX,
and David Goode, the CEO of Norfolk Southern, and it may be
that there will be increased facilities in many parts of
Pennsylvania, in a terminal in Harrisburg, or in competition in
Philadelphia. And it may be that part of Conrail will be
maintained, that there may be some joint operations, and if
that were to follow, that would be a very, very good signal.
So I welcome these hearings, Mr. Chairman, and I thank you
for the suggestion which you made yesterday of field hearings
in Pennsylvania, which I would like to see move forward perhaps
as early as April 7, consistent with the schedules that the
subcommittee has.
Thank you very much.
Senator Shelby. Senator Mikulski, I know you just arrived.
Do you have an opening statement?
Senator Mikulski. I sure do, Mr. Chairman.
Senator Shelby. OK. Sure. You will be recognized.
STATEMENT OF SENATOR MIKULSKI
Senator Mikulski. I like to think of myself as the little
engine that could, for Maryland, and so, therefore, I am
delighted to be at this hearing, and I would----
Senator Shelby. Senator, the little engine that has done so
many things, not just could.
Senator Mikulski. Well, you are very kind, Mr. Chairman.
First of all, I am going to thank you personally for conducting
this hearing, and allowing it to go forth. For those of us in
the Northeast corridor, particularly, the Boston to Carolina,
going through New York, New Jersey, Maryland, and Virginia,
there is nothing more important than railroads.
Railroads built our communities, we are railroad-dependent
communities, and, of course, in my own State, we are very much
concerned about the entire job issue.
Know this, that ultimately we, in Maryland, are very much
concerned about certain basic issues, the first and foremost is
jobs, and we want to know what this merger means in terms of
jobs, what does it mean to the great Port of Baltimore, to be
able to have competitive railroads, so that our port is
thriving, and we are just not the largest barge port or pond in
the corridor.
Second, we are concerned about jobs in western Maryland, up
in the Cumberland area, where really, the railroads are so
crucial to the viability of that community. We are interested
in what the railroad means to the Delmarva Peninsula, so that
we have rail service, to be able to bring our grain in, so that
we can have our vibrant poultry industry.
In addition to that, we are, of course, very much concerned
about what this rail merger could have as an impact on
passenger line, the so-called Marc train, which allows people
to live in Maryland and commute to jobs primarily here in the
District of Columbia.
And last, but not at all least, we are concerned about what
type of infrastructure improvements need to be made. So, Mr.
Chairman, as the hearing goes forth, I will look forward to
discussing this with my Governor, who has led the way in a task
force with his secretary of transportation, Mr. Winstead, on
analyzing these issues and what we need, and I look forward to
hearing from our railroad tycoons what their responses are to
how we are going to generate jobs, keep jobs in Maryland, while
they are trying to sort out how they can generate profits for
shareholders.
We would hope that those two would be mutually compatible,
and then if that occurs, I will be very happy to be the little
engine that could. Thank you very much.
Senator Shelby. We are joined today by our colleague,
Senator Warner. If you have any statement you want to make,
your written statement will be made part of the record in its
entirety. You may proceed.
STATEMENT OF SENATOR WARNER
Senator Warner. Thank you, Mr. Chairman, and members of the
committee.
I agree that there is a role for the Congress to review
these proposals, but it is the depth and the time that will be
consumed in that review which really, I think, is at issue.
I strongly support the efforts by these two private sector
entities and others to make this happen. I support the
proposal, because I believe that by opening the Northeast to
rail competition, for the first time in several decades, it
will yield substantial benefits to American business and
consumers throughout our country, not just here in the East.
Ensuring a strong rail network through the East has been a
long-sought goal, and a matter that I know, Mr. Chairman, has
been of interest to you and other members of this panel. The
fact that a solution is being developed through the private
sector initiative, without governmental intervention, I think
is most notable.
Today, CSX and Norfolk Southern are engaged in negotiation
to divide Conrail's operation, giving both rail systems access
to the Northeast. The final plan is not yet completed, but I
believe the negotiations will produce and enhance competition,
especially in the area north of my State, Virginia.
Two strong railroads serving industry and agriculture east
of the Mississippi ultimately will benefit shippers and
consumers alike throughout the region and the Nation.
I say to you, my good friend, Senator Specter, I keenly
share your concern for the long history of rail in your State,
but as you said, in reference to the Marquis of Queensberry,
this is a one-rail market that this group behind us are
involved in every day, and those marketplaces beyond our shares
do not play with the Marquis of Queensberry rules.
It is tough, and I think it is incumbent upon us as a
Congress to do everything we can to encourage the private
sector and industry in their ability to meet that competition.
In Virginia we have a particular interest in the process,
and have paid great attention to the unfolding events in the
last 5 months involving Conrail, which, as you know, is the
overwhelming rail presence in the Northeast.
CSX and Norfolk Southern provide service throughout the
Mid-Atlantic and Southeast. Both Norfolk Southern and CSX are
corporate citizens of the Commonwealth, combined, 8,000
employees, 3,300 miles of rails in our State.
The thousands of businesses and industries in my State that
depend on our railroads, including coal, paper, chemicals, and,
indeed, I must say, critically, national defense, are looking
for faster, more efficient, direct service to the vast consumer
markets in the Northeast.
Our ports want to strengthen the global reach through
improved north-south intermodal networks. The solution that is
being devised, I believe, promises to satisfy these goals. I
would hope that we in Congress would allow these discussions to
come to completion. Congress must not attempt, I say to my
distinguished colleagues, to write this operating plan.
Mr. Chairman, I would like to call attention to the fact
that Congress wisely has created an independent quasi-judicial
agency to evaluate the public interest and transactions of this
nature, the Surface Transportation Board.
The STB must provide a forum for all interests, including
employees, communities, and shippers, affected by this
transaction, to be heard. With that venue available to us, I
believe there is an appropriate process in place to address the
valid concerns of the many in this Northeast corridor, and
elsewhere in the country.
That concludes my statement, it's short and to the point.
Prepared Statement
Senator Shelby. Thank you, Senator Warner. We will insert
your complete statement in the record.
[The statement follows:]
Prepared Statement of Senator Warner
Mr. Chairman, thank you for permitting me to appear before
the Subcommittee today to address an issue which is very
important to the Commonwealth of Virginia.
The economic and public policy considerations posed by
pending changes in the nation's rail system certainly warrant
review, and I welcome the opportunity to share my thoughts with
you on these important matters.
I am pleased to be here to endorse the restructuring of the
Northeast rail system that is underway. I support the proposal
because I believe that, by opening the Northeast to rail
competition for the first time in several decades, it will
yield substantial benefits to American businesses and
consumers.
Ensuring a strong rail network throughout the East has been
a long-sought goal and a matter that I know, Mr. Chairman, has
been of interest to you. The fact that a solution is being
developed through a private sector initiative, without
government intervention, I find particularly noteworthy.
Today, CSX and Norfolk Southern are engaged in talks to
divide Conrail's operations giving both rail systems access
into the Northeast. While the final plan is not yet completed,
I believe that the negotiations will produce enhanced
competition--especially in the area north of Virginia. Two
strong railroads serving industry and agriculture East of the
Mississippi ultimately will benefit shippers and consumers
alike throughout the region and the nation.
We, in Virginia, have a particular interest in this process
and have paid great attention to the unfolding events of the
last five months involving Conrail, which, as you know, is the
overwhelming rail presence in the Northeast; and CSX and
Norfolk Southern which provide service throughout the mid-
Atlantic and Southeast.
Both Norfolk Southern and CSX are corporate citizens of the
Commonwealth, with 8,000 employees and 3,300 miles of rail
lines in the state. The thousands of businesses and industries
in Virginia that depend on our railroads--including coal, paper
and chemicals--are looking for faster, more efficient, direct
rail service into the vast consumer markets of the Northeast.
Our ports want to strengthen their global reach through
improved north-south intermodal networks. The solution that is
being devised, I believe, promises to satisfy those goals. I
would hope that we in Congress would allow those discussions to
come to completion, and not attempt to write the operating plan
ourselves.
Mr. Chairman, I would like to call attention to the fact
that Congress wisely has created an independent, quasi-judicial
agency to evaluate the public interest in transactions of this
nature, the Surface Transportation Board. The STB must provide
a forum for all interests--including employees, communities and
shippers--affected by this transaction to be heard. With that
venue available to us, I believe that there is an appropriate
process in place to address the valid concerns that can be
expected from an undertaking of this magnitude.
NEXTEA Program
Senator Shelby. Senator Warner, we appreciate you taking
your time to testify today, we know it is very important to
you, as it is to us. I know how busy you are working on the
reauthorization of the bill for the ISTEA, or as the
administration has called it, NEXTEA program.
While you are here, do you have any comments for us on how
the NEXTEA program might affect rail freight and intermodal
shipments? Do you anticipate that the new legislation will
cover these areas?
Senator Warner. Mr. Chairman, the anticipated legislation
will cover these areas, but I assure you, time does not permit
me the opportunity to cover that together with your colleagues.
I assure you that I will work carefully.
The distinguished Senator to your right is on our
committee, takes a very active interest, and we have gone toe
to toe, and I hope on this one we go arm and arm. Thank you
very much.
Senator Shelby. Any other questions?
Senator Lautenberg.
Senator Lautenberg. I have no questions of our colleague.
We share a common interest. We are linked together by the
rails, and we want to make sure that it is operating.
We are willing to compete on a fair and equitable basis, we
need the tools to do it with, and this could very well provide
it.
Senator Shelby. Senator Specter.
Senator Specter. I do not know if I have any questions, but
a comment or two. On the Marquis of Queensberry rules, I quite
agree with you that they do not play that way overseas, but I
just want to be sure that domestically we do serve the Marquis
of Queensberry rules.
I do not want to get into the ring with these contestants
or pugilists, but there may be some appropriate stance for a
referee.
A kind of microscope, which I think is appropriate for us
to put on here may have some impact as to how it will all be
worked out, but it has to be worked out between the parties, I
agree with you totally. And it is very much a national picture;
it is a matter for America's consumers, principally, as they
benefit from reduced shipping rates, but the employees and the
communities also have standing.
I am fascinated to know that Norfolk Southern has worked
out an arrangement with Pennsylvania Power & Light Co., which
benefits the upstate coal producers of Pennsylvania, and that
was worked out in the context of the litigation, which was
underway, so that the parties here are very sensitive to the
communities, and to the employees, and to the consumers, and I
would like to keep that sensitivity at a high level. Thank you.
Senator Shelby. Senator Mikulski.
Senator Mikulski. I have no questions of Senator Warner. I
do not know about the Marquis of Queensberry rules, but I do
know that I will not throw in the towel when it comes to
competing with Norfolk.
Senator Shelby. Senator Warner, thank you.
Senator Warner. Thank you very much, Mr. Chairman.
Senator Shelby. Our next panel, we will have the Honorable
Parris Glendening, Governor of the State of Maryland, the
Honorable Ed Rendell, Mayor of the city of Philadelphia, the
Honorable Brad Mallory, Secretary of the Commonwealth of
Pennsylvania Department of Transportation, and the Honorable
John Haley, Secretary of the State of New Jersey Department of
Transportation, if all of you would come to the table.
Governor, if you would start the panel, your complete
written statement, all of you, will be made part of the record
in its entirety, and if you will sum up in 5 minutes or less
what you want to tell us, it gives us some time to get in.
Thank you, Governor.
Statement of Governor Glendening
Mr. Glendening. Thank you, Mr. Chairman.
I am Parris Glendening, the Governor of the State of
Maryland, and I appreciate your efforts and the committee
members' efforts. Let me give special appreciation to Senator
Mikulski, who has been doing such a wonderful job for us,
overall, and particularly on this issue, where she has brought
our entire congressional delegation together on a bipartisan
basis, so that we speak with one voice.
I appreciate the opportunity to speak briefly about the
current situation regarding Conrail, CSX, and Norfolk Southern.
We have introduced a detailed statement.
For just about one-half of a year we have worked together
to protect our State's interest. Many people came together
early in the process, we identified clear objectives, and spoke
with one voice for the common good of our State.
I am very proud of the efforts of Maryland's business
community, and rail community, commuters, businesses throughout
the State, the coal mining industry, all to work with elected
officials so that we could make sure that all the issues were
addressed.
From early indications it seems that this merger is,
indeed, getting on the right track for Maryland, but I must
tell you, we are not at the station yet. Let me speak just
briefly about three issues here today that we identified, the
implications for the rail merger, what these implications are
for our State, and where we stand in light of recent events.
In terms of identifying the issues, we understood that this
merger is clearly a private business decision, but it was up to
our team to protect the railworkers in Maryland who were
concerned about the loss of jobs, to speak out on behalf of the
commuters who depend on our commuter system, as is the case in
New Jersey, to get to and from work, to ensure that businesses
across the State would have the railroads to get their products
to market, to be kept at competitive rates, and this ranged
from our concern about the Port of Baltimore, to the coal
fields in western Maryland.
The merger is about real people, that is why Senator
Mikulski and I, and others, are so concerned and involved about
this.
After the merger was announced we convened forums of
business leaders and labor leaders throughout the State, we
held dozens of meetings that involved hundreds of people, and
briefed leaders from across Maryland, we appointed a railway
merger advisory council, and we initiated repeated personal
communications with the CEO's and other representatives of all
three railroads.
For Maryland, the primary issues were to preserve
competitive service by two class I railroads, to assure class I
carriers give access to a full customer base, to secure
commitments to competitive rates and services, it would have no
significant job reductions for Maryland, and would secure
commitments to infrastructure improvements, and preserve and
enhance our commuter rail service.
Again, we recognize that this merger is a business
decision, but the public good must not be overlooked. The
railroads and services that they offer are critical elements of
our State's economic health. Everyone, business, labor, and all
levels of elected officials, agreed that we must unite and
speak with one clear voice about these goals.
With regard to the current situation, Maryland has had a
long relationship with CSX, and we are ready to welcome Norfolk
Southern to Maryland. We are excited about the prospect of
building a dynamic partnership with Norfolk Southern.
We are optimistic, but there are still some concerns that
must be met. It appears that two successful class I railroads
will continue to serve our State.
We are pleased to announce, in fact, that in Cumberland,
and elsewhere in Maryland, it appears that our jobs will be
protected, and commitments to infrastructure improvements are
being presented, but it is important to note that this is not a
full endorsement.
Until all the details of the proposals are on the table,
and can be reviewed, critical questions remain, questions
regarding freight service, congestion, regional competition,
job protection, and other issues. We are interested, for
example, in having a level playing field for our business
community.
We are concerned with our coal fields in western Maryland,
that if they continue to operate only with one class I
railroad, and two class I railroads are open for other fields,
will we be at a competitive disadvantage.
In closing I would note, Mr. Chairman, that Maryland's
approach to this merger has been somewhat unprecedented and
unparalleled. We organized very early, we clearly defined our
objectives, and we presented a unified front of elected
officials, business, labor, and community leaders.
The final decision is up to the Surface Transportation
Board, but I will remind everyone, as we know well, that it
will impact literally thousands of citizens in Maryland alone,
and tens of thousands of citizens throughout the corridor.
We have been fair and forthcoming with all three railroads,
we have worked hard to speak for our citizens, and we will
continue to speak for Maryland until the last I is dotted and
the last T is crossed.
What we are seeking is an enforceable agreement that
incorporates into the final surface transportation approval
document of the issues that we have raised, and the preliminary
consensus that we have reached with Norfolk Southern and CSX.
Prepared Statement
I thank you for the opportunity to share our approach to
this issue before the committee here, and appreciate your time.
Senator Shelby. Thank you, Governor.
[The statement follows:]
Prepared Statement of Parris N. Glendening
Thank you Mr. Chairman, members of the Committee, and of course, my
Senator, Barbara Mikulski, for giving me the opportunity to testify
before the Senate Appropriations Subcommittee on Transportation
regarding the implications of the proposed acquisition of the
Consolidated Rail Corporation by CSX Corporation, and the associated
agreements with Norfolk Southern Corporation.
First, I personally thank Senator Barbara Mikulski who has been a
tireless advocate for Maryland on this merger. I appreciate all that
you, Senator Sarbanes, and the Maryland Congressional Delegation have
done for our State, on this and so many issues that affect the lives of
our citizens.
Mr. Chairman, I very much wanted to be here today to talk about
this merger because of what it means for the future of railroads in
Maryland. Additionally, I will speak of the pursuit of Maryland's
leadership in advancing the state's interests and objectives concerning
the merger.
For the past six months, we have worked tirelessly to protect our
State's interests. We are here today because so many people, many of
whom are here today--business owners, community leaders, union
officials and the transportation community--came together early,
identified clear, achievable objectives and spoke with one voice for
the common good of our State. I know that the reason that we are here
today is because of the unparalleled, early, intense and unified effort
we began nearly six months ago. Although the Surface Transportation
Board has the final say, we hope that Maryland's leadership on this
rail merger will be seen as a model of how one state can make a
difference. From early indications, it seems that this merger is
heading down the right track for Maryland but we are not in the station
yet.
I will speak briefly about three issues today: First, how Maryland
identified the implications of the rail merger for our State; second,
what those implications are; and third, where I think we stand in light
of recent events.
process for identifying the issues
When we first learned of the proposed merger, we immediately
contacted the railroads to express our concerns about the possible loss
of competition for Maryland businesses and customers, as well as
effects on commuter rail service in Maryland. We knew that we had to
act quickly and decisively because Maryland is now served primarily by
CSX and Conrail. Therefore, any straight forward merger of these two
corporations would have left our State and the Port of Baltimore at a
competitive disadvantage by being served only by one major Class I
railroad. We were also concerned about the future of Maryland's
successful commuter rail system which operates on tracks owned by CSX
as well as on the Amtrak Northeast Corridor.
Early on, we decided that while the ultimate decision about whether
to complete this merger was a private business decision, it was up to
our team to protect the rail workers in Maryland, who told us that they
were worried about whether they would still have jobs. It was up to us
to speak out on behalf of the commuters in the Washington metro area
who depend on the MARC commuter rail system to get to work, and it was
up to us to ensure that the small produce shippers in Anne Arundel
County, the sand and gravel operators in Southern Maryland,
manufacturers in Baltimore and Montgomery Counties and poultry growers
on the Eastern Shore, all of whom rely on the railroads to get their
products to market, did not lose competitive rates or suffer declines
in service. As you know, Mr. Chairman, this merger is not simply about
rails and box cars, it is about real people and real businesses whose
survival depends upon the outcome of this merger. That is why I got
involved in this process. That is why we reached out to railworkers, to
the business community and to affected rail customers to develop a
package that reflected their interests and concerns. And, Mr. Chairman,
that is why I am here today.
We knew that we only had two real opportunities to affect the
outcome of this merger: First, we had to negotiate directly with the
railroads in hopes of influencing the development of their operating
plans; second, we had to prepare to participate in the federal Surface
Transportation Board proceedings. We believed that Maryland had to
pursue both avenues in order to protect the State's interests. In doing
so, we used a three-pronged strategy:
--First, we initiated direct and ongoing negotiations with the
railroads to seek mutually acceptable goals and conditions;
--Second, we worked to focus public attention on Maryland's concerns
about the proposed merger; and
--Third, we prepared for proceedings at the Surface Transportation
Board by collecting information to make our case.
Just two weeks after the merger was announced, on October 30, 1996,
we convened a forum for business and labor leaders from across the
State. Representatives from many sectors of business and industry in
Maryland participated in the forum, including port shippers, freight
handlers, aggregates, rail labor, longshoremen, coal, poultry, commuter
rail citizen groups, business organizations as well as federal, state
and local elected officials.
The turnout was an obvious indication of how serious and far
reaching the merger issue was for Maryland. In this, and literally
dozens of other meetings, we briefed leaders from across Maryland on
what we knew at the time, as well as on the process for the merger
proposals to move forward. Most importantly, we were able to begin a
dialogue to identify the most critical issues of concern to Maryland.
We did not stop at the forum. We reached out to more than 800
business and community leaders in Maryland, as well as to shippers
located outside of Maryland who send rail traffic through our State, to
seek their views and concerns regarding the proposed merger.
In November 1996, I appointed a fourteen member private sector
Railroad Merger Advisory Council to work closely with the me in
identifying the key issues, developing our negotiating strategy, and
providing information. All of this information was used to identify our
primary concerns about the merger.
At the same time, we initiated repeated personal communications
with the CEO's and other representatives of all three railroads, and I
talked to Senator Mikulski and other members of our Congressional
Delegation regularly about the merger. We also established an
interagency merger team of outside experts in freight and commuter rail
issues, and senior level officials from our Departments of
Transportation and Business and Economic Development. This team still
meets regularly to coordinate information obtained from discussions
with the railroads together with that provided by Maryland businesses,
elected officials, and citizens. Throughout this process, we have
remained in constant and close contact with members of our
Congressional Delegation as well. I am convinced that the fact that the
State, our Congressional Delegation, the General Assembly, business,
labor and community leaders came together with one voice for Maryland
made a difference in the future of our State, and I am grateful for the
efforts of everyone involved.
implications and concerns of the merger proposals
By speaking with one voice, Maryland has sent a clear message to
all three railroads. This comprehensive outreach process also enabled
the Maryland team to share our key concerns with the railroads early in
the process--by December. For Maryland, the primary issues were:
Preserve competitive service by two class I railroads.--In order to
preserve the value of competition in the both the Port of Baltimore and
Maryland overall, our State must have comparable rail service available
from a true competitor to a merged CSX/Conrail--that is, another Class
I railroad with similar market reach.
Assure that Class I carriers give access to a full customer base.--
We understand that for two major carriers to have a real presence, they
must have access to an adequate base of customers to make business
worth while.
Secure commitments to competitive rates and service.--Any rail
service must offer rates and service that are competitive. Businesses
were concerned that changes in pricing policy could have negative
impacts on their success.
No significant job reductions for Maryland.--Maryland currently has
over 2,000 employees directly employed by the railroads. As in every
state, we were very concerned that consolidation could lead to a loss
of employment. We were also concerned about the loss of collateral
jobs.
Secure commitments to infrastructure improvements.--The various
merger proposals have described benefits that would occur due to
additional service. In most cases, this will necessitate improvements
to tracks, bridges or clearances, such as double-stack improvements at
Perryville, Maryland. We needed to be sure that each railroad is
committed to providing funds for these improvements.
Preserve and enhance MARC Commuter Rail Service.--As mentioned,
Maryland has a very successful commuter rail service to both the
Washington and Baltimore metropolitan areas. We currently operate 80
commuter trains a day. This service involves rails owned by CSX as well
as Amtrak. We wanted assurances that any changes in freight traffic
will not have a negative effect on the hours of service to our
commuters or on the safety of such operations.
We pursued these issues with the railroads at every step of the
way. After the three railroads began to work together in January, I
contacted all three CEO's and the Surface Transportation Board and
urged them to enter into equitable discussions of the competitive
issues at stake. We believed that a more balanced solution existed.
While we understand this merger is primarily a business decision,
the public good must not be overlooked. The railroads and the services
they can offer are a critical element of each state's economic health.
In Maryland, we are proud of the choices we offer businesses that come
to our State. This merger held the potential of taking that valuable
asset--a choice between competitors--away from us. Everyone--business,
labor, and all levels of elected officials--agreed we must unite and
speak with one clear voice about what had to result from the merger
from Maryland's perspective.
current situation
Mr. Chairman, nearly six months after the merger was announced, we
are excited about the future of railroading in Maryland. Our State has
enjoyed a rich railroad tradition. The United States' first railroad,
the Baltimore and Ohio Railroad, was started in Baltimore in 1828 and
we understand the vital importance of having good rail service.
Maryland has had a long relationship with CSX, which grew out of the
Baltimore and Ohio Railroad, and we look forward to continuing and
strengthening that relationship.
We now are ready to welcome Norfolk Southern to Maryland. Norfolk
Southern has worked closely with us throughout this process to address
our concerns and needs. We are excited about the prospect of building a
dynamic partnership with Norfolk Southern, which has a well-deserved
reputation for safety, service and satisfaction throughout the railroad
industry.
While we are optimistic about the future, my presence here today
should not be interpreted as an endorsement for the current proposals
under discussion. Because the railroad operating plans are still not
available for review, we truly do not know if our issues have been
adequately and explicitly addressed. The old adage is true--``the devil
is in the details.''
We are pleased that the railroads are working together to devise a
solution. We strongly agree with the Surface Transportation Board's
Chairperson, Linda Morgan; it is best if the industry can sort most of
these issues out before coming to the Board. Based on the limited
information available so far, we are encouraged that most of our
concerns were met:
--It appears that two successful Class I railroads will continue to
serve our Maryland;
--We are pleased to announce that jobs in Cumberland and elsewhere in
Maryland will be protected; and
--Commitments to funding infrastructure improvements are being
presented.
Until all of the details of the proposals are on the table and can
be reviewed, however, critical questions remain.
--For example, how will Norfolk Southern operate its freight service
on the Northeast Corridor? The congested Corridor has presented
problems to Conrail in the past--we hope that Norfolk Southern
will do better. Is there a better solution on which the
railroads can agree?
--Will these operating plans present a new imbalance of competition
between regions by providing for new open access in some areas
but not in others? For example, we understand that there will
be open access to all customers to the Port of New York and New
Jersey, but not to Baltimore. We also understand that coal
mines in Pennsylvania will be open to competition, but that
coal mines in Maryland will not have the same access. These
inadequacies must be addressed. Will those decisions put
Maryland or others at a new competitive disadvantage?
--What jobs will be protected and what jobs will not?
Clearly, this is an evolutionary process. The effect of
restructuring the railroads serving our country will extend far into
the next century. The issues are complex and the committee is correct
in calling attention to this transaction. To date, Maryland has had
reasonably good experiences with all three railroads. We have not
favored one over the other. The process and outcomes have taken many
unexpected turns and twists along the way. We look forward to seeing
Maryland's concerns--especially the need for competition--addressed in
the operating plans submitted to the Surface Transportation Board. No
decision is final until there is an enforceable final document reviewed
by the Board, and the Board renders its decision. Based on input from
literally hundreds of people in Maryland, I know that this decision is
critical.
Mr. Chairman, the message I am bringing today is one I have heard
repeatedly over the last six months. This decision will affect the
lives, the well being and the health of hundreds of businesses and
thousands of individuals across Maryland and across the nation.
Unfortunately, corporate restructurings in order to achieve the desired
efficiencies and cost reductions often result in consolidation and job
loss. We must work to see to it that this pain is minimized in Maryland
and elsewhere.
closing remarks
Mr. Chairman, Maryland's approach to this merger has been
unprecedented and unparalleled. It appears that our strategy of getting
organized early, defining clear objectives and creating a unified front
of elected officials, businesses, labor and community leaders to
advance Maryland's interests has made the railroads recognize and
address our concerns. We have been fair and forthcoming with all three
railroads. We have worked hard to speak for our citizens, and we will
continue to speak up for Maryland until the last ``I'' is dotted and
the last ``T'' is crossed.
I again thank Senator Barbara Mikulski and the Maryland delegation
for its support of all our endeavors in this area.
Thank you for the opportunity to share our approach to this issue
and Maryland's concerns with the Committee.
STATEMENT OF HON. ED RENDELL, MAYOR, CITY OF
PHILADELPHIA
Senator Shelby. Mayor Rendell.
Mr. Rendell. Thank you, Senator, and we would like to start
off by thanking Senator Specter for asking for these hearings.
He is dogged in the protection of Pennsylvania's interest and
Philadelphia's interests, and we view these hearings as an
important step in that direction.
I would like to start out by telling you briefly what the
city of Philadelphia stands to lose if this merger is not
conducted in a proper and appropriate fashion. The city of
Philadelphia right now has 2,300 Conrail employees.
As was stated earlier, they produce $7 million in wage
taxes, and nearly $12 million from Conrail in overall direct
taxes to the city of Philadelphia's treasury.
Indirectly, Conrail produces well over $100 million in
economic impact for the city of Philadelphia. Conrail is one of
our leading corporate presences.
It delivers as a great corporate citizen, and it has
delivered over the last decade between $2 million and $2.5
million to charitable and civic organizations in the city of
Philadelphia on an annual basis. It is one of the largest land
holders, property holders, in the city of Philadelphia.
Conrail had made a commitment, which was as yet unrealized,
to develop an intermodal transportation center, taking
advantage of the confluence of our port, I-95, and our western
highway hookups, which we believe would be one of the
outstanding intermodal transportation facilities in the eastern
half of the country. So all of those things we stand to lose if
this merger is not done in an appropriate fashion.
We also need to maintain many of these things, and I would
suggest, and I do not mean to in any way denigrate Maryland's
interests, or Virginia's interests, or any other State's
interests, certainly New Jersey's, or any other State's
interests, but the city of Philadelphia has, as you know, a
historical special relationship with Conrail.
When the Congress enacted the original legislation, Conrail
legislation in 1973, Philadelphia was written into that
legislation for a guarantee that the corporate headquarters of
Conrail would remain there. Senator Vance Hartke, back in 1973,
said this was done so its headquarters in Philadelphia would
guarantee maximum reemployment opportunities for office workers
of the two defunct carriers.
In 1986, when the effort was made, and successfully made to
privatize Conrail, again, this Congress not only held that
subsection when it amended out many other provisions of the
1973 act, this Congress not only held that subsection, but
actually passed another subsection, making clear that that
subsection 741(b) would remain in effect. So we have a
historical relationship to this whole chain, recognizing
Philadelphia and Pennsylvania's importance as a great railroad
State and a great railroad city.
We need to maintain strong operating commitments of both
major facilities, Norfolk Southern and CSX, and I was heartened
to read in John Snow's letter to Senator Specter a commitment
to have a major operating presence in the city of Philadelphia,
and I would emphasize the word, major.
It is my understanding that the negotiations which, of
course, are not finalized, it is my understanding that those
negotiations will give Norfolk Southern almost all of the
existing Conrail property in the city of Philadelphia. It is
our strong belief that that justifies a significant major
operating presence in Philadelphia of Norfolk Southern.
With Norfolk Southern coming into the North, we strongly
believe that Philadelphia should receive the same treatment as
Atlanta, as an operating headquarters for Norfolk Southern.
Between those two strong operating presences, the jobs that the
Congress sought to protect in 1973, and reprotect in 1986,
will, in fact, be maintained or even grow.
We also believe that both Norfolk Southern and Conrail
working together should take steps to ensure the economic
development of our region by fulfilling Conrail's promise to
develop that intermodal facility.
The city of Philadelphia knows that it has to participate
and incentivize those efforts with land and other economic
development incentives, and we stand ready to do so, and most
of all, we need competition. As Governor Glendening said about
western Maryland, we need competition.
Today, outside of our port area and some intermodal
facilities in south Philadelphia, there is no head-to-head
class I rail competition in southeastern Pennsylvania, and that
has a definite damaging effect on southeastern Pennsylvania
companies.
When this is done, it is crucial that that type of head-to-
head competition be maintained, either by the establishment of
a neutral terminal railroad, or by an agreement of the parties,
a holding company, to do some form of--holding company that
ensures equal access and head-to-head competition.
Last, we would like to see, of course, the corporate
presence, some trust fund established to keep the corporate
presence, and a real estate task force to look at the real
estate.
Let me close by saying that this past Monday, Governor
Ridge, in Harrisburg, myself, and Secretary Mallory met with
John Snow and David Goode, and I think it was a terrific
meeting. It was a terrific meeting.
We agreed to set up a working group, a small working group,
with the governments of Pennsylvania and Philadelphia, the Port
of Philadelphia represented, with all three railroads, counting
Conrail as well.
That working group is going to move quickly in the next 2
weeks to begin the process of sorting out all of these issues,
and it is our availability, obviously, and our intention to be
available to share our progress with the Congress, and, of
course, eventually with the Surface Transportation Board.
Mr. Snow's and Mr. Goode's attitude toward our needs as a
State, I think, was extraordinarily positive, and we are
looking forward to a great working relationship.
Senator Shelby. Thank you, Mayor.
Mr. Brad Mallory, Secretary of the Pennsylvania Department
of Transportation.
STATEMENT OF HON. BRAD MALLORY, SECRETARY, COMMONWEALTH
OF PENNSYLVANIA DEPARTMENT OF
TRANSPORTATION
Mr. Mallory. Thank you, sir, and thank you all for the
opportunity to share the views of the administration of Gov.
Tom Ridge concerning the proposal to divide Conrail between CSX
and Norfolk Southern, obviously a matter of utmost importance,
not only to Pennsylvania, but to the rail industry and the
economy of the Northeast and the Nation beyond.
We must all work together to ensure that our employers, our
communities, our workers, and for that matter, our thriving
rail industry in Pennsylvania, can all find a way to benefit
and prosper out of this transaction.
The Governor said it clearly on Monday, in Pennsylvania, we
in government can be helpful allies or formidable adversaries,
depending on whether or not our legitimate interests are met.
Pennsylvania, with 70 railroads, ranks first in the Nation
in the number of operating railroads, and with 5,400 miles of
track, fifth in the Nation in terms of mileage of railroads.
One-third of all the U.S. rail traffic in the Nation moves
through the Keystone State, not incoincidentally. Railroad
employment in the State totals nearly 13,000 workers, the third
highest totals in the Nation. Obviously, we take the rail
industry in Pennsylvania very seriously.
The latest developments, obviously, would indicate that CSX
and Norfolk Southern will be dividing up Conrail's lines. We
know that rail service will change dramatically in the area,
and the Ridge administration is working diligently to ensure
that the needs of Pennsylvania are, in fact, protected.
As Mayor Rendell mentioned, on Monday of this week, the
Governor, Mayor Rendell, and I, and others met with the CEO's
of CSX and Norfolk Southern to formally establish a working
group, as to the disposition of the old Conrail freight lines,
and the operation of them.
Now, I stress formally established a working group, because
the Governor and I have met individually with Messrs. Levan,
Goode, and Snow, as early as November and December of last
year, and we, of course, had been working aggressively with
rail shipping interests, rail unions, communities, and I might
add, and stressed the port communities throughout Pennsylvania,
Deep Water, in Philadelphia, Inland, in Pittsburgh, and Great
Lakes Port, in Lake Erie, from the onset of this issue.
CSX and Norfolk Southern believe that within 1 to 2 weeks
they will have put a little more ink on their arrangement, and
will be able to join with us in aggressively pursuing a menu of
issues that the Governor, and the mayor, and others in
Pennsylvania believe must be addressed.
First and foremost, employment, a major concern. Current
employment levels and rail facility operations must be
protected to the maximum extent possible.
The indications are very promising, based on our
discussions to date, concerning the railroad repair shops in
Altoona and Hollidaysburg, the National Regional Customer
Center and regional headquarters in Pittsburgh, and the
intermodal facilities in Pittsburgh, Harrisburg, Philadelphia,
and Allentown, as well.
As the mayor mentioned, Philadelphia has a historic role as
a rail corporate headquarters for more than a century, and
consideration must be given to the maximum ongoing corporate
presence in that city.
Conrail has made a great economic impact in our State,
especially in Philadelphia. Over 2,400 people are employed just
there, 8,000 people throughout the State, $31 million in State
and local taxes, as Senator Specter mentioned.
They also purchase more than 439 million dollars' worth of
goods and services from Pennsylvania vendors, and I might add,
contributed more than $2 million to over 200 charities,
community groups, and other deserving nonprofit corporations of
Pennsylvania. This is a presence that matters.
The second major issue, competitive access. It is
imperative that all 2-to-1 locations be maintained. For
example, where Conrail is currently permitting another major
carrier to use one of its lines, the successor owner must
continue to afford access.
At least three major carriers must be granted access to the
Port of Philadelphia, as we enjoy today, and in the case of
Pittsburgh, we must maintain the level of two major railroads
having access.
We need to retain our two competitive east-west routes and
two competitive north-south routes. Major rail carriers must
provide competitive access to our large regional and shortline
railroad industry, the largest in the Nation, I might add.
Passenger service is of a particular interest to us,
obviously. It must be addressed in the merger, and we will be
seeking a commitment from all the involved class I's to work
with us on expanding rail passenger service, where it makes
sense to do so.
Obviously, the dollars are important, and fair and
competitive transportation rates and charges are going to have
to be addressed. If transportation efficiencies are realized as
part of this deal, we must have some passed through to the
customers.
Finally, plans to dispose of rail lines should be made
known to the Commonwealth as soon as possible. We need about 60
to 90 days prior notice, and the rationalized lines, if you
will, must be offered at a reasonable minimum cost.
If this merger is structured correctly, that is a big if,
but if it is, Pennsylvania could have good connections and good
routes to Chicago, St. Louis, Memphis, New Orleans, and give
Pennsylvania products a new and more competitive market reach
to the south, and ultimately to the west.
Our goal, our task, is to ensure that through face-to-face
hard bargaining, that we achieve that, and we greatly
appreciate the interest of you gentlemen, and the chance that
you can help us provide the leverage to make sure that that
process works in that fashion.
Thank you.
Prepared Statement
Senator Shelby. Thank you, Mr. Mallory. We have your
complete statement and it will be inserted in the record.
[The statement follows:]
Prepared Statement of Bradley L. Mallory
Good morning and thank you for allowing me to share the
views of the administration of Gov. Tom Ridge on the proposal
to divide Conrail between CSX and Norfolk Southern. It is a
matter of utmost importance that we are discussing here today.
The impact of this proposed restructuring of Conrail will
determine how railroads will operate well into the 21st
century--not just in Pennsylvania, but ultimately in the entire
country as well. Those of us in government must join with those
in the private sector to ensure that a merger will be in the
best interest of our economy, our workers, and all of our
railroads.
We in government can be helpful allies or formidable
adversaries depending on whether our legitimate needs are met.
Railroads have a rich heritage in leading the growth and
development of the Commonwealth. In February 1854, the
Pennsylvania Railroad began operating a through route between
Philadelphia and Pittsburgh--opening a new chapter in the
nation's and Commonwealth's transportation history. Those
cross-state ribbons of iron allowed trains to transport coal,
lumber, other raw materials and finished products to factories
and the marketplace. Towns sprang up around the railroad.
Businesses emerged. Jobs were created. Railroads were the
economic lifeblood of the Commonwealth.
While the ``glory days'' of railroading may be gone--the
``working days'' of trains are not. Railroads will continue to
play a key role in the economic well-being of Pennsylvania.
That is why the Ridge Administration and those of us in the
Department of Transportation are committed to working with the
merger partners to protect Pennsylvania's interests in this
latest transformation of the eastern rail industry.
Maintaining a viable rail system serving Pennsylvania and
beyond is important. My vision is to create--as Governor Ridge
has directed--a multi-modal transportation system throughout
the state . . . one that combines the use of our highways and
waterways, airways and bikeways and, of course, our railways.
This is the only way to move people and goods efficiently and
effectively.
Highways cannot serve as our sole means of transportation.
To be prepared for tomorrow's global demands, a blend of all
transportation modes must be developed . . . and rail must be a
part of the total transportation mix. In fact, many of our
shippers, including coal, chemicals and lumber, are dependent
on our rail network to move their commodities.
The state recognized the importance of rail by investing
$35 million in infrastructure improvements to permit
doublestack container shipments across the Commonwealth, a
crucial development to keep Pennsylvania and its employers
competitive in the world marketplace.
Today, with 70 railroads, Pennsylvania ranks first in the
nation in the number of operating railroads and, with 5,400
miles of track, the state ranks fifth in track mileage. One-
third of all U.S. rail traffic moves through Pennsylvania--
befitting our status as the Keystone State.
Railroad employment in the state totals nearly 13,000
workers, the third highest in the nation.
These numbers tell the story of railroads' role in
Pennsylvania. And any plan that would restructure rail freight
service from the Northeast to the deep South is going to affect
the Commonwealth, its other railroads and those in business and
industry who rely on trains to deliver raw materials or move
completed products to market.
The latest developments indicate CSX and Norfolk Southern
will be dividing up Conrail's lines. We also know that rail
transportation in Conrail's service area will change, perhaps
dramatically. At the Pennsylvania Department of Transportation,
we are working diligently to ensure that the needs of
Pennsylvania and its employers are protected.
On Monday of this week (March 17), Governor Ridge,
Philadelphia Mayor Edward Rendell and I met with the CEO's of
CSX and Norfolk Southern to formally open lines of
communications between Pennsylvania and the new owners of the
old Conrail freight lines. Substantive issues cannot be
resolved with one meeting. We have been talking with the
railroads all along. But now we have agreed to establish a
formal working group--one that will convene within the next two
weeks to sit down and hammer out the tough issues facing our
state's economy, worried Conrail workers and the railroads.
On behalf of the Ridge Administration, I am anxious to open
discussions with the other members of the working group which
includes a representative from the City of Philadelphia, the
chairman of the Delaware River Port Authority, the governor's
general counsel, a member of Conrail's interim management team,
and a representative from both CSX and Norfolk Southern.
This small group of individuals has the monumental task of
coming to terms, reaching agreement and compromising, where
necessary, on the key issues and concerns facing the
Commonwealth, so that we can all support the operational plan
that the railroads will submit to the Surface Transportation
Board for final approval.
Since the issue first arose last October, the Pennsylvania
Department of Transportation has been assessing the impact of
the sale of Conrail. I would like to outline for you those
concerns that I will bring to our working group.
Employment. Employment is a major concern. Current
employment levels and rail facilities' operations must be
protected to the maximum extent possible. I'm referring to the
railroad repair shops in Altoona and Hollidaysburg, the
national regional customer center and regional headquarters in
Pittsburgh and the intermodal facilities in Philadelphia,
Pittsburgh, Harrisburg and Allentown. In addition, Philadelphia
has served as a rail corporate headquarters for more than a
century and consideration must be given to an ongoing corporate
presence in the state's largest city.
Conrail has made a great economic impact in our state and
especially in the Philadelphia region where approximately 2,400
people are employed.
Conrail employed approximately 8,000 people in Pennsylvania
last year. In 1995, Conrail paid more than $31 million in state
and local taxes in Pennsylvania and purchased more than $439
million in goods and services from Pennsylvania vendors.
Conrail also contributed more than $2 million to over 200
charities, community groups and other deserving non-profit
organizations in the state in 1995. All told, Conrail's
presence has mattered in Pennsylvania.
Competitive access is critical for our rail users.
It is imperative that all ``two-to-one'' locations be
maintained. For example, where Conrail is currently permitting
another major carrier to use one of its lines, the successor
owner must continue to afford access to that rail line to the
other major carrier.
At least three major carriers must he granted access to the
Port of Philadelphia, and in the case of Pittsburgh's port
operations, a minimum of two major railroads must be
maintained.
The Commonwealth will need to retain two, competitive east-
west routes and two, competitive north-south routes within the
State.
Major rail carriers must provide competitive access to the
regional and shortline railroads. This can be attained through
trackage rights agreements or through reciprocal switch/local
access.
Passenger service is another area that should be addressed
with this merger. We will be seeking a commitment from all the
involved Class I lines to work with us on expanding rail
passenger service onto existing freight lines where it makes
sense to do so.
Fair and competitive transportation rates and charges in
some cases should be frozen or guaranteed to rail users, such
as coal companies and bulk chemical producers who are solely
dependent on railroads for moving their products. If
transportation efficiencies are realized as a result of any
merger, consideration must be given to passing some cost
savings on to the customers. We have done much to keep
Pennsylvania businesses more competitive. We need to keep
transportation rates low to assist in this effort.
Recognized customer service standards and good corporate
citizenry are essential to ensure reliable and efficient
freight service. Rail users and major carriers should meet on a
regular basis to assess service. And the railroads should
commit to local and state officials to properly dispose of
bridges, facilities and land parcels when rail lines and yards
are abandoned.
And finally, plans to dispose of rail lines, including
associated real estate and parcels of land, should be made
known to the Commonwealth as soon as possible. This
notification should come at least 60 to 90 days prior to the
railroad's filing for abandonment. Also, the major carriers
should offer future ``rationalized'' lines to our regional and
shortline railroads at a reasonable, minimum cost.
Pennsylvania has a healthy rail network today . . . a
network that is vital to the Commonwealth's economic growth.
For five months, my staff has talked with shippers,
shortline and regional railroad operators, representatives of
our ports and officials from the city of Philadelphia and our
major Metropolitan Planning Organizations. The Ridge
Administration also has maintained positive relations with all
parties to this proposed merger, and we believe we are well-
positioned to be a player in the merger's final design.
If the merger is structured correctly, Pennsylvania could
have good connections and good routes to Chicago, St. Louis,
Memphis and New Orleans. This could give Pennsylvania products
a ``new'' and more competitive market reach to the south and
ultimately to the west. But we must emphasize that the Ridge
administration will work hard to represent the state's
interests as this merger develops.
We have been and will continue to work together in
designing a rail network for the future--a system that will be
part of the world class transportation network that is vital
for Pennsylvania.
Thank you.
STATEMENT OF HON. JOHN J. HALEY, JR., SECRETARY, STATE
OF NEW JERSEY DEPARTMENT OF TRANSPORTATION
Senator Shelby. Next will be the Honorable John Haley,
Secretary of the Department of Transportation, the State of New
Jersey.
Mr. Haley. Thank you, Mr. Chairman, Senator Lautenberg,
Senator Specter.
I will enter into the record my formal testimony as well as
a tactical study that was prepared at our direction on the
impact.
And I will briefly comment to say that with New Jersey
located literally in the heart of the largest market in the
United States, 100 million customers are within 1 day's travel
of New Jersey, and really it is one of the largest markets in
the world, and to stress simply that this proposed merger is of
critical importance for New Jersey, not just as a
transportation merger, but as an economy, because our economy
and the State, to a great extent, is organized around the
distribution and movements of goods, both in and out of the
States.
As many of our other speakers have said, at Governor
Whitman's direction we have developed a series of principles
against which any merger must be measured, and I would like to
share with you those principles this morning.
First of all, as you have heard the prior speakers
indicate, we need assurance that New Jersey will have
competitive rail access by at least two class I rail carriers,
each with access to their own viable terminals, and access via
a reciprocal switching or terminal railroad operation to all
industries in the State.
As I do not have to tell anybody here, it appears that the
monopoly that Conrail has enjoyed over the last 20 years will
be going away, and we need to make sure that we have real and
viable competitive access.
The second principle is that we need access for all 12 New
Jersey shortline rail carriers. Like Pennsylvania, small
railroads provide a critical need and service to the economy in
New Jersey, they have literally picked up and grown over the
last several years, areas and businesses that are not served
for a number of legitimate business reasons by Conrail, and
they are in lumber, in warehousing, all sorts of industries, so
it is very important to us to see that the 12 shortline
railroads throughout the State of New Jersey have access to a
new arrangement.
Third, we are faced with literally, in parts of New Jersey,
a traffic jam on the existing rail system. Senator Lautenberg
laid out the importance of mass transits in New Jersey, he
talked about the need for coexistence, and suffice it to say
that we need to underscore that coexistence, not only with
commuter and freight in New Jersey, but also with the Northeast
corridor, and the intercity system, which is so important to
the State of New Jersey, and to the entire region.
Any business arrangement must have the ability to deal with
the capacity constraint that exists on the railroads throughout
New Jersey.
Fourth, and this one is particularly important to us as a
State with a number of intermodal systems in the North, is that
we have improved shipper access to intermodal and carload
freight options.
A percentage of traffic moving on rail has increased from 2
to 10 percent at the Port Authority of New York, New Jersey, in
the last few years. We would like to see continued growth of
rail, because not only would it provide for better movement,
and open up additional markets, but also will take some trucks
off the road, and we need to have a good, compatible system.
The fifth principle is that we have reasonable
accommodation for workers who may be displaced by this
arrangement. We have a number of facilities and employees
located throughout the Northeast, and let me add, this is an
issue on which we should think regionally, and New Jersey would
support the mayor's contention that we should have a very
strong corporate presence in Philadelphia.
This is important not only to Pennsylvania, but by
accidents of geography, we should not let that stand in the way
of a joint effort in bringing this important--we have had a
similar experience to what Pennsylvania has had in dealing with
the two railroads in the proposed merger.
Our feeling is that based on the information we have seen,
we can feel pretty good about it, but as was indicated earlier,
the devil is in the details, and we need to see the specifics,
and we will weigh them strongly against our five principles.
With that, Mr. Chairman, I would conclude my testimony to
say that New Jersey and Governor Whitman intend to remain
active, and we will work with the committee and the Surface
Transportation Board, and our colleagues on the panel to make
sure that we have an effective and smooth transition, and it is
in the best interests of all of the economies of our States.
Thank you.
Prepared Statement
Senator Shelby. Thank you, Mr. Haley. We will insert your
complete statement in the record.
[The statement follows:]
Prepared Statement of John J. Haley
Chairman Shelby, Senator Lautenberg, Members of the Committee: Mr.
Chairman, with your permission I would like to submit for the record a
report prepared for the New Jersey Department of Transportation and the
North Jersey Transportation Planning Authority with regard to the
Conrail/CSX/Norfolk Southern merger.
Good morning and thank you for this opportunity to appear and
discuss an issue which is of extreme importance to the future economic
health of New Jersey. I applaud your initiative in holding these
hearings, and assembling all interested parties to discuss what this
merger will mean to the States, and to the many industries that rely on
rail transportation.
First, let me begin with a word as to why this issue is so
important to New Jersey. The State is located in the heart of the
largest market in the United States (100 million consumers are within 1
day's travel), and one of the largest markets in the world. As a
result, a sizable portion of our economy is centered around the
distribution of huge quantities of goods within this market, and the
transshipment of manufactured and imported goods beyond our Region. The
following facts are indicative of the importance of this industry to
the State's economy:
--Taken as a whole, goods movement employment in New Jersey (rail,
truck, port, warehousing, freight forwarding, customs, etc.)
makes it our fourth largest industry.
--22 percent of New Jersey's work force (600,000 people) are employed
in industries which are either directly, or indirectly,
impacted by the costs and quality of rail service to the State.
--Our geographic position as a corridor State means that 850 million
tons of freight, 10 percent of the total annual freight tonnage
moved nationwide, originates, terminates or passes through New
Jersey.
--25 percent of the total revenues earned by Conrail throughout their
11,000 mile system are earned on traffic that originates or
terminates right here in New Jersey.
Put simply, the Conrail System is very important to New Jersey,
but, New Jersey is equally important to the Conrail System.
With this in mind, we entered into the process of evaluating the
impacts of the Conrail/CSX merger when it was announced in October of
last year. We developed a set of principles that we felt served as the
basis for any approval by the Surface Transportation Board (STB) of any
proposed merger.
The principles we insisted serve as the basis for any agreement
were:
(1) Assurance that New Jersey will have competitive rail access by
at least two Class 1 rail carriers, each with access to their own
viable terminals, and access via reciprocal switching or terminal
railroad operation to all industries in the state.
As most of you are aware, Conrail has held a virtual monopoly over
rail transportation in NJ and much of the northeast for over 20 years.
Competitive rights granted by Congress to the Delaware & Hudson
Railroad at that time have never yielded viable competition due to
restrictions imposed on the D&H by the trackage rights agreement with
Conrail.
(2) Access to the competing Class 1 railroads by all of NJ's 12
short line rail carriers.
(3) Co-development of intercity, commuter and freight services
where shared trackage is necessary.
This issue is of vital importance to NJ. Much of our transportation
infrastructure, especially in the northeastern part of the State, is at
or near capacity. Yet, Conrail freight service operates over every
passenger line in New Jersey. In parts of the State our excellent mass
transit system, operated by NJ Transit, is all that stands between us
and a total breakdown in transportation. Development of new transit
services, and expansion of existing services, are critical to our
efforts to assure the continued mobility of our citizens, and to our
efforts to meet Federal clean air standards.
It is largely an issue of capacity constraint. There are areas of
shared trackage between NJ Transit and Conrail that even now are
straining under the amount of traffic handled daily. This does not take
into account the increased levels of traffic projected under the merger
scenario.
(4) Improved shipper access to intermodal and carload freight
options.
This includes correction of capacity constraints at NJ rail yard
and terminal facilities to avoid the termination of intermodal
shipments at the State's border, with subsequent movement of the
freight into NJ by motor carrier. Such moves negate the clean air and
infrastructure advantages of intermodalism to the State.
(5) Reasonable accommodation for workers displaced by merging of
facilities and services between carriers, and would further maintain a
headquarters presence in the Northeast, particularly Philadelphia.
It appears that the revised merger proposal which includes Norfolk
Southern as a merger partner with CSX Corporation and Conrail appears
to achieve most, if not all, of these points . . . but only in general
terms. We need to take the next steps to ensure that the principles
will be adhered to and implemented in a satisfactory manner. As one
writer put it, ``the devil is in the details''.
--Competitive access means different things to different people. We
must ensure that all industries have competitive access to the
merger partners, and continued access to already existing
competitors, such as Canadian Pacific and the New York,
Susquehanna & Western Railroads in New Jersey. This will
require the creation of neutral terminal carriers in markets
where they do not currently exist, or the expansion of rights
by short line railroads to interchange with the competitors at
central terminal locations.
--Southern New Jersey, especially, requires close scrutiny. One of
the options suggested to provide competitive access to the
short line carriers in this part of the State would extend the
existing Philadelphia Belt Line Railway across the Delaware
River to Camden. Here it would interchange with yet another
short line, RDC, recently selected by Conrail to purchase
several lines in New Jersey. This short line, in turn, would
interchange with the existing short lines. In this particular
case, our zeal to provide competitive access could place as
many as two intervening carriers between the short lines and
the Class 1's serving the Philadelphia area.
--Capacity concerns need to be addressed up front. We must make clear
the need to expand lines to accommodate both freight and
passenger operations. Rationalization of the system over the
years by the railroads has led to decreased capacity at a time
when we're seeing a resurgence in rail use by industry, and a
demand for many new transit starts. The proposed increases in
rail freight as a result of this merger will only serve to
increase pressures on available transit assets.
--Finally, we need to establish a meaningful corporate headquarters
presence in the northeast by both competitors. The Philadelphia
headquarters of Conrail must continue to exist as the focal
point for marketing and operational activities throughout the
northeast. By their own admission, our markets are not markets
that have been cultivated in the past by CSX or Norfolk
Southern. The most effective marketing is done by people who
know their territories intimately. Likewise, customer relations
suffer if accounts are serviced by ``absentee'' account
representatives who do not know or understand the unique
requirements of each customer.
In summary, the Northeast's rail freight services must emerge from
this process with an improved ability to compete for, and serve, the
manufacturing and distribution systems that are vital to our future
prosperity. We believe this merger, as proposed, largely furnishes us
with this ability. We must, however, see to it that the STB process
leaves in place a truly competitive rail system, and positions us for
the next round of transcontinental mergers that cannot be far in the
future.
Thank you Mr. Chairman, Subcommittee Members, ladies and gentlemen.
______
Conrail Merger
why this issue is important to new jersey
The Conrail merger is the ``window of opportunity'' for NJ to
ensure future rail competitive access throughout the State to key
strategic markets.
NJ, through its maritime and aviation facilities, is a crucial
gateway to the global marketplace for U.S. industry.
Global is good for NJ. The trick is keeping manufacturing in the
U.S. We need transportation logistics to help offset cheap labor
overseas.
Within this framework, rail freight is critical for the cost-
effective movement of goods between the maritime terminals in NJ and
business locations throughout the U.S., particularly the midwestern
markets.
Without effective pricing in rail freight, truck/rail intermodal,
and maritime/rail intermodal (``hub port''), key industries in NJ will
be at a significant competitive disadvantage compared to other
locations in the U.S. and the world.
NJ is the heart of the nation's (and one of the world's) largest
markets. It is within one day's travel of 100 million consumers.
Railroads play a key role in supporting both NJ's industrial base
and its consumers.
nj's goods movement facts
Ten percent of the total annual freight tonnage moved nationwide
originates, terminates, or passes through NJ (850 million tons).
Goods movement represents NJ's fourth largest industry.
Twenty-two percent of NJ's work force are employed in industries
which either directly or indirectly are impacted by the cost and
quality of rail service to NJ.
Twenty-five percent of Conrail's total revenues come from traffic
that begins or ends in NJ.
Shortlines in NJ often serve shippers previously abandoned by
Conrail.
Rail moves 11 percent of all containers at the Port Authority of
New York & New Jersey, up from just 2 percent five years ago.
nj's merger principles
Competitive rail access by at least two Class 1 carriers to all key
NJ markets.
Access to competing Class 1 railroads by 12 shortline carriers.
Compatibility of intercity, commuter and freight services for
shared track.
Improved shipper access to all modes.
Reasonable accommodation for displaced workers.
Headquarters presence in the Northeast, particularly Philadelphia.
Additional capacity to address future rail freight and passenger
needs.
Intention of Two Carriers to Provide Competition
Senator Shelby. Senator Lautenberg, any questions?
Senator Lautenberg. Yes.
Welcome, Mr. Haley, I am glad to see you here. You have had
experience with the port authority as well as now commissioner
of transportation.
In your opening comments, you suggest that one of the key
principles of genuine rail competition is the assurance that
each of the class I carriers will have access to their own
viable terminals.
The question I raised this morning with my staff, at this
point, what are your impressions regarding these two carriers,
and whether or not they might be able to truly provide that,
and from what you have learned so far, is that your intention?
Mr. Haley. I will tell you, without question, that both of
the carriers that I have talked to understand the problem, and
have listened and stated it is their intention to provide
competition, particularly in the ports in Elizabeth and Newark.
We made clear to them some of our specific concerns
regarding capacity and intermodal transfers, both of them
understand the need for a terminal facility, and real access,
because as you know, and the committee knows, previously, when
Conrail was created, part of what was intended was to have
competition with lines like Delaware & Hudson; however, as a
practical matter, as these business arrangements evolved, the
access that Delaware & Hudson had was rather limited, so we
ended up with the situation that we have all talked about,
which is a Conrail monopoly over the last several years.
So in answer to your question, I think that in our
discussions with both CSX and Norfolk Southern, they have
indicated that they understand the problem for competition, and
are working very specifically on it in the ports in Elizabeth
and Newark.
I will tell you, though, one of the issues that we put on
the table, and we have not seen any of the details yet, is we
and Governor Whitman are very concerned about what it means for
the Port of Camden.
In the connections with the important lines in
Philadelphia, we have yet to see very much information, and I
understand and accept that they are in a negotiating posture,
but we are concerned about how the ports in south Jersey and in
the Philadelphia area are treated, and how we come out of this.
So we are, I guess, Senators, statewide, overall, guardedly
optimistic, but we will need some additional information on how
exactly the agreements will roll out, and how the lines will
shape up before we could give you much more certainty than
that.
Mr. Rendell. Senator----
Senator Lautenberg. Yes.
Mr. Rendell. I am sorry, if I could just reinforce----
Senator Lautenberg. I know, as soon as he said Camden, I
saw you twitch there.
Mr. Rendell. If I could reinforce what the secretary said,
there is no doubt, from our conversations with the two CEO's,
there is no doubt that the marketplace and the need for both to
be competitive will ensure some type of operation among
themselves.
The question is, in New Jersey, with the shortlines, and
Pennsylvania, with the shortlines, and CP, and the Delaware &
Hudson, what access they will have to competitive switching in
terminals.
That is where the rub is. I think we are absolutely assured
that we will have at least two open and head-to-head
competitors in Pennsylvania, but there are a lot of other
railroads to consider as we go through the details.
Senator Lautenberg. Yes; I am encouraged by reports I get
from each of the railroads, and I think that this is going to
be a net gain for all of us, including, obviously, the
carriers.
They are not interested in this to spread their
responsibilities. They think that is a good investment, and I
like to think of things as good investments, they can benefit
the communities that are connected or involved with them.
So I think that this is a positive thing, but I think it is
very important at this early stage to highlight those things
which we regard as kind of bedrock importance, so even though I
know the leaders of the CSX in Norfolk have been hearing it
frequently, I think it is important to get it clearly on the
table.
Mr. Haley, in your capacity as transportation commissioner,
you also serve as chairman of the board of the New Jersey
Transit.
Now, have you had discussions to date with CSX and Norfolk
Southern regarding your requirements for current and expanded
computer rail, in connection with the Conrail-owned track in
the State of New Jersey?
Mr. Haley. We have had, actually, several months of
discussions, starting back in October, with the first proposed
deal, and talked about specific corridors.
In the last 2 weeks I have had discussions with both of the
railroads as well, on the needs, particularly on the, I used
the term earlier that we have a traffic jam on the rails, but
those of us who lived in the Northeast during the phaseout or
transition of passenger service at Conrail, when they became
entirely a freight railroad, I think will have very long
memories, and most of them are not very pleasant about
experiences that many of us went through on the passenger rail
side, with delays.
It is an issue that both of the railroads have been very
forthcoming on, and understand the need for this. We have
identified particular corridors, such as the Valley Line, such
as the Port Service Line that runs between a couple of towns in
the New York State border, into Hoboken Terminal, as some key
corridors.
We have also put on the table the issue of the development
of the, further development, I should say, of the Hudson-Bergen
line, which needs to be completed on the Hudson part of it, and
moved very quickly, and Senator, with your help, again, as you
have done with the Hudson part of it, the Hudson-Bergen light
rail system as well. That will have many interfaces in the
operating area.
We have been very frank about the history of troubles, if
you will, between passenger and freight railroads operating
over the same corridor, and we are looking both for a detailed
plan that identifies open windows for freight, and how it will
coexist with passengers, as well as some commitment and
coordination on the capacity side, because I think, simply,
better management of the existing physical plant is one way
that will make the railroads coexist more effectively, but
there needs to be a well thought out and prudent plan, not only
plan, but finances for capacity expansion, because ultimately,
if this arrangement leads to what all of us in the Northeast
hope it will lead to, there is going to be a need for
additional capacity.
Senator Shelby. OK.
Senator Specter.
Senator Specter. Thank you very much, Mr. Chairman.
Secretary Mallory, I appreciated your comment quoting
Governor Ridge to the effect that the Governor and Pennsylvania
could either be helpful allies or formidable adversaries, and I
think that is a good division to make.
I was referred to in the press recently as threatening
lawsuits, which I have not done yet.
What I have tried to do is make a point that the new
arrangement could have some very beneficial effects to
Pennsylvania, as well as the country, but we have to see
exactly how it is worked out.
The unusual circumstances here, when you have a contract
between Conrail and CSX, when a new contract is formed, the
initial impression might be, as a matter of law, that there
would be nobody to enforce the contract, because Conrail
shareholders are delighted with the price that they receive.
That is why I made the point that there could be standing as to
employees under the Federal law, where the Surface
Transportation Board must consider employees, or communities
which must be considered under the Pennsylvania takeover
statute.
When you have characterized the question here as this
committee, you used gentlemen, could provide leverage, I think
that is really what we are looking toward.
Have you been aware of the arrangement which was worked out
by Norfolk Southern with Pennsylvania Power & Light, during the
course of the last litigation, which was, in effect, a
bargaining tool to try to present a good reason for
Pennsylvania to be happy with the new arrangement?
Mr. Mallory. I believe I became aware of that on or about
Monday of this week. Various representatives of the railroad
had mentioned to us that we had been working with several
Pennsylvania industries, we think we have some good news coming
in the near future, and so yes, I became aware of it, I guess,
Monday of this week.
Senator Specter. Was it your impression that that
arrangement had been made, Norfolk Southern with Pennsylvania
Power & Light, as a result of the pressure to try to have
Norfolk Southern put the best face possible on what it could do
for Pennsylvania?
Mr. Mallory. I really do not know what the motivation was.
Clearly, it was good news, and received as such in many
corridors in Pennsylvania.
Senator Specter. Well, we will reserve that question for
Mr. Goode. I gave him a little advance notice of a question.
Mayor Rendell, I congratulate you on your work generally
for the city, and for your stance taken here on this proposed
arrangement.
You have cited accurately the statutory background for
preserving Philadelphia as the headquarters for Conrail, and we
have talked a little bit about the history of the railroad in
Philadelphia, and there is a lot more to it.
The Pennsylvania Railroad was the initial giant, running
through the main line, and all the way to St. Louis, and just
an overwhelming factor, coming right opposite city hall.
The general corporation law is that when an acquiring party
takes over a company, that they succeed on all the assets and
all the liabilities.
Would you think there would be a pretty good argument for
that? I do not know whether you would call it a liability to
have Philadelphia as the headquarters, or an asset to have
Philadelphia as the headquarters, but would you agree with me
that that would at least be a pretty good argument, that there
is a statutory obligation to carry that forward, at least in
one way or another?
Mr. Rendell. I think a strong case can be made for that,
Senator, but let me say that if--we are pragmatists in
Philadelphia, the things that have happened to us in the last
quarter of a century mandate that we are pragmatists.
Senator Specter. A few of us are in Washington, too, Mr.
Mayor.
Mr. Rendell. We are more interested in concrete results
than symbols, and that is why I quoted Mr. Snow's letter to
you, which said major, and again, with the emphasis on major,
major operating presence in Philadelphia.
If there is a major operating presence, if there is the
type of corporate trust fund set up between the three entities,
if there are efforts to be made to deal with the real estate in
a positive fashion, if there is the efforts to complete
Conrail's promise to create a first-class, world-class
intermodal facility, which, Senator Lautenberg, would benefit
the Port of Camden enormously as well, if all of those things
are done, then the symbolism means little to me.
So I think it is important what the agreements are, and
what the details are, as to the agreements, but I agree with
you, as a lawyer, I learned a lot of my law from you, that that
is probably a reasonable interpretation.
Senator Specter. The mayor refers to the fact that I gave
him his first job out of law school as an assistant district
attorney.
Mr. Mayor, I appreciate you referring to my letter to Mr.
Snow, and his reply, and I would ask unanimous consent that
that correspondence be included in the record, as well as the
response from Mr. Goode.
Senator Shelby. Without objection, so ordered.
[The information follows:]
Letter From Senator Specter
March 6, 1997.
Mr. John W. Snow,
President and Chief Executive Officer, CSX Corporation,
Richmond, VA.
Dear Mr. Snow: I have been closely following the developments in
the proposed merger with Conrail, particularly the impact on the more
than 8,000 Conrail employees who live in Pennsylvania and the location
of the headquarters in Pennsylvania.
I am very troubled that CSX Corporation has breached a commitment
it made to me that any arrangement would protect both the corporate
headquarters in Pennsylvania and the dedicated employees throughout the
Commonwealth.
With an estimated 2,400 employees in Philadelphia, 1,700 in the
Pittsburgh area, 1,200 at the Altoona shops, and 850 at the Harrisburg
intermodal terminal, and several thousand others at points in between,
Conrail plays a vital role in Pennsylvania's economy and communities.
The governing Pennsylvania statute for corporate mergers is especially
relevant in the context of the commitment made to me, as it states that
the board of directors must take into account:
``[t]he effects of any action upon any or all groups affected
by such action, including shareholders, employees, suppliers,
customers and creditors of the corporation, and upon
communities in which offices or other establishments of the
corporation are located.'' 15 Pa.C.S. Sec. 1715 (1996)
(emphasis added).
In addition to Pennsylvania law, the proposed arrangement may be
contrary to federal policy which requires consideration by the Surface
Transportation Board of the impact of any merger proposal on the
employees of the rail carrier. I intend to pursue this issue and other
potential federal issues with the Surface Transportation Board.
I would appreciate your prompt response to my concerns.
Sincerely,
Arlen Specter.
______
Letter From John W. Snow, Chairman, President, and Chief Executive
Officer, CSX Corp.
March 11, 1997.
Hon. Arlen Specter,
U.S. Senate,
Washington, DC.
Dear Arlen: I have reviewed your letter to me of March 6 which
raises questions about how recent developments in the Conrail merger
will affect important Pennsylvania interests. We are mindful of your
concerns and those of other prominent political and business leaders in
the State. Let me assure you that those concerns will be addressed.
We are currently engaged in negotiations with Norfolk Southern on
the important issue of creating a balanced rail system in the East. I
am confident you will find the outcome of those discussions beneficial
for Pennsylvania and its interests It is important, however, for me to
clarify what appears to be a misunderstanding. While your comments
relating to corporate headquarters and other issues are correct under
the old contract which was in force at the time you wrote your letter,
we have now amended the contract and many of the provisions have been
revised.
As you know, on October 15, 1996, CSX announced a strategic merger
of equals with Conrail. It was our stated intention at that time to
relocate the Richmond-based holding company (currently 120 employees)
to Philadelphia. We also clearly stated that this transaction was
subject to the approval of the Surface Transportation Board and an
affirmative vote of a majority of Conrail shareholders.
Clearly, changes in circumstances forced us to amend our original
transaction with Conrail. First and most importantly, we were unable to
win the required opt-out vote of a majority of Conrail shareholders.
Subsequent attempts to sway major Conrail shareholders convinced us
that we could not win the required vote.
Secondly, statements by federal regulators, public officials, and
numerous customers led us to believe that we could not win regulatory
approval without substantive concessions to Norfolk Southern. We tried
repeatedly to persuade Conrail executives to agree to a realistic set
of concessions. This could have ultimately led to a successful outcome
of the original agreement.
With neither shareholder approval nor the likelihood of STB
acceptance, we reluctantly embraced the call for a partition of
Conrail. The amended contract that was approved by the Conrail Board
last Friday is a significant departure to the original agreement. What
was originally a merger of equals is now an acquisition.
The result is a major victory for a number of important
constituencies. The Conrail shareholders will receive $115/share, the
shippers will benefit from a balanced rail system in the East, and the
driving public will benefit from fewer trucks on already overcrowded
highways.
Please be assured that many of your concerns and those of others
were clearly heard and considered. The revised agreement with Conrail
addresses a number of your concerns in a positive fashion. We intend to
retain the Juniata Locomotive Shops in Altoona, the Sam Ray Car Shops
in Hollidaysburg, the Pittsburgh Service Center and a major operating
presence in Philadelphia.
While some important issues have been resolved, other major issues
relating to Pennsylvania will be the subject of discussions with both
Norfolk Southern and elected officials. It is my intention to discuss
these issues with you and others in the coming days. I hope that our
talks will eventually lead to your support of the revised transaction.
With best regards,
Sincerely,
John W. Snow.
Senator Specter. The red light is on, so I will conclude
with a very brief reflection on your statement. It may be that
if Norfolk Southern and CSX are in Philadelphia, and they have
substantial operating presences, and they may have division
headquarters, or offices of some sort, that they may take up
the employee level and the space level.
So I quite agree with you, that that is something which we
have to monitor and try to work out.
Mr. Rendell. Senator, I believe that, and again, this is
reinforcing my discussions with Mr. Snow and Mr. Goode, I
believe that this cannot just be an effort to maintain what we
have, but I believe out of this, there can be genuine economic
development growth, and growth in other areas as well, and we
are hopeful.
Senator Specter. OK. Equal to or better than.
Mr. Rendell. Right.
Senator Specter. Thank you.
Senator Shelby. Senator Mikulski.
Prepared Statement
Senator Mikulski. Thank you, Mr. Chairman. And, Mr.
Chairman, will the record be kept open, so that I may submit a
statement from Senator Sarbanes?
Senator Shelby. Absolutely. We will keep it open.
[The statement follows:]
Prepared Statement of Senator Sarbanes
Thank you Mr. Chairman for scheduling this hearing on the
implications of the proposed merger of Conrail with CSX and Norfolk
Southern Corporation. At the very outset, I want to commend Governor
Glendening and my colleague Senator Mikulski, who serves on this
Committee, for their continued leadership and advocacy of Maryland's
goals in connection with the proposed acquisition of Conrail.
As the birthplace of railroads in America and as a State with an
extensive freight rail network, Maryland has much at stake in the
proposed acquisition. Today, two Class I carriers--CSX and Conrail--
provide freight rail access to the Port of Baltimore and along the
Northeast Corridor. This has been an important force in guaranteeing
coal and other shippers in our State the benefits of competitive rail
rates and service levels. The two railroads move nearly 16 million tons
of freight from the Port of Baltimore alone each year, control 98
percent of the tracks in Maryland, and employ more than 2,200 workers.
Norfolk Southern also serves our State, albeit with much more limited
trackage. Maryland's commuter rail service, MARC, relies heavily upon
the CSX Brunswick and Camden lines for daily passenger service.
Clearly, the proposed merger has substantial implications for
Maryland's economy, industries, work force, and commuter rail service.
During the past six months the Maryland Congressional Delegation,
which I Chair, has worked very closely with Governor Glendening,
members of his Cabinet, the Maryland General Assembly and Maryland's
Rail Merger Advisory Council to protect and advance our State's
interests in the acquisition. We have worked as a team to develop and
press our principal goals with the three railroads:
--Preserving competitive service by no fewer than two Class I
railroads;
--Continuing existing service and rates to industries throughout
Maryland, including the Eastern Shore and Western Maryland;
--Protecting railroad related employment in Cumberland and throughout
Maryland;
--Preserving and enhancing MARC commuter rail service;
--Securing commitments to infrastructure improvements necessary to
achieve the asserted benefits of the merger.
Based on the preliminary information available to date, we are
cautiously optimistic that our goals will be met in the recent rail
merger agreement. However, key questions remain to be addressed in the
details of the proposals and in the operating plans submitted to the
Surface Transportation Board. Among other issues, we are concerned
about how open access to our full customer base, including the coal
industries in western Maryland, will be addressed. We are also
concerned about the capability to operate both expanded freight and
passenger rail services on the already congested North East Corridor.
In addition, we would like to see firm commitments to job protections
and infrastructure improvements including high cube double stack
service by both Class I railroads.
Mr. Chairman, we all want to benefit from this merger transaction.
We urge the railroads to continue to work with us to reach agreements
of mutual benefit prior to the submission of any merger application to
the Surface Transportation Board.
Senator Mikulski. To you, Governor Glendening, and to other
Marylanders who are here, Senator Sarbanes is very deeply
involved in the Housing/Banking, but he is 100 percent, as you
know, involved in this issue.
Governor Glendening, I would like to thank you for the
leadership that you have provided on this issue. When the
announcement first came about a merger between CSX and Conrail,
we were all very concerned about the crisis that this could
create for jobs in the port, western Maryland, the Delmarva,
the concern that commuters would be stranded or abandoned, and
I want to thank you for organizing the strategy and the
process, so that we could have a rapid response, talking to the
community, and your leadership in talking to the railroad, and
I would also like to thank you for the professionalism of your
staff in this.
Now that we have gone through the process, the question is:
Where are we? We have outlined those major criterions related
to jobs, passenger service, and, of course, infrastructure.
Now that you have heard what they have all said to you,
could you tell where you think we are, in terms of the jobs for
the Port of Baltimore, and do you feel that we have a real
commitment in the way this merger is being proposed to preserve
those jobs, or do you identify yellow flashing lights, that we
must continue to stand sentry over, and also flush out those
details?
Mr. Glendening. Well, Senator, first, thank you for your
comments on the State role. I recall that you and I were on the
phone, I guess, in detailed conversations just 1 or 2 days
after the discussions, and outlined how we were going to handle
this, and I certainly appreciate your help, your leadership on
this as well.
With regard to the question of where are we, and
specifically relative to the port and jobs, I must say we were
alarmed at first, but after very productive discussions with
all three principals, but particularly, most recently, with
Norfolk Southern and CSX, I believe there is the commitment
there that will either keep us at the current level of
competition, or in many cases, increase the competition level.
We want to make sure that we not only have the two class I
railroads, but we want to make sure that they have the ability
to compete with one another.
I think for the port, the potential is here to open up
competition even better to the Midwest, and that aspect of it
is just----
Senator Mikulski. So your preliminary assessment is that
this could actually enable us to have a greater volume, and
once again, reestablish our preeminence in travel to the
Midwest that we once enjoyed.
Mr. Glendening. I believe that that is very possible, and
particularly if there is a shared track use as well, and if
there are some cooperative arrangements with some of the
shoreline, even further, but I do think that you are correct in
your conclusion.
Let me make one observation, though. While I am trusting,
and I know everyone else is, and while we love the CEO's, and
everyone working very productively here today, I do hope, and I
am sure this is probably true for the other States, but I do
hope that the guarantee of competition, which is the guiding
line on the--which the Surface Transportation Board is supposed
to operate, that that is incorporated into the final agreement
of approval in a way that would be legally enforceable, so
there is personality change, we can have the same confidence in
the future.
Senator Mikulski. Well, this then takes me to western
Maryland. I know that everybody feels that they have
commitments about that.
Now, we understand--I mean there are over 1,000 jobs at
stake in western Maryland, and there are two, those who
actually work on the railroads, those wonderful people who have
really built CSX for the last over 150 years, and also the
people in our coal fields are being able to have access.
I understand that there is, again, a promise, but do you
feel that there has been an actual commitment to western
Maryland, or is this something else that we needed to pursue
with both Mr. Snow and Mr. Goode, and the others, when they
testify?
Mr. Glendening. There has been a verbal promise, and I
think that good intentions here, I would like to try to lock
some of this down a little bit further.
John Snow, as you know, has made some serious efforts to
work very closely with us, and we appreciate that, and there is
a sense of confidence, and we are clearly headed in the right
direction, and we hope to be able to have some more detailed
announcements shortly about that.
I might also add real quickly as something that is of great
concern to us, that for the 20,000 commuters a day,
particularly on the Baltimore-Washington corridor, that we are
very close to having a significant announcement there----
Senator Mikulski. Well, that is what I was going to ask,
because I am going to ask these same questions to them, in
other words, what you are saying, both either to make sure that
our commuters are not stranded, and that there will be jobs in
these areas, there seem to be assurances, but there is not now
yet firm agreements in the flushing out of the details.
Mr. Glendening. I believe on the commuters that we will
have not just a firm agreement, we will have a contract ready
to sign and announce in a matter of a few days on the
protection and actual expansion of commuter capacity. We do not
have the same guarantees yet for western Maryland, both for the
employment, but also, as you mentioned correctly so, for the
coal fields, so we want to make sure that the same level of
competition, of access, is available for our workers and owners
in western Maryland that are being provided elsewhere.
I noted with interest the conversation about what is going
on in Pennsylvania.
Senator Mikulski. Yes; another question that I will be
asking is, the rail service to the Delmarva, in order to be
able to get our grain in, to have a poultry industry, which, of
course, is so viable.
I see that my time is up. I have other questions related to
infrastructure that I will ask. I would like, in closing, just
to make a reflection.
First to you, Mr. Mayor, and to others representing the
Governor of New Jersey, it is one thing to compete on rates,
and services, and so on, but we know what it is like to lose a
headquarters. We knew how it felt when CSX moved to Florida.
So we are here, and we are all trying to be jolly, but over
the last several years, we have seen the erosion here, we do
not--I want you to know from the standpoint of Maryland, the
philosophy of Governor Glendening, we would hope that as we
work on this, that it is truly a win-win situation, and we
compete on the basis of rate and service, but we would really
look forward to that.
I think, in conclusion, what this says is that while we in
this committee focus on highways, byways, subways, ISTEA, et
cetera, that we need to keep in mind the role that railroads
play, and we need to be really standing sentry over that, see
what public policy initiatives, what kind of modernizations
there need to be, and public/private partnerships, because I
think we take railroads for granted, and then when they either
want to go or rearrange themselves, we get scared, and then we
come in, and we really need to look at what our railroad policy
is. Thank you, again. We look forward to working with all of
you.
Senator Shelby. Gentlemen, we thank all of you.
Our next panel will be Mr. John Snow, chairman and CEO, CSX
Corp., Mr. David Goode, chairman and CEO, Norfolk Southern
Corp., Mr. Tim O'Toole, senior vice president for law and
government affairs, Consolidated Rail Corp. (Conrail).
Senator Specter. Mr. Chairman, while the witnesses are
coming up, may I ask unanimous consent to put in a letter from
Mayor Tom Murphy, of Pittsburgh? Mayor Murphy could not be
here, but he has some important comments to add.
Senator Shelby. Without objection, so ordered.
[The information follows:]
Letter From Tom Murphy, Mayor, City of Pittsburgh
March 20, 1997.
Hon. Arlen Specter,
U.S. Senate,
Washington, DC.
Dear Senator Specter: Thank you for inviting me to participate in a
hearing this morning on the proposed merger of CSX, Norfolk Southern
and Conrail. I regret that prior commitments will not permit me to
travel to Washington today.
Although the details of the proposed merger are not yet finalized,
I wanted to address three critical issues that I believe must be
factored into the final plan. First, it is imperative that rail cargo
service be maintained in the City of Pittsburgh and the surrounding
region. This area is an established intermodal hub that connects air,
highway, rail and water transportation systems to move local goods and
products to domestic and international markets.
Second, the redevelopment of Pittsburgh's downtown and riverfronts
has been tremendously successful in recent years. There are currently
1,000 units of new market-rate housing underway, many on the
historically underutilized waterfronts. Plans for the downtown area
include an expanded convention center, a new department store and the
continued development of the Cultural District. The presence of major
rail lines along the riverbanks and, literally, through the downtown
area pose public safety risks and may limit the development potential
of the City. It is important to this community that the future
relocation of these lines be an explicit condition of the final
business deal.
Finally, Conrail has an historic presence in Western Pennsylvania.
Thousands of dedicated employees have made this area their home and
have contributed to its vitality for many years. I trust that the
merger will appropriately respond to the employment needs of these
individuals.
Again, thank you for permitting me to submit this statement for the
record. I look forward to working with rail officials and you to insure
the future of railroad service in Pittsburgh.
Sincerely,
Tom Murphy,
Mayor.
Prepared Statement
Senator Specter. And also testimony from the Pennsylvania
Coal Association.
Senator Shelby. Without objection.
Senator Specter. I thank the Chair.
[The statement follows:]
Prepared Statement of George Ellis, President, Pennsylvania Coal
Association
Thank you for accepting my written testimony concerning the
proposed breakup of Conrail. My name is George Ellis, and I am
president of the Pennsylvania Coal Association, a trade association
organized and operating under the laws of Pennsylvania representing
producers of bituminous coal in Pennsylvania.
PCA's 40 Producing Members are responsible for 75 percent of the
state's annual bituminous coal output, which according to preliminary
data from the Department of Environmental Protection and the U.S.
Department of Energy, totaled approximately 67 million tons in 1996.
PCA's 86 Associate Members provide services to the coal industry
ranging from banking and insurance to equipment and engineering
consultation.
According to DOE's latest figures, railroads are the main
transportation link for coal nationwide. Coal constitutes some 40
percent of rail tonnage and a fourth of the railroads' annual revenues.
Pennsylvania is no exception. During 1995, 36 percent (or 22
million tons) of Pennsylvania bituminous coal deliveries to both in-
state and out-of-state customers were by rail. The vast majority of
that coal went to electric utility generation stations, which consumed
70 percent of Pennsylvania's coal production. While railroads are the
dominant haulers of Pennsylvania mined coal to Pennsylvania utilities,
Pennsylvania coal is also delivered by rail to electric generation and
industrial consumers in 22 other states.
Coupled with utility deregulation, rail mergers are changing
forever the way coal is bought, sold and transported. The proposed
breakup of Conrail is no different in that its outcome will realign
Eastern coal markets and dramatically change coal movement and rates.
With that, it should come as little surprise that PCA member
companies have a substantial interest in and harbor a number of
concerns about splitting Conrail between Norfolk Southern and CSX.
Fairness, competition and cost are paramount concerns; but equally
important questions turn on captive shipper access, rate structures,
quality of service, and new access to Pennsylvania coal markets from
out-of-state suppliers.
There is a risk that Conrail will merely be replaced by another
dominant carrier and that one railroad will reach most rail users. If
this happens, coal operators fear a market concentration that would
impede a shipper's ability to obtain competitive contract rates.
A good example of monopolistic control over pricing in the realm of
transportation is airline routes with no competition, where the
consumer in effect becomes the captive ``shipper.'' With no competition
for flights to Pittsburgh from Baltimore (211 miles), a roundtrip
excursion fare on USAir costs $198.00 (94 cents per mile). Yet from
airports with competition to destinations with much longer air mile
routes, USAir ticket prices plummet. A good comparison is Baltimore to
Chicago, where United Airlines competes with USAir. Even though this
flight is nearly three times as long (611 miles) as the first example,
USAir's excursion fare price is only $130.00 (21 cents per mile)! The
price for any commodity will decrease where there is more competition
and increase where there is less. That is the basic tenet of economics.
The coal industry may likely bear the lion's share of the burden posed
by a realignment, as higher rail freight costs reduce the
competitiveness of Pennsylvania coal and force down coal prices.
The split may also accelerate the growth of Central Appalachian
coal in markets historically supplied by Pennsylvania coal operators
(i.e., Pennsylvania coal-fired electric generating plants). Coal mined
to the south is inherently lower in sulfur and can be burned as a so-
called ``compliance'' fuel by electric utilities with little or no
value-added preparation. As the mandates of the Clean Air Act
Amendments of 1990 become even more strict after 2000, this fuel option
could become increasingly attractive to utilities in Pennsylvania and
the Northeast. With that potential demand, a single rail system with
monopolistic pricing control and access to huge, Central Appalachian
low-sulfur coal reserves could open a floodgate of that competing coal
to Pennsylvania coal markets.
The result would not only be devastation of the state's most
important indigenous energy supplier (coal, much of it mined in
Pennsylvania, fires 58 percent of the state's electricity supply), but
also for the many communities for which it provides well-paid, family-
sustaining jobs. And the breakup could have a similar effect on
shipments of Pennsylvania products from other economically important
businesses and industries--from agriculture to manufacturers.
This is all playing out at a time when both the electric utility
industry and the coal industry are in a period of rapid change due to
the deregulation of the electric industry. Competition in electric
generation will place a premium on cost-effectiveness. Consequently,
the future for coal or any other fuel will be dictated by how
competitive it is. If coal remains a cost-effective fuel--as it
certainly is now--the coal industry will benefit from competition in
the electric generation market. However, competition among coal-fired
plants will intensify, which could result in significant displacements
between coal-fired plants.
Thus, transportation costs, which already represent a significant
portion of the cost to generate electricity, and the ability to
negotiate with railroads for lower rates, become an even more
significant component in the fuel procurement equation. As utilities
sell electricity in a competitive, real-time market, will the railroads
package coal hauling services to meet utilities' changing needs?
Utilities may balk at fixed-volume, fixed-rate, long-term commitments.
But without such commitments, railroads may resist the capital
improvements utilities expect. How can coal haulage contracts be
written to satisfy these seemingly conflicting concerns while providing
haulage rates that will continue to make locally produced Pennsylvania
coal attractive to its chief users--Pennsylvania's electric utilities.
It is also hard for coal operators to believe that the breakup of
Conrail will accrue the ``efficiencies'' and ``cost savings''
promised--especially for coal. Why? Because the debt load of any
Conrail acquisition will easily offset by far any potential economies
of scale.
The bid for Conrail went so high that the debt of the new rail
company will be enormous once acquisition is completed. The coal
industry will certainly face claims by the new, monopolistic giant that
they must receive ``a fair return on their investment'' that will
require higher freight rates.
Another fear expressed by Pennsylvania coal operators is loss of
service quality with a breakup. Without any real competition left
behind in the wake of the deal making, quality of service may be
reduced.
Experience shows that deficiencies in coal transportation services
are more prevalent to coal train movement originating in mines where a
single rail carrier represents the only mode of freight transportation.
Problems such as late train arrivals for scheduled loading operations,
an inadequate supply of rail cars, and lack of track maintenance,
repair and upgrading operations adversely affect utility operations
which characteristically demand a relatively constant flow of coal
fuel.
The issue surrounding captive coal shippers in Clearfield County is
also very urgent. Currently, 75 percent of coal shipped from the
Clearfield Cluster, a privately owned short line system in central
Pennsylvania, goes to power plants operated by Pennsylvania Power &
Light Co. In 1996, total coal shipments on the Clearfield Cluster
totaled 3.2 million tons. Because of Clearfield coal operator proximity
to PP&L's coal-fired power plants--and the importance of coal industry
jobs to the Clearfield County region, the Clearfield Cluster must be
offered competitive shipping rates in the future.
The Clearfield Cluster provides rail access to approximately 10
percent of the land area of Pennsylvania. Without its primary coal
traffic, the Clearfield Cluster will be forced to discontinue its
operations, with devastating impact on Clearfield County's already
distressed economy for years to come.
Conrail's argument that Clearfield County coal--or coal from mines
in other regions of Pennsylvania--will become less attractive to coal-
fired utilities in the future due to its sulfur content and Clean Air
Act considerations denies the fact that low-cost sulfur dioxide
emission allowance credits are available for sale with their coal.
Indeed, if they remain inexpensive, emission allowance credits
combined with higher sulfur coal shipments are a viable Clean Air Act
compliance option for utilities that can keep Pennsylvania coal
competitive during Phase II implementation.
To summarize, the future for Pennsylvania coal depends on how
efficiently--and economically--it can be delivered to electric
utilities and other markets. Because rail freight rates are a major
part of the delivered price of coal, the cost of that transportation is
a key factor in coal sales. Only with true market competition can
reasonable rates for hauling coal and other bulk commodities be
assured.
Many shippers of coal and other commodities are already captive to
Conrail in Pennsylvania, with no effective transportation alternatives.
This condition will remain no matter how the current proposal proceeds
through the approval process. Therefore, captive shipper protection
against abuses in rates or service must be instituted where railroads
dominate Pennsylvania rail shippers. Conversely, where effective rail
transportation competition does exist in Pennsylvania, it must be
preserved when a railroad consolidation would otherwise wipe out that
competition.
The goal of preserving the limited competition can only be attained
by retaining the competition offered by more than one rail carrier, or
at the very least, requiring trackage rights for a second railroad as a
condition of approving any transaction.
In the final analysis, PCA believes that a Conrail split should
only take place if it includes provisions that give shippers meaningful
competitive options. Issues such as how rates will be established,
competitive access to traditional markets and quality of service need
to be addressed and resolved before approval is given to any
realignment.
PCA will continue to work with the General Assembly and the Ridge
Administration to assess the implications for shippers and freight
originators. We will also closely examine related issues raised by
public comments as the proposal is considered by the federal Surface
Transportation Board. We reserve judgment on any realignment until the
specifics on the restructuring of the Eastern rail system are made
known.
I thank you for the opportunity to voice PCA's concerns and our
wish to preserve effective rail transportation competition where it
exists today for Pennsylvania coal producers.
Prepared Statement
Senator Specter. And also a statement for the record by Mr.
Paul Gilmore, president of the Delaware & Hudson Railway Co.
Senator Shelby. Without objection, it will be ordered.
[The statement follows:]
Prepared Statement of Paul D. Gilmore, President, Delaware & Hudson
Railway Co.
The Delaware & Hudson Railway Company appreciates having this
opportunity to present its views to the Subcommittee.
the delaware & hudson (``d&h'')
The Delaware & Hudson Railway Company is the oldest continuously
operated transportation company in the United States. The D&H traces
its history back to 1823 when the New York State Legislature passed a
special act establishing the Delaware & Hudson Canal Company. In 1840
the D&H became the first transportation company traded on the New York
Stock Exchange.
The D&H is a survivor and has a sense of history and tradition
which has provided the company with the creativity to compete in an
increasingly competitive environment. Today, the D&H operates in six
states, the District of Columbia and one province on 1,500 miles of
track. The primary Class I interchange partners with the D&H are
Conrail, CSX, Norfolk Southern and Canadian National. The D&H also
connects with 24 regional and shortline railroads throughout its system
of which we currently interchange freight traffic with six Pennsylvania
shortlines.
With the 1976 creation of Conrail from the ruins of six bankrupt
railroads (at a cost of more than $7 billion to tax payers), the
Federal government designated the D&H, the region's only viable
operator, as the competitive alternative to Conrail in the Northeast.
However, the government assumed that an enlarged D&H could retain its
overhead business even though more than one third of that traffic would
originate on Conrail owned lines. This assumption was incorrect.
In 1991 with the help and support of Pennsylvania and New York, and
of the Federal Railway Administration the D&H was acquired by the Class
I CP Rail System. Since 1991 CPR has invested more than $200 million in
the purchase, rehabilitation and operating expenses of the D&H.
Canadian Pacific Railway system is the first transcontinental
railway and currently the only transcontinental railway to provide
seamless service to U.S. ports. As an integral part of the Canadian
Pacific Railway system, the D&H belongs to North America's fifth
largest railroad network. This system provides Class I service to D&H
customers.
Our first transcontinental movement occurred shortly after the D&H
was purchased in 1991--a movement of cedar shakes from Vancouver to the
Port of Philadelphia. Before the purchase, Canadian Pacific Railway
would have moved this traffic via Montreal.
the merger and the northeast
The acquisition of Conrail by either CSX or Norfolk Southern, or
both, will have a profound impact on the competitive balance of rail
transportation in the Northeast. Here, our market has been dominated by
Conrail since 1976. Some call it a monopoly. Indeed, the proposed
merger could be the precursor of a fundamental realignment of the
United States rail system that would leave the U.S. with two
transcontinental railroads that will dominate long haul rail
transportation. The implications for the Northeast are significant.
Both the Federal government and State governments have poured
billions of dollars into Conrail's structure. The Federal government
spent over $7 billion on the first years of Conrail's existence. State
governments continue to provide major funding for some capital
projects. When the federal government created Conrail in 1976, provided
it with tax exempt status, and conveyed other lines to it, it limited
competitive rail service in key industrial locations in the Northeast.
It is clear that the Delaware & Hudson is well-positioned to
provide added rail service, particularly for Canadian traffic, in the
Northeast, if it is given the proper tools. However, the D&H needs
expanded access over our current routes, access over new, more
competitive routes and access to terminals and facilities, to be able
to provide that service effectively to the ports and industrial centers
of the Northeast.
what the cpr/d&h partnership has to offer shippers
The CPR/D&H is particularly attractive to shippers in the Northeast
because it has demonstrated its determination to serve its customers
through such action as an expenditure of $200 million on D&H operations
since 1991 and contributing to double-stack clearance of the Conrail
line through Pennsylvania. CPR/D&H is already well positioned
geographically in the heart of the Northeast. When the Federal
government created Conrail, it designated the D&H to provide
competition, albeit without granting the necessary access. When CP
purchased the D&H in 1991 it undertook an obligation to provide service
over the full D&H franchise, including to the railway connections at
Alexandria and over the Southern Tier to Buffalo, although access over
this franchise remained limited by the 1976 plan.
The D&H continues to provide a valuable bridge line for shippers
and shortlines in the Northeast to CSX and NS as well as to other
railroads. It functions as a bridge carrier between Canada and New
England and the South; it also bridges shippers and shortlines in the
Northeast and the Midwest.
If CSX and NS divide the Conrail assets between them, CPR/D&H
offers shippers a unique North-South service, connecting the eastern
seaboard with the northern states and the Canadian provinces of Quebec
and Ontario. This service will be significant to pulp and paper
shippers whose competitors are located on the CSX and NS owned lines.
The D&H offers shippers much more than a regional railroad. On
joining the CPR, the Delaware & Hudson became an integral part of a
major transcontinental Class I system that operates from the East Coast
of North America through both the United States and Canada to
Vancouver, the North American port closest to the main Asian markets.
New York to Hong Kong is 1,000 miles shorter via Vancouver than through
Los Angeles! Importantly, D&H traffic moves onto CP's Soo Line in
Chicago, giving ``end-to-end'' CP access to the upper Midwest. As well,
it connects with Conrail, CSX, NS and other railroads at numerous
points between the East Coast and the Midwest, extending the range of
the D&H's bridging role.
the merger and the d&h
CPR's preferred strategy is to negotiate the business opportunities
with the merging entities. We feel that it is not in anyone's best
interests to fight this out in front of the STB. Currently, at the
highest levels, we are negotiating with both the NS and CSX.
It must be admitted that the current scenario of a split Conrail
appears to be the most challenging of all merger scenarios for CPR. CPR
is concerned about its investment in the Northeast. The D&H, despite
its enthusiastic management and the injection of over $200 million, has
only reached the ``break even'' point; this status quo is NOT
acceptable in the long term. The D&H must acquire more traffic to
survive. We believe that the task of providing the D&H with a fully
viable network will be that much more difficult when there are three
rather than two Class I railroads seeking assets and access.
The current ``bridge line'' role of the D&H could come under severe
pressure as a result of CSX and NS acquiring Conrail lines into the
heart of the Northeast, reducing or eliminating the D&H hauls that
currently exist. The thrust of the two buyers of CR to obtain direct
access to Northeast markets will likely bring pressure to short haul,
if not eliminate, the D&H as a bridge carrier between Canada and/or New
England and the South; it could also be increasingly difficult to
continue competing between the Northeast and the Midwest.
CPR also has concerns about the long-term viability of rail service
to customers of the D&H that wouldn't be served by either NS or CSX. It
has invested substantially in the D&H's current franchise of providing
a competitive alternative to CR as far South as Alexandria and West to
Buffalo. While the competitive balance will change under the scenario
of a CR split, the rights and interests of the D&H and its customers
will remain. The D&H has struggled to provide service despite severe
restrictions on access. These must be corrected in this merger.
The CPR is prepared to invest capital to expand its participation
in the Northeast if it is determined that there is a good business case
for such investment. There are no arbitrary bounds on what we would
consider. We would require adequate assets, terminals, trackage rights
and access agreements to be commercially viable in the Northeast and an
aggressive, effective competitor. This includes adequate terminal
facilities and local access to the industrial base in the Northeast
port areas as well as competitive and viable corridors to Buffalo and
to the North.
Our concept of operations makes us particularly attractive as a
partner to regional railroads and shortlines. Our approach is to
utilize regional carriers already having assets and operations in the
area. Conceptually, the regional carriers will perform certain of the
local pick up and delivery functions. We will perform the linehaul work
and national marketing. CPR will be the Class I thread through the
whole plan.
Given a choice between owning and renting railway assets, we prefer
to own in instances where the potential volumes from the opportunities
are sufficient to justify ownership. This will be assessed on a case by
case basis. In some instance there are no surplus assets, leaving no
choice to renting from the merger partners. In these cases, long-term
financial predictability and equal treatment will be very important. We
cannot afford drawn out and expensive legal battles over exorbitant
trackage rights cost increases like we are now in with Conrail on the
Southern Tier.
conclusion
It goes without saying that, in your consideration of the impact of
the merger (or mergers) on shippers and the economy of the Northeast
you will be demanding competitive choices in rail transportation. We
respectfully ask that you also examine how those competitive choices
have been provided in the past and will be provided in the future. We
ask that you continue to support the CPR/D&H network.
Thank you.
Senator Specter. And also to note that my colleague Senator
Santorum has other commitments, could not be here, but is very
much concerned about the entire process.
Senator Shelby. Any statement, and we will leave the record
open, too, for Senator Santorum.
Senator Specter. Thank you very much, Mr. Chairman.
Senator Shelby. Gentlemen, your written statement will be
made part of the record in its entirety.
Mr. Snow, we will start with you, if you can sum up your
testimony in a few minutes.
STATEMENT OF JOHN SNOW, CHAIRMAN AND CEO, CSX CORP.
Mr. Snow. Thank you very much, Mr. Chairman, Senator
Specter. It is a great privilege to be here.
Let me assure you that I am a mere businessman, I'm not a
pugilist, and not a Titan, but somebody who is, with Mr. Goode,
and with the full cooperation of Conrail at this point, an
advocate for a transaction which we think is very much invested
with the public interest, a transaction that I must say has
taken many twists and turns, and is quite a bit different than
the one that Mr. O'Toole, and I, and a number of others worked
on last July, August, September, and October, and yet it is one
that I feel advances the interest in competitive rail service
in the region effectively, that will provide single-line
service over most of the Eastern half of the United States,
benefiting shippers in New Jersey, Alabama, Florida, and
Pennsylvania, one which will promote economic development in
the Northeast, connect the Northeast, and the Southeast, and
the Southwest, in ways that simply--the full benefits of which
are not even foreseeable today.
But one thing we know about rail transportation, where
single-line service is made available, our ability to render
better service, and, therefore, grow the business, and compete
more effectively with trucks, is demonstrably better,
demonstrably better.
It is as if the railroad industry today is two worlds,
there is the world of single-line service, where our market
share against trucks is quite high, and there is the world of
joint-line service, where our market share is demonstrably
lower.
The secret of this merger, the key to this merger is the
potential for, Senator Lautenberg talked about it, competing
more effectively against the major competitor of railroads,
that is the motor carrier industry, an industry that
overwhelmingly has the majority of the transportation service
in the United States today.
This merger is going to give us the ability, the respective
mergers, of each of these companies, Norfolk Southern and CSX,
to compete more effectively with truck return traffic that is
now on the highways, to the rail beds, and I am confident, grow
employment in the railroad industry over time.
While this has been a stressful time for all of us, I must
say that I got quite a measurable sense of satisfaction a week
or so ago when a letter arrived in my office from a
distinguished former Philadelphia lawyer, who went on to great
national prominence, is Secretary of Transportation, and I
refer, of course, to Bill Coleman, and I had the great
privilege of serving under Bill Coleman back in the Department
of Transportation in the mid-1970's, when the very issue of
what would happen with Conrail, which was then being managed by
the Department of Transportation, was the principal issue on
the Secretary's desk, and the Secretary had designed a program
for returning Conrail to the private sector, in which a
substantial part of it would go to Mr. Goode's predecessor
company, the NNW, and a substantial part, the other half, would
go to my predecessor company.
Secretary Coleman's letter to me, in effect, said, ``John,
congratulations, you did now what you and I tried to do and
could not do 20 years ago.''
Justice Holmes once observed, Senator Specter, that
sometimes a page of history is worth a volume of logic, I think
there is important history here, but there is also important
logic, fundamental transportation, competitive policy logic in
the way this merger has unfolded, and I thank you very much for
the opportunity to be here with you.
Prepared Statement
Senator Shelby. Thank you, Mr. Snow. Your written statement
will be made part of the record.
[The statement follows:]
Prepared Statement of John W. Snow
Mr. Chairman, and members of the Subcommittee, I am John W. Snow,
Chairman, President and Chief Executive Officer of CSX Corporation. I
appreciate the opportunity to appear before the Subcommittee today to
discuss the merger agreement that we entered into with Conrail last
October, the key reasons which led us to amend that merger agreement,
and why we believe that the acquisition of Conrail by CSX and Norfolk
Southern will bring significant benefits to the region and the nation.
CSX entered into a strategic merger agreement--a merger of equals--
with Conrail last October 15. We felt that agreement would be
beneficial to our companies, customers and employees. Of course, the
entire merger agreement was subject to an affirmative vote of the
majority of Conrail shareholders and the approval of the Surface
Transportation Board.
As has been widely reported, this proposed merger was strongly
opposed by Norfolk Southern, but that opposition was not restricted to
Norfolk Southern. In January, Conrail shareholders resoundingly refused
to opt-out of the Pennsylvania law that would have allowed us to
proceed with the merger. In addition, statements by federal regulators,
public officials and numerous customers made it clear that regulatory
approval was not achievable without major concessions to Norfolk
Southern and that in fact, a negotiated settlement with Norfolk
Southern that provided competitive balance in the region was the
preferred course.
It was always CSX's view that some concessions would have to be
made. In part, this view was based on the history that led to the
creation of Conrail. Conrail was created in 1976 out of the bankruptcy
of the Penn Central and other railroads in the Northeast. At the time,
I was an Assistant Secretary at the Department of Transportation under
Secretary Bill Coleman serving on his senior policy team. Secretary
Coleman pushed for a private sector solution that would have split the
assets of the bankrupt railroads between the Norfolk and Western and
the Chessie System (predecessor railroads of the Norfolk Southern and
CSX, respectively). The Department advocated this approach because it
wanted shippers to have a choice between the two carriers. Unable to
overcome some of the objections from rail labor and the carriers own
reluctance to proceed, a backup plan proposed by the United States
Railway Association (USRA) for the creation of a single ``Big Conrail''
was adopted. That outcome was reluctantly agreed to by Secretary
Coleman and the Congress.
Given this historical perspective and the clear signals we were
getting from shippers, other railroads and public officials demanding a
private sector solution that created competitive balance in the region,
we tried to persuade Conrail to agree to a reasonable set of
concessions to Norfolk Southern. While we remained committed to our
friendly merger of equals until the end, we could not overcome
Conrail's insistence on retaining virtually all of its system. As a
result, we failed to produce a solution that could gain support from
shippers or public officials.
Norfolk Southern's February 24 proposal to us and Conrail calling
for a roughly equal division of the Conrail system forced resolution of
the issue and resulted in amendment of our merger agreement with
Conrail. Currently, we are in negotiations with Norfolk Southern which
I am confident will produce two strong railroads.
I would like to be able to provide this Subcommittee today with
very specific information about that transaction. However, such details
must await the successful conclusion of these negotiations. Today, I
can tell you--the result of the amended agreement with Conrail is a
major victory for a number of important constituencies. Conrail
shareholders will receive $115/share in cash and, although we do not
yet have a final division or operating plan, it is clear that shippers
throughout the East will benefit from much better service over a
balanced rail system, and the driving public will benefit from fewer
trucks on already overcrowded highways.
While I am optimistic that this transaction holds great potential
for economic growth and expanded employment opportunities for the first
time in the rail industry, I must be candid and acknowledge that
initially there will be some job loss. Once we complete our
negotiations with Norfolk Southern, we will file a joint application
with the Surface Transportation Board which will provide a detailed
operating plan. This plan, among other things, will specify the impact
on jobs. It goes without saying that we are attempting to minimize job
loss. It is important to keep in mind that under federal law any worker
who is unable to continue working will be eligible for up to six years
of labor protection or a generous stay and severance package which is
provided for under the amended merger agreement. In addition, many of
Conrail's employees participate in an ESOP which would be a benefit in
addition to the stay and severance package.
As we take advantage of the business opportunities presented by
this pro-growth transaction, CSX will not lose sight of our fundamental
commitment to safety. Over the last eight years, we have dramatically
improved our safety record. Today we are first in the industry in train
accident prevention and Norfolk Southern is first in personal injury
prevention.
We hope to conclude our negotiations with Norfolk Southern and file
a joint application with the Surface Transportation Board by the end of
May or early June. Mr. Chairman, we believe that an historic
opportunity exists to bring to the Northeast precisely the competition
that was sought--but never achieved--twenty years ago. This transaction
will maintain competition where it exists today and introduce
competition into key areas that have not seen competition in three
decades. We plan to work with interested parties in the coming days so
this application will enjoy widespread support. I am confident that it
will obtain approval by the Surface Transportation Board. I will, of
course, keep this Subcommittee informed as our negotiations proceed.
I am happy to answer any questions that you may have.
STATEMENT OF DAVID GOODE, CHAIRMAN AND CEO, NORFOLK
SOUTHERN CORP.
Senator Shelby. Mr. Goode.
Mr. Goode. Thank you, Senator Shelby.
My filed statement does have some information about Norfolk
Southern, but in the interest of time, I will leave the
advertisements for those to read, and turn to the proposal.
As has been said earlier, right now Norfolk Southern and
CSX are working hard on a lot of details of a historic proposal
for a major restructuring of rail transportation in the East.
As we reach those agreements, a lot more information is
obviously going to become available. We are in the process,
trying to work hard with other interested parties, including
many of the parties who have already been here this morning,
and a great many others, and with shippers, so that we can
present to the Surface Transportation Board, an application
supported by a very wide group of constituencies.
We have groups, as has been alluded to earlier, working
with the States and public officials. We hope that we can wrap
all of this together, so that we can get a proposal to the
Surface Transportation Board by June, and seek approval as
rapidly as possible, because we want the benefits of this
transaction, which we believe will be very competitive and good
news for all of the region, to be available as quickly as
possible.
This is a procompetitive proposal, we are going to create
two relatively equivalent competitor rail transportation
companies east of the Mississippi, as there are now two such
companies in the West.
Our systems will provide the benefits of long-haul, single-
line rail transportation service for shippers throughout the
region, and will make the economy more efficient and
competitive, and while we have been focusing a lot on the
Northeast and the area served by Conrail, it is very important
to recall throughout this that the benefits of that kind of
service will benefit people all through the area that Norfolk
Southern and CSX serve, which includes all of the country east
of the Mississippi, and, indeed, in our cooperation with the
Western railroads, this is going to mean that the benefits of
the better service presented by this proposal are going to
redound to the benefit of shippers, really, throughout the
United States.
As Senator Warner said earlier, this is a global
transportation network, it is a global economy, and the
benefits of this proposal, we believe, can redound to make
industry in this entire country more competitive, and that is
our plan.
As has been said several times, the devil is in the
details, and John and I are discovering a lot of devils as we
negotiate. We are good friends, we have competed head to head
for many years, our companies, and John and I have long
histories in our two companies, and we have done that for a
long time, and I think it has been a benefit to both of our
companies, and to the shipping public, to have us as friendly,
but hard, and decisive competitors.
So we look forward to the opportunity to present that, and
while we need some space and time to complete these
negotiations, we are certainly welcoming the opportunity, and,
indeed, are seeking it out to involve all of the interested
constituencies in our thinking, as we proceed forward to get to
the Surface Transportation Board.
This is a very positive development. It is going to yield
significant public benefits, and Senator Specter, I will wait
and let you ask me that question, rather than presuming the----
Senator Specter. No; go ahead, your green light is on, use
your time.
Mr. Goode. Would you like me to? Perhaps as a preliminary
statement, I would be happy to address the reasoning behind the
contract that we have entered into with PP&L, which they
announced the day before yesterday, or a couple of days ago.
I am happy, if it is seen as a positive thing for the State
of Pennsylvania, and the customers of PP&L, and I am happy that
they are happy about it, but Norfolk Southern enters into
transactions for the purpose of making a fair return for our
shareholders.
We believe that that is best done by serving our customers
effectively, we are interested in doing business, and we are
happy to be moving some coal to PP&L, and I hope it is
profitable.
I have every confidence that it is a profitable transaction
for us, but it is a good illustration, perhaps, of some of the
benefits that can redound from this.
Thank you very much.
Prepared Statement
Senator Shelby. Thank you, Mr. Goode. Your written
statement will be made part of the record.
[The statement follows:]
Prepared Statement of David R. Goode
Mr. Chairman, members of the Subcommittee, my name is David R.
Goode. I am Chairman, President and Chief Executive Officer of Norfolk
Southern Corporation. I am pleased to be here today to discuss various
aspects of our proposed acquisition of Conrail with CSX.
I would like to begin by telling you a little about Norfolk
Southern. Then, as you have requested, I will address some of the
issues you have raised about this transaction. Before I am through I
hope to convey Norfolk Southern's firm conviction that the proposed
plan for Conrail will be good for customers, good for employees and
good for the country.
Norfolk Southern Corporation was created in 1982 through the
combination of two highly successful railroads, Norfolk and Western and
Southern. Some of you may be surprised to learn that Norfolk Southern
has deep bloodlines in the Northeast. In fact, the Pennsylvania
Railroad, one of Conrail's predecessors, once controlled Norfolk and
Western.
Today, Norfolk Southern is the fourth largest freight railroad in
the United States. We own more than 14,000 miles of track throughout
the Midwest and Southeast. We haul anything that moves by rail,
primarily coal, chemicals, automobiles, auto parts, grain, paper, and
construction materials. We also move trailers and containers--what's
known as intermodal freight because it moves by more than one kind of
transportation (for example, trains and trucks)
One of Norfolk Southern's proudest accomplishments has been to
achieve the best safety record among the nation's larger railroads for
seven years in a row, an unprecedented feat. In its annual corporate
reputations survey, Fortune magazine for the second year in a row
recently named Norfolk Southern ``America's most admired railroad.'' We
were ranked 41st, in the top 10 percent of all companies surveyed.
Let me turn now to Norfolk Southern's and CSX's proposal to
restructure Conrail. There is no question it has been a tough fight.
Norfolk Southern battled hard to get to where we are today. We fought
fairly, honestly and with the integrity that defines the way we conduct
business. Right now, we are meeting with CSX to work out the myriad
details of the restructuring. We have a basic agreement on what the map
will look like and how the transaction will be structured. Norfolk
Southern, for example, will step into Conrail's shoes most places in
Pennsylvania. We will also extend our reach north to the Port of New
York and New Jersey and introduce a number of new north-south services
that will link the metropolitan New York area with Philadelphia,
Baltimore and the Southeast.
We plan to file an application with the Surface Transportation
Board in June. If the Board approves the plan, the restructuring will
take place in 1998. Many more details will become available once we
file with the STB and we will be happy to return and give you an
update. In the meantime, I can tell you in general terms how this
transaction will benefit customers, employees, and the communities in
which Conrail operates.
There will be a blossoming of competition, the likes of which the
Northeast has not experienced in decades. It is not difficult to
foresee the advantages of the new competitive framework. Railroads are
network businesses, and they are most useful when they connect the
markets their customers want to reach. Our restructuring plan will
create two far-flung transportation networks, each serving virtually
all major markets east of the Mississippi River. Each will link
domestic manufacturing centers with consumer markets, and also with
Atlantic coast ports, which will speed the flow of goods from United
States origins to overseas destinations. Similarly, the proposed
restructuring will lessen transit times for products moving among the
United States, Canada, and Mexico. This will help make a broad base of
American businesses more competitive internationally, and will reduce
costs to consumers.
But don't take our word for it. Just this week Pennsylvania Power &
Light said the restructuring ``would reintroduce competition to rail
service in the Northeast, benefit electricity consumers in Pennsylvania
and lower the cost of transporting coal to PP&L power plants.'' There
is no question the transaction will have a direct benefit for customers
like PP&L. But that is not all: it will have a ripple effect throughout
the Northeast's economy that will extend to consumers of electricity,
among others.
The impact of the transaction on economic development should also
be extremely positive. When Norfolk Southern enters new markets, our
world-class industrial development team accompanies it. To give you an
idea of what we can do, in 1996 alone, Norfolk Southern helped locate
73 new industries on its lines, and helped 32 other industries to
expand. Eight of the last 11 automobile assembly plants built in the
United States were constructed on the Norfolk Southern system. There is
every reason to be confident similar success stories can occur
throughout the Northeast.
We are already beginning to think about some of the projects we
will undertake to improve the Conrail lines we will acquire. We expect
that the lion's share of the east-west freight trains we will operate
will utilize the old Pennsylvania Railroad mainline across the state of
Pennsylvania. However, we will also acquire, and intend to upgrade, the
former Erie-Lackawanna between northern New Jersey and Buffalo, the
line known as the Southern Tier. Conrail has operated the Southern Tier
as a secondary mainline for secondary trains. But the dynamics of
Norfolk Southern and the portion of Conrail we will acquire will cast
the Southern Tier in a new role: it will be our main link between
northern New Jersey and Buffalo. It will also serve as Norfolk
Southern's key route between New England and the West.
In closing, Norfolk Southern and CSX are working hard to nail down
the details of the Conrail restructuring. Unfortunately, we may not
have answers yet to some of your questions. Even now, however, I can
say with complete confidence that the opportunity before us--an
historic opportunity, to restore competitive rail transportation to the
Northeast--will yield very substantial public benefits.
Again, thank you for inviting me. I will be happy to answer your
questions.
STATEMENT OF TIM O'TOOLE, SENIOR VICE PRESIDENT, LAW
AND GOVERNMENT AFFAIRS, CONSOLIDATED RAIL
CORP. (CONRAIL)
Senator Shelby. Mr. O'Toole.
Mr. O'Toole. Thank you, Senator.
My comments will be very brief. As you say, I serve as
Conrail senior vice president for law, but throughout the term
of this transaction, I occupy the position of Conrail's chief
financial officer.
Under the terms of our amended agreement with CSX, our
shareholders will receive no later than June 2, through CSX's
tender offer, $115 in cash for all the remaining shares of our
common and ESOP stock. All the Conrail stock, as you know,
acquired by CSX, will be placed in a voting trust, pending the
outcome of the STB's proceedings.
The amended merger agreement enables CSX to negotiate with
Norfolk Southern on a division of our assets, as you pointed
out, and although Conrail will cooperate fully to ensure an
orderly transition, we are not party to the current discussions
between CSX and NS, therefore, I really am not in the position
to comment on the public policy ramifications of those
discussions.
I would only note, especially for Senator Specter's
interest, as he has pointed to it, that the amended merger
agreement with CSX states that it is CSX's intention that
following the control date, Conrail's locomotive shops at
Altoona, PA, Conrail's Sam Rea car shops at Hollidaysburg, PA,
Conrail's Pittsburgh Service Center, and a major operating
presence in Philadelphia shall be maintained.
In conclusion, Conrail's board management would have
preferred for the Conrail system to remain intact; however,
under the circumstances, as they develop, we believe we
succeeded in negotiating the best possible transaction for all
of Conrail's constituents.
Thank you. I would be happy to answer any questions.
Prepared Statement
Senator Shelby. Thank you, Mr. O'Toole. Your written
statement will be made part of the record.
[The statement follows:]
Prepared Statement of Timothy T. O'Toole
My name is Timothy O'Toole, and I have been Conrail's Senior Vice
President for Law and Government Affairs since February. Before that I
was Conrail's Chief Financial Officer.
Under the terms of Conrail's amended merger agreement with CSX,
Conrail shareholders will receive no later than June 2, through a CSX
tender offer, $115 in cash per Conrail share for all remaining shares
of Conrail's common and ESOP preferred stock. All the Conrail stock
acquired by CSX will be placed in a voting trust pending the outcome of
the Surface Transportation Board's proceeding.
The amended merger agreement also enables CSX to negotiate with
Norfolk Southern on a division of Conrail's assets. Although Conrail
will cooperate fully to ensure an orderly transition, we are not party
to the current discussions between CSX and NS. Therefore, I really
cannot comment on the public policy ramifications of their discussions.
The amended merger agreement with CSX states that ``it is White's
(CSX) intention that following the control date: Green's (Conrail)
locomotive shops at Altoona, Pennsylvania; Green's Sam Rea car shops at
Hollidaysburg, Pennsylvania; Green's Pittsburgh service center; and a
major operating presence in Philadelphia (including headquarters of the
surviving corporation) shall be maintained.''
In conclusion, Conrail's Board and management would have preferred
for the Conrail system to remain intact. However, under the
circumstances as they developed, we believe we succeeded in negotiating
the best possible transaction for all of Conrail's constituents.
I would be pleased to answer any questions. Thank you.
Positive Side of Conrail Acquisition
Senator Shelby. Mr. Snow, on the positive side, and there
have to be big positive sides, otherwise, you would not be here
today, and you would not have pursued, first, the Conrail
acquisition, and then joined by Norfolk later, there are going
to always be disruptions and some negative sides to everything,
but just in a couple of minutes, tell us again what are the big
positive sides of this acquisition for both companies, if it
goes through.
Mr. Snow. Senator, you are absolutely right in saying that,
given the price we are paying----
Senator Shelby. That is right.
Mr. Snow. We have to expect enormous benefits from this
merger for our shareholders and investors to benefit. Mr.
O'Toole, Mr. Levan, and their board have negotiated a whale of
a transaction from the point of view of the Conrail
shareholders and other constituencies.
If the transaction is going to fulfill the expectations for
our shareholders and the Norfolk Southern shareholders, there
is only one answer, and that is growth. We have to grow the
business.
This is not a merger where you can save yourself to
prosperity. Given the price we have paid, there is no way to
save yourself to prosperity. We need to grow the business, and
that means we are going to have to make very large investments
in our system to expand the capacity for the growth we
anticipate.
Senator Mikulski, large investments are being contemplated
right now on the B&O Railroad, and large investments in new
sidings, double track, communications systems, information
systems, to enable us to accommodate the growth that we are
confident will come as a result of this single-line service.
That means long term, more jobs in the railroad business.
Senator Shelby. To all three of you, my State of Alabama,
and all the other Southeastern States, what will this mean to
them?
I can see it moving--you can move it all the way to the
Northeast from the Southeast on either line that we would
choose to run with, and that would be up to the market, right?
Mr. Goode. I would be happy to confirm that this is good
news for Alabama. Of course, we----
Senator Shelby. And the other Southeastern States.
Mr. Goode. And, indeed, throughout all of the East, but
particularly in the Southeast. The Northeast is a fabulous
consumer market, it is a fabulous manufacturing area, and goods
move back and forth between the Northeast and the Southeast.
This will enable both Norfolk Southern and CSX to provide
single-line service both ways on that corridor, and goods move
in major ways in that corridor, and we are going to be able to
provide faster, more efficient service as a result of having
single-line service, and we are going to compete actively for
that business, and that is good news for the shippers
throughout the Southeast.
Senator Shelby. Let me ask you this. What about head-to-
head competition between your two big railroads, if this goes
through? You are going to have more of it, are you not?
Mr. Goode. We have thrived on it. We have competed----
Senator Shelby. That is good.
Mr. Goode. If you look at a railroad map, you will see that
Norfolk Southern and CSX have pretty much competed head to head
in the Southeast and the Midwest for many years. John and I are
fond of using each other as examples, both internally, and to
drive our people to better service and higher levels of
productivity, because we have been in the position of
competing.
I think that both our companies have thrived on that, and I
am convinced that it has had a lot to do with the success of
industrial development in the Southeast and the Midwest, that
our two companies are competing in that fashion, and we look
forward to doing the same in the Northeast.
Senator Shelby. Gentlemen, at this point in time I am going
to turn the chair over to Senator Specter. Senator Lautenberg
is the next one to question. I have to go to another committee
meeting. Thank you.
Mr. Goode. Thank you, Mr. Chairman.
Mr. Snow. Yes; thank you, Mr. Chairman.
Mr. O'Toole. Thank you, Mr. Chairman.
Senator Lautenberg. Thanks, Mr. Chairman.
I wanted to ask what we can do to get real competition, for
instance, in the Port of New York/New Jersey, but particularly
focused on the Port of Newark, which is a pretty appealing
marketplace, I would think.
How do you arrange for each of you to be able to provide
some service in there, and get some market share that each of
you see?
Mr. Goode. That is precisely the question that John and I
have a team working on right now, because I think we are doing
something here that we recognize is very significant, and
perhaps a little different than anything we have seen before,
because of the scope and the broadening of the service in areas
like the area that you mentioned, Senator Lautenberg, which are
vitally important areas, with tremendous amounts of business.
We are working out the arrangement, not only because we
know that the ports want to have both the service from both
railroads, but because we both expect to be in there, competing
for the business on behalf of our own company, we want the
access.
Senator Lautenberg. You do this, I assume, by establishing
some kind of a terminal operation, terminal railroad, is that
the proper----
Mr. Snow. That is being explored as one way to do it.
Senator Lautenberg. Is there another way, Mr. Snow?
Mr. Snow. I think there may be other ways. I think we are a
little reluctant, because we need some time to negotiate this
arrangement among ourselves----
Senator Lautenberg. I will not press you for the details.
It has to be high on the agenda, so that we can be sure that
there is service out of the port area that accommodates the
needs of the shippers.
Mr. Snow. While we cannot give you the details on that
Senator, I think we can assure you that that is right at the
top of the discussion among our associates, who I think are
meeting right now.
The problem we have is to decide first the big division,
and I think we have made a pretty good cut at the big division,
so that we are both in, say, the Port of New York/New Jersey.
Then the question is: Well, how do each get competitive
access in a way that is equitable for the shippers and for the
company?
Mr. Goode. Fortunately, John and I have a lot of talented
people working for us, who have been working closely with the
officials in New Jersey, Pennsylvania, Maryland, and other
areas, who I am confident are going to be able to come up with
a satisfactory resolution of that, if John and I give them
enough room to do that.
Senator Lautenberg. How about southern New Jersey? Now, I
know Senator Specter is sitting here alongside me, and I do not
see Mayor Rendell in the room anymore, but there is enough
business, I think, to satisfy everybody down there, if the port
area gets developed to its maximum capability.
We saw that in the New York/New Jersey area. Once we
cooperated, instead of fighting one another, then things really
began to develop.
Can we be assured that there will be a serious attempt to
provide the same kinds of service on an as-needed basis in the
southern part of our State, a lot less business and so forth,
but great potential, and pretty good ports down there. Are you
looking at what is required to provide service to the southern
New Jersey shippers?
Mr. Goode. Again, we are, and while the details of this as
well need to be worked out, we certainly are looking at that,
because we believe, and we are convinced, and we are making a
very large financial bet on this, because we believe that there
is a lot of business that is not being handled by rail in the
area you are talking about right now, and our objective is to
work out the best structure, so that we can tap that business,
much of which is moving on the highway now, and make it
available for rail service. So that means we will be making the
investments that will be necessary in order to do that, because
it is going to be good business for us.
Mr. Snow. In the process we are learning a lot of new
geography that----
Senator Lautenberg. New Jersey is small.
Mr. Snow. [continuing]. Deep Water, Vineland, Palarmo, and
Salem. Fortunately, we have people who are far more
knowledgeable on that subject than David and I, who are also
working with the State authorities, the State department of
transportation authorities on this very question.
Senator Lautenberg. I would like to ask you a question
about labor protection provisions that Conrail workers would
expect, if they are displaced, a general question about labor.
Mr. Chairman, I beg your indulgence here for just a minute.
Senator Specter [presiding]. That is fine. Proceed, Senator
Lautenberg.
Senator Lautenberg. Is the combined railroads willing to
enter into a dialog with Conrail's labor force about severance
packages? It is distinctly different from the labor protection
that is currently existing in law now.
I have had a chance to read the article in the New York
Times, it is pretty illuminating, it is so illuminating, that I
wonder what happened when I left the corporate world to come
here. I do not know if we are dealing in different currencies
or what, but we were not certainly in the same league. What
about that?
Mr. Snow. Senator, we have already begun discussions with
the various brotherhoods, and with the AFL-CIO, which has
indicated it wanted to play a coordinating role in all of this.
We are open to suggestions, and certainly want to have an
open, candid, and effective set of discussions with rail labor
on this whole subject, but obviously, this is not the place to
carry on negotiations.
Senator Lautenberg. No, no; and I would not expect that.
But the fact that it is something that you recognize has to
be----
Mr. Goode. Senator, I might say that we would hope that,
again, because of our desire to move the transaction toward
approval as rapidly as possible, that will put a very high
priority on us, working out implementing agreements with labor,
because what we are talking about doing will require that, so
we have that very high up on our list of priorities.
Senator Lautenberg. Have you had discussions with----
Mr. Goode. We have begun discussions, yes.
Senator Lautenberg. Thank you very much, Mr. Chairman.
Thank you, gentlemen.
Senator Specter. Thank you, Senator Lautenberg.
Mr. O'Toole, we appreciate you being here, and I talked to
Mr. David Levan, CEO of Conrail, he said he could not be here,
because of a prior commitment, and a funeral this afternoon,
and we may need to call him, too, but we will wait to see what
the events are there.
Let me move west to east. We have talked about shippers,
and about competition, and I would like to be as specific as I
can, realizing that much of this has to be worked out, but
moving west to east from Pittsburgh, and focusing on one of the
issues in Mayor Murphy's letter today, you have in the
Pittsburgh area 1,700 employees divided among the national
customer service center in North Fayette Township and the
Conrail railyard in the Greentree division headquarters. To
what extent will those operations be maintained? I think that
will be your question, Mr. Goode.
Mr. Goode. Yes; I think, again, while we are still working
it out, I think it is likely that we will be getting Conrail's
operations in the Pittsburgh area, and we are happy to do that.
It will clearly be our intention that Pittsburgh will
continue to be the major operating center that it is now. The
yards and the yardworkers, I think, will certainly be something
that we would anticipate continuing. We are looking hard at the
service center.
Senator Specter. Will you keep the service----
Mr. Goode. I had one conversation with Mayor Murphy, and we
have talked about, I know how important the service center is.
We have not yet, frankly, made a decision whether the service
center will be able to serve for the entire system or not, but
we are looking at that, and clearly we will have a major
presence in Pittsburgh.
Senator Specter. Mr. Goode, if you undertake to make any
significant changes there, would you be willing to let the
subcommittee know?
Mr. Goode. Absolutely.
Senator Specter. OK. Moving east to the Altoona shops, the
locomotive repair shops, and Hollidaysburg, again, Mr. Goode,
what would your expectation be there as to the employment
situation?
Mr. Goode. Well, we have looked, as you know, earlier this
week at those shops, we had some knowledge of them earlier than
that. John and I had a very good tour of the shops, they are
excellent facilities.
Since Norfolk Southern will be the likely beneficiary of
the lines and of those shops, we do not have nearby shop
facilities, as CSX did in Cumberland, so we are in a position
of not only being able to give assurances that we will keep
those shops and keep them operating, we are going to need them.
I have talked with, as we toured, the folks in the shop
some about looking at ways to expand the work that is going on
in those shops.
I may even be negotiating with Mr. Snow, perhaps, on some
of his work, but certainly we would anticipate that our
operating plan would include not only using those shops in the
way that they are used now, but in seeking ways to find
additional business for them, and it will be important that we
enter into good implementing agreements with labor, so that we
can have a strong competitive product and do that.
Senator Specter. OK. That answer will be well received in
Blair County. Thank you.
Moving on into the Harrisburg and Enola area, the
Harrisburg intermodal terminal, you and I have discussed, Mr.
Goode.
Mr. Goode. Yes.
Senator Specter. The likelihood of expanded operation,
because of the new configuration of Norfolk Southern, could you
confirm that and amplify it a bit?
Mr. Goode. I would be glad to. As you and I have discussed,
and as we have discussed with the Governor's transportation
department, Mr. Mallory, and others, Norfolk Southern's, we
would anticipate that our major north-south intermodal route
will be the route where we connect with Conrail now at
Hagerstown, and go north to Harrisburg, and into the New York
area that way, so that we move along what I think of as the
Interstate 81 corridor, with a lot of intermodal traffic.
There will be major expansions in the intermodal business,
if we are successful in getting that business, which I
certainly anticipate we will be, and I think that will clearly
auger for more intermodal development in the Harrisburg area.
Senator Specter. Well, time does not permit going into all
of Pennsylvania's 67 counties, where Conrail now has employees,
or the 18 counties having more than 100 Conrail employees as
residents, but I would appreciate your commitment to keep the
subcommittee informed as to any significant changes in that
employment picture.
Now, as to the Philadelphia location, this would involve
Mr. Snow, as well as you, Mr. Goode. Both of the railroads,
Norfolk Southern and CSX, will have major operations in
Philadelphia, is that correct, Mr. Snow?
Mr. Snow. Well, we contemplate certainly having on the CSX
side, on behalf of CSX, major operations in Philadelphia, yes.
Senator Specter. Mr. Goode, Norfolk Southern will have
major operations as well.
Mr. Goode. That is also our--we see Philadelphia as a major
business center for the railroad, and also we would--our plan,
while we have not formulated it completely yet, envisions that
we will have a significant general presence in the Philadelphia
area.
Senator Specter. When you say a significant general
presence, will that include some sort of a regional
headquarters?
Mr. Goode. I would think--I do not know whether regional
headquarters is the right way to characterize it.
Senator Specter. Well, leave out the word regional.
Mr. Goode. I was going to leave out the other word.
Senator Specter. But you will not.
Mr. Goode. But I will not. No; very seriously, we will
certainly have a major operational presence and a major
marketing presence, and Philadelphia will be the center of
activities for us, and we certainly will have significant
continuing operations there, in terms of people in offices, in
addition to what I think will be significant growth, in terms
of the intermodal activities and the other on-the-ground
workers.
Senator Specter. Now, Mr. Snow, I am sure you can top that
description, as to the extent of CSX's operation in
Philadelphia.
Mr. Snow. Well, Mr. Goode always tops me, but I have told
you privately and publicly, and in my letter to you, that we
will have a major presence there.
We will need to have a major presence there in order to be
able to manage the part of the railroad that looks like will be
taking runs from Philadelphia, and north, to New York, and up
Albany, and across to Boston, and so on, Montreal. So there
will be a real need for us.
The details of that are, of course, not worked out yet. It
is part of the discussion with the working group that Mayor
Rendell talked about, and Secretary Mallory.
Senator Specter. Would you expect--I am going to go into a
little overtime, and I will give Senator Mikulski more time,
too, so we can just do this on one round. Would you expect to
have a regional headquarters in Philadelphia?
Mr. Snow. I would expect a division headquarters, regional
headquarters. We call our management groups corridors or line
segment management groups, and that is to take a big part of
the railroad, Chicago to Atlanta, and put it under a major
management field team that has close connections with the
Jacksonville operation center. That is the new way we are
operating.
I think we will need that sort of management arrangement,
and Philadelphia would be a natural place to headquarter that
major operation. As I say, part of the purpose of the working
group is to review these matters.
Senator Specter. From the conversations that I have had
with you, Mr. Snow, you expect to give better service to the
port or expanded service to the Port of Philadelphia.
Mr. Snow. I think that is one of the truly major benefits
of this merger. We will both be in the port, we will both be
in, I hope in ways that give us access, and we are talking to
the mayor about this, more efficiently, more effectively, maybe
with some closings of great crossings and great separation, and
other things, that will enable us to access the port more
effectively, and tie intermodal operations more effectively
with port operations, which is not the case today, at all, as
you know, with the potential for new world-class intermodal
facility of some kind in the Philadelphia Port area.
Senator Specter. Would you anticipate Norfolk Southern as
well servicing the Philadelphia Port?
Mr. Snow. No question. We will undoubtedly be discussing
whether we even have some sort of sharing, and we will want to
talk with the mayor about how to make that investment in the
best way for both of our operations in the city, but, again, we
are looking--we are paying a lot of money for this property,
and we are doing it, because we are going to generate business,
and the Port of Philadelphia is one way, along with the other
ports, to do that. We think it can be done.
Senator Specter. Well, as you men describe the activities
with expanded service of the Port of Philadelphia, and
intermodal facilities, in looking for expanded business, there
seems to be a decisive likelihood, at least as you have
described it today, that there may be more employees in
Philadelphia, and the combined headquarters operation, whatever
you call it, may exceed what the Conrail headquarters has
today, is that a possibility, Mr. Snow?
Mr. Snow. Senator, I am not quite sure what the numbers
are, in terms of the headquarters staff today. Mr. O'Toole
would have that. It is something on the order of 1,300 people,
something like that----
Mr. O'Toole. In the nonagreement ranks.
Mr. Snow. In the nonagreement ranks, yes. I think there
will be----
Senator Specter. Did you say in the nonagreement, Mr.
O'Toole?
Mr. Snow. In the nonagreement ranks. One thousand three
hundred or so is my recollection. I think it is safe to say
that there will be a significant reduction in that number. What
we are talking about here is replacement jobs in one form or
another, as we grow the business, put in intermodal yards,
compete more effectively.
Senator Specter. Those replacement jobs might grow to or
exceed that number.
Mr. Snow. Potentially, sure. Potentially. I do not think
day one, but I think potentially, yes.
Senator Specter. Mr. Goode, same question, do you think
there is a likelihood that the combined operations, as you have
described them, expanded on the port, intermodal, et cetera,
might lead to a greater presence of the two railroads in
Philadelphia than is present today with Conrail?
Mr. Goode. I do not know--I just do not know what the
numbers are going to be in the future, but we are making a
major bet here, both companies are. We are making a major bet
on behalf of both of our companies, on growth in this business.
We are looking to the future.
This is not an investment that is based upon cost savings,
and that sort of thing, it is based upon growth and the
expectations that we can make the business grow in the future.
If we do that, that is going to mean jobs. That is the
commitment that we are making, and we are making it, because we
believe it is a good business commitment to make.
Senator Specter. Senator Mikulski.
Senator Mikulski. Thank you, Senator Specter.
First of all, I want to thank you for your leadership in
making sure that this hearing happened. It has been an
excellent conversation. I have a few questions. The entire
Maryland delegation is meeting with our mayor of Baltimore.
We are all worried about our cities, and I know you, and I
know your wife Joan, a former city council lady, are very
deeply concerned, so I am going to ask my questions, and I
wonder when Ms. Morgan testifies if I could just ask her three
quick questions after that.
Senator Specter. Certainly, Senator Mikulski.
Senator Mikulski. Thank you very much.
First of all, Mr. Goode, I do not know you, and I am
looking forward to getting to know you.
Mr. Goode. We will get better acquainted.
Senator Mikulski. I know that Norfolk Southern has a great
reputation for both service and competitive rates. I do know
Mr. Snow, and I do know Conrail, because before I became a U.S.
Senator, I was on the Energy and Commerce Committee, where we
essentially created the Conrail railroad system, and worked
hands-on with Liddy Dole to make sure we had a railroad system,
and also that it was not cherry picked over the years with
piecemeal selloffs that would leave shippers and commuters
vulnerable. So we look forward to it.
Now, let me get specifically to my question. The very
excellent question of Senator Specter about the Port of
Philadelphia is what I have, and here is the fear. When all of
these mergers became discussed, and you started your bidding
wars, and all the things you did as tycoons, we in Baltimore
were doing shooters of Mylanta, because here is what we were
concerned about, exactly that.
You are Mr. Norfolk, Conrail is Mr. Philadelphia, and then
there is the great market of New York/New Jersey. We were
concerned that whatever the arrangements were would be a
leapfrogging over Baltimore, that essentially for the Port of
Baltimore, there would be a leapfrogging out of Norfolk, a
great competitor, into either Philadelphia or New York, and we
would either become a great barge port, we would become a great
pond, and quite frankly, I love my inner harbor, and I helped
to save that area, but when we have to choose between quiche
and cargo, I will go with cargo any day of the week, because of
the kinds of jobs it has.
Now, my question to you is: Are you, with all these
wonderful promises you just gave Senator Specter, intermodal
this, and headquarters that, and we are sure going to be
generating business, are you two, in these routes, do you
envision leapfrogging over Baltimore, or is it in your thinking
that Baltimore would be a major anchor to what you envision in
terms of railroad service?
My question is really for you, sir, and for Mr. Snow.
Mr. Goode. Let me try it first, Senator----
Senator Mikulski. Remember, I am the cargo Senator, not the
quiche Senator. [Laughter.]
Mr. Goode. Well, first let me say that I do look forward to
getting better acquainted with you, and I assure you that my
consumption of Mylanta during the last 6 months will be the
equal of anybody's in this.
Our commitment on behalf of Norfolk Southern, we make a
commitment to the ports we serve, because it is a good business
commitment.
There is no question that--sometimes I think that railroads
are extensions, are just the natural extensions of the ports,
and vice-versa. We are in the business of getting that
intermodal freight and other freight off the ships and moving
it inland, and vice versa, and we pride ourselves on the
development of it. We are proud of what we have done----
Senator Mikulski. Good. What does it mean, though?
Mr. Goode. What we will do for the Port of Baltimore and
the Ports of Philadelphia and New York is what we have done for
Norfolk, make sure that there is good rail transportation
service available out of that port.
We will provide the service to move those goods. We cannot
develop the ports, I mean the ports themselves need to develop
themselves, and there is a lot of competition.
What we want to do is be a first-class rail transportation
provider to all of the ports in the eastern part of the
country, and compete with----
Senator Mikulski. Do you see major rail service continuing
and adding competition for Baltimore, or is it your long-range
intention to eventually leapfrog over us?
Mr. Goode. Absolutely not. Absolutely the former, rather
than the latter. We are going to be in the port, we are going
to be providing first-class rail transportation for the port.
Senator Mikulski. Mr. Snow.
Mr. Snow. Well, I regret to hear that, but it is obviously
going to happen, and where it does happen, I can say, Senator
Mikulski, good things happen for shippers, rates come down,
service gets better, there is more traffic, there is more
economic development.
We are going to get better in Baltimore, I think, because
Norfolk Southern is there with the whole network that they have
to serve the port from, and you and I will continue our
discussions about improvement to the port with the port
authority people and the Governor on double-stacking, which, as
you know, is something we think will have to come to the port
for us to be as competitive in serving the port as we need to
be.
Senator Mikulski. Well, thank you.
Mr. Chairman, I just have a question also about these
railroad jobs in western Maryland that----
Senator Specter. Proceed, Senator Mikulski, if you need a
little extra time, by all means.
Senator Mikulski. Thank you. Let us go to western Maryland,
both Cumberland, the railroad yards in western Maryland, as
well as I know there has been some talk about intermodal
facility in Hagerstown.
Mr. Snow, Mr. Barlett said that he got a commitment from
you about jobs in western Maryland. Could you tell us what
really is the commitment to jobs in the CSX Railroad there?
Mr. Snow. Well, I have been talking to you and to House
Speaker Cass Taylor for 6 months now about western Maryland,
and know well your concerns on that subject.
To be candid, the original proposal presented some risks to
Cumberland, because the Altoona and Hollidaysburg shops are, as
the crow flies, not very far. I think it would have meant some
reductions or rationalizations at one place or the other. That
was almost inevitable.
One of the virtues of the merger, as it has evolved, or
mergers, as they have evolved, is that threat to each of those
facilities has been, in effect, eliminated, and we are, as I
said to the employees of the shops in Cumberland just 2 days
ago, when I was there, I think you can count on these shops
continuing to operate for the next 150 years, because the
threat has been removed.
If anything, we are going to see growth in jobs, as I told
the mayor and told the speaker, and the county commissioners
who were there, you are going to see growth in jobs here,
because we are deadly earnest about growing the business.
The Cumberland facilities are critical to us now. They are
even more critical now than they were before. And added to that
is the fact that single-line service on the coal, moving out of
that region, and you know we have the headquarters for the coal
unit for northern West Virginia and western Maryland, which
generates a lot of coal, that unit is headquartered there in
Cumberland.
With the single-line service, Dan Green, who runs that unit
for us, who you know, our vice president for coal there,
estimates that we are going to be able to generate additional
demand for western Maryland coal, with additional moves into
the present Conrail territory, and into southern Maryland, with
quicker turn times and better results.
It is a growth story, and as we grow the coal business out
of there, there are more locomotives to be repaired and more
cars to be repaired.
Senator Mikulski. Well, I would really welcome a letter
from you kind of outlining what your plans are for that.
Mr. Snow. I will give you that. Sure.
Senator Mikulski. I say that, because I know Senator Byrd
is interested. This is my last question for the panel.
Mr. Goode, is Norfolk Southern's intent to continue to--do
you plan to take over the tracks in the Delmarva Peninsula and
serve their bringing in Midwestern grain? I know this is
important to Biden and Roth, Robb and Warner, and, of course,
Sarbanes and Mikulski.
Mr. Goode. And I have heard from most of those folks about
it, and it is important, and we have every anticipation of
continuing that service, and, indeed, this will improve the
service of grain into those areas, and I know how important it
is to the poultry farmers, and others in that area, an we have
every intention of continuing and improving that service.
I might just say one thing about Hagerstown, too.
Senator Mikulski. Yes.
Mr. Goode. The story on Hagerstown is that there is going
to be a lot more freight moving through that important gateway,
and I do not know exactly what we will be looking at developing
there, but it is certainly good news for that.
Senator Mikulski. Well, thank you. That is very, very good
news to know about Hagerstown, but also Delmarva.
Mr. Chairman, there are many questions, and I know we will
continue this conversation, but I think the representatives of
the railway industry raise a really important point that I know
you are keenly interested in, which is the modernization of our
ports, and I would like to compliment the Port of Philadelphia,
that put in a bucket of bucks modernizing its port, but it is
hard for one State to do it, or one city to do it, and I think
it is a conversation that those of us in the corridor should
have, with the recommendations of what is appropriate in a
public/private cost-sharing relationship to modernize our
ports, because this is the stuff of Philadelphia, this is the
stuff of Baltimore that generates jobs and makes cities great.
Knowing of your commitment in this area, I think it will be
a topic for us to have conversations about. I invite the
railroads to give us what their thinking is on that topic,
again, not a new railroad entitlement, but a public/private
partnership about the role of the private sector, States, and
the Federal Government.
There is a great cornucopia of opportunities developing.
With ships coming through the Suez Canal, we can begin to pick
up some Asian traffic, whether it is Philadelphia, Baltimore,
Camden, Newark, et cetera, that we now do not have, but boy,
our infrastructure is old, and it is a topic I think we should
really think about. I offer that in a very invitational and
hospitable way.
Senator Specter. Senator Mikulski, I think you raise a good
point, and we have deepened the Port of Philadelphia, and it
may well be that the new approaches for extended service by the
two railroads, intermodal, will make it in their interest to
have a deeper port, and I think to the extent that we can help
on the costs there, so much for the good, so we will pursue
that.
Gentlemen, we will be submitting some questions for the
record, but before you leave, I want to touch on just a couple
of other points very briefly.
There is a 42-mile stretch of track from Meadville to
Corry, in northwestern Pennsylvania, which Conrail has decided
to abandon, and tear up the tracks for use elsewhere in the
Conrail system, and it is now in litigation. If either of you
is familiar with it, I would be interested in your comments as
to whether--Mr. Goode is gesturing to Mr. Snow.
Do you think we might work that out? This is of great
concern to Congressman English, as well as to Senator Santorum
and me, if we might find some help for that area.
Mr. Snow. Senator, that is going to be on the part of the
system that apparently CSX will be taking in the division. We
have heard that that is a very important issue, and it is under
review, and my discussions with the Conrail counterparts
indicate that we are prepared, CSX, to, in effect, see the
Corry to Meadville segment stay in operation.
Senator Specter. Stay in operation. Well, that will be very
good news to Congressman English, who has been very concerned
about it, as has the rest of our delegation.
One other point, and that is, in my discussions with both
of you gentlemen, you have described some operations which
might be joint, and there might be an entity or a chain, they
might even be named Conrail, and I had urged you that if there
were two operations, and there could be some retention of
Conrail, that that would, at least symbolically, be very, very
helpful to public acceptance of this whole arrangement.
To what extent, Mr. Snow, do you see joint operations which
might be under a common operation, and might be labeled as
Conrail?
Mr. Snow. Senator, there are a number of places on the
system where CSX and Norfolk Southern, I think, will end up
sharing facilities, whether it is a terminal company, or a
joint operation, or something, because we will each need access
to the industries. I think Indianapolis is an example. Senator
Lautenberg mentioned the New York/New Jersey Port Authority.
As we have talked about it, I think there is, and David and
I have not--this is one of the things we are still reviewing,
but I think there is a reasonable prospect, a good prospect, I
would say, that, given the sensitivities of Conrail, and its
name, and its corporate presence, that we can structure the
transaction in a way that a Conrail continuing corporate
presence with the Conrail name to manage these very important
joint activities could occur.
Senator Specter. Well, I am very pleased to hear that, and
we will stay in touch with you to see what extent--I know you
are not in the position to say now what that would mean by way
of headquarters or employees, but I think that would be very
helpful.
Well, we very much appreciate you coming, and the final
word, I want to compliment all of you. Mr. Goode, I am not
going to pursue this issue with Pennsylvania Power & Light, I
know that Norfolk Southern only makes arrangements, I am trying
to quote you, because I wrote it down for the benefit of your
shareholders, but there might be something equivalent of a loss
leader, or it might be something of a little initiative to make
the coal operators happy, and Pennsylvania Power & Light happy,
and make it look good in Pennsylvania. If that was not your
motive, I would accept that, and I would compliment you if that
had been your motive.
Thank you very much.
Mr. Goode. Thank you, Senator.
Panel 2
SURFACE TRANSPORTATION BOARD
STATEMENT OF LINDA MORGAN, CHAIR
Introduction of Witness
Senator Specter. We now call the Honorable Linda Morgan,
Chairman of the Surface Transportation Board.
Chairman Morgan, we welcome you here.
Ms. Morgan. Thank you.
Senator Specter. Before turning to you for any testimony,
when we had proposed a witness list, I was a little
apprehensive about including you on the witness list, but we
leave it, of course, to your discretion, because you have a
judicial function, as Chairman of the Surface Transportation
Board, and we want to be very careful that we do not impinge in
any way on that judicial function in any conversations we have
there.
So to the extent you feel comfortable in testifying, we
very much welcome you, but we just raise that issue, so that
you will know in advance that in addition to your own
sensitivity on it, that we are sensitive as well, and would
respect any judgment you might make on not answering, or not
elaborating, or handling it however you see fit.
Ms. Morgan. Thank you very much, Mr. Chairman. As you
indicated, I am Linda J. Morgan, Chairman of the Surface
Transportation Board. I am here at the request of this
committee, following recent activity surrounding possible
restructuring of rail service in the East.
I ask unanimous consent that the full text of my extensive
written testimony be submitted in the record, and I will now
summarize that presentation.
Senator Specter. That is fine. As requested, your full
statement will be made a part of the record, without objection.
Ms. Morgan. Thank you.
As the committee knows, this activity regarding
restructuring of rail service in the East has spanned several
months, and has garnered much attention. However, because no
merger application affecting the East has been formally filed
with the Board as yet, the Board is not formally privy to any
final details surrounding any such application. Nevertheless,
to assist the committee in understanding this entire matter
more fully, my testimony explains the process by which the
Board would handle such an application, should it be filed.
Such an application would involve control or merger of two
or more class I railroads, and would be governed by the rail
merger provisions of the ICC Termination Act of 1995,
administered by the Board. My testimony lays out in some detail
the nature of the proceeding that would be conducted by the
Board, the statutory criteria to be applied by the Board, and
the Board procedures applicable to such a proceeding.
The Board, as the committee knows, is an independent
adjudicative body that must conduct all of its deliberations on
the record, and make all of its decisions based on a record
compiled after adequate notice and full opportunity for
participation and comment by interested parties.
With respect to any rail merger proposal such as the one at
issue today, the record would include facts and argument
concerning the statutory criteria, and the Board's evidentiary
regulations implementing those criteria. As no formal
application regarding rail structuring in the East has yet been
filed, no record building on such a proposal has yet begun.
In this regard, I, as an ultimate decisionmaker, cannot
prejudge or speculate about any decision that the Board might
reach on such a merger proposal. Rather, the Board must
maintain objectivity until the evidentiary record is completed
and analyzed, and a final Board decision is rendered. I know
that this committee shares my commitment to ensuring that the
independent adjudicative process at the Board is preserved in
the way envisioned by Congress when it established the Board.
Thus, I remain committed, as with any pending proceeding before
the Board, to maintaining my impartiality today, and throughout
any proceeding involving any rail restructuring in the East.
With respect to the overall statutory standards, under the
ICC Termination Act, the Board shall approve a transaction that
is consistent with the public interest. The Board does not
initiate or solicit such a transaction, but rather becomes
involved once the private sector has produced such a proposal,
and then seeks Board approval.
In reviewing a rail merger proposal of two or more class I
railroads, the Board must consider the following five factors:
One, the effect of the proposed transaction on the adequacy of
transportation to the public; two, the effect on the public
interest of including or failing to include other rail carriers
in the area involved in the proposed transaction; three, the
total fixed charges that result from the proposed transaction;
four, the interest of rail carrier employees affected by the
proposed transaction; and five, whether the proposed
transaction will have an adverse effect on competition among
rail carriers in the affected region or in the national rail
system.
The Board may, where warranted to alleviate anticompetitive
effects, impose conditions upon any merger approval, including
divestiture of parallel tracks, or requiring the grant of
trackage rights, or grants of access to other facilities. Also,
in approving a merger, the Board is required, by statute, to
impose labor protective conditions to alleviate harm to
nonmanagement employees who are adversely affected by the
transaction.
As you know, Congress has recognized that rail mergers
invariably result in job losses and in job relocations, and
Congress has addressed this matter in the statutory provisions
governing rail mergers by directing the agency to impose the
standard New York Dock employee protective conditions. The New
York Dock conditions impose and embody the basic framework for
mitigating the labor impacts of rail mergers. The conditions
provide both substantive benefits for adversely affected
employees--dismissal allowances, displacement allowances, and
the like--and procedures--negotiation, if possible,
arbitration, if necessary--for resolving disputes regarding
implementation of particular merger-related transactions.
In addition, as part of the decisionmaking process, the
Board also must consider the environmental impact of such a
proposed merger, pursuant to the National Environmental Policy
Act and related environmental laws. In approving a merger, the
Board imposes conditions, as appropriate, to mitigate the
potential environmental impacts resulting from the proposed
merger that are identified during the course of the
environmental review process. That process runs concurrently
with the procedural schedule for considering the merits of the
merger proposal, and considers such matters as safety.
My written testimony also discusses overall procedures and
timetables for handling a merger application, as well as how
the Board would handle competing applications and merger-
related applications.
In addition, my written testimony describes in detail the
information required to be filed with each application,
including a summary of the proposed transaction, its purpose,
and its financial arrangements, as well as information about
the statutory criteria, environmental submissions, market
analyses, operational data, and material on specific labor
impacts.
This concludes my oral testimony. In accordance with my
earlier remarks, I would be happy to answer any questions that
you might have.
And you have my commitment that any and all issues and
concerns that are raised on the record developed in any
proceeding at the Board relative to this matter will be
carefully and fairly considered in accordance with the Board's
statutory responsibilities.
Prepared Statement
Senator Specter. Thank you very much, Chairman Morgan. Your
complete statement will be made part of the record.
[The statement follows:]
Prepared Statement of Linda J. Morgan
Mr. Chairman and Members of the Committee, my name is Linda J.
Morgan, and I am the Chairman of the Surface Transportation Board
(Board). I am here at the request of this Committee, following recent
activity surrounding possible restructuring of rail service in the
East.
summary of testimony
As the Committee knows, this activity has spanned several months
and has garnered much attention. In October of last year, CSX
Corporation (CSX) and Conrail Inc. announced their plan for merging.
Subsequent to that announcement, Norfolk Southern Corporation (NS)
indicated its intention to pursue a ``hostile'' bid to take over
Conrail. A bidding war ensued, and on January 27, 1997, the
shareholders of Conrail voted not to allow the merger proposal that had
been agreed to between Conrail and CSX to go forward. More recently,
the three railroads announced their agreement to pursue a joint
restructuring.
Because no merger application affecting the East has been formally
filed with the Board as yet, the Board is not formally privy to any
final details surrounding any such application. Nevertheless, to assist
the Committee in understanding this entire matter more fully, my
testimony explains the process by which the Board would handle such an
application should it be filed. Such an application would involve
control or merger of two or more Class I railroads and would be
governed by the rail merger provisions of the ICC Termination Act of
1995 (ICCTA), administered by the Board. My testimony lays out in some
detail the nature of the proceeding that would be conducted by the
Board, the statutory criteria to be applied by the Board, and the Board
procedures applicable to such a proceeding.
overview of the board's adjudicative process
The Board, as the Committee knows, is an independent adjudicatory
body that must conduct all of its deliberations on the record and make
all of its decisions based on a record compiled after adequate notice
and full opportunity for participation and comment by interested
parties. With respect to any rail merger proposal such as the one at
issue today, the record would include facts and argument concerning the
statutory criteria and the Board's evidentiary regulations implementing
those criteria. As no formal application regarding rail restructuring
in the East has yet been filed, no record-building on such a proposal
has begun.
In this regard, I as an ultimate decisionmaker cannot prejudge or
speculate about any decision that the Board might reach on such a
merger proposal. Rather, the Board must maintain objectivity until the
evidentiary record is completed and analyzed, and a final Board
decision is rendered. I know that this Committee shares my commitment
to ensuring that the independent adjudicative process at the Board is
preserved in the way envisioned by Congress when it established the
Board. Thus, I remain committed, as with any pending proceeding before
the Board, to maintaining my impartiality today and throughout any
proceeding involving any rail restructuring proposal in the East.
overall standards for review and conditioning authority
Statutory Standards.--Under the ICCTA (section 11324), the Board
shall approve a transaction that is consistent with the public
interest. The Board does not initiate or solicit such a transaction but
rather becomes involved once the private sector has produced such a
proposal and then seeks Board approval.
In reviewing a rail merger proposal of two or more Class I
railroads, the Board must consider:
(1) the effect of the proposed transaction on the adequacy of
transportation to the public;
(2) the effect on the public interest of including, or failing to
include, other rail carriers in the area involved in the proposed
transaction;
(3) the total fixed charges that result from the proposed
transaction;
(4) the interest of rail carrier employees affected by the proposed
transaction; and
(5) whether the proposed transaction would have an adverse effect
on competition among rail carriers in the affected region or in the
national rail system.
Conditioning Authority.--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
alleviated. As an example, in approving the Union Pacific-Southern
Pacific (UPSP) merger in August of last year, the Board imposed as a
condition of approval the granting of 4,000 miles of trackage rights to
the Burlington Northern Santa Fe (BNSF) over UPSP track to ameliorate
competitive harm.
Also in approving a merger, the Board is required by statute to
impose labor protective conditions to alleviate harm to non-management
employees who are adversely affected by the transaction. As you know,
Congress has recognized that rail mergers invariably result in job
losses and job relocations, and Congress has addressed this matter in
the statutory provisions governing rail mergers by directing the agency
to impose the standard New York Dock employee protective conditions
[New York Dock Ry.--Control--Brooklyn Eastern Dist., 360 I.C.C. 60
(1979)]. The New York Dock conditions embody the basic framework for
mitigating the labor impacts of rail mergers. The conditions provide
both substantive benefits for adversely affected employees (dismissal
allowances, displacement allowances, and the like) and procedures
(negotiation if possible; arbitration, if necessary) for resolving
disputes regarding implementation of particular merger-related
transactions.
In particular, the New York Dock conditions require the merged
carrier to pay up to 6 years of wages to employees dismissed or
displaced as a result of the consolidation. And procedurally, the
merged carrier, under New York Dock, must give at least 90 days written
notice of any action implementing the merger that adversely affects
employees, including a 30-day negotiation period. If the parties are
unable to resolve their differences, the matter then may be submitted
to binding arbitration.
In addition, as part of the decisionmaking process, the Board also
must consider the environmental effects of a proposed merger pursuant
to the National Environmental Policy Act (NEPA) and related
environmental laws. In approving a merger, the Board imposes conditions
as appropriate to mitigate the potential environmental impacts
resulting from the merger that are identified during the course of the
environmental review process. That process runs concurrently with the
procedural schedule for considering the merits of a merger proposal.
The Board's environmental staff, the Section of Environmental
Analysis (SEA), establishes the process and conducts various public
outreach activities to inform the public about the proposed merger and
to encourage and facilitate public participation in the environmental
review process. As part of the environmental review process, SEA
prepares a detailed analysis not only of the system-wide effects of the
proposed merger, but also of particular merger-related activities that
would affect, for example, individual rail line segments, rail yards,
intermodal facilities, and commuter and rail passenger services. This
analysis includes a thorough independent assessment of potential safety
impacts as well as other environmental impacts.
overall procedures and timetable
Statutory Scheme.--The schedule for processing applications for the
merger or control of two or more Class I railroads is governed 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.
Procedural Regulations.--The regulations that govern mergers are
published at Volume 49 of the Code of Federal Regulations, Part 1180
and amplify the statutory requirements. In accordance with these
regulations, applicants proposing the merger or control to two or more
Class I railroads must file a notice of intent to file an application
between 3 and 6 months prior to filing the application. When a 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, the year to be used for impact
analyses, and the approximate date for the filing of the application,
which when filed then triggers the statutory time frame set forth in
section 11325.
In the matter at issue today, CSX 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. NS filed a notice of intent on November 6, 1996, indicating
an intention to file an application for control of Conrail on or before
May 1, 1997. The Board published notice of that filing on November 27,
1996. Thus, two separate proceedings were initiated: one by CSX and
Conrail, and one by NS.
Procedural Schedule.--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 that is less than that required by statute, the
agency solicits public comments on a proposed schedule (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.
For example, the Board granted the UPSP application for common
control in a decision issued approximately 8\1/2\ months after the
application was filed. The BNSF application for common control was
approved by the agency 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 following shareholder approval of the proposed transaction.
As noted earlier, both CSX and NS filed notices of intent to file
an application for a consolidation with Conrail. Each requested that
the Board establish a procedural schedule that would provide for a
final decision 8\1/2\ months after the filing of their respective
applications. The Board reviewed these requests and instead proposed a
10-month procedural schedule and sought comments from the public on its
proposed schedule. Based on the comments, the Board issued decisions in
both proceedings on January 30, 1997, establishing a 365-day schedule
for each of the Conrail merger proposals. In deciding on this schedule,
the Board determined that additional time was needed to handle both the
primary, or first-filed, merger application and the inconsistent
application expected to be filed by whichever carrier did not file the
primary application. As part of the procedural schedule, the Board also
adopted the requirement that the applicants file a preliminary
environmental report 30 days prior to the filing of the primary
application. NS filed its preliminary environmental report on February
21, 1997.
Other Matters.--Typically, during this prefiling stage, prospective
applicants submit a request for a protective order (to permit any
necessary access to confidential materials, while at the same time
providing protections for sensitive data), a petition for waiver or
clarification of certain filing requirements, and a request for an
informal staff opinion on a proposed voting trust agreement to ensure
that any stock transfers do not result in unlawful control in advance
of any final Board action on the merger proposal. Informal staff
opinions have been issued on various voting trusts and amendments
proposed by CSX and NS, respectively. Board decisions also have been
issued granting protective orders and addressing petitions for waiver
or clarification by the prospective applicants in each proceeding.
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. 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.
Inconsistent 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. In the past 20 years, railroads have filed inconsistent
applications in a half dozen or so proceedings. In the decisionmaking
process, the statutory criteria are applied to the evidence presented
with respect to both the primary and the inconsistent application and a
decision on each is reached at the same time.
In late 1994 and early 1995, for example, it looked for a period of
time as if there might be competing applications filed for 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 Board 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, the Union Pacific withdrew as a competing bidder, a new
procedural schedule was established, and the record-building and review
process resumed. While Union Pacific might have filed a competing
application in that proceeding, it did not.
Other Responsive Applications.--Interested parties may file
narrower responsive applications. These include applications seeking
trackage rights or other conditions to be imposed on the merger if it
is approved. These are also due 90 days after the Board publishes a
notice that it has accepted the primary application. Each responsive
application is considered consolidated with the primary application.
Records are built for each responsive application and a decision on
each one is reached at the same time as a decision is reached on the
primary application.
Any merger-related applications, petitions, and notices (such as
for trackage rights, abandonments, and constructions) are 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, as indicated previously, the
environmental review process occurs concurrently with the record-
building and decisionmaking process under the overall merger procedural
schedule.
required information
General.--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
transaction (such as improving service, improving the financial
viability of the applicants, eliminating excess facilities, or
attaining operating economies), and 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 carriers' employees; and the effect on
inclusion (or lack of inclusion) in the merger of other railroads in
the territory. An application must also include geographical and
environmental data, which can include information relative to safety.
Market Analyses.--Applicants are required to submit analyses of the
impacts of the proposed transaction (both adverse and beneficial) on
intermodal and intramodal competition for 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 relevant
markets. 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.
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 and 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 the 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.
Specific Labor Impact.--Applicants are required to provide
information on the impact that the transaction will have on employees
of the merging carriers. Specifically, applicants must discuss the
effect of the proposed transaction on applicant carriers' employees (by
class or craft), the geographic points where the impact will occur, the
time frame of the impact (for at least 3 years after consolidation),
and whether any employee protection agreements have been reached.
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 encumbered properties, the properties and encumbrances must
be identified.
other procedural matters
In recent merger proceedings, the record has closed with an oral
argument. The oral argument on the UPSP merger, as an example, lasted
10 hours. 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 testimony. In accordance with my earlier remarks,
I would be happy to answer any questions that you might have. You have
my commitment that any and all issues and concerns that are raised on
the record developed in any proceeding at the Board relative to this
matter will be carefully and fairly considered in accordance with the
Board's statutory responsibilities.
Enforcement mechanisms
Senator Specter. Senator Mikulski, you had commented
earlier that you have a luncheon commitment with the
delegation, so you may proceed first.
Senator Mikulski. Thank you very much, sir, and thank you
for the courtesy.
Ms. Morgan, we understand the need for real propriety. My
questions are only broad policy questions. First, I am
delighted to hear about the fact that one of your criteria will
be adequacy of public transportation, because we are concerned
about passenger rate, but also the rigorous criteria on
specific impact on labor, both in terms of the jobs affected,
as well as the specific geographic areas.
But let me get to my question. After all the processes go
forward, and all the agreements are signed, my question about
the Board is this: What enforcement mechanisms does the Board
have to ensure that the railroads live up to the plans that
have been filed and approved, how do you monitor that
compliance, and what recourse do parties have if the railroads
do not live up to it?
In other words, your enforcement mechanisms, how will you
monitor it, and what is the place of redress?
Ms. Morgan. Well, I would answer that question in a couple
of different ways. First of all, it depends upon what the
commitment, the issue, the obligation is. If the Board relies
on a particular commitment and obligation as part of its final
decision, whether it would be about benefits, or employee
impact, or whatever, then we would expect the parties that have
filed the application to live up to their responsibilities.
Second, there are situations in which the Board will impose as
a condition, to ensure the public interest, a particular
arrangement that has been agreed to.
With respect to enforcement in either of these situations,
obviously, we can enforce in both situations. We have oversight
responsibilities, we can haul the parties back in, we can try
to determine exactly why certain obligations were not met. We
have very broad authority in this area.
Senator Mikulski. How will you monitor it?
Ms. Morgan. Well, monitoring can be by a very specific
monitoring condition, which we have imposed before in prior
mergers.
For example, in one merger, we are requiring quarterly
reports, and we have indicated that at a minimum, within a year
of the implementation of the transaction, we will begin a
proceeding to take comments on how the conditions that we have
imposed are working.
Senator Mikulski. If the parties do not feel that the
railroads have lived up to their agreements, and particularly,
the labor area, or the passenger maintenance area----
Ms. Morgan. They can certainly file something with us,
which can assist us then in trying to determine whether,
indeed, there is a valid concern about----
Senator Mikulski. An affected party, the municipality, a
labor union, can----
Ms. Morgan. Yes; either we can, on our own initiative,
pursue oversight and monitoring, or we can do it in response to
particular information that has come to our attention, or a
combination of both.
Senator Mikulski. Thank you very much.
Mr. Chairman, thank you.
That kind of gives me an answer to that, and Ms. Morgan, I
would like to compliment you on your intellectually rigorous
presentation here. It is the best understanding I have gotten
of this Surface Transportation Board since we have eliminated
the ICC, and I am going to thank you. I now have an excellent
understanding of it, and appreciate it very much.
Thank you for the courtesy.
Ms. Morgan. Thank you for your comments.
Senator Specter. Thank you, Senator Mikulski.
Chairman Morgan, I began with an exchange of
correspondence, which you and I had, prompted by a newspaper
account appearing in the Washington Post on January 21 of this
year, quote:
The Chairman of the Surface Transportation Board, the
agency that is likely to redraw the map of eastern railroading,
says the Board would prefer a negotiated settlement of the
battle for Conrail, but is prepared to impose a plan that will
split control of the East equally between the two rail giants.
Now, my letter of January 21 was made a part of the record
together with your reply of January 23, and also my letter to
you of March 11, together with your reply of March 13, and in
your reply of March 13, you point out, quote:
Because these are pending cases, it will be inappropriate
for me to comment on the specific merits of these matters.
Now, I can understand, I had not asked you to comment in my
letter to you, I had referred to you the recent developments on
the abrogation of the Conrail/CSX matter, and the new
arrangement between CSX and Norfolk Southern, and I quite agree
with you in the comment in your letter of March 13 that it
would be inappropriate for me to comment on the specific merits
of these matters.
In your reply on this newspaper article, you did not deny
that that had been said, you said the account was essentially
correct, and I know it is difficult for anybody in public
office making comments to the press as to what appears and what
does not appear.
But when somebody is in a judicial position, it is my sense
that it is something that ought not to be done. I have heard it
quoted repeatedly that the regulators did not like the Conrail/
CSX deal, and the comments were made that when you combine Wall
Street and the regulators, this was a deal which could not
occur.
My question to you is: Is it really appropriate--you
testified today that the Surface Transportation Board, quote,
``Does not initiate or solicit,'' a transaction, and, of
course, you do not, but in saying that the Surface
Transportation Board is prepared to impose a plan that would
split control of the East equally between the two rail giants,
does not that really prejudice the Conrail/CSX agreement?
Ms. Morgan. Well, let me just discuss in answer to your
question here, which I think I explained in my letter to you of
January 23, the circumstances surrounding that interview. I was
called by Don Phillips, and he asked me to discuss the UPSP
merger decision, which had already been rendered.
If you read the article by Don Phillips, he indicates that
I did not discuss the merits of the particular matter in the
East, that I discussed the UPSP merger and what that decision
meant.
So I do not believe that I have been inconsistent in
anything that I have said regarding how I am handling a pending
matter.
Senator Specter. Well, the Washington Post article does
say, as you quote in your letter of January 23, ``Carefully
avoided discussion of specifics of the Conrail matter,''
Conrail matter in parentheses. Discussion of specifics has a
lot of latitude.
Did you tell the reporter that the Surface Transportation
Board, and this is what he says, ``Is prepared''--he does not
put this in your quotes, this is what he says out of quotes,
but he says, referring to you, the Chairman of the Board, and
this is his language, and this is language, quote, ``Is
prepared to impose a plan that would split control of the East
equally between the two rail giants,'' closed quote.
Ms. Morgan. As you indicated, that is not a direct quote
from me. All of the direct quotes in that article are accurate.
Inferences can be drawn from direct quotes.
I cannot speak to the inferences that have been drawn, and
I indicated that in my letter to you in response to your letter
about that article.
Senator Specter. Well, from the totality of your
conversation with him, is it an incorrect inference that you
said that the Surface Board, quote, ``Is prepared to impose a
plan that would split control of the East equally between the
two rail giants''?
Ms. Morgan. I did not say that I would approve a plan to
split Conrail. What we talked about was the UPSP merger and the
notion of competitive balance, and preservation of balance in
the West.
Senator Specter. Well, Chairman Morgan, it is pretty strong
language for him to say that the Chairman is prepared to impose
a plan; that is a pretty forceful statement. Are you saying
that that is an unfair, incorrect inference from the
conversation you had with the reporter?
Ms. Morgan. All I can say to you is that was not a direct
quote. We discussed the UPSP merger and the meaning of that
decision. I do not want to comment on Mr. Phillips and his
press integrity one way or the other.
Senator Specter. Well, I am not talking about Mr. Phillips'
press integrity, I am talking about what is a fair inference
from what you said. Is it a fair inference or is it not a fair
inference, from what you said to the man?
Ms. Morgan. I do not know that it is or it is not. We
discussed the UPSP merger, and what we did in that case, which
was to try to achieve a competitive balance and a preservation
of competition, and to ensure that there were two strong
competitors in the West.
Senator Specter. OK, Madam Chairman, if you do not know
whether it is or is not an unfair inference, you are not saying
it is an unfair inference.
Ms. Morgan. I am not commenting on it, because it was not
the position that I took in the interview, and as a
decisionmaker in this case, I do not want to take a position,
nor have I taken a position.
Senator Specter. OK. On the issue of making sure that the
competitive balance is worked out--Senator Mikulski covered
this with you to some extent.
But I would just like to be as precise as we can be,
Conrail and Norfolk Southern are going to work out an
arrangement here, and it is obviously in their economic
interest if some parts are not as competitive as they might be,
and the Surface Transportation Board is going to look at it,
and you are going to try to work it out so that it is as
competitive as it can be, correct?
Ms. Morgan. That is my responsibility, yes, in terms of
analyzing the effect on competition of any proposed----
Senator Specter. Right. Well, I understand that is your
purpose, and I think it is a very important objective,
obviously, but if after you make an approval you find that
there are modifications, or the way they work it out in
practice is not as toughly competitive as they had committed,
do you have authority to enforce the original undertaking?
Ms. Morgan. Again, it depends upon the situation. In the
UPSP merger, we adopted a 5-year monitoring condition, whereby
we are requiring parties to file quarterly reports, and as I
indicated earlier, at a minimum, an annual proceeding to take
comment on the status of the implementation of the conditions
that we have imposed.
Senator Specter. Why only 5 years, Chairman Morgan, why not
longer?
Ms. Morgan. We felt that 5 years, which we had imposed
previously in other decisions, seemed to make sense.
Senator Specter. On the issue of the employees, your
testimony notes that under the applicable provision of Federal
law, the Board must consider the impact of a transaction on the
affected carrier's employees.
A review of the Board's decision and the Union Pacific/
Southern Pacific merger shows that the Board pretty much
dismissed the impact on such employees by noting that they
would receive certain severance benefits under the so-called
New York Dock doctrine.
Do you think that that is all that you have to consider,
insofar as the employees are concerned, that they are getting
severance benefits under the New York Dock doctrine?
Ms. Morgan. Again, it would depend upon what record is
developed and what evidence is presented to us, in the context
of the employees. We are responsible for looking at the impact
on the employees, and each case is different in that respect,
in terms of what the record shows.
Senator Specter. So you are saying it could go----
Ms. Morgan. We are required by statute to impose labor-
protective conditions, pursuant to New York----
Senator Specter. Well, I know you are, and the Congress
knew about the New York Dock doctrine when the Surface
Transportation Board was formed, and maintained the criteria,
one of which you quoted: the interest of rail carrier employees
affected by the proposed transaction. So I would think that it
would require something more than the New York Dock doctrine,
that there would be an obligation on the part of the Surface
Transportation Board to look beyond just that compensation, and
protecting employees interest. Would you agree with that?
Ms. Morgan. Well, again, if an argument is made and a
record is developed on that issue that causes us to do
something different from what we may have done in the past, we
obviously would have to make a decision based on what is in the
record.
Senator Specter. I am not quite sure what your answer
means.
Ms. Morgan. Well, what my answer means is that each case is
different, the facts are different----
Senator Specter. Well, I understand that.
Ms. Morgan. The arguments are different, parties bring to
us different arguments from arguments that we have seen
previously, and the----
Senator Specter. Well, you are saying the facts may present
a situation where the New York Dock compensation would not be
the totality of employees' rights.
Ms. Morgan. That may be. I cannot prejudge even that--that
it may be--but it is always a possibility, because parties can
file whatever argument they feel is appropriate in any given
case.
Senator Specter. OK. Thank you very much, Chairman Morgan.
We very much appreciate you joining us here today.
Panel 3
NONDEPARTMENTAL WITNESSES
STATEMENT OF HUGH WELSH, PORT AUTHORITY OF NEW YORK/NEW
JERSEY
Introduction of Witnesses
Senator Specter. I would like to call our final panel now,
Mr. Hugh Welsh, Mr. Robert Scardelletti, Mr. Robert Evans, Mr.
George Warrington, and Mr. Michael Hawbaker. The full
statements will be made a part of the record.
We appreciate your patience, we are running late, but this
is an important matter.
We would like to turn first, as the witness list has been
presented, to the deputy general counsel, Mr. Hugh Welsh,
deputy general counsel, Port Authority of New York and New
Jersey.
Welcome, Mr. Welsh, your full statement will be made a part
of the record, and to the extent you can summarize within 5
minutes, or even less, we would appreciate it.
Mr. Welsh. Thank you, Senator. Senator, I represent an
agency that was created by a compact or treaty between the
States of New York and New Jersey, and it is rather unusual, in
that regard, but that same treaty created a district in
southwestern New York and northeastern New Jersey, and it is
recognized as being one economic and commercial community, and
it has existed since 1921. It is our mandate to represent the
commercial interests of that region.
In addition, I have heard a lot of talk this morning about
ports, and we do have a port of some significance built to the
north of Philadelphia, that you might be aware of, that we are
concerned about.
The port district currently has 15 million residents, and
by anybody's standards is a vital economic and commercial
center of the United States. We already had a rail
consolidation in the Northeast, and particularly in our region,
in the port district, and that came about with the creation of
Conrail.
It was, in fact, a rail consolidation of the bankrupt
railroads, except that consolidation came about immune and
exempt from oversight and approval of the ICC, it was immune
from the antitrust laws, it was immune from virtually all
oversight, except, of course, the approval of Congress, so we
have essentially a monopoly railroad in our region that is a
creation of the Congress of the United States, and for that
reason, if no other, this merger proceeding can be
distinguished from any other railroad merger proceeding that
has ever taken place before.
We have read reports about a tentative settlement between
the two major suitors for Conrail, but none of these accounts
have mentioned anything with regard to the disposition of the
rail lines within the port district in the lines serving the
Port of New York and New Jersey.
We are, of course, vitally interested in the disposition of
that, because at the present time we have a monopoly situation
in New York. Unlike some of the other ports and regions that
are worried about the loss of competitive rail service, we
currently do not have competitive rail service.
The rail lines in the New York district, or the Port of New
York district, if you will see by the maps that are attached to
the prepared text of my testimony, are highly concentrated in a
very urbanized area of our country, and they are in an area of
extreme real estate values.
With the disposition of those rail tracks, it will be
necessary, in order to achieve competitive rail service to all
areas of our port district, it will be necessary to work out
some scheme or arrangement so that there will be an equitable
distribution or division of those lines, and it will be
extremely difficult, given the high concentration of the rail
lines in those areas.
We suggest that a neutral terminal railroad that would be
operated or established by the two principal railroads that are
seeking Conrail, and perhaps others, would probably be a good
device in order to provide rail access to our region.
Our studies have indicated that after the turn of the
century the rail facilities in our region will not have the
capacity to handle the increased demand at that time, and
service by a neutral terminal railroad that would be supported
by all of the railroad users could allow for the most efficient
allocation of the limited resources that would be available,
and to provide needed additional capacity and competitive rail
access into our region.
We have not yet had any discussions with either the CSX or
the Norfolk Southern regarding their plans for the port
district, we have not received any details of any planning with
regard to the disposition of those tracks, but we assume that
they have been busy with what I think what Mr. Snow called the
major division that has been taking place, and will be getting
down to the allocation or the division of the rail lines within
our port district in the future.
We look forward to working with both the CSX and the
Norfolk Southern in the planning for the disposition of those
rail systems within our region, and hope that it can be done in
a manner that will provide efficient rail service, and most
importantly, competitive rail service into our area, and we
believe it should be done prior to any filing with the Surface
Transportation Board, so there is no misunderstanding.
Prepared Statement
Senator Specter. Well, thank you, Mr. Welsh. I think that
you raise a very important consideration as to what will happen
to the rail lines which service your port area, and we will
maintain a continuing monitoring of it to see what is done
there.
[The statement follows:]
Prepared Statement of Hugh H. Welsh
My name is Hugh H. Welsh and I am the Deputy General Counsel of the
Port Authority of New York and New Jersey. I am pleased to be here
today to present the views of the Port Authority of New York and New
Jersey on the disposition of Conrail. We at the Port Authority have
followed with interest the merger options and subsequent discussions
relating to the future of Conrail. The Port Authority has been involved
in virtually every railroad issue affecting the New York/New Jersey
area since the creation of the agency in 1921 and since the creation of
Conrail in 1973 has consistently advocated the establishment of rail
competition within our region. We find ourselves as one of the few
areas of the country without significant rail competition. The lack of
meaningful rail competition was not the result of business decisions or
competitive forces but rather the result of a final system plan adopted
by Congress and a series of circumstances which prevented it being
dealt with at that time.
The Port Authority was created in 1921 by a Compact between the
States of New York and New Jersey with the consent of Congress. That
Compact also created the Port of New York District, a legislatively
created district which today has over 15 million residents, retail
sales of more than $100 billion dollars, over $400 billion in personal
income with some 7.2 million salary jobs. By any standard, the Port
District is a major commercial and industrial area of this country.
Attached you will find a map of the Port District so that you can
better appreciate the area included in it.
The Port Authority had its genesis in railroad issues, having been
created as a result of the New York Harbor case which was decided by
the Interstate Commerce Commission in 1917. The ICC in its decision
recognized that the area that would later become the Port District
historically, geographically and commercially constituted a single
community. It was a recognition that this area was one commercial and
economic entity regardless of where the State boundary was.
Our agency was created as a means of resolving some of the railroad
rate and other disputes that existed prior to World War I involving the
then 12 major railroads that served our port and the region. The Port
Authority has vigorously attempted to fulfill its duty to protect the
commerce of the Port District during the current era when as a result
of the failure of the major railroads serving the area, Conrail was
created. Toward that end, we participated in the legislative debate
that led to the passage of the Rail Reorganization Act of 1973 (3R
Act). This Act created Conrail as a ``for-profit'' corporation which
would acquire and operate any rail properties that might be conveyed to
it pursuant to the Final System Plan. The implementation of the Final
System Plan was freed from restraints normally applying to railroads
and it was granted anti-trust immunity, immunity from the Interstate
Commerce Commission, the Bankruptcy Act and the National Environmental
Policy Act. While it is clear that the goal of the 3R Act was not to
create a virtual rail monopoly in the northeast, unfortunate
circumstances resulted in that occurring.
Hence, we find ourselves in a unique situation. We receive
meaningful service from only one major railroad and that railroad is a
product of legislative fiat. Conrail is a creature of Congress not the
private sector and was established as a virtual railroad monopoly in
our region. We suggest that this alone distinguishes this railroad, and
any merger or disposition of this railroad, from any merger that has
come before.
Since the passage of the 3R Act in 1973, other legislation has been
enacted by Congress such as the Railroad Revitalization and Regulatory
Reform Act of 1976 (4R Act), the Staggers Act and the Northeast Rail
Service Act of 1981 (NERSA). All of this legislation has affected to
some extent, the regulation of railroads and the ability to compete in
the Northeast. Many of the regulatory policies that were set forth in
the 4R Act were carried forward and expanded in the Staggers Act, or
what is sometimes referred to as the Railroad Deregulation Act.
Included in the policy statement of the 4R Act is a declaration that
``the policy of Congress in this Act is to foster competition among all
carriers by railroad and other modes of transportation services . . .''
The Staggers Act was equally dedicated to the precept that competition
is the best regulator. We believe in these statements of public policy
and urge that they be considered now during the disposition of Conrail.
We find ourselves now on the verge of the next chapter in the
history of railroads in the Northeast. There are competing offers to
acquire Conrail, the only railroad we have. Both the CSX and Norfolk
Southern are well managed companies and fine railroads. We have no
doubt regarding the ability of either to manage and operate a new
railroad that will include some or all of the Conrail properties. We
are concerned, however, that the transactions contemplated will only
perpetuate the current condition, the lack of significant rail
competition to the Port District. Our concern is not recent. Similar
concerns were expressed by the Port Authority in 1985 at legislative
hearings regarding the proposed acquisition of Conrail by Norfolk
Southern. Also, CSX and Norfolk Southern are not the only railroads
that are seeking full access to the Port District. Several others who
have operations in New York and New Jersey want to expand their
service, which ought to be encouraged.
We've read lately reports of a ``settlement'' by the two railroads
that are seeking to acquire Conrail. Based upon the newspaper accounts
and industry statements, the competing suitors have decided to divide
Conrail's lines generally along the lines of the former New York
Central and Pennsylvania Railroads. It is probably logical and
efficient to resolve the dispute in such a rational manner thus
avoiding the depletion of the resources of one or both of the railroads
and it is generally positive news. What concerns us is not what has
been described as the basis of a settlement, but rather what is
conspicuously absent from any described solution. No mention has been
made publicly of how the valuable tracks and property within the Port
District will be disposed of. We have heard nothing of the final
disposition of the rail system in the region, the rail monopoly enjoyed
by Conrail.
Exhibit B attached is a map showing the rail lines, docks and yards
in the Port District. These rail properties are within some of the most
urbanized areas of the country and among some of the most valuable real
estate. We wonder how these properties can be divided in an equitable
manner between the two railroads and yet, provide the efficiency and
competitive access needed so badly.
It will be very difficult if not impossible to provide duplicate or
parallel facilities in the region. For one railroad to pledge trackage
rights to the other to permit the competitor access to valuable
customers only promises years of contentious relationships. Yet, we
feel that it is absolutely critical to the needs of the people of the
Port District, that meaningful competitive rail service be provided.
One solution that could be considered is the development of a
neutral terminal railroad in the Port District by the two competitors
and perhaps more, to provide access to this region. Such a solution
would provide a rationalization of the facilities available and an
efficient use of a railroad which, to a certain extent, the public paid
for. It would avoid the need for duplicate infrastructure and provide
the potential for competitive access. Most importantly, it would
provide a condition encouraging the improvement of service and
facilities and the development of improved rail facilities in the
future. Our studies have indicated that after the turn of the century,
the rail facilities in our region will not have the capacity to handle
the increased demand. Service by a neutral terminal railroad supported
by all of the railroad users would allow for the most efficient
allocation of limited resources to providing additional capacity.
This we're sure is not the only possible solution to the problem of
lack of rail competition and the need for additional capacity. We look
forward to hearing from the various interested parties as to their view
on how the problem can be addressed. We pledge to work with them to
develop a solution to these problems. But we are of a view that it must
be addressed in any planning for the disposition of Conrail, in any
proceeding before the Surface Transportation Board or legislative
hearings such as the one we are participating in today.
The disposition of Conrail presents a unique opportunity to correct
a problem that resulted during the creation of Conrail. If it is not
resolved now, in the future nothing short of legislative intervention
could correct it. Thank you for the opportunity for the Port Authority
of New York and New Jersey to present its views on this important
matter.
STATEMENT OF ROBERT SCARDELLETTI, INTERNATIONAL
PRESIDENT, THE TRANSPORTATION
COMMUNICATIONS UNION
Senator Specter. I would like to turn now to Mr. Robert
Scardelletti, international president of the Transportation
Communication Union, since 1991 and 1995, elected to the post
on the AFL-CIO executive council.
Welcome, Mr. Scardelletti, the floor is yours.
Mr. Scardelletti. Thank you, Senator Specter.
Let me begin by saying that there is a great deal we do not
know about this transaction, and really, until we learn the
details, there is no way that rail labor can make a judgment on
the impact it will have on us.
So far, really all we know is what the rails have chosen to
tell us, and basically through the press, and basically what we
heard this morning, that is really the extent of what the
railroads have told us.
We have heard some comments about jobs being created, and
just let me say that in the history of rail mergers, which goes
back with the history of the United States, there has never
been a rail merger that has created more jobs than it started
with. Every single rail merger, including the rail mergers that
created the three railroads that just testified, resulted in
significant losses of jobs, and that would be expected in
whatever scenario that comes out in the end here. Just
recently, with the UPSP and Santa Fe, two mergers, they are
projecting 6,000 rail jobs will be decreased.
While we try to keep an open mind, we think it is becoming
clear who the winners will be, it is going to be Wall Street
and the railroad corporate chieftains, who are going to enlarge
their empires, and we know who the losers are going to be, it
is going to be the same people who have been losing in railroad
mergers all along, it will be those people who have sweat and
put their money in preserving the rail system in the Northeast,
and in this case, with Conrail, it is the public, it is the
taxpayer, and most importantly to rail labor, it is the
employees.
We sweated through the years when Conrail was a basket
case, you are familiar with that, Senator, begging Congress for
funds to repair the infrastructure that Penn Central and other
Northeast bankrupt railroads intentionally neglected.
We fought to preserve Conrail when some said it could never
make it on its own. We convinced Conrail employees that they
should take a wage cut, and in some cases, actually lose their
jobs, so Conrail could become a successful company. We
struggled for over 21 years to have a viable company that would
preserve good rail service in the Northeast, and the public,
and for Conrail employees, and we succeeded very well, and
actually, we succeeded too well.
The railroad we privatized in 1987 with the Government got
about $1.6 billion. Today it is worth seven times more. The
Federal Government invested billions into Conrail, but that
even was not enough.
It took the investment of Conrail employees, they invested
with wage cuts, job cuts, and sweeping changes in their
collective bargaining agreements, and just a lot of plain, hard
work, and without those employees, Conrail would not be the
success it is today.
We have heard a lot about what a good deal this is for rail
service in the Northeast. Well, let me say this, Senator, I
have 30 years on the railroad, and every rail merger you are
going to hear, it is always good for the company, for the rail
merger, and for the customers, but basically, they will tell
you whatever is necessary to win your support, and then after
the merger, they will do whatever they need to do to maximize
their buck, so you need guarantees from them.
We see the creation of short lines, and the short-line
sales after a merger, where a company who expends too much cash
in a merger seeks to get money back by selling lines. BN and
Santa Fe are now in the process of selling off 2,300 miles,
because they overpaid in that rail merger. Not surprisingly, we
now see the short lines come before Congress and wanting
Federal assistance under ISTEA to preserve their deteriorating
infrastructure.
So I do not think we want to allow that to happen in the
Northeast, where we have already invested billions.
We need enforceable guarantees, with the conditions that
exist today. That means the track, the maintenance facilities,
locomotives, rolling stock, customer service operations. We do
not need pie-in-the-sky predictions, when management describes
the transaction, we need enforceable guarantees.
We have already seen in the press about Conrail management
receiving $1.5 billion in severance and bonus packages, with
Chairman David Levan receiving an estimated $22.3 million.
Now, that combined figure is over 10 percent of the
purchase price, just to pay management off, even if they do get
a job. If they get a job the next day, they still get all this
money, and most of these management people getting all this
money, they were not there back then when Conrail was
struggling to survive, when we made it work, they were not even
a part of it.
We have heard job protection. Yes; we have job protection,
we know all about job protection under the New York Dock
doctrine. You try to collect it. This is a very difficult,
complicated protection agreement, a lot of loopholes, and a lot
of strings.
A lot of things have to be proven that you are affected by
the transaction, and it can be very difficult at times, and
sometimes even when you win in arbitration, the STB the last 13
times, overruled the arbitrators and favored the company, the
last 10 out of 13 cases that the company appealed to the ICC,
to overrule the arbitrators.
There are a lot of difficult obligations that you have to
assume under this job protection, and, of course, it is
important, but it does not compare it to the extravagant sums
of money being provided to these few management employees.
The hard-working men and women who have made Conrail the
success it is, through their sacrifices and hard work, cannot
be abandoned, so Wall Street, top management, and other
railroads can count their millions. We need to look at this
transaction with great care, there can be no rush to judgment.
Once it is done, it cannot be undone.
I thank you, Senator.
Prepared Statement
Senator Specter. Thank you very much, Mr. Scardelletti.
Your complete statement will be made part of the record.
[The statement follows:]
Prepared Statement of Robert Scardelletti
Mr. Chairman and Members of the Committees my name is Robert
Scardelletti and I am International President of the Transportation
Communications Union. I appreciate the opportunity to testify today
about the sale of Conrail to CSX and Norfolk Southern (NS) and the
impact the sale will have on our transportation system, rail service,
and employees. I am here today speaking on behalf of the Rail Labor
Division of the Transportation Trades Department, AFL-CIO, which
represents all the rail unions whose members are affected by this
transaction.
Let me begin by saying that there is a great deal that we do not
yet know about this transaction. And until we learn the details, there
is no way we can judge the impact of this breakup of Conrail on our
rail transportation system and its working men and women. What we know
so far is what the parties have chosen to tell us through press
releases and newspaper leaks, and I guarantee there is a lot we haven't
been told.
We will wait to see the details before we make a final judgment,
but there are criteria by which we will judge the transaction, and
those are what I would like to talk about today.
Some are describing this breakup of Conrail as inevitable. That is
incorrect. Conrail is an immensely profitable corporation, with good
markets, a terrific, modern infrastructure, productive employees and a
bright future. There was and is nothing inevitable about this
transaction except the desire of some to make a quick profit.
While we will keep an open mind as we learn more about the
transaction, it is perfectly clear who the winners are. The winners are
the Wall Street arbitrageurs, the same ones who denounced CSX and
Conrail when the price wasn't as high as they thought they could get.
Now they think this is a great transaction, and I am sure they have
carefully studied the impact on the transportation infrastructure, the
economy, and jobs in Pennsylvania, New York, New Jersey, Ohio and many
other states. They are the winners, along with the corporate chieftains
who get to enlarge their empire.
And it is clear who the losers will be--those who have put their
sweat and money into preserving rail service in the Northeast. It is
the public, the federal taxpayer, and the employees who stand to lose
the most.
Rail labor sweated through the years when Conrail was a basket
case, begging the Congress for funds to repair an infrastructure the
Penn Central and its predecessors intentionally neglected, fighting to
preserve Conrail when some said it could never make it on its own,
convincing Conrail employees that they had to sacrifice part of their
wages, and in some cases their jobs, so Conrail would be a successful
company. We struggled for a decade and a half to preserve a viable,
competitive company that would preserve good rail service in the
Northeast. And we succeeded.
Maybe we succeeded too well. Conrail is so successful, because of
the efforts of the federal government, the employees, and the
management, that now it is worth $10.5 billion. This is the railroad we
privatized in 1987, with the government getting $1.6 billion. It is now
worth nearly seven times what we sold it for in 1987.
Remember what we put into preserving rail service in the
Northeast--we invested in keeping Conrail going, over $3 billion
between 1976 and 1982; we invested when we were forced to pay the Penn
Central for the assets the federal government took over, some $3
billion.
And most important of all, we invested with the wages, jobs and
hard work of all the Conrail employees. Without those sacrifices by the
employees, Conrail would not be the success it is today. It would have
been broken up and sold off, and the Northeast economy would have been
the loser. Conrail handles the same traffic it did a decade ago with
half the number of employees.
Our financial return was $1.6 billion when Conrail was privatized,
a laughable amount compared with what Wall Street will take out of this
transaction. But we should keep our eye on what the real return was and
continues to be--the preservation of rail service in the Northeast. We
have a rail system in the Northeast where once we had a disaster. We
have rail service, we have jobs, we have infrastructure. That is why
this transaction is about more than money. It's about continuing the
commitment to a vital region and part of our economy.
Let me describe briefly the principles that rail labor will use to
judge this transaction.
rail service in the northeast
First, we are concerned about the impact on rail service in the
Northeast. We have simply invested too much to preserve rail service to
see it neglected because someone has taken on so much debt they must
make decisions based on financial considerations rather than the needs
of the Northeast transportation system.
We have seen a lot of press releases from CSX and NS about how good
this deal is for rail service in the Northeast. We are going to insist
that the deal live up to the press releases. That means better rail
service, not abandonments or selling off segments to cut expenses or
raise cash. If Conrail is so valuable, CSX and NS must make a
commitment to maintain the entire Conrail system.
We have seen throughout the country the creation of short lines
after a merger, as the merged carrier seeks to cut costs or raise cash.
The result is less dependable rail service and the loss of good jobs
only to be replaced by lower wage, typically non-union jobs. Not
surprisingly, we have seen recently where all these wonderful short
lines, described as independent entrepreneurs preserving rail service,
are now seeking federal assistance under ISTEA to preserve a
deteriorating infrastructure. So goes entrepreneurship.
We cannot allow this to happen in the Northeast where we have
invested millions. We need an enforceable guarantee that the
infrastructure will be preserved and maintained in the condition it is
in today. That means the track, the maintenance facilities, the
locomotives, the rolling stock and the customer service operations.
Not the pie in the sky predictions we get when management describes
the transaction, but enforceable guarantees. If this transaction is so
good, let's get some guarantees.
We read in the press releases that this breakup will increase
competition. After watching rail mergers for two decades, we have
observed that people don't pay a premium for the ability to compete
fiercely.
Competition should mean what it says: railroads competing with each
other on price and service. And again we must get enforceable
guarantees.
impact on employees
Second, we are concerned about the effect on the employees, and I
mean the employees of Conrail, CSX and NS.
We have seen the news reports about the $1.15 billion going to the
management employees of Conrail. That's $1.15 billion for a couple of
thousand employees, with hundreds of management employees getting
bonuses worth over a million dollars. Over 10 percent of the purchase
price has been carved out to pay off management employees even if they
start a new job the next day. No such luck for rank-and-file workers.
We will not sit back and let the union employees get less than the
management employees. I have already seen the stories that the union
employees will be okay because they will get six years of their salary.
At best, if they have enough years on the railroad, they get a one-year
severance payment if they flat out lose their job because of the
merger.
But try to collect. First, the employee must prove that he or she
lost a job because of the transaction. And proving it is not easy. In
the unusual event that the Surface Transportation Board determines that
a job is lost because of the transaction, the worker is entitled to
protection. But he or she also must be prepared to show up for work
whenever called, or everything is lost. If another job is secured, any
income is deducted from his or her protection. And any of the workers
can be ordered to move or lose all protections.
While this protection is something, it is nothing like the
astounding amounts being provided to these few management employees,
and it doesn't compare with a job. The hardworking men and women who
have made Conrail a success through sacrifices--in salary, in jobs, and
in hard work--must not be abandoned, while the Wall Street
arbitrageurs, top management, and other railroads count their millions.
impact on csx and norfolk southern
No one should believe that the potential fallout from this merger
will affect only Conrail or the Northeast. The financial impact on CSX
is enormous. I guarantee you that the employees of CSX subsidiaries are
praying they get the buyout package offered to Conrail management as
CSX puts them on the block to raise cash.
While they have my sympathy, our concern is the rail industry. CSX
cannot be allowed to do to itself what we should prohibit them from
doing to Conrail--cutting back on capital investment, selling essential
rail assets, or cutting employees--in the desperate attempt to find the
cash to pay off their share of the $10.5 billion.
Once again, we do not want promises. We want enforceable guarantees
about the level of service, competition, employment, and investment.
The same analysis applies to NS. While NS has a great deal more
cash than CSX, we need the same guarantees that capital investment,
rail service and jobs are maintained.
conclusion
I want to commend this Committee for holding this hearing. It is
the Congress which created Conrail, funded it, made it the success it
is today. I do not believe that any of us who participated in that
effort should stand by and watch our efforts destroyed because a few
Wall Street speculators stand to make billions.
This transaction should be judged on its merits--its effects on the
transportation system, the economy of the regions, and jobs. The
breakup of Conrail is not inevitable. If this transaction does not meet
the test of improving rail service, helping the economy and preserving
jobs, then it should be rejected.
We all need to look at this transaction with great care. There can
be no rush to judgment. Once done, it will not be undone.
Rail employees stand ready to work with all participants to make
sure that these goals are achieved.
STATEMENT OF ROBERT L. EVANS, CHAIRMAN, RAILROAD
TRANSPORTATION COMMITTEE, NATIONAL
INDUSTRIAL TRANSPORTATION LEAGUE
Senator Specter. Turning now to Mr. Robert Evans, chairman
of Railroad Transportation Committee, of the National
Industrial Transportation League.
Welcome, Mr. Evans, the floor is yours.
Mr. Evans. Thank you, Senator.
My name is Bob Evans, and I am corporate manager of rail
transportation for Occidental Chemical, but I appear today as
Chairman of the National Industrial Transportation League's
Railroad Transportation Committee.
The league is the oldest and largest shipper's
organization. The league represents shippers of all sizes and
types. Our members use all modes of transportation and domestic
and international commerce.
Over the past few years there has been much debate about
the national rail transportation policy and rail mergers. In
1994, the Burlington Northern and Santa Fe Railroads merged. In
1995, Congress eliminated the Interstate Commerce Commission
and established a Surface Transportation Board to administer
rail policy. In 1996, the Union Pacific and Southern Pacific
Railroads merged.
Today we await the formal filing of a proposal to divide
Conrail between CSX and Norfolk Southern Railroads. When the
dust settles, the United States will be served by two mega
railroads in the West and two mega railroads in the East. It is
important, therefore, that this merger be viewed from a
national perspective.
In the debate before Congress over sunsetting the ICC,
shippers argued that rail mergers should be judged by mergers
of any other company, solely by antitrust laws. Congress chose
a different approach, the Surface Transportation Board is
instructed by statute to take the antitrust laws into account,
but it is not restricted to those laws.
Instead, the STB can find a rail merger to be completely
anticompetitive, yet still approve it, because it produces rail
efficiencies, and the Department of Justice cannot challenge a
merger as anticompetitive in court.
Taken to the extreme, the STB could allow one railroad in
the United States, because it would produce efficiencies.
Obviously, rail shippers would have no benefit of competition
in that case. Competition in the railroad industry is already a
difficult issue for customers of railroads.
Today most shippers are served by only one railroad at
origin, destination, or both. It is vital, therefore, that
shippers have reasonable access to another railroad. Access
means more than having a competing railroad nearby.
Shippers must actually be able to utilize a railroad to
carry freight. In other words, shippers desire increased rail-
to-rail competition, so that the market will function properly.
It is from head-to-head competition that companies find ways to
capture and retain customers through price, innovation, and
service improvements.
An example from my own company may help to illustrate.
Occidental Chemical ships 10,000 carloads a year from a plant
in Niagara Falls, NY. In practicality, the plant is served by
one carrier, Conrail. Just about 25 miles away, Buffalo is
served by competing rail carriers. That does not help us,
because Conrail insists on the longer haul.
Niagara Falls needs both of the mega railroads of the East.
The Niagara Falls area of New York could use an economic shot
in the arm, and competitive rail service would be of
substantial help to the industries located there.
The Conrail merger offers a unique opportunity. In previous
mergers, railroads have been held to a relatively low standard.
In essence, the ICC and STB have forced the railroads to
provide additional competition in places where the number of
rail competitors would be reduced from two to one, because of a
merger.
Usually, the additional competition has been provided
through trackage rights. In this case, CSX and Norfolk Southern
have promised a plan to expand and enhance rail-to-rail
competition, even to the areas where today no competition
exists.
According to the company statement, much of the expanded
competition will be developed through line sales. Two competing
railroads which own their own tracks are preferable to one
railroad merely renting track space.
The league's rail transportation committee will meet in
April to formulate our policy with regard to the Conrail
merger. The league will work to ensure that the agreement
between CSX and Norfolk Southern truly results in expanded and
enhanced rail-to-rail competition for shippers in the affected
areas.
While some observers might view this merger negatively on
its impact on Conrail, I suggest it is viewed in a broader
context. A more competitive rail system would strengthen the
area's economy by making it a more desirable business location,
by making local businesses more competitive, both domestically
and internationally, and by enhancing the viability of local
ports.
One of America's greatest strengths is its transportation
system. It is this transportation system that allows us to
remain competitive, even though our cost productions are
higher.
To remain competitive, however, we need to have a fiercely
competitive transportation system, one that is both
intermodally and intramodally competitive. The public
statements about the proposed Conrail merger are positive
developments, in the effort to have a more competitive
transportation system.
The league is anxious to await the details, and I would
like to thank you for this opportunity.
Prepared Statement
Senator Specter. Thank you, Mr. Evans. We have your
complete statement and it will be made part of the record.
[The statement follows:]
Prepared Statement of Robert L. Evans
My name is Robert L. Evans. I am Corporate Manager, Rail
Transportation, for Occidental Chemical Corporation. I appear today as
Chairman of The National Industrial Transportation League's Railroad
Transportation Committee. The League is the nation's oldest and largest
shippers' organization. The League represents shippers of all sizes and
types. Our members use all modes of transportation in domestic and
international commerce.
Over the past few years there has been much debate about the
national rail transportation policy and rail mergers. In 1994, the
Burlington Northern and Santa Fe railroads merged. In 1995, the
Congress eliminated the Interstate Commerce Commission and established
the Surface Transportation Board to administer rail policy. In 1996,
the Union Pacific and Southern Pacific railroads merged. Today, we
await the formal filing of a proposal to divide Conrail between the CSX
and Norfolk Southern railroads. When the dust settles, the United
States will be served by two mega-railroads in the West and two mega-
railroads in the East. It is important, therefore, that this merger be
viewed from a national perspective.
In the debate before Congress over sunsetting the ICC, shippers
argued that rail mergers should be judged like mergers of any other
company--solely by antitrust laws. Congress chose a different approach.
The Surface Transportation Board is instructed by statute to take the
antitrust laws into account, but it is not restricted to those laws.
Instead, the STB can find a rail merger to be completely
anticompetitive, yet still approve it because it produces rail
efficiencies and the Department of Justice cannot challenge the merger
as anticompetitive in court. Taken to the extreme, the STB could allow
only one railroad in the U.S. because it would produce efficiency.
Obviously, rail shippers would have no benefits of competition in that
case.
Competition in the railroad industry is already a difficult issue
for customers of railroads. Today, most shippers are served by only one
railroad at origin, destination, or both. It is vital, therefore, that
shippers have reasonable access to another railroad. Access means-more
than just having a competing railroad nearby. Shippers must actually be
able to utilize the railroad to carry freight. In other words, shippers
desire increased rail-to-rail competition so that the market will
function properly. It is from head-to-head competition that companies
find ways to capture and retain customers through price, innovation,
and service improvements.
An example from my own company may help to illustrate this. OxyChem
ships 10,000 carloads/year from a plant in Niagara Falls, NY. In
practicality, the plant is served by one carrier--Conrail. Just about
25 miles away, Buffalo is served by competitive carriers. That doesn't
help us because Conrail insists on a longer haul. Niagara Falls like
other shipping locations needs both of the mega-railroads in the East.
The Niagara Falls area of New York could use an economic shot-in-the-
arm and competitive rail service would be of substantial help to the
industries located there.
The Conrail merger offers a unique opportunity. In previous
mergers, railroads have been held to a relatively low standard. In
essence, the ICC and STB have forced the railroads to provide
additional competition in places where the number of rail competitors
would be reduced from 2 to 1 because of a merger. Usually, the
additional competition has been provided through trackage rights. In
this case, CSX and Norfolk Southern have promised a plan to expand and
enhance rail-to-rail competition, even to areas where today no
competition exists. And, according to the companies' statements, much
of the expanded competition will be developed through line sales. Two
competing railroads which own their own tracks are preferable to one
railroad merely renting track space.
The League's Railroad Transportation Committee will meet April 10
and 11 to formulate our policy with regard to the Conrail merger. The
League will work to ensure that the agreement between CSX and NS truly
results in expanded and enhanced rail-to-rail competition for shippers
in the affected area. While some observers might view this merger
negatively for its impact on Conrail, I suggest that it be viewed in a
broader context. A more competitive rail system could strengthen the
area's economy by making it a more desirable business location, by
making local businesses more competitive both domestically and
internationally, and by enhancing the viability of local ports.
One of America's greatest strengths is its transportation system.
It is this transportation system that allows us to remain competitive
even though our costs of production are high. To remain competitive,
however, we need a fiercely competitive transportation system. One that
is both intermodally and intramodally competitive. The public
statements about the proposed Conrail merger are positive developments
in the effort to have a more competitive transportation system. The
League is anxious to see the details.
Thank you for this opportunity.
NATIONAL RAILROAD PASSENGER CORPORATION (AMTRAK)
STATEMENT OF GEORGE D. WARRINGTON, PRESIDENT, NORTHEAST
CORRIDOR
Introduction of Witness
Senator Specter. Next is Mr. George D. Warrington,
President, Northeast corridor, National Railroad Passenger
Corporation (Amtrak).
Welcome, Mr. Warrington, the floor is yours.
Mr. Warrington. Thank you, Senator Specter, for the
opportunity to testify here today.
Tom Downs, President of Amtrak, is unfortunately
unavoidably absent today. Your counterpart on the House side,
the Transportation Appropriations Subcommittee, is having a
hearing on DOT appropriations today.
As you know, Amtrak stands in a dual capacity as railroad
passenger service provider. Across most of the country, Amtrak
operates on track that is owned, dispatched, and maintained by
freight railroads.
In the Northeast corridor, the situation is reversed,
Amtrak owns, dispatches, and maintains the tracks. As a
corporation we have been watching the merger events very
closely.
As president of the Northeast corridor, I have been
particularly interested in the effects the merger will have on
the operations on the Northeast corridor, which is the Nation's
busiest corridor, carrying not only daily freight trains and
Amtrak trains, but over 220 million commuter passengers each
year, on eight commuter services between Massachusetts and
Virginia.
We have been watching these events over the last several
months with an eye focused on three areas in particular,
improving the ontime performance of Amtrak and commuter trains
over freight railroads, ensuring that no additional burden of
excess railroad retirement costs is imposed on Amtrak and
commuter rail operations, and evaluating the opportunities for
Amtrak revenue through selective, compatible, incremental
freight services on the Northeast corridor.
Let me address each of these points individually, very
briefly. With respect to ontime performance in the recent past,
the Northeast corridor of Amtrak and commuter operations on the
Northeast corridor have consistently averaged low to mid 90
percent ontime performance [OTP].
We continue to strive for even better performance, and we
will be increasing our OTP goals continually as we make very
selective capital investments in the corridor to increase
reliability and flexibility in our own operations.
By contrast I will tell you that the off-corridor
performance is far less impressive. Where the freight railroads
own, dispatch, and control the tracks, many of them do not do a
satisfactory job of bringing our trains in on time, despite
Amtrak's statutory right to priority, and financial incentives
that generously reward ontime performance.
The last page of my written testimony, Mr. Chairman,
contains a chart that details the OTP of the three railroads
you have heard from today, and as you can see, the 3-year
average of those railroads is less than 75 percent. Even the
best of the group, the Norfolk Southern, hovers at about 80
percent.
Market research and experience clearly tells us that ontime
performance is the single most significant driver of customer
satisfaction for us.
Nationally, poor ontime performance costs Amtrak more than
$68 million a year in both lost revenues and excessive costs.
Commuter authorities share this concern with ontime performance
on freight railroad lines, which we heard about earlier today.
Our hope and our expectation is that the performance of
freight railroads in delivering Amtrak trains on time will
improve as a result of the merger proceedings. At a minimum,
the traveling public, Amtrak, and commuter customers need to be
assured that ontime performance will not degrade further. What
we really need, however, is improvements.
In the UPSP merger, the ICC approved the proposal, but
clearly retained jurisdiction over the issue of ontime
performance. With respect to Amtrak services, it allowed the
Commission to revisit the merger if ontime performance did not
meet Amtrak's stated goals. This is a good approach.
With respect to excess railroad retirement, as you know,
the railroad retirement system assesses costs based on the size
of the railroad's current work force, not based on actual
retirees from that railroad. Specifically, Amtrak will pay $198
million to the Railroad Retirement Board in fiscal year 1997.
Of this amount, only $56 million, that is $56 million of
$198 million, is attributable to benefits for employees who
worked for Amtrak. The remaining $142 million will fund the
pensions of workers who never, ever worked for Amtrak, not even
a single day.
This situation--pension responsibility for employees who
never worked for the company--is shared by commuter authorities
across the country.
The trend is, in fact, worsening. In recent years,
passenger rail operations in America have been growing
significantly, while freight railroads have been consolidating
and shrinking their work force.
These factors: growth and passenger rail service and
employment reductions in freight rail employment, and a RRTA
formula that is calculated based upon current work force, has
imposed enormous financial burdens on publicly funded passenger
rail services in this country, including Amtrak.
Any further job losses resulting from this merger would
have a continuing cumulative effect. The STB and Congress need
to ensure that downsizing, as a result of this merger, is not
balanced on the back of publicly funded passenger rail
customers and taxpayers. If not, both Amtrak and the commuter
railroads will be back in front of this very subcommittee,
seeking relief from federally imposed excess mandatory RRTA.
With respect to freight service on the Northeast corridor
over the past 10 years, and, frankly, thanks in large part to
Senator Lautenberg's leadership with respect to rail safety,
including a sponsorship of amendments to the Rail Safety Act of
1988, we have implemented many critical railroad operating
safety measures across the Amtrak system, and on the Northeast
corridor in particular.
These include speed control for Amtrak, commuter, and
freight trains on the NEC, random drug and alcohol testing for
hours-of-service employees, improvements to engineer
certification and recertification processes, and improved audit
and enforcement procedures, for both the Federal Railroad
Administration and the operators.
Thanks to these efforts, one of the possible potential
opportunities flowing from this merger is the ability to safely
support limited, selective, and compatible competitive freight
access to ports along the Northeast corridor. The Northeast
corridor could play a role in helping facilitate access to
ports along the eastern seaboard, spur economic competitiveness
and development in the region, and generate new commercial
revenue for Amtrak in the context of declining Federal
operating support for Amtrak.
Senator Specter. Could you summarize the balance of your
statement, please?
Mr. Warrington. Yes; as a practical matter, Senator, we
believe that Amtrak's interests clearly have to be protected
when considering this merger proposal, and those interests are
principally around ontime performance, and not having to bear
the excess railroad retirement burden associated with cost
shifting from the freight railroads to Amtrak.
Prepared Statement
Senator Specter. Thank you very much, Mr. Warrington. We
will insert your complete statement in the record.
[The statement follows:]
Prepared Statement of George D. Warrington
Mr. Chair: Thank you for this opportunity to appear before the
Subcommittee to bring to your attention potential implications of the
Consolidated Rail Corporation (Conrail) merger on the National
Passenger Railroad Corporation, otherwise known as Amtrak.
Tom Downs, President of Amtrak, is unavoidably absent due to a
previously scheduled appearance. He is currently testifying in front of
the House Transportation Appropriations Subcommittee, otherwise he
would be here himself. Today's hearing, I expect, is likely to focus on
the effects on the Northeast of the most recent Conrail merger
proposal, which is the primary reason I was selected to represent
Amtrak here today. As president of Amtrak's Northeast Corridor business
unit, I oversee our railroad's operations from Maine to Virginia,
across New York State and through most of Pennsylvania.
As this Subcommittee knows, Amtrak owns most of the Northeast
Corridor, stretching north from Washington, DC, to the northern border
of Rhode Island, except for some stretches in Connecticut, then north
from New Haven, Connecticut to Springfield, Massachusetts, and west
from Philadelphia to Harrisburg, Pennsylvania. Amtrak controls and
dispatches all freight movement on these lines.
Amtrak has been watching the events surrounding the proposed merger
closely. The health and future of the freight railroad industry is
critically important to Amtrak's passenger operations.
There are many potential implications of the proposed merger on
Amtrak, both on and off the Corridor. The ones we have identified and
which we believe deserve attention are:
I. The effect of the merger on ``on-time performance'' of Amtrak
and commuter trains;
II. The effect on Amtrak's excess mandatory Railroad Retirement
payments;
III. The effect on ``flowback'' rights between Conrail and Amtrak;
and
IV. The effect of additional freight traffic on the Northeast
Corridor.
All of the technology improvements we have done on the Northeast
Corridor were done with the goal of enhancing safety and improving
performance. We believe the merger could provide the opportunity for
significant economic development opportunities for states and
communities in the Northeast, while still preserving what is paramount:
the highest level of safety and on-time performance for commuter and
Amtrak trains. The most recent CSX/Norfolk Southern proposal to divide
Conrail provides for multiple access to ports in the Northeast. If the
four issues mentioned above are adequately addressed as part of the
merger process, Amtrak believes the current proposal affords an
opportunity to enhance competition and generate economic development in
the Northeast, and can be accomplished while preserving the paramount
concern of safety and on-time performance on the Corridor. It would
also enhance the environment for a more successful intercity passenger
service.
i. on time performance
Amtrak's business and the freight business are intimately
intertwined, on and off the Corridor. We have contractual relationships
across the country to operate on railroad tracks that are owned,
maintained and dispatched by the freight railroads, and the opposite is
true on the Corridor, where we own, maintain and dispatch. Freight
train interference negatively affects our on-time performance, which in
turn lowers customer satisfaction. This translates into lost revenue
for Amtrak.
For example, Conrail's Harrisburg-to-Pittsburgh line, which we use,
has been a particularly poor performer: the two Amtrak trains that
operate over this line were on time only twenty-one percent of the time
in fiscal year 1996. However, the more recent proposal between CSX and
NS gives us some cause for optimism, since we understand Norfolk
Southern will acquire the Harrisburg-to-Pittsburgh line, and Norfolk
Southern has one of the best on-time performance levels of the major
railroads: Norfolk Southern achieved an eighty-one percent on-time
performance for the Amtrak service it hosts in fiscal year 1996, and
eighty-five percent on-time record in fiscal year 1995.
By law, Amtrak trains are supposed to receive priority over freight
trains. In its contracts, Amtrak offers the host freight railroad a
financial incentive for delivering our trains on time. Every year
freight railroads earn between $20 and $25 million in on-time
performance incentives but they leave another estimated $40 million
dollars in incentive payments behind due to late trains, while Amtrak
estimates a loss of $68 million per year, due directly to poor on-time
performance. Dependable performance is the major driver of all of our
customer satisfaction indicators, so this is a very serious concern,
which can either be aggravated or improved as a result of the merger.
The historical performance of the three affected railroads in
delivering Amtrak's passenger trains is depicted on the attached chart.
It is Amtrak's hope that the CSX performance levels improve
substantially until it mirrors or surpasses Norfolk Southern's. We
consider this an issue critical to our customers, critical to our
bottom line, and thus critical to our survival. Therefore, Amtrak will
carefully evaluate the merger from an on-time point of view and urge
the Surface Transportation Board (STB) to do likewise.
ii. excess mandatory railroad retirement payments impact
Perhaps the biggest single cost item that is unrelated to the
operation of Amtrak trains is the mandatory payment requirement for
excess Railroad Retirement Tier II (RRTA) taxes made by Amtrak to the
Railroad Retirement Board. First, this should not be part of Amtrak's
operating budget. It has nothing to do with the operation of passenger
trains, nor does it in any way contribute to the cost of our
operations. It supports railroad retirees who never worked for Amtrak.
It goes directly to the Railroad Retirement Board, and is a cost the
federal government will incur with or without Amtrak. It artificially
inflates the size of Amtrak's operating budget, since it is
appropriated as part of our operating grant. There should be a clear
delineation of excess Railroad Retirement from the normal retirement
contributions which are legitimately a part of the Amtrak budget.
Amtrak pays almost $200 million per year into the Railroad
Retirement Account. These payments are based on the current work force
levels. If Amtrak were required to pay for those employees that retired
from Amtrak, only, its costs will be significantly lower than the $200
million it now pays. This year Amtrak will pay $142 million in excess
payments, for retired railroad employees that have never worked for
Amtrak. After a merger, these excess payments will increase for all
those railroads that have had a relatively stable employment level,
many of which are taxpayer supported commuter railroads and Amtrak. The
last two major railroad mergers resulted in 6,000 fewer railroad
employees. While this merger will undoubtedly result in fewer railroad
employees, it alone would not have a significant impact on the
remaining railroads. The concern is over the cumulative effect the
number of recent mergers have had on the remaining railroads,
especially those that depend on taxpayer support. While the overall
impact of the pending merger may have positive economic results for the
involved railroads, shippers and the citizens in the region, the
increase of excess Railroad Retirement costs should not be at the
expense of the taxpayers that support commuter and intercity rail
service.
Second, it is a system where the amount of tax railroads pay is
based on how much is needed to support the number of retirees, financed
by a tax on industry payroll: 16.1 percent is contributed by Amtrak,
4.9 percent is the employee portion, up to a maximum salary of $46,500.
As the work force shrinks and the retiree rolls grow, a larger and
larger cost is borne by those remaining railroad companies. To put it
in terms, every Member of this Subcommittee could relate to, those
railroads that have relatively constant levels of employment, such as
Amtrak, could be considered ``donors,'' while those freights that have
greatly decreased their size over the last thirty years can be consider
``donees.'' Those railroads that are ``younger,'' who have a higher
number of employees than they do retirees, such as the commuter
agencies and Amtrak, are even more disproportionately ``donors.''
Amtrak is by far the largest donor to the system.
The number of railroad employees paying railroad retirement taxes
has declined from approximately 625,000 in 1971, the year Amtrak was
formed, to about 265,000 today. Much of this decrease in employment is
reflected in the size of Amtrak's excess mandatory payments, and the
dollar amounts are significant. In fiscal year 1995 the cost to Amtrak
was $145 million, and the Congress provided only $120 million, which
meant the rest came from Amtrak's operating budget. In fiscal year 1996
it was $141, and it is expected to be $145 this year. These dollar
amounts will increase as a result of this proposed merger.
According to the Surface Transportation Board, the recent mergers
of the Union Pacific and Southern Pacific Railroads, and the Burlington
Northern and Santa Fe Railroads, will result in the elimination of more
than 6,000 railroad jobs. Since it is a per-capita for railroads and
their active employees, these 6,000 less contributors to the rail
retirement system means that those still paying in will have to pick up
an even larger burden. In the most parochial terms, it means this
Subcommittee will have to fund a larger mandatory excess RRTA amount
for Amtrak. We may have a mutual goal here--to take this cost off of
Amtrak's books, since it has absolutely nothing to do with the
operation of intercity passenger rail service, artificially inflates
the size of our budget, and will only increase as a result of mergers
over which we have absolutely no control. Amtrak and the commuter
railroad should be held harmless as a result of this or any other
merger with respect to increased Railroad Retirement costs.
iii. ``flowback'' rights for conrail and amtrak employees
There are statutorily mandated employee ``flowback'' provisions,
between Amtrak, Conrail and the commuter authorities on the Northeast
Corridor. Any change in employment levels on Conrail lines could impact
upon Amtrak employment for employees engaged in train and engine
service. At this time we are unable to estimate what threat this impact
would be.
iv. the effect of additional freight traffic on the northeast corridor
As the proposed merger goes forward, one of the outcomes Amtrak
hopes for is the evolution of a more business-like relationship with
the new operator of freight on the corridor, and not a relationship
dictated by federal statute. For example, we would like to replace the
current flat track use charge with varying rates, which would recognize
and reflect the peak traffic hours of commuter and passenger trains,
and encourage freight trains to operate at night. One of the reasons we
want to implement varying price structures is to encourage freight
traffic at night to the greatest extent possible, and to encourage
freight traffic that is compatible with passenger rail.
With respect to the commingling of freight and passenger rail on
the Corridor technological advances made in the last twenty years have
made tracks, signals, and infrastructure safer, while accommodating
increases in passenger train frequencies. Over the past twenty years
there has been a significant reduction in freight volume on the
corridor from 165 million car miles in 1977 to 19 million car miles in
1995, a decrease of nearly 90 percent.
Amtrak also wants the right, which it does not currently have, to
grant other railroads the right to operate over the Corridor where such
operations are compatible with existing Amtrak and commuter uses. This
would be beneficial to both Amtrak and other railroads in that it could
provide other railroads with efficient routes to reach locations such
as Philadelphia, and encourage greater economic competition as well as
generate additional revenues from portions of the Corridor which are
underutilized, such as the line between Philadelphia and Harrisburg,
PA.
In conclusion, these are the most significant anticipated impacts
of the proposed merger on Amtrak that we are currently aware of. I will
hasten to add that at this point in time we do not know enough about
the Norfolk Southern/CSX plan to clearly assess additional impacts, but
that, of course does not mean there will not be any. We believe that if
on-time performance and the other concerns we have expressed are
considered and adequately addressed as part of the merger process, the
current merger proposal could afford an opportunity to enhance
competition and generate economic development in the Northeast, and can
be accomplished while preserving the paramount concern of safety on the
Corridor.
On behalf of Amtrak, I appreciate the Committee allowing me to
appear here today, and it is my hope that we will be able to sustain a
dialogue with the Congress on these and related issues as the proposed
merger moves forward.
[GRAPHIC] [TIFF OMITTED] T12MA20.051
NONDEPARTMENTAL WITNESS
STATEMENT OF MICHAEL HAWBAKER, GLEN O. HAWBAKER, INC.,
STATE COLLEGE, PA
introduction of witness
Senator Specter. I would like now to turn finally to Mr.
Michael Hawbaker, of the Glen O. Hawbaker Corp., State College,
PA.
Welcome, Mr. Hawbaker, and the floor is yours.
Mr. Hawbaker. Thank you, Senator, I appreciate being able
to speak today.
Again, my name is Michael Hawbaker, and I am representing
our company, Glen O. Hawbaker, Inc., out of State College, PA.
A little bit about our company, we are a heavy highway
construction company that also has a material supply of crushed
limestone aggregates and hot-mix asphalt.
We are a third-generation company, which I am, we employ
about 500 people, and our major trade area is in central and
north-central Pennsylvania.
Currently, we have one operation located in the Port
Allegheny area, which would be off the Harrisburg to Buffalo
line, off of Conrail, currently. Last year we received around
1,400 carloads of crushed limestone aggregate at that point, at
which we have a distribution yard and a hot-mix asphalt plant
at that location.
It is the only source in that area and the Port Allegheny
and north-central area of Pennsylvania that has that type of
quality aggregate limestone, bringing a new quality to the
area.
We look to continue growing our operation with continued
access to rail and rail service, but we have been prevented
from doing that. We have an operation in Dubois, PA, and it
sits right adjacent to the Buffalo and Pittsburgh line, but we
cannot get there from our central location, our point of
distribution in State College.
Our problem is, we get into a situation of what we call the
three-line haul. To get out of our plant at State College, we
leave a shortline, and then transfer to a class I.
We are able to keep it to a two-line haul, to our existing
operation in Port Allegheny, but other operations that we have,
and operations that we have made plans for, cannot be
economically done, with the fact of having a three-line haul.
With this merger of Conrail, NS, and CSX, we would like to
see that there would be access granted to the shortlines and/or
trackage rates granted to those shortlines, so that material
could be transported across the class I carrier, some kind of
working relationship developed with the shortline to foster
passage of more material on those lines.
Our current operation, I mentioned before, in Dubois,
currently uses an excess of 200,000 tons of material per year.
We have another operation we would like to put on line with the
rail system, which would account for another 100,000 tons, but
at this time we are precluded from doing that, by the fact that
we are in a three-line haul situation, and the shortlines are
unable to work with Conrail, and in gaining access across those
lines, or a grant of trackage rights to move the materials
economically.
Again, as we grow as a company throughout central/north-
central Pennsylvania, one of our biggest things we watch for is
rail, and where can we rail material to construction sites and
permanent facilities through the central portion of the State,
and we are very concerned about the merger, and how that may,
as we look at it, hopefully, possibly affect access and
trackage rights for the shortlines that we work with.
I thank you for the opportunity of speaking today. Thank
you.
Senator Specter. Well, thank you very much, Mr. Hawbaker,
we appreciate your being here.
Are you familiar with the arrangements which have been
worked out with Pennsylvania Power & Light, which would
accommodate the carriage of coal from Clearfield, your area of
north-central Pennsylvania?
Mr. Hawbaker. No; I am not.
Senator Specter. Well, it may be that what Norfolk Southern
has done, and had started on quite some time ago, in an effort
to buttress their public position to deal with the proposed
merger of Conrail and CSX, perhaps those lines will be of
service to you, because they go very close to your area.
It would be my expectation that they would, so I would urge
you to take a look at that, and if you have further problems,
let us know.
Mr. Hawbaker. Thank you.
Senator Specter. I would like to make a part of the record,
I think some of this has been already done, but I want to make
sure it is a part of the record, my letters to Chairman Morgan,
dated January 21 and March 7, and her responses of January 23
and March 13, and my letter to Mr. Levan, of March 3, to Mr.
Snow, March 6, and to Mr. Levan, Mr. Snow, and Mr. Goode, of
March 14, and the response by Mr. Levan, March 18, and Mr. Snow
and Mr. Goode on March 19.
Senator Lautenberg has rejoined us, it is now 1:05, and I
am going to have to excuse myself.
And I will leave you the gavel, Senator.
Senator Lautenberg [presiding]. Oh, you are very kind. I
hope it was not something I said.
Senator Specter. No; because you have not said anything.
[Laughter.]
Senator Lautenberg. Thanks very much, Mr. Chairman, I
appreciate it.
I will not keep you too long. There are a couple of things
that I wanted to have a little discussion on. Obviously, when
the port authority reviews what it wants to see out of the
merger, out of the service that is supplied to the area, to our
ports, I am very concerned and very interested.
So, Mr. Welsh, you heard perhaps before, when Mr. Goode and
Mr. Snow were here, my question about how they provide the
service to the area with the two lines, and how does one work
that out?
I mean you cannot have them both running over the same
trackage, and be able to exchange the service very easily.
I asked them about a neutral terminal railroad. Is this the
solution that you think is best for the problem?
Mr. Welsh. It is one of the solutions that we have
identified that should certainly be considered and studied very
carefully.
The problem that we have in the New Jersey and the New York
area is a problem that probably is shared in other urban areas
that are served by only one railroad, and it comes about,
because of the fact that for the past 20 years, our area has
been served by only Conrail, and there has been a
rationalization of the rail lines there, and a concentration,
so it is very difficult to just take that concentrated rail
line now, and split it up, or develop parallel lines, it is
just too expensive to do it.
So we felt the use of the current system, by a neutral
terminal railroad, promised to be the most efficient use of
those assets, providing it is neutral, and provides complete
competitive access to all of the people who are participating
in that terminal railroad.
Senator Lautenberg. There is nothing that comes to mind
that otherwise might serve to provide the kinds of service that
we are----
Mr. Welsh. Well, there is reciprocal switching, which has
certain inherent problems and open access, but both of them
assume complete cooperation by competing railroads. A neutral
terminal railroad assumes that you have to set up a neutral
third party to control the access.
Senator Lautenberg. Thank you. You also, in your comments,
talk about the fact that the capacity of problems in the next
century will not be able to take care of the demand that we
might experience.
Were these studies done, assuming that traffic increases
might result from competitive rail service in the port, is that
a factor that you took into consideration, as you projected
what the requirements might be, the traffic load might be?
Mr. Welsh. No; it is a natural growth of the rail service
in our area. We are assuming that there will be an increased
demand for rail service into the New York/New Jersey area,
independent of competitive factors, and that is going to
overburden the current system, and we believe there is a need
to increase the capacity in the future, which is one of the
critical issues that we are looking at in any merger, in any
acquisition.
Senator Lautenberg. I would ask you this, that the port
authority, I assume, has been an integral part of the
discussion that is taking place, in terms of examining how the
port is serviced, et cetera, is that the case?
Mr. Welsh. That is true, Senator. We have been working with
both New York and New Jersey in formulating common policies
where we can, with regard to the competitive rail access, or
generally, the rail issues.
We are, of course, concerned with our own facilities at the
port, but also with the regional concerns, but in addition, we
are sharing information with other ports in the North Atlantic
range.
Even though we are competitors, we find that we can share
ideas, and we do have some common interest, even though we will
be maintaining a competitive position with them.
Senator Lautenberg. So do you see a significant addition to
the port's capacity to provide service with the lines going in
there that we are contemplating here?
Mr. Welsh. Well, it depends on how they come in. If the
lines attempt to come in and develop some sort of a parallel
system, they will be breaking up the network that is in there
at the present time, and it would be very difficult to create
new capacity under those circumstances, because of limited
areas, because of limited acreage in the area.
We feel, however, a neutral terminal railroad would give us
a concentration and a more efficient use of facilities, and
permit for an increased capacity in the future. It just seems
to be a more efficient use of limited assets.
Senator Lautenberg. Mr. Scardelletti, hello to you. In your
opening statement, you remark that Conrail's executives are
being given fairly generous severance packages. I just looked
at the headlines, it should happen to me, while the rank-and-
file workers are being ignored.
There are statutory protections for railroad workers that
lose their jobs as a result of rail mergers, consolidation,
acquisition, but your statement implies that these employees
are not entitled to these protections. You say that they must
qualify for them, or prove their eligibility.
What specifically do you find to be inadequate with the way
the Federal labor protection provision works in a case like
this?
Mr. Scardelletti. Well, it is New York Dock protection, you
have to prove that you are affected by the transaction, by the
merger itself. In some cases, you can do that; in other cases,
it is very difficult, in many cases, it is very difficult.
All the railroads, this is something we are familiar with
on a national scale, fight us tooth and nail on applying New
York Dock benefits to their employees, and many times we end up
in arbitration on the issue.
I remarked that in the last 13--in the arbitration
procedures, the railroad, when we win, the railroad can appeal
it to the STB, and the STB has authority over it, and can make
a ruling.
In the last 13 times that the railroads have appealed the
arbitrator's decision that was in favor of the union, the STB
ruled against the union 10 times.
So it is a very difficult protection, it has a lot of
loopholes, and a lot of strings attached, you have to do a lot
of things to comply, and it is not Utopia, by any stretch of
the imagination. It is no golden parachute, like the people I
described are receiving.
Senator Lautenberg. Have the employees, the railroad
workers been offered severance packages?
Mr. Scardelletti. Well, they have not been offered anything
yet. I mean there has been no--there were remarks regarding
discussions with labor, there have been no discussions with
labor.
I am the person they would discuss it with, with respect to
my craft, but all the rail unions, we have had a meeting with
Conrail, where Conrail proceeded to tell us what a great thing
this was, and now they are out of the picture.
We requested to meet with CSX and Norfolk Southern, but
they do not have their operating plan, so there is no reason to
meet, which those are their words. When we get to meet with
them, then we will be able to see what we can negotiate. I do
not know when that will be, but we have to meet with them.
Senator Lautenberg. Well, I trust that they will meet with
you, and I will be watching to see whether or not there is an
arrangement that can be worked out. It is not for me to
interfere, I can tell you that, I mean it has to be settled
with the parties, but the parties, I think, have to meet.
Mr. Warrington, after the Chase accident, I included
provisions in the Rail Safety Improvement Act of 1988 that put
a process in place for all the major users to develop
recommendations to improve safety over the corridor. One of the
recommendations at the time was to minimize freight traffic
over the corridor. That recommendation was endorsed by the FRA.
Now, if the stated Federal policy is to minimize freight
traffic on the corridor, why are we now hearing about proposals
to expand freight use on the Northeast corridor, what
conditions have changed that would open the subject up?
As a matter of fact, can we say, from the early
examination, that there have been changes that would give a
degree of comfort to the fact that this sharing might take
place, without interfering with either's operation?
Mr. Warrington. Senator, a couple of points. We all share
your concern around safety on the corridor. You have clearly
been a leader around that issue, with Amtrak, and as a result
of those amendments of the 1988 act, there were a whole host of
improvements in technology, operating protocols, and practices,
that position us--put us in a much different position today,
with respect to freight service.
You are correct, as a matter of fact, 20 years ago there
were about 167 million car-miles of freight operating on the
Northeast corridor, and today there are only about 19 million
car-miles of freight operating on the Northeast corridor.
So it has been a significant reduction, and generally it
has been a policy of Amtrak over those 20 years to minimize the
extent to which freight service operates on the corridor.
The combination of those technology and operating
improvements, coupled with the availability of certain windows
for certain kinds of freight traffic, is something that we
would like the ability to explore, but only explore and only
move forward with, to the extent that we could all be satisfied
that, not only from a safety point of view, this operation
works, but from a commuter impact and commuter reliability
point of view, it works, and if, in fact, there were any kinds
of wear and tear, or useful life impacts on the asset, that
Amtrak was certainly fully compensated for any of those
impacts.
But what we are seeking, Senator, is the opportunity to
exploit or explore limited potential for selective kinds of
freight services that might generate revenue for us at a time
when we are facing serious and significant declining support
for Amtrak, particularly on the operating side, and we have to
clearly establish a commercial orientation, but at the same
time doing that, while protecting commuter interests, and
obviously, clearly supporting and assuring a safe operation.
Senator Lautenberg. All right. Because one of the principal
questions was: Can you realistically operate both kinds of
service without damaging the effectiveness of either one? Of
course, when we look at the passenger trains, we have a lot of
people for whom we are responsible, and we want to make sure
that nothing goes awry there, and the experience then was a
rather bitter one, because it did involve the passenger rail
and freight service.
So can we assume from your remarks that these freight
carriers will have to pay a premium to operate on the Northeast
corridor, and will that premium, in your view, be able to take
care of the needs that Amtrak has, while at the same time
providing good competitive availability to the freight
carriers?
Mr. Warrington. Yes; I think that is probably a fair
statement, Senator. As a matter of fact, one of the things we
would like to explore is opportunities for variable pricing, so
that service that operates--sort of an incentive for service to
operate at locations which are underutilized, particularly from
a passenger point of view, like the Springfield line in
Connecticut and Massachusetts, and the Harrisburg line, in
Pennsylvania. We would price them in a way which would provide
some incentives, for use of either underutilized track, and
facilities, and assets, or priced in a way which directs that
kind of service to hours of operation, where there is no
passenger interference, such as late at night.
There may be some opportunities and windows there, where
there could be a win-win. We could aid in the competitiveness
of the Northeast and the region, and at the same time provide
some desperately needed revenue for Amtrak.
conclusion of hearing
Senator Lautenberg. Gentlemen, I thank you for being here.
I am told that the next hearing of the subcommittee will
take place on Thursday, April 10, 10 a.m., in the same room.
The topic will be the administration's NEXTEA proposal. That
does not mean tea at the White House, or anything like that.
Thank you very much. That concludes the hearing. The
subcommittee will recess and reconvene at the call of the
Chair.
[Whereupon, at 1:18 p.m., Thursday, March 20, the hearing
was concluded and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
MATERIAL SUBMITTED SUBSEQUENT TO CONCLUSION OF HEARING
[Clerk's note.--The following material was not presented at
the hearing, but was submitted to the subcommittee for
inclusion in the record subsequent to the hearing:]
Prepared Statement of C. Alan Walker, President and Chief Executive
Officer, Bradford Coal Co., Inc.
Thank you for the opportunity to present a written statement about
our concerns with the proposed division of the Conrail rail system. My
name is C. Alan Walker, and I'm presenting these remarks in my capacity
as president and chief executive officer of Bradford Coal Co., Inc.
Bradford Coal is located in Clearfield County, Pennsylvania. Our
company was founded in 1935 as a bituminous coal mining and marketing
operation. Like the vast majority of coal companies, we are a rail
dependent organization. Our survival and our future is tied to the
viability of the rail system in central Pennsylvania. Consequently,
it's not quite as important to us which company ultimately controls our
rail system, but the effect it will have on our ability to remain
competitive.
In the way of background, our coal field was developed immediately
after the Civil War when the Pennsylvania Railroad laid tracks into
Clearfield County in 1868. The New York Central arrived in 1898. In the
130 years since the railroad came to the county, over one billion tons
of coal have been mined in this area. Coal mining has been a major part
of our heritage, and energy needed to fuel the economic expansion in
the Northeastern United States from 1880 to 1930 came from coal mined
in this region. Despite all the mining activity that has taken place
here, geologists estimate there are still over 700 million tons of
mineable coal reserves remaining in Clearfield County.
As you are aware, the rail system here became part of the Penn
Central, and later Conrail. The Clearfield Cluster was historically a
very profitable section of railroad for the rail operators because of
the coal tonnage originating from the line. However, as a number of
large deep mines were closed over the past ten years, the coal tonnage
began to drop.
In late December 1995, Conrail sold the Clearfield Cluster--250
miles of rail system in Clearfield, Cambria, and Indiana Counties--to
R.J. Corman, a shortline operator headquartered in Nicholasville,
Kentucky. The area served by this shortline railroad represents
approximately five percent of the surface area of the State. To his
credit, Corman and his organization have done a superb job at operating
the railroad.
Under the proposed sale of Conrail, the problem is not in who
operates the railroad, but to insure that competitive rates will be
established and that access to traditional markets will be maintained
at these competitive rates. Currently, all rail rates in place for the
Clearfield Cluster shippers set by Conrail expire no later than 1999.
Our shortline operator, R.J. Corman, must interface with Conrail at
Keating Junction in Clinton County. In rail terms, Keating Junction is
known as a bottleneck because it's an area where two different
railroads interchange. Historically, it has been easy for the larger
railroad at an interchange to set high rates for tonnage coming from
the smaller line because the shortline has no other options. This often
forces tonnage away from the shortline railroad. We are concerned that
extra revenues needed to pay for the purchase of Conrail's assets could
lead to higher rates and lock us out from our traditional customers.
Currently, 75 percent of the coal shipped from the Clearfield
Cluster goes to either the Montour or Sunbury Stations of Pennsylvania
Power & Light Company. Montour Station is in Montour County near
Williamsport, and Sunbury Station is in Snyder County near Selinsgrove.
Both plants are approximately 130 rail miles from the gathering yard at
Clearfield. The Clearfield County producers are geographically the
closest coal mining operations to these power stations. The next
closest bituminous coal mining operations to these power stations are
more than three times as far by rail. However, because of railroad
pricing, the Clearfield Cluster rate does not enjoy its true
competitive advantage. Future pricing must have some correlation with
distance moved, or we can be priced out of business.
In addition, we're concerned about what happens to Conrail's fleet
of open top hopper cars after the merger. This fleet is currently at
19,000 cars, and it's a fairly good match for Conrail's 60 million tons
of coal moved annually. However, should these hopper cars be split
unfairly or used to supplement the fleet of one of the surviving
railroads at the expense of the traditional Conrail shippers, a car
shortage could develop, which again has the potential to disrupt
traditional shipper-customer relationships. This sensitive balance
could be easily manipulated to favor one region over another.
In conclusion, I would like to urge this committee to ask for
guarantees from the new railroad owners that will protect Conrail's
present shippers. Before we can fully support the sale and split-up of
Conrail, we need detailed information about how rates will be set in
the future, how access to traditional markets will be affected, and how
the open top hopper car fleet will be managed.
______
Prepared Statement of Michael J. Sabia, Senior Vice President and Chief
Financial Officer, and Gerald K. Davies, Senior Vice President,
Marketing, Canadian National Railway Co.
My name is Michael Sabia, and I am Senior Vice President and Chief
Financial Officer of the Canadian National Railway Company (``CN''). My
colleague, Gerald Davies, Senior Vice President, Marketing, joins me in
this statement for consideration by the Transportation Subcommittee of
the Senate Appropriations Committee in the context of its inquiry into
the nature and consequences of the breakup of Conrail.
CN applauds this Committee for seeking to probe beneath the surface
of this deal. There should be no rush to judgment, particularly since
many of the details of this transaction have yet to be disclosed.
However, CN believes that there exist serious competitive issues
affecting the Northeast and Midwest to which this Committee and others
should be alerted before reaching any final conclusions. We have
excerpted portions of our recent testimony before the New York State
Department of Transportation which identify one set of issues that
arise in that region served by Conrail. Further study and analysis as
facts become more clear are likely to uncover other problems beyond
those in New York.
1. introduction
We have three objectives:
--we want to describe the new Canadian National, particularly our
operating capabilities and financial strengths;
--we want to share our views, and concerns, on the dismemberment of
Conrail; and
--finally, we would like to secure your support for what we believe
to be major opportunities--for the state of New York and for
CN--flowing from the breakup of Conrail.
2. who we are and what we do
Canadian National is Canada's largess railroad and North America's
sixth biggest. We operate a transcontinental system, the only railroad
in either Canada or the United States to do so. Our business base
produced revenues of more than $4 billion (CDN) in 1996, almost $2
billion of it from operations in the eastern part of North America.
In the geography affected by this transaction, our railroad is the
only one generating a significant volume of traffic between Canada and
the U.S., the world's largest trading partners. Canada-U.S. trade
represents one-third of our business and is our fastest growing segment
at ten percent a year.
In the U.S. we own the Detroit-based Grand Trunk Corporation, which
manages a 1,000-mile network that is a Class I railroad in its own
right. It employs 2,000 people, generates revenues approaching $400
million annually, and has presence in Illinois, Michigan, Ohio,
Wisconsin, Minnesota, and Indiana. We also enjoy strategic connection
to all major U.S. railroads; operating through important gateways at
Chicago, Detroit, Buffalo, and Massena.
Our business base is made up of commodities that are important to
the people of New York and the northeastern U.S. Last year we handled
100,000 carloads of traffic via the Buffalo and Massena gateways,
almost two thirds of all rail traffic crossing the state's northern
frontier. The automobile parked in a New Yorker's driveway is likely to
have come from Michigan or Ontario and to have been moved on a CN
train, and the newspaper read every morning is likely to have been
printed on newsprint delivered in a CN railcar.
In 1995 Canadian National moved its ownership from the government
to the private sector in the most successful public share offering in
Canadian history. Today, the company is 100 percent investor-owned. We
are publicly traded on the New York Stock Exchange, and U.S. investors,
own two thirds of the company.
In 1996, our first year as a publicly traded company, operating
income increased by 34 percent to $610 million, and we currently have a
debt-to-equity ratio of 38.6 percent. CN owns one of the strongest
balance sheets in the North American railroad industry, affording us an
opportunity to grow our business.
3. conrail breakup: problem definition
In some quarters, the pending division of Conrail's network by
Norfolk Southern and CSX is being promoted as the return to true Class
I rail competition in the northeastern United States.
We believe the CSX/NS plan falls well short of that goal.
As reported by the media, the breakup of Conrail would create
competition between CSX and Norfolk Southern for some traffic from New
Jersey and Pennsylvania to portions of the Midwest and the southeast.
It would not produce a competitive balance for traffic moving into New
York and New Jersey from the north and from the west.
This lack of competitive access for railroads operating on New
York's western and northern borders will not merely mirror the
extraordinary market dominance which Conrail currently enjoys, it will
bring with it a threat to the future viability of a number of key New
York rail lines.
A. Future of Montreal/Syracuse (``Massena'') Line at Risk
Both the Norfolk Southern and the CSX are southern railroads. The
incentive for each will be to exploit long-haul opportunities by
sourcing traffic from the southeastern United States, thus limiting
choice for shippers and receivers in New York.
Newsprint produced in Quebec for markets in New York, Pennsylvania,
and New Jersey, for example, would likely be replaced by product from
southeastern sources. And plastics and petrochemicals from Ontario and
Alberta would give way to producers from the Gulf of Mexico.
But this is not simply about the sale of Canadian goods, nor about
traffic volumes for Canadian railroads. The many in New York industry
who ship or consume Canadian goods want and deserve choice of product.
And shortline railroads in the state deserve an opportunity to carry
the product that New York industry judges to be the most competitive,
from the standpoint of either quality or price.
Canadian traffic now moving over the Massena line generates two
trains per day and accounts for 80 percent of the line's total traffic
base. Without this freight some 33,000 carloads a year--the line would
be difficult to sustain, as would the 100 jobs associated with its
operation and maintenance.
B. Viability of Southern Tier Route in Doubt
As seen by us, Norfolk Southern's share of the Conrail network will
include the choice ``Pennsylvania'' main line connecting New York, New
Jersey, and Pennsylvania to Cleveland, Detroit, and Chicago, as well as
the ``Southern Tier'' route running through upstate New York to
Buffalo.
Of the two, the Pennsylvania route is markedly superior in quality,
grade, and density. Conrail has never moved much business over the
Southern Tier route, nor does it currently. And indeed, at the time of
both CSX's and Norfolk Southern's bids for Conrail, there was wide
speculation that both would divest the line, judging it to be
unnecessary to core operations.
It stands to reason, therefore, that Norfolk Southern will
concentrate its east-west traffic on the Pennsylvania line.
The implications for the Southern Tier route are similar to those
for the Montreal to Syracuse line.
Without a consistent and constant volume of freight--made worse by
a paucity of traffic from the north and west--the line's existence as a
core rail route, as a generator of jobs, and as an engine of economic
development, seems difficult to imagine.
C. Shortline Railroads Remain Vulnerable
For several years Conrail's market dominance in the northeastern
United States has made it difficult for shortline railroads to perform.
Their ability to develop and create transportation alternatives has
been compromised by restricted access to industry, and by the denial of
direct and efficient connections with Class I carriers.
In Buffalo, a critical gateway whose rail interchanges are
controlled by Conrail, the Buffalo and Pittsburgh Railroad has been
prevented direct connections with our railroad.
In New York City, the New York and Susquehanna Railroad relies on
CSX for one half of its total business. Were CSX to inherit Conrail's
New York Central route, its incentive would be to move this traffic
over that line--with, we suspect, dire consequences for the
Susquehanna.
The Long Island Railroad, a shortline with enormous potential to
move rail freight into metropolitan New York, has Conrail as its only
available connection.
Without expanded access to industry, and to friendly connections
with Class I railroads, the future of shortline railroads in the state
of New York is placed very much in doubt. The hundreds of shippers and
receivers which they serve risk having to move product by truck or not
at all.
4. our solution: the new york network
When created in 1976, Conrail was awarded extraordinary market
dominance on the assumption that the economic geography of the area
could not support rail competition. Evidence that such is no longer the
case--if it ever was--is offered by the price being tendered for the
Conrail network by both NS and CSX.
Since introduction of the North American Free Trade Agreement on
January 1, 1994, Canadian exports to the United States have increased
by more than 40 percent.
Transborder rail volumes have also grown by more than 40 percent
over the period. We continue to project healthy growth in this area,
reflecting both the strong trade flows created by NAFTA and the
strength of economic growth in both the U.S. and Canada.
In the state of New York, however, while transborder business has
grown, rail's share of the market continues to take a beating from
trucks. Only 23 percent of southbound transborder traffic is handled by
rail, down significantly from 37 percent in 1991. The impact is clear,
congested highways, higher public expenditures, and more and more
concern about safety.
This trend will not reverse, New York industry and consumers will
not benefit from the economies of competitive choice, and New York
State will be denied the chance to preserve its existing railroad
network unless the opportunity presented is seized.
If acted upon we are positioned to contribute two vital elements to
the reality of effective rail competition for the northeastern United
States.
First, we are prepared to participate financially either through
ownership, co-ownership, access arrangements, or other mechanisms in
establishing and then maintaining, a high quality rail system capable
of providing competition to the New York market from the north and from
the west.
Second, our existing and growing transborder traffic volumes would
serve as the necessary ``anchor'' for such a network.
We have tried to outline the basic architecture of the proposed
system in the map accompanying this statement. The system would be
founded on three core components: a network of routes, the substantial
broadening of access for competing railroads at the all important
Buffalo gateway, and effective alliances' with shortline railroads.
a. The route network would comprise:
--the Southern Tier route from Buffalo, through Binghamton, to New
Jersey;
--the ``Montreal Secondary'' route from Montreal to Syracuse, and
extending on to Binghamton;
--the route from Montreal to Albany via Palmer connecting down the
east side of the Hudson River, to New York City; and
--possibly, to promote east-west traffic, the route from Binghamton
to Albany.
b. Competitive access would be extended to:
--shippers in Buffalo, Albany, and New Jersey;
--the Buffalo and Pittsburgh Railroad, Canadian National, and
Canadian Pacific at Buffalo;
--the Norfolk Southern and CSX at all intersections; and
--all serving railroads at Albany.
c. To enhance the efficiency and effectiveness of the system, we
propose to share its operation with a network of shortline operators
already present in the region. Collectively, their routes would, after
all, represent the substance of the network, and their entrepreneurial
skills are well suited to the communities in which they operate and the
local industries they serve.
A rail network capable of providing competition to the New York
market from the north and from the west would, of course, establish a
future for the Massena-to-Syracuse line, and generate the traffic
necessary to ensure the financial viability of the Southern Tier route.
More importantly, it would benefit development in the state of New York
and enhance the efficiency and effectiveness of northeastern industry.
We urge this Committee and the Surface Transportation Board to
support the Conrail merger transaction only if the rail networks so
created ensure competitive rail access to the New York market from the
north and from the west.
You have a one-time opportunity to establish competitive rail
service for markets in the northeast, delivered by operationally and
financially strong railroads with connections to markets that matter to
New York.
Thank you very much for providing CN the opportunity to present its
views to this Committee.
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