[Senate Hearing 107-1031]
[From the U.S. Government Printing Office]

                                                       S. Hrg. 107-1031
                            NEW MERGER RULES



                               BEFORE THE

                          AND MERCHANT MARINE

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION


                             JUNE 28, 2001


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

88-970                       WASHINGTON : 2004
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                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

              ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana            KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
MAX CLELAND, Georgia                 GORDON SMITH, Oregon
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia

               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
                  Mark Buse, Republican Staff Director
               Ann Choiniere, Republican General Counsel


       Subcommittee on Surface Transportation and Merchant Marine

                  JOHN B. BREAUX, Louisiana, Chairman
DANIEL K. INOUYE, Hawaii             GORDON SMITH, Oregon
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
RON WYDEN, Oregon                    OLYMPIA J. SNOWE, Maine
MAX CLELAND, Georgia                 SAM BROWNBACK, Kansas
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JEAN CARNAHAN, Missouri              JOHN ENSIGN, Nevada
JOHN EDWARDS, North Carolina

                            C O N T E N T S


Hearing held on Thursday, June 28, 2001..........................     1
Statement of Senator Breaux......................................     1
Statement of Senator Smith.......................................     3
Statement of Senator Carnahan....................................     4


Gebo, William L., Manager of Rail Services, Dow Chemical Company, 

  accompanied by George Marshall, Director of Supply Cycle, 
  Albemarle Corporation..........................................    40
    Prepared statement...........................................    41
Haverty, Michael R., Chairman, President, and CEO, Kansas City 
  Southern Railway Company.......................................    30
    Prepared statement...........................................    31
Howells, Claudia L., Rail Division Manager, Oregon Department of 
  Transportation.................................................    44
    Prepared statement...........................................    46
Morgan, Hon. Linda J., Chairman, Surface Transportation Board, 
  accompanied by Commissioners Wayne Burkes and William Clyburn..     4
    Prepared statement...........................................     6
Snow, John W., Chairman, President, and CEO, CSX Corporation.....    23
    Prepared statement...........................................    24
Tellier, Paul M., President and CEO, Canadian National Railway 
  Company........................................................    26
    Prepared statement...........................................    28


Lott, Hon. Trent, U.S. Senator from Mississippi, prepared 
  statement......................................................    59
Hamberger, Edward R., President and Chief Executive Officer, 
  Association of American Railroads, prepared statement..........    60
Marshall, George, Director of Supply Cycle, Albemarle 
  Corporation, prepared statement................................    61
American Chemistry Council, prepared statement...................    43
American Forest Resource Council, prepared statement.............    63
Response to written questions submitted by Senator Dorgan to:
    Linda Morgan.................................................    66
Response to written questions submitted by Senator McCain to:
    Wayne O. Burkes..............................................    77
    William Clyburn, Jr..........................................    74
    William Gebo.................................................    88
    Michael Haverty..............................................    89
    Claudia L. Howells...........................................    86
    Linda Morgan.................................................    68
    John W. Snow.................................................    80
    Paul M. Tellier..............................................    81
Response to written questions submitted by Senator Specter to:
    Linda Morgan.................................................    70
Response to written questions submitted by Senator Smith to:
    Linda Morgan.................................................    72
    John W. Snow.................................................    81
    Paul M. Tellier..............................................    84
Response to written questions submitted by Senator Rockefeller 
    Linda Morgan.................................................    73

                            NEW MERGER RULES


                        THURSDAY, JUNE 28, 2001

                               U.S. Senate,
            Subcommittee on Surface Transportation 
                               and Merchant Marine,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:34 p.m., in 
room SR-253, Russell Senate Office Building, Hon. John B. 
Chairman of the Subcommittee, presiding.

                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. The hearing will please come to order. Good 
afternoon. Thank you all for being with us this afternoon.
    I want to, first of all, say how pleased I am that we begin 
this hearing with my good friend and colleague, Senator Gordon 
Smith, who is now on this side of the middle. Last time you 
were on this side of the middle. I am not sure why you are over 
here this time, but we are delighted you are here and look 
forward to a long and fruitful relationship as Ranking Member 
and Chairman of this Subcommittee. I think we have an 
opportunity to do a lot of things that are very, very important 
for this country in the area of transportation and also 
maritime affairs.
    Let me just say that when we look at the issue that is the 
subject of the hearing this afternoon, which deals with 
railroad mergers and the work of the Surface Transportation 
Board, I take the opinion that it seems to me that more and 
more we have less and less. What I mean by that is it seems 
that more and more in this country, we have less and less of 
companies that are engaged in competition with each other, 
because more and more, we have mergers and consolidations, and 
the end result is that we have few competitors.
    If you look at what has happened in the airline industry, 
we have fewer airlines. If you look at what has happened in the 
telecommunications industry, we have fewer telephone companies. 
If you look at what has happened in the energy production area, 
we have fewer oil companies. And we certainly have fewer 
railroads than we used to.
    For those of us who believe in competition as the way to 
have a society that serves consumers and also allows businesses 
to prosper, in this country it is fundamentally based on 
competition and not by regulation of those industries. It is 
apparent, however, to me and I think to most Americans, that 
you cannot compete if you have no competitors. And if you do 
not have sufficient competitors to allow the free market and 
the competitive marketplace to work, then you end up with 
additional regulation, a result that I am not in favor of.
    If we end up with two railroads or two airlines or one oil 
company or one phone company, then the Federal Government is 
going to regulate everything they do. We will regulate where 
they can go, who they can serve and how much they can charge. 
That is not something I want. That is not something I would 
expect anyone in this room would want. I would certainly think 
that my colleague, Senator Smith, would agree with that 
    So, today the purpose of this hearing is to listen to the 
Surface Transportation Chairwoman and the Board members about 
their recent decisions to remove the previous hold that they 
had on any mergers, the freeze, and to discuss with the Board 
members and with some of our other witnesses the effect of 
those rules, the intent of those rules as well.
    I would commend the Board for the so-called timeout that 
they took when they had a freeze on any future mergers. I think 
that it was important to allow for a freeze to occur, to step 
back and look at the big picture. I am a little concerned about 
whether that may have been too late.
    I think that this is obviously a very difficult issue to 
come up with something that is fair for everyone. Every merger 
in every industry has pros and every merger in every industry 
has a lot of cons. There are good and bad in all of these 
    But I do think that we can all agree that we need a strong 
and a vibrant railroad industry in America, and we are 
committed to doing everything we can to work with our 
Administration officials to see that that happens.
    The new merger rules, as I understand them, will clearly 
require that merger applicants demonstrate with greater 
specificity even than what the old rules required before a 
merger can be shown to benefit the public, and I think that is 
    The new rules would require the Board and future Boards to 
evaluate a wider range of merger related activity. I think that 
is good.
    I am particularly pleased to see that the merger applicants 
now will have to file a plan on how they intend to provide 
compliance with the promised levels of service as a result of 
the merger. I am interested to know more about the effect of 
that plan. Is it a guideline? Is it a contract? Is it a wish 
list? Is it enforceable? And questions of that nature.
    I know in Louisiana some of our shippers have been required 
to suffer the consequences and pay the extra costs associated 
with mergers that did not work as they were intended to work 
certainly or as soon as they were intended to work.
    The final note. I was somewhat surprised to read, in 
reading this new rule by the Surface Transportation Board, 
about the distinct treatment afforded one railroad, Kansas City 
Southern, in particular. I look forward to hearing from the 
Board as to why that decision was made, what was the 
justification for it, and was that the only way to accomplish 
what the Board said that they were attempting to do.
    We have only seven independent Class I railroads left in 
this country, and if you exempt one of them from the merger 
rules and they engage in a merger with another Class I 
railroad, then you are, in effect, exempting one-third of the 
Class I railroads from the new rules. Is that good public 
policy? Does that make sense? Those questions need to be not 
only asked, they need to be answered. And that is the purpose 
of this hearing.
    With that, I would recognize my good friend, Senator Smith, 
for any comments he might have.

                    U.S. SENATOR FROM OREGON

    Senator Smith. Thank you, Mr. Chairman. I am very pleased 
to be here with you and with our witnesses today.
    Before the recent fate of the Republican Party, I occupied 
your chair and I know we are in very good hands in this 
Subcommittee, but it was my purpose to begin a series of 
hearings on a wide range of rail transportation issues. The 
first we held in March was with Linda Morgan here, where we 
focused on the Surface Transportation Board and its ongoing 
efforts to carry out its statutory responsibilities and to 
explore the Board's merger rulemaking procedure that was then 
pending and is now the subject of this hearing today. I note 
that the Board's rules include a few items which we did not 
discuss at the hearing, including the exemption of those rules 
for one specific Class I carrier, and I am interested in 
exploring that exemption.
    Also, we had a second hearing in May, Mr. Chairman, on the 
state of the rail industry, including its current financial 
condition, capacity constraints, and long-term capital 
investment needs.
    I know, Mr. Chairman, of your willingness to pick up on the 
agenda that we had set to hold a hearing to consider rail 
shipper concerns, including service, reliability rates, and 
competition. I think this is a good place to air out these 
issues. So, I know we are in very good hands, Mr. Chairman.
    I want to especially welcome Ms. Claudia Howells from the 
Oregon Department of Transportation Rail Division. I appreciate 
that she would come back here to share her views and those of 
our State on these merger rules and their application on Oregon 
and the Nation's rail transportation system.
    So, I welcome you, sir, and congratulate you and look 
forward to working in every constructive way with you.
    Senator Breaux. Thank you very much, Gordon. I did want to 
also say and to recognize, under your leadership, that this is 
an effort that was started previously. You had already started 
looking at shipping interests and railroad interests. I know 
you want to do some more hearings on the question of shipper 
protection, and we are going to certainly be cooperative in 
that regard and hopefully, come up with something that will 
make sense because you started this and we just hope to 
continue in a cooperative fashion with you.
    For any comments that you might have, Senator Carnahan.

                   U.S. SENATOR FROM MISSOURI

    Senator Carnahan. Thank you, Mr. Chairman.
    Unfortunately, I will not be able to stay at this hearing 
very long today but I did want to take the opportunity to 
acknowledge one of the witnesses here today.
    Michael Haverty is the President and Chief Executive 
Officer of Kansas City Southern Railway and the Chairman of 
Kansas City Southern Industries. He is a fourth generation 
railroader who started out as a Missouri Pacific brakeman at 
the age of 19. In 1970, he moved over to the Santa Fe Railroad 
and ultimately became the President and Chief Operating Officer 
of that company in 1989.
    In 1995, he came to Kansas City and was appointed President 
and Chief Executive Officer of Kansas City Southern Railway. In 
large part, because of Kansas City Southern's successful 
acquisition of Mexico's Northeast Railway, Railway Age magazine 
named Mike Haverty Railroader of the Year. All of us in 
Missouri are proud to have Kansas City Southern as an exemplary 
corporate citizen in Kansas City, and I am pleased to welcome 
Mr. Haverty to this Subcommittee today.
    While I will not be able to stay here to hear the witness, 
I am very interested in the subject matter at hand. The various 
consolidations over the past decade have raised serious 
concerns about the status of competition in the rail industry.
    With these concerns in mind, the Surface Transportation 
Board recently adopted new merger rules that placed additional 
burdens on applicants to demonstrate that proposed mergers will 
actually enhance competition instead of simply preserving it. I 
look forward to examining these new rules and reviewing the 
testimony of today's witnesses.
    Thank you very much, Mr. Chairman.
    Senator Breaux. Thank you, Senator Carnahan.
    I would just say to all of our guests that it is a terribly 
busy day on the floor. Everybody is looking toward the Fourth 
of July recess, so we are trying to get everything done in one 
day, and it has been very, very difficult. But this hearing is 
also very important.
    I would like to invite as our first witness who the Chair 
of the Surface Transportation Board, the Honorable Linda 
Morgan, but I also want to ask Commissioner Wayne Burkes and 
Commissioner William Clyburn to please come and take their 
seats at the witness table too. This Board does not operate in 
a vacuum. It operates with all of its members and I want them 
all there. We will have a statement and then we will proceed to 
questions of our Chair, Linda Morgan. Welcome back.


    Ms. Morgan. Thank you. I am appearing here today at the 
request of the Subcommittee to discuss the Board's new major 
rail merger rules. I will make my oral remarks brief. I have 
submitted written testimony and I ask unanimous consent that it 
be included in the record in its entirety.
    Senator Breaux. Without objection, it will be included.
    Ms. Morgan. My written testimony reviews the Board's new 
merger rules in some detail. My written testimony demonstrates 
that the Board has acted affirmatively and appropriately by 
significantly raising the bar for future merger approvals. By 
raising the bar, our final rules address issues that have been 
presented about railroad consolidation.
    Concerns have been raised about the level of competition in 
the rail industry. We expect that, because our new rules view 
enhanced competition as a clear benefit that will tip the 
scales in favor of the public interest, mergers approved in the 
future will add competition.
    There has been legitimate concern raised about the service 
problems associated with prior mergers. We have made sure by 
requiring, for the first time, the filing of a service 
assurance plan with a merger application, that new merger 
proposals demonstrate how service will be improved and how 
service problems will be dealt with.
    There also has been concern raised about benefits claimed 
with past mergers that have not been realized. We have made 
sure that merger applicants are held more accountable for 
benefits claimed and that applicants address whether claimed 
benefits can be achieved by means other than merger.
    We have made sure that downstream effects and cross-border 
issues associated with a final round of North American rail 
mergers are fully aired and considered. Also, our rules focus 
particular attention on the interests of smaller railroads, 
ports, and passenger and commuter operations, and we have 
addressed concerns raised about the impact of mergers on 
    Some have said that the new rules do not really change 
anything, but the rules clearly reflect otherwise. For one 
thing, our old rules provided for the approval of a merger 
``unless,'' whereas our new rules provide for approval ``only 
if.'' Our new rules clearly reflect a greater skepticism about 
the benefits of future mergers and a greater concern about the 
potential harm of further consolidation. And we have shifted 
the focus, imposed new requirements, and codified and expanded 
upon past practices in a number of areas. To me, all of that 
represents quite a change.
    Some say that we have not gone far enough with respect to 
enhancing competition. We went as far as we could legally go in 
our decision, and I did not see the benefit in issuing rules 
that stood a very good chance of being thrown out in court. In 
any event, we clearly went further in this regard than our old 
rules provided for.
    Without question, these rules have clearly changed the 
landscape for the future, reflecting the lessons learned from 
the past. And it is my hope that, in raising the bar, these 
rules will remind the railroads to take care of business with 
the systems they now have and to stop viewing mergers as the 
only way to go.
    In this regard, I dissented on the waiver for Kansas City 
Southern from the new rules. These new rules are intended to 
address the final round of major rail mergers. Exempting a 
strategically important carrier in a transaction that could be 
expected to begin the final round and putting KCS customers 
under a different set of rules from other customers seems 
inconsistent and inappropriate to me.
    In closing, I know that regardless of how much we have done 
in these rules and elsewhere and how much we do in the future, 
there are those who will say that we have done nothing of 
substance unless we somehow guarantee the opportunity for every 
shipper to be served by at least two railroads. To me, 
belittling the progress that has been made is just not 
    I believe that the Board has acted responsively and 
responsibly to address, in a manner consistent with the 
statute, concerns that have been raised about the rail sector 
and to drive change that has moved the industry in a positive 
direction. These new major merger rules are no exception. Our 
rules recognize that a final round of major rail mergers will 
draw the map for the North American rail network of the future, 
and that if we go down that path, we had better take great care 
to get it right.
    I will be happy to answer any questions that you might 
    [The prepared statement of Ms. Morgan follows:]
              Prepared Statement of Hon. Linda J. Morgan, 
              Chairman of the Surface Transportation Board
    My name is Linda J. Morgan, and I am Chairman of the Surface 
Transportation Board (Board). I am appearing today at the 
Subcommittee's request to review the Board's new rules governing 
mergers of large railroads adopted in Major Rail Consolidation 
Procedures STB Ex Parte No. 582 (Sub-No. 1).
    The Board's decision adopting new major rail merger policies and 
rules, which was issued on schedule on June 11, 2001, after a 15-month 
period of extensive notice and comment, significantly raises the bar 
for approval of a major merger. Merger applicants must clearly show 
that a merger is in the public interest by demonstrating that public 
benefits, such as improved service and enhanced competition, outweigh 
any negative effects, such as potential service disruptions and harm 
that cannot be mitigated. In particular, the Board indicated that it 
will be looking for merger proposals to add competition, and the new 
rules suggest ways in which that objective could be met in the original 
proposal filed with the Board or by way of conditions imposed by the 
Board. The rules also require that any merger application must include 
specific details about the service that would be provided, how service 
will be improved, and how service problems will be addressed. And in 
the decision, the Board stated that it will take a more skeptical view 
of claims of merger benefits, that it will hold applicants more 
accountable for those claims if a merger is approved, and that 
applicants will be required to address whether claimed benefits can be 
achieved by means other than a merger.
                events leading to issuance of new rules
    In recent years, the railroad industry in the United States has 
consolidated substantially. With those mergers came severe service 
disruptions and concerns about further concentration in the industry. 
Thus, the announcement in late December 1999 that the Burlington 
Northern Santa Fe (BNSF) rail system would seek to merge with the 
Canadian National Railway Company (CN), one of the two large Canadian 
railroads, drew strong expressions of concern from many quarters.
    The Board, concerned that the BNSF/CN merger proposal would trigger 
another (and quite likely final) round of merger proposals, began a 
proceeding in January 2000 to elicit public comment on the future 
structure of the rail industry in the United States and the role of 
mergers today. The Board received well over 400 written comments. And 
during 4 days of hearings in March, the Board heard oral testimony from 
about 125 parties, including Senators and Congressmen, the Departments 
of Agriculture, Defense and Transportation, several ports, large and 
small railroads, numerous shipper associations, individual shippers of 
all sizes from every major industry, and the financial community.
    The overwhelming message at the hearing was that the Board's then-
existing merger policies and procedures--as reflected in its rules, 
policies, and precedents--were inadequate to deal with any new merger 
proposals, and that fundamental changes to that body of law were 
required to address any further mergers. Most witnesses also expressed 
the concern, which the Board shared based on its own experience with 
rail mergers over the previous 5 years, that additional mergers at that 
time would have disrupted the Nation's rail transportation network and 
disserved the public interest.
    After evaluating these extensive comments, the Board agreed that a 
broad reexamination of the agency's merger policies was required, and 
concluded that the existing rules and policies were not adequate to 
address what could be the final round of consolidation in the rail 
industry leading to two transcontinental railroads. Accordingly, on 
March 17, 2000, the Board imposed a 15-month moratorium on the filing 
of major merger applications so that it could reexamine and revise its 
merger policies and procedures before considering any new merger 
proposals, including the anticipated BNSF/CN proposal (for which an 
application had not yet been filed). The Board's moratorium, about 
which I testified before this Subcommittee last year, was upheld in 
                             the new rules
    So that final rules could be in place by June 2001, in accordance 
with the moratorium period, the Board promptly initiated a rulemaking 
proceeding. In the proceeding, the Board issued an advance notice of 
proposed rulemaking, a notice of proposed rulemaking with a proposed 
set of rules, and a set of final rules. The final rules increase 
significantly the burden on major merger applicants. The new rules 
require applicants to demonstrate that, among other things, a proposed 
transaction would enhance competition where necessary to offset 
negative effects of the transaction, such as competitive harm, and to 
address fully the impact of the transaction on service, including plans 
for service reliability.
Overall Approach
    The new rules reflect a significant change in the way the Board 
will apply the statutory public interest test to any major rail merger 
application. The Board stated that, because of the small number of 
remaining large railroads, the fact that rail mergers are no longer 
needed to address excess capacity in the rail industry, and the 
transitional service problems that have accompanied recent rail 
mergers, future merger applicants will be required to bear a heavier 
burden to show that a major rail combination is consistent with the 
public interest. This shift in policy, the Board noted, will place 
greater emphasis in the public interest assessment on enhancing 
competition, while ensuring a stable, balanced, and reliable rail 
transportation system in a way that accounts for smaller railroads, 
ports, and passenger and commuter services.
Enhancement of Competition
    The new rules reflect the Board's intent to offset, through the 
adoption of proposals made by merger applicants and as necessary 
through adoption of conditions for competitive enhancements, merger-
related harms that cannot be directly or effectively mitigated. The 
Board indicated that such competitive enhancements could include, but 
would not be limited to, reciprocal switching arrangements, trackage 
rights, and efforts to eliminate restrictions on interchanges by 
shortline railroads. The Board also indicated that the quantity and 
quality of competitive enhancements that would be required relative to 
a particular transaction would depend upon a variety of factors, such 
as merger-related competitive harms for which feasible and effective 
remedies could not be devised, and the amount of public benefits that 
could be expected to flow from a particular transaction.
Benefit Assessment
    The new rules also reflect the Board's view that, because the 
realization of benefits in recent mergers has been delayed or 
frustrated by transitional service problems, future merger proposals 
should be met with a more skeptical, ``show me'' attitude toward claims 
of merger benefits and toward claims that transitional service problems 
will not occur. The Board said that it will also consider the extent to 
which various claimed merger benefits can be achieved, short of merger, 
through cooperative agreements among railroads. The Board further 
indicated that, given the size of the transactions that may be proposed 
in the future, and, given the dangers involved should such transactions 
fail, the benefits claimed by future merger applicants will be very 
closely scrutinized.
Service Assurance Plans
    The Board's new rules require merger applicants to submit a Service 
Assurance Plan with their initial application and operating plan. The 
Board stated that, given the importance of service to shippers and that 
implementation of any merger plan necessarily has an element of 
uncertainty, applicants' Service Assurance Plan for each major merger 
proposal must provide certain essential information, such as plans to 
deal with any potential adverse service effects during implementation 
and plans to accommodate such less-than-optimum operations. The Board 
indicated that, in particular, a Service Assurance Plan must include 
information about proposed operational integration, training, 
information technology systems, customer service, freight and passenger 
operations coordination, yard and terminal operations management, 
service disruption contingency plans, how traffic-level changes or 
increases will be accommodated by the combined system, infrastructure 
improvement, labor issues, service benchmarking, and timetables for the 
completion of implementation activities, as appropriate. The Board 
stated further that the Service Assurance Plan must provide for the 
establishment of problem resolution teams and describe specific 
procedures to be used toward problem resolution.
Downstream Effects
    The new rules reflect the Board's determination to ``look down the 
road'' to ascertain whether approving not just the immediate proposal 
that may be before the Board, but also others that are expected to flow 
from it, would ultimately result in a rail industry structure that 
would continue to provide at least the existing level of competitive 
options for shippers. The Board stated that merger applicants will not 
be required to present alternative benefit calculations based on 
specific alternative possible responses that could be filed by other 
railroads; yet, merger applicants will be required to initiate a 
commentary, to which other parties may respond, that would give the 
Board the information needed to rule on what would likely be the first 
step in an end-game situation in which only two transcontinental 
railroads would remain in North America. The Board made clear that it 
is also prepared to use its power to apply conditions to a transaction 
to repair conditions previously imposed on rail mergers that might be 
substantially impaired by a new major rail merger.
Employee Concerns
    The Board indicated that it is extremely pleased with the privately 
negotiated ``historic settlement agreement'' on the issue of collective 
bargaining agreement (CBA) overrides recently signed by most of the 
larger railroads and by unions representing most rail employees. The 
Board stated that, to the extent there is still any live issue relative 
to CBA overrides, the new rules, which reaffirm that the Board supports 
negotiated agreements wherever possible, respects the sanctity of CBAs, 
and looks with disfavor on overrides, properly implement the Board's 
statutory mandate concerning overrides.
Transnational Issues
    The Board stated that, because future major transnational mergers 
are likely to raise novel jurisdictional, national interest, and public 
interest issues, it will be necessary to gather information about 
relevant facts, laws, and policies important to an accurate and 
comprehensive understanding of such merger applications. The new rules 
therefore provide that, in addition to full-system competitive analyses 
and operating plans required of applicants with transnational 
operations, all applicants will be required to address any ownership 
restrictions (by law or corporate initiative) and any pertinent 
governmental restrictions or preferences.
Oversight and Monitoring
    The new rules codify the Board's recent practice of formal 
oversight for a period of no fewer than 5 years following each merger. 
With respect to operational monitoring, the Board noted that, because 
its monitoring of previous transactions has proven vital to identifying 
and correcting operating deficiencies during implementation, the new 
rules also provide for expanded post-approval monitoring of the 
implementation of mergers to help ensure that adequate service is 
provided during the crucial transitional period, and beyond. The Board 
further indicated that, if substantial service disruptions occur as the 
result of a merger's implementation, the Board will consider 
alternative service arrangements.
Kansas City Southern
    Finally, a majority of the Board granted a waiver to KCS from the 
application of the new major rail merger rules. The majority indicated 
that parties could attempt to show in a particular case that this 
waiver should not be allowed. I dissented to this aspect of the 
decision. I do not believe that KCS adequately demonstrated why it 
should have been given special treatment. Also, I am concerned that, 
given KCS' strategic position, any merger involving KCS and another 
large railroad will likely trigger the final round of consolidations 
leading to only two systems of large North American railroads. It seems 
incongruous to me to exempt a carrier transaction that could trigger 
the final round from the very rules that have been promulgated to 
address the final round and the interests of rail customers and other 
parties affected by further consolidation.
    Overall, the Board's new rules for major rail mergers will make 
merger approval more difficult, reflecting a greater skepticism about 
the benefits of more consolidation and a greater concern about the 
potential harm of more consolidation. The rules make clear in this 
regard that in order for the scales to be clearly tipped in favor of a 
merger proposal, that proposal will have to offer competitive 
enhancements. And any proposal will have to have been subjected to 
significant pre-filing analysis and planning as to the type of service 
to be provided and the actions to be taken in the event of service 
failures. Given the risks and finality associated with what could be a 
final round of consolidation leading to two transcontinental railroads, 
the final rules ensure that any further consolidation will be approved 
only if it is truly in the public interest.
    I would be pleased to answer any questions that you might have.

    Senator Breaux. Thank you very much, Ms. Morgan, for your 
presentation on behalf of the Board.
    Let me talk in the beginning about a plan that you are 
requiring, as I understand it, with the new rules, that a plan 
be submitted. That is different from the old rules?
    Ms. Morgan. Exactly, yes.
    Senator Breaux. What is the purpose of the plan? What 
should it constitute and what is the effect of it?
    Ms. Morgan. Well, the service assurance plan is new, and 
the purpose of that plan is to make sure that applicants focus 
on service in advance of filing their application.
    Senator Breaux. Why is that any different from what 
previously was required, or how is it different?
    Ms. Morgan. It is different because we did not previously 
require a specific plan that focused on how the operating plan 
will be implemented in the context of service to customers. So, 
this plan will focus on what service levels will be provided 
and how those levels will be provided. It envisions that the 
applicants will get with customers in advance to discuss 
service needs so that the plan that is filed with us will 
obviously reflect the needs of the customer community. And then 
throughout the process of reviewing the merger application, 
that plan will be before us and a record will be developed on 
the aspects of that plan. So, the benefit is that service is 
being discussed up front in a way that it has never been 
discussed before.
    Senator Breaux. Is the purpose of the plan to be something 
that is considered prior to the merger, or is it some document 
that is supposed to have an effect after the merger is 
    Ms. Morgan. It will have an effect after the merger is 
completed, but the plan is to be put together before the filing 
so that, when the filing comes to us, it will include this 
service assurance plan. So, whatever planning needs to be done 
has to be done in advance of the filing.
    Senator Breaux. Is there any legal effect that the plan 
brings to the table? In other words, suppose you have a plan 
which the Board agrees to and then a year after the merger 
there are significant areas of the plan that have not been 
considered or requirements met. Is the plan worth anything, or 
is it just a guideline? Can you enforce the plan, or is it just 
a good idea?
    Ms. Morgan. Well, it is a good idea, but it also has, I 
think, some important ramifications. As part of the plan, we 
also ask of the applicants their plan for how they will address 
service problems, how they will address service failures, how 
they will address claims. So, as part of our review process, we 
will be looking at the adequacy of this plan not only in the 
context of the service levels, but also in the context of the 
procedure for resolving disputes. We will look at the plan in 
the context of whether it is a benefit that will go into our 
benefit box in determining whether a particular merger proposal 
is indeed in the public interest.
    Senator Breaux. Is a plan a document that both of the 
merger railroads would have to agree to?
    Ms. Morgan. Yes, because that would be part of the filing 
that would be made.
    Senator Breaux. I am trying to find out the effect. The 
plan you said is a good idea, but a good idea that is not 
enforceable is not necessarily a good idea if it cannot be 
enforced. I am trying to figure out what does the plan, which I 
agree is a good idea, because it clearly spells out what you 
are going to try to do in areas of service--but if it is not 
enforceable, what good is it?
    Ms. Morgan. Well, I think it is enforceable in the context 
that it is a plan that is filed with us, which then we will 
monitor after the merger is put into place. It is also a plan 
that will involve dialog between customer and railroad in terms 
of what the service needs will be. So, whatever legal 
ramifications of that will be represented in the plan. In 
addition, of course, the plan for resolving disputes will also 
cover whatever problems arise as a result of not meeting the 
plan. So, it has importance in that regard.
    Senator Breaux. How do people who utilize railroad services 
have input into the content of the plan, if at all?
    Ms. Morgan. Well, if a railroad is going to file an 
application and have with it a service assurance plan, we will 
be looking for whether that represents discussions with 
customers about their service needs, whether it will include 
some sort of service guarantees. So, we will be looking for 
what went into that plan. That will again be part of whether we 
view that plan as a good plan, as a beneficial plan, and 
whether it is good enough to go into the benefits box, if you 
will, in determining whether a particular proposal is in the 
public interest.
    Senator Breaux. Who is responsible for writing the plan?
    Ms. Morgan. Well, the applicants will be responsible for 
filing it with us, so they obviously, in the first instance, 
would have to be the ones reaching out to affected people in 
the context of the plan.
    Senator Breaux. I am not challenging that in particular, 
but if the two railroads are responsible for writing the plan, 
how do you guarantee that people who utilize railroad services, 
i.e., shippers, have had their input in the designing of the 
    Ms. Morgan. Well, you would hope that the railroads would 
get with the customers, because I do not know how you would 
write a service assurance plan without doing that. But let us 
assume they do not. Then it comes to us and then we begin to 
accumulate a record on that plan. If customers have not been 
involved in the discussion on that plan, then they will clearly 
file their comments with us. So, we will know in that regard 
whether they have been involved and what their concerns might 
be with the plan.
    The key here is, whereas before some of these issues would 
come to us as the proceeding evolved or perhaps after the 
merger has been approved, this plan forces these discussions in 
advance of the filing. Then it gives the opportunity for a 
record to be built on the plan so that by the time we get to 
the end of the process, we have a much better understanding of 
where everybody is and everybody has had the opportunity to 
have input into it.
    Senator Breaux. I understand that shippers, for instance, 
obviously can comment on merger applications and get their 
input before the Board makes a decision. But I take it there is 
no requirement of the Board. You said ``hope to'' have input 
from shippers, but there is no requirement that this plan is 
one that is achieved only after getting comments from users of 
the services.
    Ms. Morgan. Well, again, if you read the rules themselves 
and the text that goes with the rules on this particular 
section, I think it is pretty clear that the service assurance 
plan, which focuses on service levels and service needs, would 
need to involve a discussion with customers. And in our 
description of that particular rule, we emphasize the 
importance of that, of getting with the customers, and so we 
will be looking for that in the context of whether the plan has 
validity or not.
    Senator Breaux. So, you would recommend as chairperson of 
the Board that this plan obviously indicates that it has made 
contact with people other than just the two railroads.
    Ms. Morgan. Absolutely.
    Senator Breaux. Let me talk about previous consolidations 
and mergers which this rule obviously does not affect. Can you 
give the Subcommittee an update on some of the problems that we 
have had? Can you tell me how some of these previous mergers 
are doing now as opposed to in the past where we have had some 
    Ms. Morgan. Well, as you correctly stated, in the last 
round of rail mergers, we experienced some pretty significant 
service problems in the integration process, first in the West 
and then in the East.
    We have obviously moved a great distance from where we 
were. Service is much better than it was during that period. 
Obviously, the West has been functioning better for longer than 
the East, but now the service in the East is much improved. 
Obviously, we continue to focus on further service improvements 
in both the West and the East.
    Senator Breaux. Things are better?
    Ms. Morgan. Yes.
    Senator Breaux. What areas are they not better in?
    Ms. Morgan. Well, in terms of service, I think we continue 
to hear about specific issues with particular customers, and we 
have a rail consumer assistance program that is specifically 
designed to interface with individual customers and other users 
of the rail network with respect to particular problems that 
arise. So clearly, we deal with those. We do not have an 
overwhelming number of problems coming in. We have a steady 
stream of individual issues, but we have been able to deal with 
them and move on. So, I would not suggest that there is any 
particular area that continues to be a particular problem. I 
think we have moved beyond that. Now what we are doing is 
focusing on individual issues in particular areas of the 
    Senator Breaux. Are conditions indicating adequate 
competition in these areas where we have had these previous 
    Ms. Morgan. Well, as I have said before, this question does 
relate to how one would define adequate competition. There are 
those who feel that if a shipper is not served by two rail 
carriers, then there is not adequate competition. Obviously, 
there are customers out there who are not served by two rail 
carriers and have not been served by two rail carriers for a 
long time.
    As far as the state of competition today, in terms of post-
merger implementation, I think we are seeing vigorous 
competition both in the West and the East. There are rate wars 
going on between carriers, and that is an indication of 
competition. So, I think post-merger there is competition.
    Senator Breaux. I think that that will be something that 
the Subcommittee and I am sure the Full Committee under Senator 
Hollings' leadership will continue to look at as far as the 
preexisting mergers and the continuation of adequate 
competition. I think that is obviously very, very important.
    Let us talk about the KCS exemption and the rule. In 
looking at your dissent on the rule, you said that you disagree 
with the special treatment being afforded to KCS and the 
decision being issued today. You point out that, indeed, as the 
self-styled NAFTA railway with a substantial ownership interest 
in a Texas-Mexican railway company and the strategic 
importance--and I am paraphrasing here--that any merger between 
KCS and another Class I railroad could well trigger the next 
round of major rail mergers, resulting in two transcontinental 
railroad systems. Giving KCS the opportunity to pursue waiver 
requests on a case-by-case basis at the time it proposed a 
specific merger transaction would have seemed appropriate.
    Do I understand the exemption correctly that if KCS, which 
is a Class I railroad, and another Class I railroad entered 
into a merger agreement, that they would not be required to 
meet the standards of the new rules?
    Ms. Morgan. Well, that would be the effect of the waiver in 
the first instance. Now, the majority voted also as part of 
that provision to allow parties to come in and dispute that. 
So, if a record were developed that that particular waiver 
would not be appropriate, then it might not apply. But it is a 
blanket waiver in the first instance.
    Senator Breaux. Where did this exemption come from? The 
reason why I ask that is because it was not included in the 
Board's proposed rulemaking.
    Ms. Morgan. No, it was not.
    Senator Breaux. And I want to ask Mr. Burkes and Mr. 
Clyburn the same question.
    Ms. Morgan. Well, KCS had a proposal originally that would 
have put it in a category other than the major rail merger 
category. That was proposed in response to the advance notice 
of proposed rulemaking.
    Senator Breaux. They did not ask for, at that time, an 
exemption from the new rules.
    Ms. Morgan. Not in so many words. Their proposal involved 
setting a threshold below which a railroad would not be 
considered to be part of the major rail merger pool, and it 
would go into another pool.
    Senator Breaux. It was my understanding that what they had 
requested was that if it was a friendly takeover or a friendly 
merger, they would be considered a significant merger as 
opposed to a major merger.
    Ms. Morgan. That is correct. If it was a hostile takeover, 
then they would want it to be considered a major merger.
    Senator Breaux. So, if that is what they proposed, how did 
it come out of the Board being something entirely different?
    Mr. Burkes, would you comment on that?
    Mr. Burkes. Thank you, Mr. Chairman. I will be delighted to 
comment on it.
    First of all, as you know, there has been a long history 
under the Interstate Commerce Commission and the Surface 
Transportation Board of treating carriers differently based 
upon their size. I reviewed those records.
    Senator Breaux. I am sorry?
    Mr. Burkes. I reviewed the records of those cases.
    Senator Breaux. You reviewed them?
    Mr. Burkes. Yes.
    Senator Breaux. I just misunderstood what you said.
    Mr. Burkes. Well, there is a long history of treating 
carriers differently based on the size of the carrier, whether 
it is under the Interstate Commerce Commission or the Surface 
Transportation Board, the successor of the Interstate Commerce 
Commission. As a result of that and based on the fact that 
Kansas City Southern at most of the public hearings and in 
their comments, their replies, and their rebuttals emphasized 
that they were not anywhere near in the class of the other 
Class I railroads.
    Senator Breaux. They are a Class I railroad, are they not?
    Mr. Burkes. Yes, they are a Class I railroad based on their 
annual operating revenue exceeding $250 million. That puts them 
one-fifth the size of the next Class I above them.
    Senator Breaux. They are still a Class I railroad.
    Mr. Burkes. I understand that, but we are dealing with the 
new rules for mergers of Class I railroads. They are one-
twentieth the size of the largest carrier, and them being 
treated as a Class I railroad as a major combination, whereas 
the proposal that I made was that any carrier whose annual 
operating revenue was $1 billion or less--it would be treated 
as a significant transaction. Our general counsel's office 
looked at that. One reason I made that proposal is because 
Florida East Coast and Montana Rail Link will, after another 
year, it appears, become Class I railroads, but very small 
Class I railroads.
    Senator Breaux. So, is it correct, as I asked Chairman 
Morgan, that if they had another Class I railroad that merged 
with a Kansas City, another Class I railroad, that you would 
have both of them exempt from the rules? Is that not correct?
    Mr. Burkes. Well, it depends. It depends on whether 
somebody filed a request that the waiver not apply. Another 
carrier has that----
    Senator Breaux. No, but the new rules, is it not correct, 
would allow two Class I railroads to merge without being 
susceptible to the new rules on merger? Is that not correct? 
Unless someone challenged it. They can always do that.
    Mr. Burkes. Yes, that is correct so far as being treated as 
a major merger under the new rules. Now, they will still be 
treated as a major merger, but it will be under the current 
rules rather than the new rules.
    Senator Breaux. Well, my concern is obvious by my question. 
I do not understand where this came from. Can you shed some 
light? Because this was not requested by KCS when they did 
their proposed oral arguments before the Board. Who came up 
with the idea of just carving them out as a special exemption?
    Mr. Burkes. No. They had requested through their public 
appearance before the Board, as well as in their comments, 
their replies, and their rebuttals that they not be treated 
like the other big Class I railroads.
    Senator Breaux. But they did not request an exemption, as I 
understand it, and Chairman Morgan said that they had requested 
that they be considered as a significant merger if it was a 
friendly merger and a major merger only if it was a hostile 
    Mr. Burkes. Yes, they requested they be treated as a 
significant transaction.
    Senator Breaux. So, they did not request an exemption.
    My question to you, sir, is where did the concept of just 
carving them with an exemption come from?
    Mr. Burkes. The concept came from our general counsel's 
office that recommended it be treated as a waiver rather than 
    Senator Breaux. It is not a waiver, Mr. Burkes. It is an 
exemption. It is an exemption that has the effect of law. It is 
not a waiver request. KCS does not have to ask for anything. 
They got it.
    Mr. Burkes. It is a waiver, and they would be exempt unless 
somebody within that 10-day period requests that they not be 
    Senator Breaux. Is someone merely requesting that they not 
be exempt sufficient to prevent the exemption?
    Mr. Burkes. Well, the Board would make that decision at 
that time, just the same as the Board would make the decision 
if they were included in the new rules as to whether or not to 
waive them under the new rules.
    Senator Breaux. Mr. Clyburn, where did this concept come 
    Mr. Clyburn. Throughout the testimony and the submissions 
that came before the Board in the ANPR and the NPR, KCS was 
asking to have, I guess, two bites of the apple. If it were a 
friendly takeover, then it would be a significant transaction.
    My concern is that approach would exempt them from 
possibly, arguably, the rules under Section 11324 of Title 49 
where we have the criteria, even under the old rules, 
determining whether a proposed transaction is within the public 
interest or not. I did not want to just give an outright 
exemption, saying ``Well, because you are merging with KCS, you 
do not have to go through the rules and the criteria as 
Congress put forth for a major Class I transaction.''
    True enough, KCS is a Class I railroad. One of the issues 
that came out was that KCS is such a small Class I railroad, in 
terms of their trackage and their revenues, compared with the 
other railroads. KCS has approximately $575 million in 
operating revenues as opposed to BNSF with $9.1 billion or 
Norfolk Southern with $5.2 billion. So, the issue was raised.
    There was a concern that KCS not be treated differently 
than Wisconsin Central per se which, with operating revenues of 
approximately $300 million, is closer in size to KCS. As you 
already know, the Board has deemed the Wisconsin Central/
Canadian National merger proposal as neither major nor 
significant, but minor.
    I have not proclaimed to be a soothsayer or prognosticator 
as to what will happen next year or 2 years from now. So I was 
concerned when the original proposal came through to carve out 
that outright exemption for KCS.
    True enough, KCS is a very small Class I, and I would like 
to go back into the history of why the Board even has the Class 
I classification. The major policy purpose for the Class I 
classification is that railroads having major transportation 
significance must file certain financial reporting 
    In 1990, there was a proposal to change the Class I 
threshold from $50 million to $250 million. The rationale 
behind that change was that the agency did not see the need to 
have the smaller Class I's, at that time, submit certain 
financial requirements.
    Since KCS is hovering around that threshold, particularly 
when compared with the larger Class I's, the issue was raised 
whether KCS should be treated differently.
    My major concern was that KCS not get an outright 
exemption. The rebuttable presumption is relevant to whether 
KCS is deemed to be similarly situated as Wisconsin Central. If 
so, then let us not automatically say that KCS is not a major 
transaction and merely a significant one. Let us say we can 
deal with them within the old context of the rules for a major 
    However, because of the rebuttable presumption, I thought 
it was always important for the Board to stay in the game. We 
do not want to be onerous with our rules or our regulations. 
However, I have traveled all over the country and I have talked 
to shipper groups who are not too enamored with the Board. They 
feel that the Board's rules do not go far enough if we do not 
overturn the bottleneck decision, if we do not loosen the 
competitive access rules in Midtech I and II, or if we do not 
impose final offer arbitration.
    Senator Breaux. Let us get right to the point on this. You 
are saying you did not like the exemption that they were 
requesting for, but in essence, you voted for another exemption 
which was a blanket exemption. They do not have to comply if 
they are going to merge with another Class I railroad with the 
new rules. That is a blanket exemption. That is a more 
extensive exemption than what they were asking for before the 
    Mr. Clyburn. It actually may be more of a ``blanket 
exemption'' having a KCS merger deemed a significant 
transaction as opposed to deeming the transaction major under 
the old rules. Arguably, if the Board deemed a merger with KCS 
a major transaction, the applicants will have more requirements 
to satisfy, more work to do with the application, than if the 
transaction were deemed significant under any rules. The 
rebuttable presumption still allows the Board to protect the 
public interest.
    Senator Breaux. This is my last question. You do not 
disagree with Chairman Morgan that the effect of what the Board 
did was to allow two Class I railroads to merge, whether it is 
a friendly or a hostile merger, without meeting the 
requirements of the new rules.
    Mr. Clyburn. If the Board at that time deems that the 
rebuttable presumption is not met. The Board is still in the 
game, Senator.
    Senator Breaux. Only if someone comes in and challenges it.
    Mr. Clyburn. Often there are challenges. Even in the 
Wisconsin Central/Canadian National merger proposal which the 
Board deemed as minor, there were challenges.
    Senator Breaux. Then they have got to come prove that the 
exemption that you granted was incorrect in the first place.
    Mr. Clyburn. If someone believes a merger with KCS might 
trigger other mergers, even if a merger with KCS does not 
create a transcontinental, that party has the opportunity to 
file that concern with the Board after the prefiling notice is 
submitted, which occurs 3 to 6 months before the application is 
    Senator Breaux. Did any other railroads support the 
    Mr. Clyburn. Well, there was a question in regards to 
whether other railroads actually supported it. There is a 
record of one or two railroads not opposing the outright 
exemption. But as I said before, I felt comfortable with the 
rebuttable presumption; that the Board would always be in the 
    Senator Breaux. Ms. Morgan, do you agree with the response 
that any other railroads supported the exemption?
    Ms. Morgan. My recollection was that this particular issue 
was not expansively discussed in the record. There were a few 
comments along the way, but it was not a clear discussion one 
way or the other.
    Senator Breaux. It was not presented in oral arguments.
    Ms. Morgan. Not to my knowledge, no. Not to my 
    Senator Breaux. Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you very much. I regret 
that I was not here during the initial presentations. I have 
read much of it.
    Let me say, Mr. Chairman, that Senator Rockefeller and 
Senator Burns and I and some others have introduced the Rail 
Shipper Protection Act, and we look forward to working with you 
to get a hearing on that piece of legislation. I chair the 
Subcommittee dealing with consumer issues, and perhaps we can 
work with you on a hearing.
    We are very concerned. You all have heard us describe our 
concerns--Senator Rockefeller and myself, Senator Burns--about 
what has happened with mergers and concentration in the rail 
    I want to say first that I appreciate the courage it took 
for the Board to do what it did in creating the position you 
did where you stopped all of the potential merger activity and 
said, we are going to take a fresh look at this and create some 
rules and regulations. I think that took some courage and it 
took some thinking outside the box. That moratorium was in the 
public interest.
    It is not clear to me. I am not an expert and I have not 
spent enough time studying these new regulations to know 
whether they do what I would like them to do. I certainly think 
it is a step in the right direction.
    I guess the first question I would ask about them is, Linda 
Morgan, you said that these new rules went as far as the 
statute would allow you to move to enhance competition and 
increase the burdens on major mergers. What kind of additional 
authority would you need to have moved further?
    And do you think that it would be advisable to have 
additional authority that would allow you to move further in 
these circumstances?
    Ms. Morgan. Well, I think, first of all, with respect to 
your discussion of my oral testimony, the key is that we had to 
be very careful that we did not imply in our rules somehow that 
mergers were bad in the first instance and that every merger 
would be treated exactly the same in the context of what would 
come in and how we would deal with the particulars. That is 
something that we have to be cognizant of in a lot of the 
issues that are before us.
    Having said that, what you are interested in is enhanced 
competition. My view of these rules is that if anybody brings 
an application to us and they want it approved, they had better 
have some sort of enhanced intramodal competition. And that is 
a message that I think is very clear throughout the rules. If 
you want your transaction approved and you want to make sure 
that you bring something that has a pretty good chance of 
getting approved, then if I were advising an individual, I 
would say you had best come in with some sort of enhanced 
intramodal competition.
    Senator Dorgan. I do not understand that. Intramodal 
enhanced competition. It seems to me highly unlikely that 
anyone, given what has happened in recent years with the 
mergers, the mega-mergers, and ending up with really four 
behemoth enterprises dividing up the country, can come in and 
say, by the way, here is another merger application and we 
think it will ``enhance competition.'' Are there circumstances 
where you think that will be the case?
    Ms. Morgan. Well, for example, just looking backwards, the 
Conrail transaction involved shared asset areas where there was 
added competition, where two carriers are now serving a 
particular area. That was part of the application that came to 
us. So, there are avenues for enhancing competition, whether it 
be trackage rights or whatever, that could be offered in the 
context of the application. I do not see that as a problem.
    If they want to come in and they want to get some sort of 
approval, then I think the rules are pretty clear that we are a 
little more skeptical about benefits from further 
consolidation, we are concerned about harm from further 
consolidation. So, we will be looking very carefully at the 
benefits from future consolidation, and if you want to show us 
that the benefits box is fuller than the harm box, then 
enhanced competition should be what is brought to the Board.
    Senator Dorgan. I think the phrase ``benefits from further 
consolidation'' is an oxymoron.
    Ms. Morgan. When I said it, I figured that is where you 
    Senator Dorgan. I cannot conceive of benefits from further 
consolidation being something that is even in our language 
here. When I speak of benefits, I think of the public interest. 
The Chairman just observed, well, it is going to benefit some 
people. That is quite clear.
    Ms. Morgan. But what we do look at is public benefits. We 
look at the public interest and we weigh the benefits against 
the harm in determining whether a merger approval would be in 
the public interest.
    Senator Dorgan. Obviously, this Committee is interested in 
the public interest. I will not inquire further except to say 
this. We have introduced now for the third time----
    Senator Rockefeller. 35th.
    Senator Dorgan [continuing]. The 35th time----
    Senator Dorgan [continuing]. The Rail Shipper Protection 
Act. And they are being protected very slowly at this point. 
But we are determined this time to get a hearing, to get a 
markup, and move this legislation. So, the first step, of 
course, is with the cooperation of our colleague, Senator 
Breaux, to schedule it for a hearing. The second step is to 
have you show up and fully and without reservation support all 
provisions of it.
    Senator Dorgan. And then we will mark it up, and it will 
become law. And I will be a much happier Senator.
    Ms. Morgan. And you will drug me before I come to that 
particular hearing.
    Senator Dorgan. No. I think it is going to work out fine 
for you.
    Senator Dorgan. But I want to say very seriously, Senator 
Rockefeller and myself and others, Senator Burns, have been 
very serious about this for a long while. It made almost no 
progress. We have drafted good legislation. But I was told 20 
years ago, ``you take on the railroad, you are not going to 
win. You are just sort of spinning your wheels.'' We learn 
these lessons the hard way I guess. But we think this is such 
important legislation that we must continue and we are 
determined to succeed.
    So, again, let me just say that your moratorium took some 
courage. I do not know whether these regulations do what I want 
done, and I certainly cannot conceive of enhanced competition 
coming from further mergers. But I do know that passing a Rail 
Shipper Protection Act fits right in the glove of what we are 
talking about today, and it is critically necessary for the 
public interest.
    Mr. Chairman, thank you for holding the hearing.
    Senator Breaux. Senator Rockefeller.
    Senator Rockefeller. Thank you, Mr. Chairman. We are going 
to be meeting on an easy matter in a little while.
    Senator Breaux. Yes.
    Senator Rockefeller. I wanted to say, Mr. Chairman, just as 
an opener that I do not know this to be a fact, but I have 
heard that the railroads are going to Members of this 
Subcommittee asking them to sign a letter which would, in a 
sense, sort of discourage the introduction of the bill that 
Byron Dorgan was talking about. I do not know if that is true, 
but I would hope that that would not be true.
    And I would hope that the processes of the Subcommittee 
would work so that a bill which has, in fact, been introduced 
for 15-16 years or whatever, and in the three names, there is 
even an advance, and I think our time will come that this will 
not happen.
    I think it is terribly, terribly important that we do not 
have railroad companies going to Subcommittee Members telling 
them what letters they ought to write to our Chairman and 
whatever else. I am certainly not going to write such a letter 
and I hope that others do not either.
    Ms. Morgan, I want to also commend you, as Byron Dorgan 
did, on the courage--I guess I can include all of you, but I 
know the best, so I am talking to you--on recognizing some 
potential harm and deferring some things and making some good 
decisions. And that was good. That really was. I do not say 
that because I am about to get into tougher questioning, which 
I am, but because I really mean it. If it was not a shift, it 
was an evolution and it was strong and it was good and it was 
meaningful and had a very good effect.
    Now, I have not read your remarks because I have been 
swamped in the other work that John Breaux are doing all day.
    But that does not prevent me--I know there is evidence that 
one requires for mergers. And pro-competitive evidence you have 
referred to in another way for the public benefit and all that 
kind of thing. But pro-competitive evidence is a technical term 
which is used and I think which is in that category. Is that 
the kind of thing that one would look for if there were future 
merger opportunities?
    Ms. Morgan. In line with my earlier discussion with Senator 
Dorgan, our rules definitely shift the focus toward enhanced 
competition in a way that the rules had not previously.
    Senator Rockefeller. I got that very clearly because I 
listened very clearly. But the pro-competitive evidence is just 
a bit sharper.
    Ms. Morgan. Well, we use the term ``enhanced competition.'' 
Pro-competitive initiatives, as far as I am concerned, mean the 
same thing. I may be missing something, but we just use the 
term ``enhanced competition.''
    Senator Rockefeller. But find no disagreement in the way I 
put it in particular.
    Ms. Morgan. No.
    Senator Rockefeller. It sort of seems like the same thing.
    Ms. Morgan. Right.
    Senator Rockefeller. I have been a Governor for 8 years and 
I have been doing this for some time. Like when John and I 
would have discussions on managed care, there is always what 
happens in the first couple of years and then what happens in 
the third, fourth, fifth, sixth, and seventh year. If you look 
at managed competition in health care, you can always say that 
it is going to save costs, but the major question is how long 
will it save costs. In other words, is there a period of 2 or 3 
years where they can save costs and after that point they have 
pretty much saved the costs that they are going to be able to 
and therefore, it sort of even outs and goes into what we would 
refer to as more fee-for-service like Medicare?
    Now, having thoroughly engaged your interest on that----
    Ms. Morgan. I think I will switch to that issue.
    Senator Rockefeller. There has to be a follow-up on all of 
this was my point. The question is, how does the STB do a 
follow-up on enhanced competition or pro-competitive evidence 
or whatever the word is? One can say the conditions seem to be, 
but then a couple of years pass, and things could change.
    So, how does one follow up on that? And how does one do 
that in the process of making a decision that you can only make 
    Ms. Morgan. I presume we are discussing the merger process 
because that is where we are today.
    Senator Rockefeller. We are, right.
    Ms. Morgan. As you know, in the past round of mergers, we 
instituted an oversight and a monitoring process. That has 
become more and more refined. In our new merger rules, we have 
formalized our 5-year oversight process, and also we have 
formalized our operational and service monitoring process. So, 
we have built into the rules, from lessons of the past, a 
formalized oversight process for the implementation of the 
merger for conditions that are imposed and so forth. I believe 
that is what you are talking about.
    Senator Rockefeller. It is. Suppose you find it becomes 
deficient. There is not much you can do about, is there?
    Ms. Morgan. Well, in our new rules, we have a provision 
which formalizes our oversight and indicates what our oversight 
will be looking at. One of the things that our oversight will 
be looking at is the conditions that we have imposed and 
whether they are working as they were intended to work.
    Senator Rockefeller. If they do not?
    Ms. Morgan. Then we will step in and fix the problem.
    Senator Rockefeller. How?
    Ms. Morgan. Again, without having a particular proposal in 
front of me----
    Senator Rockefeller. I understand that.
    Ms. Morgan. But it would be coming up with a condition, 
another condition, that would serve the same purpose and effect 
as the original condition that we imposed was intended to have.
    Senator Rockefeller. What would be a way that you might--
not hypothetically, but just thinking back in your experience 
when you say enhanced competition or I would say pro-
competitive evidence--and we have agreed it is sort of the 
same. What would be an example of enhanced competition?
    Ms. Morgan. Well, I have used an example in the Conrail 
merger of the shared asset areas. That represents the creation 
of competition, in other words, having two carriers serving 
those shared asset areas, and that was part of the proposal 
that came to us. Trackage rights is another form of enhanced 
competition, which I discussed with Senator Dorgan earlier.
    Senator Rockefeller. Trackage rights gets interestingly 
close to bottleneck, does it not?
    Ms. Morgan. Well, obviously bottleneck is, I am sure, an 
issue that we are going to get to here in a minute.
    Senator Rockefeller. No, but I was not thinking about it.
    Ms. Morgan. I was waiting for you to lead right into that.
    Senator Rockefeller. Does that not fit under the definition 
of enhanced competition?
    Ms. Morgan. Yes, it can.
    Senator Rockefeller. You have heard me do this so much that 
you can sort of sip some water while I am saying it because you 
are so accustomed to it. Again, if I am taking a flight to 
Fargo, which I have done--I have not been invited back, but I 
did it once--and let us say I have to make a switch. I am told 
that the flight to Minneapolis or Chicago or whatever is such-
and-such, but then the flight to Fargo is not listed, and I do 
not know what the cost is. Now, obviously within the airline 
industry, the public would rebel.
    The FAA would step in. The President would declare a state 
of--it would be totally untenable. And they do not have the 
protection, of course, that railroads do.
    Is that an example of the kind of thing that could be 
looked at in terms of prices that are not quoted on clearly and 
predictably to be used rail service lines?
    Ms. Morgan. Yes. May I elaborate on that answer? And maybe 
now you may hear some of the prior discussion that we have had.
    As you know, the Board issued a decision on bottlenecks 
that was affirmed. So, in the context of the future direction 
of the Board, we could not undo that decision because obviously 
that decision, we felt, was based on the statute, and it was 
    Now, having said that, in the context of a merger, given 
what I have said earlier, if applicants were interested in 
seeing their application approved, they, as I said, should 
think about bringing us enhanced competition. Some sort of 
additional bottleneck relief other than what the Board has 
provided clearly could be initiated by the parties in the first 
    Senator Rockefeller. I am trying to think if I understand 
    Senator Dorgan. Her answer was yes.
    Senator Rockefeller. That is what I thought. I think you 
are going in that direction, but it was not clear to me.
    Let me put it negatively. If in the questioning that you 
did in a proposed, hypothetical future merger, one of the 
commissioners--it might be yourself; it might be one of your 
colleagues--posed that question and the answer came back, ``no, 
we do not really intend to do that because we do not have to, 
because we have protections that others do not.'' Would that 
negatively affect the way you looked upon an enhanced 
    Ms. Morgan. Well, again, if we are outside the merger 
context, then as you and I have discussed previously--and I 
know you do not like the decision we issued on bottleneck--
obviously, there is only so much relief in a generic sense that 
can be provided under our current decision as upheld in court 
in accordance with the statute.
    Now, in the merger context----
    Senator Rockefeller. Now, is that a way of saying that 
until we change the law, you are stuck?
    Ms. Morgan. Well, we have had that conversation before.
    Senator Rockefeller. We certainly have.
    Ms. Morgan. But in the merger context, again if someone 
wants to get approval for their transaction, they must figure 
out a way to bring us what we comfortably feel is enhanced 
intramodal competition, which will help us to feel better about 
the benefits of a particular transaction. So, in the merger 
context, that is one avenue that could be pursued. There are 
other avenues that could be pursued to enhance intramodal 
competition as well.
    Senator Rockefeller. Let me just end with this, Mr. 
Chairman, I apologize and I thank you, as I always do, and 
apologize to you as I often do.
    Everything you are saying, your body language, the word 
``intramodal'' which caused confusion for a moment--but 
everything you seem to be saying is really affirming an answer 
to a question that I gave to you. I do not think you want to 
come out in a Committee hearing and create an insoluble problem 
for yourself or create unnecessary ruckus. But I think you are 
saying that, yes, that is something we would look at. Yes, that 
has to do with enhanced competition, and yes, intramodal means 
things of that sort, that defines things of that sort. So, I 
would take it that you would look at that carefully.
    Ms. Morgan. In the context of a merger review, yes.
    Senator Rockefeller. In the context of the merger, yes. I 
would not be wrong, right, in saying that?
    Ms. Morgan. No.
    Senator Rockefeller. Thank you, Mr. Chairman.
    Senator Breaux. I want to thank the panel.
    Mr. Burkes. Mr. Chairman, may I make one comment in 
response to the question you asked about others supporting 
KCS's position? Obviously, the U.S. Department of 
Transportation supported it. Wisconsin Central supported it. 
CSX did not use the exact language, but in several areas they 
referred to it on January 20th. The fact is there are only six 
major railroads left in North America. If the proponents of the 
combination that did not involve two of the big six carriers 
could demonstrate that there was no reason to apply the rules, 
then presumably after comment, the Board could grant the 
waiver. So, they supported a theory but not the exact language.
    Now, Dr. John Snow is here. He will be testifying. He can 
respond to that as well as Mr. Haverty.
    Senator Breaux. Have any of the Class I railroads ever 
requested not to be considered a Class I railroad before?
    Ms. Morgan. Not to my knowledge, no.
    Mr. Burkes. Not to my knowledge. Obviously, six of them 
would not because they so far exceed the limits.
    Senator Breaux. But KCS has never requested that they be 
not considered because of their smaller size?
    Mr. Burkes. No. They just requested in all the comments and 
the public hearings that they not be held to the standards of--
    Senator Breaux. But they never requested changing what was 
a requirement to be considered a Class I railroad.
    Mr. Burkes. No. They requested the threshold be raised.
    Senator Breaux. I understand.
    We want to stay in touch with the Board on this decision 
and work with you on future things that you are going to 
involved with and do so very closely. Thank you for being with 
    We would like to welcome up our next panel, which will be a 
panel consisting of Mr. John Snow, who is Chairman and 
President and CEO of CSX Corporation; Mr. Paul Tellier, who is 
President and CEO of the Canadian National Railway Company; Mr. 
Mike Haverty, who is Chairman and President and CEO of the 
Kansas City Southern Industries; Mr. William Gebo, who is 
Manager of Rail Services for Dow Chemical, who will be 
accompanied by Mr. George Marshall, who is Director of Supply 
Cycle for Albemarle Corporation in Louisiana, a chemical 
company; also Ms. Claudia Howells with the Oregon Department of 
Transportation. We look forward to receiving their testimony.
    Let us see. We have got three good railroad men there and 
look forward to hearing their testimony.
    John, we have you listed first. We welcome you to the 
Subcommittee and are pleased to hear your testimony.

                    AND CEO, CSX CORPORATION

    Mr. Snow. Mr. Chairman, thank you very much. Senator 
Rockefeller. I am delighted to be here today. I have submitted 
a statement and I will make some brief comments now and look 
forward to your questions.
    CSX is in broad and basic support of the rules that have 
been propounded by the agency with respect to future mergers.
    We think they are timely. They meet the requirements of the 
situation, which is really a product of recent history, because 
recent history, as you all well know, of railroad mergers has 
not been a completely happy story. In fact, it has, in many 
ways, been quite an unhappy story. These rules are designed, I 
think, to deal with the unique circumstances of the current 
environment. I think they adopt the right approach. They raise 
the bar. They make future mergers more difficult. They put 
added requirements on railroads going forward, as you have 
heard the Chairman of the STB testify.
    At the same time, I think we are in a period where further 
rail mergers are clearly inadvisable. This is a time when 
railroads ought to be focusing on serving customers better, on 
reducing their costs, on improving their balance sheets, on 
improving earning power, on winning back the confidence of both 
shippers and investors.
    I must say the process of the last 4 or 5 years with the 
mergers has shattered, in many respects, that confidence of 
shippers and Wall Street. We are now in the process of 
rebuilding that confidence. I think we need some more time to 
complete that process and do it right. I am confident that we 
    CSX is a fundamentally different and better railroad today 
because of the opportunity we have had to focus on improving 
our performance than we were a year ago. I think if we had been 
caught up in a merger movement 18 months ago or so, it would 
have been hard for us to have made the clear progress that we 
have made in the East.
    Finally, I would say that I do not see any need for mergers 
at this time. I do not see any sentiment for mergers at this 
time. If there are to be mergers in the future, they should 
come at a time when the shipping public and the investing 
public really express a need and a desire for them. So, for the 
next 3, 5, 7--I do not know--some considerable number of years 
going forward, I do not see mergers. I see railroads, rather, 
focusing on the things I mentioned to improve their 
    One important path to improving their performance will be 
these alliances and joint ventures that have been talked about.
    So, I think we are in a new era in railroading, Mr. 
Chairman. We are in an era where we will consolidate the 
benefits of prior mergers rather than seek future 
consolidations for now.
    I thank you very much.
    [The prepared statement of Mr. Snow follows:]
        Prepared Statement of John W. Snow, Chairman, President 
                       and CEO of CSX Corporation
    Good afternoon, Chairman Breaux and Members of the Subcommittee. I 
am John W. Snow, Chairman, President and Chief Executive Officer of CSX 
Corporation (CSX). CSX operates the largest freight railroad in the 
eastern half of the United States, serving 23 states, the District of 
Columbia and the Provinces of Quebec and Ontario. I appreciate the 
opportunity to appear before you today to present CSX's views on the 
new merger rules issued by the Surface Transportation Board (STB).
    All of us with a stake in the industry--rail customers, labor, 
management, short lines and the financial markets--have followed 
closely the lengthy proceeding that produced these rules, and have 
anxiously awaited the Board's ruling on the many complex issues that 
were raised. Many of us have different interests. I believe, however, 
that a broad consensus of interested parties agrees that the Board's 
process was timely, open, professional, and fair in every respect. 
Indeed, this has been our experience with the STB since its formation. 
While we have disagreed with certain decisions, we have found that 
under Chairman Linda Morgan the STB has functioned thoughtfully, 
carefully, productively and efficiently.
    CSX and the other major carriers are all products of 
consolidations. Over many decades, mergers have produced substantial 
economies and efficiencies. Shippers have shared in these benefits, 
enjoying an inflation-adjusted rate reduction of more than 50 percent 
since 1980. Now, with only seven major carriers left, however, the 
Board has recognized the need to pause to identify the key issues for 
study in future mergers which would result in a smaller major carrier 
    When the STB inaugurated this process, rail customers and investors 
in the industry were experiencing the impact of service difficulties 
following recent mergers, including the absorption of Conrail lines by 
CSX and Norfolk Southern. It was a rough time for all of us--a time 
when the industry was single-mindedly focused on re-building service. 
We were determined to win back the confidence we had earned in 
preceding years.
    Recognizing the paramount importance of industry recovery, the 
Board believed that another merger could trigger a final industry 
restructuring at the wrong time. We agreed. Such destabilization could 
have wreaked havoc in the economy and produced long-term problems. 
Clearly, the decision to institute the moratorium and rulemaking was 
well-timed and sound policy.
    Given 15 months of breathing room, I am pleased to tell you that 
CSX today is running better than ever. The critical operating metrics 
we use as performance indicators--freight car dwell time in yards, 
velocity, and cars on line--are exceeding goals. Customers have noted 
the improvement: Complaints have plummeted and we are recapturing 
business. Daily, we are becoming more responsive to our customers' 
needs in our expanded service territory. While we recognize the need 
for continuous improvement, CSX today is well staffed, well equipped, 
running smoothly, and beginning to reap the considerable benefits of 
the single-line service provided through the Conrail acquisition. We 
are moving traffic from the highways onto the rails. We are moving coal 
to our nation's utilities and industries in record amounts. My sense is 
that other roads are experiencing similar improvements and are back on 
a solid operational footing. The Board was prescient in deciding to 
institute a moratorium on mergers, thereby giving the industry a 
critical opportunity to stabilize and earn back the confidence of its 
various constituent interests.
    But I believe this rulemaking also sends the rail industry a clear 
signal. It tells me that future Class I rail mergers will be much 
harder to accomplish, which is as it should be given the industry's 
recent history and current circumstances. It tells me that customers 
and other constituencies have convinced the Board that more time must 
pass to complete and verify industry recovery. I see this as a prudent 
approach--the right approach for these times--which will be followed to 
keep the rail industry on the main line to full recovery.
    The Board's new rules focus on two key issues. First, how a 
proposed merger affects competition in the surface freight industry; 
and second, the need to thoroughly plan and implement well all the many 
steps involved with any new merger initiative. We agree with the Board 
that the need for increased focus on safety, service plans and 
communications with employees, customers and affected communities are 
appropriate elements for consideration in future merger proceedings.
    On competition, the Board's decision confirms sound agency policy 
against using its jurisdiction in ways that would re-regulate the 
industry and, in short order, return to the regrettable pre-Staggers 
days of regulated rates and services that virtually crippled the 
industry. I can assure you that re-regulation of our industry with its 
extremely competitive marketplace would ultimately deprive our 
customers of the significant benefits they secured under the Staggers 
Act, and would severely limit our ability to fund the necessary, 
substantial costs of our infrastructure. This is a very important 
point. We are one of the most capital-intensive industries in America. 
This year alone CSX will invest nearly $900 million in infrastructure 
and equipment. Re-regulation would be a stranglehold, constraining our 
ability to generate these funds internally or secure outside financing 
to even maintain our railroad in sound condition.
    I am concerned, however, about the interpretation of competitive 
standards in the future. There was considerable debate during the 
proceeding over the roles of intermodal and intramodal competition in 
future consolidations. While I believe that the final rules reflect a 
recognition of the role of single-system service and intermodal 
competition in delivering benefits to the nation's shippers, I'm 
concerned that the Board in interpreting the new rules may focus too 
much attention on intramodal competition without enough credit being 
accorded intermodal, geographic and product competition--all of which 
are key drivers in the rail marketplace.
    In terms of the general rules for mergers, the bar has been set 
higher, and winning approval of future mergers will be more difficult. 
That result makes good sense for now and for the foreseeable future, as 
railroads need to focus on securing the benefits of past mergers and 
not on initiating new mergers. But as industry efficiency improves 
further and we regain customer confidence with steadily rising service 
reliability, there may come a time in the future when shippers seek the 
benefits of mergers and when our shareholders' interests are enhanced 
by a restructuring. These opportunities should not be permanently 
foreclosed. But let me emphasize that for now, and for perhaps even 5 
years from now, the message and effect of these new rules are not only 
sound and appropriate, they are an imperative.
    As I have indicated, we are in a time when railroads must continue 
to demonstrate the benefits of prior mergers. As I see it, there is 
little or no sentiment for additional major mergers among the rails 
themselves, from our customers, or from our investors. For our part at 
CSX, we have absolutely no plan, intentions, or inclination to initiate 
any restructuring and would be opposed to such action by anyone else as 
well until our recent history has become a much more distant memory. In 
fact, the very existence of these new, more stringent standards 
encourages us not only to continue improving our railroad in 
traditional ways, but also to look for innovative, creative 
alternatives to mergers. With our operations substantially improved and 
our railroad running smoothly, we at CSX have turned our attention to 
using the technological and marketing tools available to develop 
alliances with other railroads to improve service and capture more 
business from the highways.
    Here are some examples: Just last month, CSX Intermodal and 
Canadian National introduced a range of new intermodal services 
connecting major Canadian and U.S. markets. The CN-CSXI marketing 
agreement offers shippers highly competitive service for coast-to-coast 
intermodal traffic moving between Vancouver, B.C. and New York; between 
Toronto and Florida; and Toronto and New York. We are working with 
Norfolk Southern on many projects, including an arrangement to improve 
service in the critical Cincinnati gateway. With Union Pacific, we have 
introduced ``Express Lane'' service which is moving fruits and 
vegetables and even wine from the West Coast to New York City and 
Boston on a greatly accelerated schedule that is 94 percent on time. We 
also are running a NAFTA express with UP to get vehicle parts from 
Michigan to Mexico. We estimate that 45,000 loads have been taken off 
the highway and put on the rails as a result of this service alone. And 
we are developing what we call a ``watershed'' business opportunity 
using simplified routings with Western roads to connect target markets 
that are generally 200-250 miles on either side of the Mississippi. Our 
goal is to capture business that currently is moving almost exclusively 
over the highways between these relatively short distances.
    Last week we announced a partnership between CSX Intermodal and 
Burlington Northern Santa Fe to provide service for temperature-
controlled products from San Bernardino, California to Little Ferry, 
New Jersey. The schedule meets midnight delivery times and is a 
seamless service that is a highly competitive alternative to over-the-
road transportation. In addition to our activities with other major 
railroads, we are, of course, working with our friends in the short 
line industry. There are a variety of alliances and marketing 
initiatives underway between other railroads, and I anticipate even 
more emphasis on these types of approaches now and in the future. I 
sense a real ``sea change'' in the railroads' willingness to cooperate 
with each other.
    In conclusion, the challenge ahead of us is not to quickly 
formulate a merger to meet the new requirements. The challenge is to 
develop and test ways to reap many of the benefits of consolidations 
without precipitously plunging down the merger track.
    I appreciate having had this opportunity today and will be pleased 
to answer any questions you may have.

    Senator Breaux. Thank you very much, John. We appreciate 
    Monsieur Tellier. [French spoken.]


    Mr. Tellier. Merci.
    Mr. Chairman, Senator Rockefeller, I am delighted to have 
this opportunity to talk about these new rules.
    By way of background, just a couple of words about Canadian 
National. We are the only transcontinental railroad in North 
America from the East Coast, Halifax, to the West Coast, 
Vancouver, and also, as you know very well, Mr. Chairman, to 
the Gulf Coast to New Orleans.
    We are very much a North American company. The reason I say 
this is that 52 percent of our revenues are derived either from 
carrying freight in the U.S. or in cross-border traffic. We are 
also a North American company because 65 percent of my 
shareholders are on this side of the border. We are a $3.5 
billion company in terms of revenues, real dollars, U.S. 
    Mr. Tellier. And 22,000 employees. We are the fifth largest 
railroad, but we never describe ourselves in that fashion. We 
prefer to describe ourselves as the largest of the small guys.
    Mr. Chairman, if I may say so, we offer quite a unique 
perspective for the simple reason that we are the most 
efficient railroad in North America, bar none. Six or seven 
years ago, we were the last in the class. And today we are at 
the top of the class. Whichever way you look at it, in terms of 
operating ratio, in terms of quality of service, in terms of 
the way we run our trains on a scheduled basis, we are at the 
top of the class.
    We are committed to shipper service. I can relate very 
well, Senator Rockefeller, to your concern. As a matter of 
fact, I stood in front of a group of shippers some years ago 
proposing a bill of rights for customers or shippers. So, 
therefore, our perspective is quite unique.
    As you are very much aware, Mr. Chairman, in 1998 we 
acquired the Illinois Central, and we integrated these two 
companies without any service disruption. It was a successful 
    Later on that same year, we did a marketing alliance with 
KCS, and since then we have embarked on a number of alliances, 
for instance, very recently with our friend here at CSX 
providing the best intermodal service from the West Coast to 
the East Coast.
    So, from that perspective, let me make some very brief 
comments on the rules.
    First of all, Canadian National is very pleased that the 
STB has raised the bar for these future mergers if they do take 
    Second, we are very pleased that our arguments were heard 
and that the STB has come out saying that in transnational 
mergers involving a U.S. railroad and either a Canadian 
railroad or a Mexican railroad, the same rules should apply. We 
are very, very pleased about that.
    Third, we had expressed some concerns about the Board's 
proposal on identifying the downstream effects of a future 
merger. But we think that the new rules have addressed our 
concern and have addressed the issue of enhanced competition 
and, therefore, we are very comfortable with that.
    My last comment on the rules. We may not agree with every 
aspect of these rules, but Canadian National is quite confident 
that the industry can live with these rules and we can operate 
effectively within that framework.
    A word before closing, Mr. Chairman, about the future of 
the industry. It is difficult to predict. It is possible that 
we will end up with only two transcontinental railroads, but 
this is not a certainty. Some will say it is not even a 
probability. It is certain that the industry will continue to 
evolve. For instance, NAFTA over 10 years since it was signed 
between Canada and the U.S.--the two largest trading partners 
in the world--and Mexico has influenced a lot the evolution of 
the structure of the rail industry, and I am sure that is going 
to continue to be the case.
    In conclusion, Mr. Chairman, what I would say to you and to 
your colleague, Senator Rockefeller, really matters for us, CN, 
is the quality of service. The quality of service has to 
continue to improve.
    Second, we are going to continue to improve the quality of 
service. We, the Class I's, have to work better with one 
another. The number of us is shrinking and therefore we must 
work better together. If we cannot provide single line service 
as a result of a merger, we should be able to provide single 
line-like service as a result of good alliances.
    At this point in time, we do not plan to merge with any 
carrier. You may be aware, Mr. Chairman, that we announced at 
the beginning of this year the acquisition of Wisconsin 
Central, a Class II railroad. This application is currently 
before the Surface Transportation Board. We are hopeful that it 
is going to be approved by early fall and we will be able to 
put these two companies together without any traffic disruption 
by the end of the year.
    Therefore, my very last point, Mr. Chairman, CN is not a 
defender of the status quo. We know that our industry must 
evolve. The truckers have been eating our lunch every day of 
the week. We have got to be more conscious than ever that the 
customers, the shippers, are paying our salaries. Therefore, we 
at CN have been trying to provide leadership in this. On the 
basis of our scheduled service, which means that we have a trip 
plan for every car, year to date our service has been 92 
percent on time. So, we think that by working better together 
with our colleagues, the other Class I's, we could meet your 
objective, Senator Rockefeller, and continue to provide better 
    Thank you.
    [The prepared statement of Mr. Tellier follows:]
 Prepared Statement of Paul M. Tellier, President and Chief Executive 
               Officer, Canadian National Railway Company
    Mr. Chairman and Members of the Subcommittee: On behalf of Canadian 
National Railway Company (CN) and its affiliates, I appreciate the 
opportunity to present our views on the new rules governing railroad 
mergers that were issued on June 11 by the Surface Transportation Board 
(STB) in STB Ex Parte No. 582 (Sub-No. 1), Major Rail Consolidation 
    By way of background, CN spans Canada and mid-America, from the 
Atlantic and Pacific Oceans, to the Gulf of Mexico. With extensive 
operations in Canada, as well as our activities in the U.S. and our 
reach into Mexico by virtue of our marketing alliance with the Kansas 
City Southern (KCS), we have a North American focus. We operate 15,500 
route miles of track and we are the fifth largest of the seven Class I 
railroads operating in the United States, with annual operating 
revenues of approximately US$3.5 billion.
    CN appears before you today with a unique perspective on these 
merger rules. We are the most efficient railroad, with the best 
operating ratio of all Class I railroads. Our objective since CN was 
privatized in 1995 has been to become the best railroad in North 
America by delivering high-quality service to our customers. We are 
committed to more efficient service and faster transit times for our 
customers, and we are committed to moving more freight, more quickly, 
with fewer assets. We are always seeking new ways to compete in the 
very dynamic transportation market.
    To this end, we have undertaken a number of important initiatives. 
To capitalize on the rapidly expanding market for north-south trade 
that has arisen as a result of the North American Free Trade Agreement 
(NAFTA), we merged with the Illinois Central Railroad (IC) in 1999 with 
no serious integration problems. We have undertaken alliances and 
entered into marketing agreements with other rail carriers. And, CN 
announced earlier this year our intent to merge with the Wisconsin 
Central Transportation Corporation (WC). All of these efforts make CN a 
stronger railroad and a more effective competitor, which in turn 
benefits our customers.\1\
    \1\ One initiative on which we were not successful was our attempt 
last year to combine the operations of CN with those of the Burlington 
Northern Santa Fe (BNSF) in a new company, North American Railways, 
Inc. We saw this essentially end-to-end transaction as good for 
shippers, competition, the economy, and the shareholders of CN and 
BNSF. However, the Board's review of our proposed combination was 
suspended with the STB's imposition in March 2000 of a 15-month 
moratorium on activity related to mergers of Class I rail carriers. CN 
and BNSF appealed the Board's decision to the U.S. Court of Appeals for 
the District of Columbia Circuit, but the Court denied our appeal. On 
July 20, 2000, CN and BNSF announced that we were abandoning plans for 
our combination. To this day, we have not revived those plans.
                 cn's position on the new merger rules
    We are pleased that the rules adopted by the Board will raise the 
bar for the quality of customer service in future railroad mergers. The 
Board has said it will closely scrutinize claims of benefits made by 
future merger applicants and has imposed requirements intended to 
ensure that railroad customers receive the service envisioned by merger 
applicants. CN had urged the Board to adopt such an approach last year.
    We also are particularly gratified that the Board appears to have 
heard the concerns raised by CN, Canadian Pacific, and the Government 
of Canada regarding the Board's proposed requirements related to 
transnational mergers. In the final rules, the Board now plans to apply 
higher public interest standards for mergers equally to all 
applicants--both domestic U.S. companies and foreign-headquartered 
corporations. If the goal of treating U.S. and foreign-headquartered 
railroads equally is met in the implementation of the rules, that will 
help stimulate competition in our industry.
    In our comments during the Board's proceeding, we had expressed 
concerns about the Board's proposal that merger applicants identify 
``downstream'' effects of a merger and the Board's proposed requirement 
that future mergers enhance competition. The new rules have taken steps 
to allay our concerns in these areas, but the implementation of these 
rules will be of vital importance. These rules should be a mechanism to 
promote efficiency and service, not a way to induce artificial, 
economically unsustainable competition or to protect some carriers from 
competition with others.
    It is also important to note that the enhanced competition that the 
Board seeks can also come through more efficient competition. One of 
the best actions carriers can take for their customers is to reduce 
costs and improve service. Mergers may still have an important role to 
play in helping the industry achieve that goal.
    While we may not agree with all aspects of the new merger rules, CN 
believes that, if the rules are properly implemented, the rail industry 
will be able to operate effectively and will have the opportunity to 
bring good merger cases before the agency and receive a fair hearing.
                   future railroad industry structure
    In its new merger rules, the Board appropriately emphasizes the 
importance of a renewed emphasis on improved customer service, which is 
essential if the railroad industry is to survive. How the industry will 
respond to new service challenges--and the new merger rules--is the 
subject of considerable speculation.
    It is important to note that no particular industry structure is 
inevitable. It is, of course, possible that two major North American 
railroads will emerge, but that possibility is neither a certainty nor 
even a probability. Nor is there any reason to believe that the 
industry structure will ever become static. CN believes the railroad 
industry will continue its long history of changing along with the 
economy at large, which is the only way rail can remain a competitive 
    In recent years, we have seen the rail industry change dramatically 
with the economy. For example, short lines have re-emerged as an 
important rail sector. Similarly, NAFTA has increased the importance of 
improved north-south routes, which was one of the factors behind the 
Board's approval of the CN/IC merger in 1999. Other new forms of 
competition will undoubtedly emerge to meet future market needs. 
Similarly, new capabilities may emerge that will allow old structures 
to become effective in ways that are not yet possible.
    CN believes that railroad customers can be the beneficiaries of a 
new railroad paradigm that emphasizes responsible growth and responsive 
customer service. Our industry will stagnate and deteriorate if it does 
not continue to grow by providing more and better services to our 
customers so that rail will always be an attractive alternative in this 
dynamic, multi-dimensional economy. For customers who rely entirely on 
railroads, we have to provide service that keeps them competitive in 
the global marketplace. For the vast majority of our customers, who 
have a choice between railroads and other modes, we have to make rail a 
better choice of transportation than the other modes. We also need to 
capture a part of the share of other modes, which have the largest 
share of the freight transportation market--if we are to stay in 
    With respect to CN, we of course are always looking to the future 
and seeking new ways to improve our performance and enhance our 
customer service. However, we have no plans at this time to merge with 
another rail carrier. We are currently focusing solely on our proposed 
merger with Wisconsin Central and the ongoing regulatory review process 
at the STB surrounding that transaction.
    Mr. Chairman, thank you again for the opportunity to appear before 
the Subcommittee on this important subject. I would be happy to answer 
any questions you might have.

    Senator Breaux. Merci, Monsieur Tellier. It is nice to hear 
someone who does not have an accent testify.
    Senator Breaux. Michael Haverty.


    Mr. Haverty. Good afternoon, Mr. Chairman and Senator 
Rockefeller. It is a pleasure to be here today.
    A little brief history on the Kansas City Southern. It was 
founded back in 1887, primarily a North-South railroad intended 
to move goods from the Midwest down to the Gulf Coast. When I 
showed up in 1995, it was a mid-sized regional railroad. The 
very month that I showed up, in May 1995, the Union Pacific/
Chicago & North Western merger was approved. Three months 
later, the Burlington Northern/Santa Fe merger was approved. 
The next month, the Union Pacific/Southern Pacific merger was 
    So, that meant that Kansas City Southern was clearly at a 
crossroads in its history. If the merger was approved between 
Union Pacific and Southern Pacific, which ultimately it was, it 
meant that 90 percent of all of the rail traffic west of the 
Mississippi River would be controlled by two railroads.
    Inasmuch as we were west of the Mississippi River, that did 
not bode well for our future.
    But we looked at what courses of action we had. Number one, 
we said we can shrink the railroad, which meant if we did that, 
we probably would not be here today. Or second, we could 
aggressively try and capitalize on the NAFTA trade agreement 
that had just been passed in 1994 and through a series of 
acquisitions, investments, and marketing alliances try and 
capitalize on that traffic. And that is exactly what we did, 
and in three-and-a-half years, we put together a NAFTA rail 
    But I would like to point out that we did it by only 
purchasing 450 miles of track. The rest of it was through 
marketing alliances or investments where we are not the 
controlling shareholder. We went from 2,700 miles in the United 
States to 3,150. We are by far the smallest carrier, 3,150 
miles compared to Burlington Northern and Union Pacific that 
are close to 33,000 miles. So, even though we have been able to 
survive with this strategy, we are still the smallest and we 
have limited market access.
    A year ago when the moratorium was proposed, we supported 
the moratorium. We said that you needed a breather from major 
railroad mergers. When the advance notice of proposed 
rulemaking took place simultaneously, we participated in that, 
and in fact, we proposed seven rules, none of which were 
accepted in totality. But we have publicly supported the rules 
that have just come out by the Surface Transportation Board.
    Let me just briefly address some of the concerns that you 
have, Senator, about the so-called exemption that Kansas City 
Southern got.
    First of all, it has been no secret that for a period of 15 
months we have said that we think that Kansas City Southern 
needs to be treated differently. I understand the Class I 
rules, but to say a Class I is a Class I is a Class I certainly 
is not the case. When I go out to compete with a railroad that 
is 10 times our size and has 17 times more revenue for the same 
customer in your State of Louisiana that produces paper, there 
is absolutely no way that the two of us are the same. It is 
very, very difficult to compete. In fact, many of the major 
railroads today have argued that they had to merge in response 
to other mergers because they did not want to be smaller. Well, 
here we are, much, much smaller than any other carrier.
    I think that a lot of the concern about this new rule is 
really too much concern. Again, as was pointed out, the 
grandfathering of the Kansas City Southern under the previous 
rules--and that is the way I look at it, not an exemption, but 
grandfathering--is appropriate, and there is a rebuttable 
presumption. So, if someone thinks that we should not be 
exempted or we should not be grandfathered, then they certainly 
have the right to file for that.
    Also, grandfathering KCS does not mean an exemption from 
merger rules. All we are saying is that we be guided by the 
same rules that the other mega-mergers were guided by when they 
put together their 30,000-miles-plus systems. Again, we are 
one-tenth the size of them.
    We were somewhat surprised by Chairman Morgan's dissent. A 
couple of months ago, Mr. Tellier's railroad here was granted a 
right to move forward with the Wisconsin Central purchase. It 
was considered a minor transaction, which means it can be 
completed in basically 6 months under very lenient rules.
    Kansas City Southern is very much closer to being the size 
of Wisconsin Central than it is of the other Class I carriers. 
We are at around $565 million and Wisconsin Central, in the 
United States, was a little less than $400 million. Kansas City 
Southern owns 3,150 miles of track; Wisconsin Central was 
    Also, we were a little bit surprised when the comments were 
made that Kansas City Southern might trigger the eventual move 
to two railroads. Here we are, again 3,150 miles, yet Canadian 
National bought WC (Wisconsin Central), which is similar in 
size, and yet there are no strategic implications of the kind 
that have been suggested for KCS? A Canadian railroad [CN] and 
a U.S. railroad [WC] that owns trackage in Canada? There really 
has been no protest by any other railroads or by shippers about 
the WC transaction. Therefore, I did not understand the claim 
that if we were involved in a transaction, as a 3,150-mile 
railroad, we would trigger a major merger.
    True, we have investments in Mexico. We also have 
investments in Panama. But we are either an equal investor or a 
minority investor, and we do not control the railroad down in 
    Thank you very much.
    [The prepared statement of Mr. Haverty follows:]
Prepared Statement of Michael R. Haverty, Chairman, President and CEO, 
                      Kansas Southern Railway Co.
    Good afternoon Mr. Chairman, members of the Committee. My name is 
Michael R. Haverty. I am Chairman, President, and Chief Executive 
Officer of The Kansas City Southern Railway Company. I am pleased to 
appear before you today, and I thank you for the opportunity to discuss 
KCS's thoughts on the recently released final rules for major rail 
mergers and their impact on the country's railroad system.
    I would like to begin my comments by explaining the role that KCS 
plays in the national railroad system. KCS is the smallest of the Class 
I railroads. See Exhibit A. Using 1999 annual operating revenues 
available from AAR, KCS's revenues were approximately $564 million 
dollars. In comparison, the next largest Class I carrier, Canadian 
Pacific Railway (``CP'') (including its U.S. subsidiary, Soo Line 
Railroad), had annual operating revenues of approximately $2.4 billion 
dollars. The largest Class I carrier, Union Pacific Railroad (``UP''), 
is over 17 times the size of KCS with annual operating revenues of 
approximately $10 billion dollars. In comparison, KCS is much closer in 
size to Wisconsin Central's U.S. rail operations, that include a Class 
II railroad, and had combined annual operating revenues around $400 
million dollars. A quick look at the miles of road operated by each 
Class I carrier reveals the same story of disparate size differences. 
KCS's miles of road operated (including Gateway Western Railway) in 
1999 was 3,158; CP's miles (including the Soo Line) were 14,358; UP's 
miles were 33,341 and WC's miles were 2,756. See Exhibit B. Notably, WC 
would have become a Class I railroad under existing criteria on January 
1, 2002 if the recently announced acquisition by the Canadian National 
Railway had not occurred. Also, notably, the Surface Transportation 
Board (STB or the Board) determined this transaction would be treated 
as minor, the most lenient treatment available for proposed rail 
    KCS was founded in the 1880s by a visionary that sought to connect 
America's heartland to the Gulf of Mexico to move Midwest agricultural 
products by rail to southern states and by ship to other countries. 
KCS's main lines ran from Kansas City to Lake Charles, Louisiana and 
Port Arthur, Texas. In the 1930s, a line between Dallas and New Orleans 
via Shreveport, Louisiana was added to the KCS network. In 1993, KCS 
purchased a strategic line from Shreveport to Meridian, Mississippi via 
Vicksburg and Jackson. KCS's rail network remained in this 
configuration as a regional railroad until 1995.
    In 1995, the Union Pacific/Chicago & North Western and the 
Burlington Northern/Santa Fe mergers were approved by the Interstate 
Commerce Commission (ICC), completing another wave of major rail 
mergers. See Exhibit C. That same year, the proposed Union Pacific/
Southern Pacific merger was announced, and it was subsequently approved 
by the STB, the successor to the ICC. As a result, KCS found itself 
facing the possibility of extinction as two major rail carriers were 
created that would control 90 percent of the traffic west of the 
Mississippi River.
    In an entrepreneurial reaction, KCS, in a span of about three and 
one-half years, became part of a ``NAFTA Railway'' network, spanning 
from Canada to Mexico. This network was created through a series of 
acquisitions, investments and strategic marketing alliances. The 
interesting thing to note is that KCS added only about 450 miles of 
rail ownership to the company that it controls. The rest of the network 
was created through minority investments and strategic alliances. KCS 
is one-tenth of the size of the two major railroads it competes against 
in the west, Burlington Northern Santa Fe (BNSF) and Union Pacific 
because Kansas City Southern does not actually own controlling interest 
in trackage beyond its 3,158 miles compared, for example, to Union 
Pacific's actual ownership of over 33,000 miles of trackage and BNSF 
ownership of over 33,000 miles of trackage as well.
    Subsequent to the two major rail mergers approved in the west, two 
major rail carriers were also created in the east when the CSX and 
Norfolk Southern purchase of Conrail was approved by the STB. As a 
result of these major rail transactions, two giant rail carriers 
dominated traffic in the west and two dominated traffic in the east. 
Besides these four major rail carriers in the United States, there are 
two major railroads in Canada and two in Mexico. (KCS owns a minority 
position in one of the two Mexican systems.) Because previous STB 
decisions have established that two carriers are adequate competition 
in the United States and there are only two major rail carriers today 
in Canada and Mexico, the likelihood of eventually seeing only two 
major rail companies in all of North America is strong. However, the 
premise that KCS would be the catalyst of triggering a move to the 
final end game of mergers, with ownership control of only 3,158 miles 
of track in a 100,000 plus mile major rail network in North America, 
is, in my opinion, unrealistic.
    The mergers and other changes that have taken place in the rail 
industry over the past two decades have in part been the result of the 
major merger regulations enforced by the ICC, and (since 1996) by the 
STB. Shortly after the enactment of the Staggers Rail Act of 1980, the 
ICC modified its merger regulations to place a premium on the reduction 
of excess capacity which was deemed to be choking the large railroads. 
Under these merger regulations, consolidation was encouraged as long as 
it was not deemed to unacceptably reduce competition. Along with the 
liberalization of abandonment rules and, perhaps most significantly, 
the reduction in government regulation of ratemaking and other service 
issues, the merger regulations implementing the Staggers Act helped to 
return the railroad industry from the brink of financial ruin.
    The railroad industry that we see today is largely the result of 
the ICC's and STB's interpretation of the post-Staggers merger 
standards. However, it has now been determined that the reduction of 
excess capacity should not be the primary goal of future rail mergers. 
KCS supports that concept and supported the STB's 15-month merger 
moratorium imposed in March 2000, and we were pleased when the 
moratorium withstood a challenge in court.
    The purpose for imposing the moratorium, according to the Board, 
was to allow the Board time to re-write the merger regulations, to 
better address the competitive and service issues which would now arise 
from a round of final combinations. KCS also supported the Board in its 
pursuit of these goals. However, I would like to make it clear that KCS 
has not been, and is not, part of the ``mega-carrier'' problem that the 
STB sought to address in its new regulations.
    KCS actively participated in the STB's review of its merger rules--
a process which spanned 15 months. At each step in the proceeding, KCS 
filed comments proposing modest changes which we believed could put the 
merger regulations more in tune with the modern rail industry. See 
Exhibit D. KCS's written comments were contained in hundreds of pages 
of text, all of which reflected views on improving the rail system as a 
whole. We were also represented by our regulatory counsel at an oral 
hearing conducted by the STB to facilitate a dialog on the Board's 
revision of the merger rules.
    At each step in the Board's review proceeding, KCS urged the Board 
to consider seven specific proposals for improving its regulation of 
major rail mergers. Those seven points were as follows: 1. Rail Service 
Options Should Be Preserved In Merger Proceedings; 2. Service 
Restrictions Contained In Marketing, Haulage And Trackage Rights 
Agreements Imposed As Merger Conditions Should Be Disclosed And 
Justified; 3. Benefits Claimed From Prior Mergers Should Be Preserved; 
4. Applicants Should Be Required To Disclose And Discuss The Impact Of 
Related Negotiated Agreements In Merger Proceedings; 5. Recent 
Cancellations Of Reciprocal Switching Access Should be Disclosed and 
Discussed; 6. The Definition of ``Major'' Merger Transactions Should Be 
Limited To Mergers Involving Only The Largest Railroads; 7. Merger 
Applicants Should Be Required To Disclose And Discuss Paper And Steel 
Barriers Applicable To Their Shortline Interchange Connections.
    KCS was pleased that our seven modest proposals generated a 
significant amount of discussion in the merger rule proceeding. 
Although none were adopted in totality, other railroads, government 
agencies, and shippers all made comments directly or indirectly 
supporting or opposing the suggestions made by KCS. KCS has supported 
the STB's new rules.
    Since I assumed the Presidency of KCS in 1995, we have been 
actively involved in all of the major rail mergers, urging the STB and 
the ICC before it to maintain as a guiding principle the preservation 
of rail competition. Railroading involves enormous capital expenses. 
Unlike the trucking industry, for example, where underserved markets 
can be remedied with the purchase of some trucks, railroads must pay 
for their own infrastructure, meaning that it is virtually impossible 
for any new rail systems to be built. In short, the rail systems we see 
today are likely all we will have to work with for many years to come. 
For that reason, we have repeatedly asked the Board to make sure that 
rail mergers do not reduce competitive options to shippers in major 
    Over the last few weeks, some have questioned the majority of the 
Board's approval of a regulation grandfathering any potential merger of 
KCS and another Class I carrier under the Board's former regulations 
governing major rail mergers. The final regulation is different than 
the proposal put forth by KCS, which was that such a merger be reviewed 
as a ``significant'' transaction, not a major one, under the new merger 
regulations. The Board's rule is different from what we proposed but is 
based on the same facts that spurred our original proposal 15 months 
ago: KCS's limited market reach simply cannot support the types of 
concern over service and competitive issues which will dominate future 
mergers of the other Class I carriers. The ``grandfathering'' of KCS, 
under the previous rule, which is fair and appropriate, is a rebuttable 
presumption that could be challenged by a concerned party if they 
desired to do so.
    I would like to conclude my comments with a few observations on 
KCS's independence. Many parties have been speculating that the recent 
adoption of the STB's major merger regulations is nothing short of a 
``For Sale'' sign on KCS. The people making that speculation have 
simply not watched us over the past few years. KCS has worked 
diligently to maintain its independence while entering alliance and 
marketing agreements to extend its reach and better serve our 
customers. We have worked hard to develop on-line business 
opportunities, and to work with our connecting carriers to better serve 
our shippers. We are currently involved in the construction of a new 
headquarters building in downtown Kansas City, an action that we would 
not be taking if we were looking to exit the market as an independent 
carrier. It is true that we are a publicly traded company, and thus in 
some sense our future rests in the hands of those who invest in our 
stock. Additionally, we must protect the interest of not only our 
shareholders but our customers and employees as well. But a railroad so 
dwarfed by major carriers around it with limited geographic reach may 
well prove to be in no one's best interest. But, in the meantime, we 
will continue to focus our energies on keeping KCS a strong, reliable 
carrier, one with a proud heritage and a challenging future.
    Again, I want to thank the Subcommittee for giving me the 
opportunity to testify today. I would be pleased to answer any 
questions you might have.





               Exhibit D--Debate Timeline On KCS Proposal
              Date                       Event           What Happened
March 11, 2000..................  STB imposes 15      ..................
                                   month moratorium
                                   on major rail
March 21, 2000..................  STB issues          ..................
                                   Advanced Notice
                                   of Proposed
                                   (``ANPR''); seeks
                                   public comments.
May 16, 2000....................  Comments on the     Over 100 parties
                                   ANPR due.           filed Comments
                                                      KCS asks any
                                                       future KCS-Class
                                                       I merger to be
                                                       not ``major''
                                                      WCL supports the
                                                       same idea in
                                                       KCS's proposal
June 5, 2000....................  Reply Comments on   Approximately 60
                                   the ANPR due.       parties filed
                                                       Reply Comments
                                                      KCS again urges
                                                       between large and
                                                       small Class I
                                                      BNSF, UP, EEI and
                                                       SPI oppose KCS's
                                                      WCL and CSX
                                                       indicate support
                                                       for KCS's
October 3, 2000.................  STB issues Notice   1No distinction to
                                   of Proposed         ``major'' merger
                                   Rulemaking          definition
                                   (``NPR'').          included
November 17, 2000...............  Comments on NPR     Over 100 parties
                                   due.                filed Comments
                                                      KCS urges
                                                       of its proposal
                                                      WCL supports KCS's
                                                       request and USDOT
                                                       agreed with the
                                                       same concept of
                                                       KCS's request
December 18, 2000...............  Reply Comments on   Approximately 50
                                   NPR due.            parties filed
                                                       Reply Comments
                                                      KCS continues to
                                                       seek distinction
                                                       in ``major''
                                                       merger regulation
                                                      IMPACT and UP
                                                       oppose KCS's
                                                      WCL and USDOT
                                                       indicate support
                                                       for KCS's request
January 11, 2001................  Rebuttal Comments   Approximately 40
                                   on NPR due.         parties filed
                                                       Rebuttal Comments
                                                      KCS's final
                                                       justification for
                                                       amendment to
                                                       ``major'' merger
April 5, 2001...................  STB conducts oral   Approximately 40
                                   argument.           parties
                                                       participate in
                                                       oral argument
                                                      KCS appears before
                                                       STB to answer
                                                       questions about
June 11, 2001...................  STB issues final    Regulations
                                   major merger        include
                                   regulations.        rebuttable
                                                       presumption that
                                                       KCS-Class I
                                                       merger to be
                                                       reviewed under
                                                       ``major'' merger

    Senator Breaux. Thank you, Mike.
    Mr. Gebo.


    Mr. Gebo. Yes, Mr. Chairman, Senator Rockefeller. My name 
is William Gebo, and I am the Manager of Rail Services 
Purchasing for Dow Chemical Company. It is an honor to appear 
here today on behalf of the American Chemistry Council.
    Dow Chemical is one of the Council's largest shipping 
members. We operate a fleet of 29,000 rail cars with a 
replacement value of $2 billion. We initiate over 145,000 rail 
shipments per year, and we spend in excess of $450 million a 
year on rail freight in North America.
    For several years, coinciding with the recent wave of rail 
mergers, the Council and its member companies have been 
increasingly concerned about the lack of direct head-to-head 
competition among railroads. For the Council's membership as a 
whole, two-thirds of all rail-served chemical plants are 
restricted to service by a single railroad. These captive 
plants have no opportunity to obtain competitive price 
quotations or service options. This is not acceptable to us as 
an industry.
    Throughout the recent 15-month merger moratorium and 
rulemaking process, the Council took part in every phase of the 
STB policy review. Our industry took those STB proceedings very 
seriously, but we were fairly disappointed with the outcome. 
STB had the opportunity to establish clear rules for the next 
round of rail mergers. Now that there are only two major Class 
I's in the East and two major Class I's in the West, the next 
round of mergers will be the last round.
    The Council believes that within a few years there will 
only be two North American railroads. With our members already 
subject to monopoly conditions at almost two-thirds of their 
rail-dependent facilities, we are worried that there will be 
even more concentration and even fewer routing options for 
captive customers.
    In the rulemaking docket, the Council asked the STB to make 
competition the centerpiece of its new merger guidelines. While 
the STB did appear to change its emphasis regarding 
competition, unfortunately it declined to lay out specific 
guidelines to enhance rail-to-rail competition.
    Therefore, the American Chemistry Council makes the 
following recommendations to the Subcommittee.
    One, elevate the involvement of the Department of Justice 
in rail mergers.
    Two, direct the STB to examine marketing alliances and 
other cooperative arrangements between the railroads that have 
the potential to further limit competition without the benefit 
of meaningful Federal scrutiny.
    Three, direct the STB to establish more precise merger 
guidelines for enhancing rail-to-rail competition.
    Under these merger rules, there is no requirement to 
enhance rail-to-rail competition in the future consolidations, 
and moreover, there is no attempt to restore competition that 
was lost from previous mergers.
    Merger rules aside, the overall implementation of rail 
policy so limits the opportunity for competitive market forces 
to work, it is clear that Congress must intervene. Therefore, 
we urge this Subcommittee--and I guess as far as Senator 
Rockefeller is concerned, I am preaching to the choir--to 
consider legislation such as S. 1103 that would promote rail-
to-rail competition as originally envisioned by the Staggers 
Rail Act.
    Thank you very much.
    [The prepared statement of Mr. Gebo follows:]
 Prepared Statement of William L. Gebo, Manager of Rail Services, Dow 
     Chemical Company, on behalf of The American Chemistry Council
    Good afternoon Mr. Chairman and members of the Subcommittee. My 
name is William L. Gebo and I am Manager of Rail Services for the Dow 
Chemical Company. I am appearing here today on behalf of the American 
Chemistry Council.
    The American Chemistry Council (``the Council'') represents the 
leading companies engaged in the business of chemistry. Council members 
apply the science of chemistry to make innovative products and services 
that make people's lives better, healthier and safer. The Council is 
committed to improved environmental, health and safety performance 
through Responsible Care, common sense advocacy designed to address 
major public policy issues, and health and environmental research and 
product testing. The business of chemistry is a $460 billion enterprise 
and a key element of the nation's economy. It is the nation's largest 
exporter, accounting for ten cents out of every dollar in U.S. exports. 
Chemistry companies invest more in research and development than any 
other business sector.
    Safe and efficient rail service is crucial for the member companies 
of the American Chemistry Council. The business of chemistry is second 
only to the nation's electric utilities in terms of its dependence on 
railroads and the size of its freight bill. Chemicals and plastics 
annually account for 150 million tons of rail traffic, which provides 
our rail service providers with $5 billion in revenues.
    On behalf of Dow and the Council, it is an honor to be here today 
to address the subject of the new major rail merger rules that the 
Surface Transportation Board (``STB'') adopted on June 11, 2001. These 
rules [often referred to by docket number as ``Ex Parte No. 582 (Sub-
No. 1)'' or as STB's ``Major Rail Consolidation Procedures''] will have 
a significant impact on the country's economy and should be carefully 
reviewed by Congress.
    Before commenting these rules, the Council wishes to note that 
earlier this year, under the chairmanship of Senator Gordon Smith, this 
Subcommittee undertook a series of three hearings on the condition of 
the rail industry. Rail customers respectfully request that, after 
holding this special hearing on STB's new merger rules, the 
Subcommittee complete its original series of three hearings. Still to 
be examined in that series, and not on addressed today, are the on-
going problems that rail customers face on a daily basis.
    For several years--coinciding with the most recent wave of rail 
mergers--the Council and its member companies have become increasingly 
concerned about the lack of direct head-to-head competition between 
railroads. For the Council's membership as a whole, 63 percent of all 
rail-served chemical plants are restricted to service by a single 
railroad. In other words, when it comes to rail transportation, nearly 
two-thirds of our industry is ``captive'' and therefore has no 
opportunity to obtain competitive price quotations or service options. 
Member companies that have competition available at some of their 
facilities report that their freight rates are much higher (ranging 
from 15 percent to 60 percent more) where the railroad has a monopoly 
over the shipper's traffic. Nor is it surprising that the Council's 
members report that railroads are less responsive to customer service 
concerns at locations without rail-to-rail competition.
    This lack of competition is not acceptable for the business of 
chemistry, which is obligated to supply customers in virtually every 
sector of the U.S. economy--including motor vehicles, pharmaceuticals, 
computers, packaging, agriculture, and water treatment. Moreover, as I 
have noted, the business of chemistry is the nation's largest exporting 
industry, with more than $80 billion in exports last year. So the 
business of chemistry must also rely on railroads to reach customers in 
Canada and Mexico and to move products efficiently to various ports.
    Having underscored the importance of rail service to the business 
of chemistry, I will now focus on the specific topic of today's 
hearing--rail mergers. Throughout the recent 15-month moratorium, the 
Council took part in every phase of STB's rail merger policy review. 
Our industry took those STB proceedings very seriously. But we are 
extremely disappointed with the outcome. STB had the opportunity to 
establish clear rules for the next round of rail mergers. And make no 
mistake, now that there are only two Class I railroads in the East and 
two in the West, the next round of mergers will be the last round. The 
Council believes that within a few years there will be only two major 
railroads in North America. Obviously, with our members already subject 
to monopoly conditions at almost two-thirds of their rail-dependent 
facilities, we are worried that there will be even more concentration 
and even fewer alternatives for captive shippers.
    In the rulemaking docket, the Council asked STB to make competition 
the centerpiece of its new merger guidelines. Unfortunately, however, 
STB declined to enhance competition when railroads merge. To be sure, 
STB invited--and perhaps, to some extent, may be said to have 
encouraged--railroads to ``talk the talk'' about competition and 
improved customer service when they file their next round of merger 
applications. But STB clearly did not adopt any rules that would 
require railroads to ``walk the walk'' by competing directly with each 
other at all points on their merged systems.
    The American Chemistry Council commends to the Subcommittee's 
careful attention the following three points about the current status 
of Federal rail merger policy:
    1. Ideally, the final round of rail mergers should not be reviewed 
by STB, which simply can't bring itself to address the needs of captive 
rail customers. We therefore urge you to adopt legislation, like S. 526 
(already introduced by Senators Dorgan and Rockefeller), which would 
elevate the involvement of the U.S. Department of Justice in rail 
mergers. Given the extreme concentration already existing in the rail 
industry and the market power that railroads exert over individual 
captive shippers, it would certainly be appropriate to give more 
authority to an agency with a balanced view of competition.
    2. Even if Congress chooses to leave rail merger authority with 
STB, that authority must be explicitly clarified to require the 
examination of so-called ``marketing alliances'' and other cooperative 
agreements between railroads. STB has generally not interpreted its 
authority to include such transactions. Because railroads, like Major 
League Baseball teams, are not subject to normal antitrust review, 
there is the risk that ``de facto'' rail mergers could occur without 
any meaningful Federal scrutiny.
    3. Finally, this special hearing may well be the Senate's only 
chance to direct STB to reconsider its new rail merger guidelines 
before it is too late. Instead of issuing precise rules, which all 
interested parties would understand in advance of a merger, STB has 
left everyone wondering. Captive shippers see clearly that merging 
railroads will not be required to enhance competition in a future 
consolidation under these rules. Although STB itself recognizes that 
rail mergers can lead to serious service problems, the new rules do not 
require carriers to compensate shippers, who have suffered tremendously 
in the wake of four of the past five mergers. For that matter, how can 
short lines and rail labor unions and potentially affected communities 
know what will happen to them? In fact, even the Class I railroads may 
not be sure how STB will judge the final round of mergers, until after 
that round has been completed.
    In conclusion, the American Chemistry Council thanks the 
Subcommittee for the opportunity to participate in today's hearing. 
Because our members depend so heavily on the railroads, we urge the 
Senate to provide clear pro-competitive rules in place of vague merger 
guidelines. We also urge you to pass legislation that would promote the 
long-term health of the nation's railroads--as envisioned in the 
Staggers Rail Act of 1980--by allowing free-market forces to operate in 
a truly competitive manner.
    Thank you.

           Railroads Need to do More Than Talk, ACC Testifies

               [American Chemistry Council News Release]

    Arlington, VA--In a special hearing held today before the U.S. 
Senate Surface Transportation and Merchant Marine Subcommittee, the 
American Chemistry Council emphasized that time may be running out to 
reconsider rail merger guidelines. On June 11, 2001, the Surface 
Transportation Board (STB) released new major rail merger rules that 
the business of chemistry believes missed the opportunity to make rail-
to-rail competition the centerpiece of the new merger guidelines.
    ``The new rail merger guidelines may have encouraged the railroads 
to talk about competition and improved customer service when they file 
their next round of merger applications,'' testified William L. Gebo, 
Manager of Rail Services for The Dow Chemical Company of Midland, 
Michigan, ``but the STB clearly did not adopt any rules that require 
railroads to compete directly with each other at all points on their 
merged systems.'' Gebo pointed out that captive shippers see clearly 
that merging railroads will not be required to enhance competition in a 
future consolidation under current rules. ``Make no mistake, the next 
round of, mergers will be the last round. With almost two-thirds of our 
members already subject to monopoly conditions, our industry is worried 
that there will be even more concentration and even fewer alternatives 
for captive customers,'' he stated.
    The U.S, Congress should adopt legislation that would elevate the 
involvement of the U.S. Department of Justice in rail mergers, Gebo 
urged. Currently, rail mergers are subject to review by only the 
Surface Transportation Board. ``It certainly would be appropriate to 
give more authority to an agency with a balanced view of competition,'' 
he said.
    Gebo also proposed that the STB's authority be explicitly clarified 
to require examination of ``marketing alliances'' and other cooperative 
agreements between railroads. The STB generally has not interpreted its 
authority to include such transactions. ``There is a risk,'' Gebo 
continued, ``that rail mergers could occur without any meaningful 
Federal scrutiny.''
    Safe and efficient rail service is crucial for the member companies 
of the American Chemistry Council. The business of chemistry is second 
only to the nation's electric utilities in terms of its dependence on 
railroads and the size of its freight bill. Chemicals and plastics 
annually account for 150 million tons of rail traffic, which provides 
our rail service providers with $5 billion in revenues.
    ``We urge the U.S. Senate to provide clear pro-competitive rules in 
place of vague merger guidelines,'' Gebo concluded. He noted that on 
June 26, Senators John D. Rockefeller (D-WV), Bryon L. Dorgan (D-ND) 
and Conrad Burns (R-MT) introduced S. 1103, the ``Railroad Competition 
Act of 2001.'' The U.S. Congress, he emphasized, must ``pass 
legislation such as S. 1103 that would promote the long-term health of 
the nation's railroads by allowing free-market forces to operate in a 
truly competitive manner.''
    The American Chemistry Council represents the leading companies 
engaged in the business of chemistry. Council members apply the science 
of chemistry to make innovative products and services that make 
people's lives better, healthier and safer. The Council is committed to 
improved environmental, health and safety performance through 
Responsible Care, common sense advocacy designed to address major 
public policy issues, and health and environmental research and product 
testing. The business of chemistry is a $462 billion a year enterprise 
and a key element of the nation's economy. It is the nation's #1 
exporting sector, accounting for 10 cents out of every dollar in U.S. 
exports. Chemistry companies invest more in research and development 
than any other industry.

    Senator Breaux. Thank you, Mr. Gebo.
    Mr. Marshall, you are from Louisiana. Do you have anything 
to add to Mr. Gebo's testimony?
    Mr. Marshall. I fully concur with his comments, sir.
    Senator Breaux. OK.
    You had some interesting comments in your remarks regarding 
KCS. You may want to talk to Mike Haverty there before you all 
leave and work it out.
    Senator Breaux. It will save me a meeting.
    Senator Breaux. Ms. Howells, we are glad to have you here 
and are pleased to take your testimony.


    Ms. Howells. Thank you, Chairman Breaux and Senator 
Rockefeller. I am very honored to be here today.
    My name is Claudia Howells and I manage the Oregon 
Department of Transportation's Rail Division. And I am here to 
talk to you today about the consolidation rules, as well as to 
bring some other issues forward, if I may.
    Because Oregon's economy continues to be based in great 
part on agricultural and timber production and because we are 
distant from major markets, rail transportation is essential to 
keeping Oregon producers competitive. We are somewhat unusual 
in the country in having over half of our rail miles in short 
line management, with 60 percent of our rail-served industries 
served by a short line. The Union Pacific is by far the 
dominant Class I carrier since the recent mergers, with 
Burlington Northern Santa Fe generating only a small percent of 
the Class I railroad revenue in the State.
    I will mention that the short lines and their production of 
carloads equals the Port of Portland's, which is the other 
primary shipper in Oregon.
    All of Oregon's shippers have been significantly affected 
by all of the recent railroad mergers, including the Eastern 
ones, since most of our markets are in fact in the East and the 
South. While most Oregon shippers consider rail service to be 
good today--it is always a relative term in this business--only 
one shipper, when we recently surveyed them, found any benefit 
from the mergers in terms of service or rates. The best that 
can be said at present is that service and rates are comparable 
to what they were before the mergers.
    We reviewed the merger rules and we commend the Surface 
Transportation Board for taking a very balanced approach to 
drafting those rules. The Board clearly recognizes that the 
rail system today is profoundly different than when the 
Staggers Act was put in place. But what we say is I think what 
others have said, and that is these rules come too late.
    Had they been in place even 7 to 10 years ago, I think we 
would have a better and stronger rail system than we do now.
    One of the problems that I have seen over the last 18 
years, the last 50 years of public policy decisions on 
railroads come only after a catastrophic event such as a 
bankruptcy of a major rail system or these service disruptions 
that have caused so much agony to so many shippers.
    What I would like to bring forward today are some issues 
that I see coming ahead, and I think some of them rather 
quickly. One of them is actually the breakup of the major 
carriers, not in a way that will necessarily make sense, but 
driven primarily by the need to spin off those parts of the new 
mega-railroads that are costly and that are also less 
lucrative. This will be as disruptive to shippers as have been 
the mega-mergers and I suggest will not necessarily enhance 
    Another issue we have been very concerned about, but that 
tends to be treated as a minor transaction, is the ongoing 
consolidation of the short line holding companies. While there 
certainly are not competitive problems, we foresee that this 
will result in a wave of abandonments that are not necessarily 
the kinds of abandonments that we saw in the mid-1980s.
    We also predict a bankruptcy of many of our independently 
owned short lines, primarily because they are captive and 
because they are unable to withstand the damage caused by the 
new heavier rail cars. In Oregon we see several short lines 
facing very serious financial difficulties even while the 
traffic levels are, in fact, fairly good. We would like to see 
the STB play a stronger role in protecting the interests of 
these smaller railroads and helping States and shippers deal 
with what I see are up and coming bankruptcies.
    Finally, the issue of passenger use of freight lines. We in 
Oregon are very much involved in redeveloping intercity, 
interurban, and commuter rail, but we also recognize that the 
needs of the freight railroads need to be protected, and we see 
the STB has having a larger role in mediating the needs of 
moving people and moving goods.
    Finally--and I have said this for a long time--we need a 
national rail policy. Without it, we believe that railroads 
will continue to engage in risky financial moves, such as mega-
mergers, which we believe are primarily done to generate 
capital. Railroads will continue to reduce system capacity 
because Wall Street punishes railroads that make long-term 
capital investments or retain marginal operations.
    Railroads will continue to hang on to their franchise, 
perhaps irrationally, because it is all they have left.
    I have noted some things I think that can be done. Chief 
among them is that the three Federal agencies involved in 
railroads, the STB, the FRA, and the FTA, need to work together 
in developing a policy that will make sure that we have a rail 
system as we move forward into the 21st Century.
    We have a tremendous asset that we need to protect and not 
simply treat as some other private investment.
    I appreciate again the opportunity to be here. Thank you.
    [The prepared statement of Ms. Howells follows:]
   Prepared Statement of Claudia L. Howells, Rail Division Manager, 
                  Oregon Department of Transportation
    My name is Claudia L. Howells, and I am the Manager of the Oregon 
Department of Transportation (ODOT) Rail Division. Thank you for the 
opportunity to testify today on behalf of the State of Oregon and 
Oregon producers as the committee addresses new procedures on major 
railroad consolidations adopted by the Surface Transportation Board.
                       role of odot rail division
    Oregon State Law vests the Department of Transportation Rail 
Division with the responsibility of representing the customers of 
railroads before the Surface Transportation Board (STB) and other 
Federal agencies. We also are responsible for maintaining a current 
State Rail Plan, which is an element of the Oregon Transportation Plan. 
The 2001 update of the Rail Plan, which includes both freight and 
passenger rail, is in the final stages of the approval process.
        significance of rail transportation to oregon's economy
    Because Oregon's economy continues to be based in great part on 
agricultural and timber production and because we are distant from 
major markets, rail transportation is essential to keeping Oregon 
producers competitive. We are somewhat unusual in having over half of 
our rail miles under short line management, with sixty per cent of 
rail-served industries served by those short lines. The Union Pacific 
(UP) is by far the dominant Class I carrier, with the Burlington 
Northern Santa Fe (BNSF) generating only a small percent of the Class I 
railroad revenue in the state.
    Oregon shippers have been significantly affected by all of the 
recent railroad mergers. The 2001 Oregon Rail Plan includes a survey of 
Oregon shippers on rail service and their perception of the effects of 
the recent mergers. While most Oregon shippers consider current rail 
service to be reasonably good, with the short lines getting most of the 
credit, only one shipper surveyed has found any benefit from the 
mergers in terms of service or rates. The best that can be said is that 
at present, service and rates are comparable to what they were before 
the mergers.
                      comments on stb merger rules
    We commend the Surface Transportation Board for a taking a balanced 
approach in drafting new procedures governing major rail 
consolidations. The Board clearly recognizes that the railroad system 
today is profoundly different than when the Staggers Act, and its 
regulatory predecessors, were put in place. We will say though what I 
am sure others will say. These are rules that come too late, and sadly, 
they will have little affect on the ability of the railroads to 
    I would suggest that had these rules been in place prior to the 
merger of the Union Pacific and the Chicago Northwestern, there might 
have been a more rational, less destructive chain of mergers that began 
with the merger of the Union Pacific and Chicago Northwestern. Had the 
new merger rules been in place before the merger of the Southern 
Pacific and Denver & Rio Grande Western, a stronger railroad might have 
emerged and been capable of standing on its own. But the rules were not 
in place because, in my opinion, the last fifty years of public policy 
decisions on railroads have come only as a result of catastrophic 
events--like the bankruptcies of the Penn Central, the Rock Island and 
the Milwaukee Road, and now the service disruptions caused by poorly 
planned and poorly implemented railroad consolidations.
                  the future of the railroad industry
    I suggest that we must begin to anticipate the challenges facing 
railroads rather than waiting for the next disaster. Based on what we 
see in Oregon, I will make the following predictions:
1. Break Up of Major Carriers
    I predict that we will see few, if any, major railroad 
consolidations in the coming years, once the Kansas City Southern/
Canadian National merger is completed. Although it seemed for a time 
that we were headed for a round of transcontinental mergers, the 
resulting service disruptions, I suspect, have cooled the interest in 
the financial community for any more major railroad mergers. I think we 
will begin to see, soon, spin-offs from these new mega-railroads into 
small Class I or Class II railroads as the big railroads attempt to 
jettison the less lucrative, costlier parts of their systems. I also 
predict that these break ups will prove just as disruptive to shippers, 
and just as destructive to the overall national transportation system, 
as the mega-mergers. Without some clear direction now to the STB, the 
regulatory response will again come too late.
2. Short Line Consolidation
    I also predict that we will see further consolidation of short line 
holding companies that will result in a new wave of abandonments as 
they, like the Class I railroads, attempt to keep stockholders and 
financial analysts happy by dropping less profitable lines. Under 
current regulatory constructs, short line consolidations are handled as 
minor transactions, because clearly the competitive issues do not 
exist, and there is little in the way of statutory direction to look 
much beyond those issues. The STB needs to address this issue with the 
same level of attention as it has the issue of Class I railroad 
3. Bankrupt Short Lines
    I also predict that many of the smaller independent short lines 
will head toward bankruptcy. Absent financial support from either the 
public, or the connecting Class I, these smaller lines will not be able 
to bear up under heavier cars. Many of these short lines, having 
experienced financial losses because of merger related service 
disruptions, may not ever recover. In Oregon, several short lines are 
facing serious financial difficulties, for the most part not of their 
making. The STB should play a greater role in protecting the interests 
of the smaller railroads, and Federal law needs to allow a greater 
level of participation by shippers and public interests in abandonment 
4. Passenger Use of Freight Lines
    We will see growing pressure to use the freight rail system for 
passenger and commuter trains. The Oregon Department of Transportation 
fully supports redeveloping intercity, interurban and commuter rail, 
which is very much a mission of Oregon's rail program. However, we 
cannot afford to reduce the capacity of the freight system or in any 
way adversely affect the profitability of the freight railroads. I 
believe the STB should take the lead role in balancing the interests of 
current and future users, both passenger and freight so that the 
overall system remains solid.
                          national rail policy
    Most importantly we need a National Rail Policy that is integrated 
into the overall transportation policy, and that better balances the 
interests of all the commercial transportation industries. If we fail 
in that, then I predict, railroads will continue to engage in risky 
financial moves, such as mega-mergers, because that is the only way to 
generate capital. Railroads will continue to reduce system capacity, 
because Wall Street punishes railroads that make long-term capital 
investments or retain marginal operations. Railroads will continue to 
hang on to their ``franchise'', perhaps irrationally, because it is all 
they have left. Shippers will be left with an increasingly unstable 
railroad industry; something no one wants.
    What can be done to avoid this? First, the railroads, large and 
small, need a financial safety net. Second, railroads need to remain 
under a regulatory agency that has a greater mission than simply 
mitigating competitive damage. The STB should be given a greater 
mission to protect railroads as a national resource, which may not 
always be consistent with the desires of either railroad management or 
railroad labor or even rail shippers. Third, railroad mergers, 
acquisitions and abandonments should continue under the jurisdiction of 
the STB and not be transferred to any other Federal agency. Fourth, the 
missions of the STB and the Federal Railroad Administration need to be 
complimentary, and these agencies need to work together. Fifth, the 
STB, the Federal Railroad Administration and the Federal Transit 
Administration need to establish compatible policies when it comes to 
the management of the railroad system.
    With a clearly stated National Rail Policy and with the STB given 
an expanded role, we may be able to head off the next major railroad 
    Recently, a member of the Oregon Transportation Commission observed 
something that I do not believe I have ever heard so clearly stated. 
She began by remarking on the initial investment by the government in 
building the nation's railroads. She then went on to say that 
government has all but abandoned the railroads and in so doing has 
demonstrated a lack of stewardship over a valuable public resource, and 
over that initial public investment.
    Railroads continue to be the best example of a public-private 
partnership that this Nation has ever seen. It is clearly a partnership 
that needs to be reestablished if indeed we place any value on our 
nation's rail system. In truth, we as a Nation should be grateful every 
day that the railroads maintain their own infrastructure, run their 
trains every day and help keep industries all over the country in 
business without costing the taxpayer a dime. We must remember that 
rail is not an alternative mode. It is an essential part of our 
transportation system, and if not in private hands, would by necessity 
become the responsibility of the public. In short, railroads most 
assuredly need to act in the public interest, but in return the public 
interest needs to support the railroads.
    While I may believe that the STB's rules came too late, I also 
believe that the quality of the new rules indicate an agency that 
understands the industry and also understands its responsibility to 
shippers and the public.
    Thank you again for the opportunity to testify before the 
subcommittee today.

    Senator Breaux. Thank you, Ms. Howells, and thank you for 
coming from Oregon, and all of our guests from distances that 
they have traveled to be with us. Thank you for being here.
    Let me start.
    John Snow and Monsieur Tellier, you both indicated that 
there are no new merger plans out there. You want to 
concentrate on what we have got and make it work. If that is 
the state of the industry, no new mergers, would it not have 
been just as good just to leave the moratorium on for no new 
    Mr. Snow. I think this is a better approach, Mr. Chairman, 
because it lays out sensible rules of the road for railroads to 
follow. There may come a time--I do not know when it would be, 
I certainly do not foresee it--when the benefits of alliances 
will have been exhausted, when the shipping public will say we 
desire more single line services, when the investing public 
says mergers make sense--none of that is true today--and where 
mergers would once again be viewed as an appropriate way to 
advance the well-being of shippers, investors, and railroads. 
So, this Ex Parte 582 rulemaking sets broad guidelines, 
sensible guidelines for dealing with that possibility. I see it 
as a remote one for many years frankly.
    Senator Breaux. Thank you.
    Mr. Tellier, the same question. It just seems to me that if 
there are no mergers that are going to be occurring in the 
foreseeable future, according to your and Mr. Snow's feelings 
on this issue, why do we not just leave the moratorium in 
place, and if that time ever gets here, then we can see at that 
time what the appropriate rules are at that time rather than 
try to set the rules today for something that may happen 
sometime in the foreseeable future, we know not when?
    Mr. Tellier. Well, Mr. Chairman, I think it is important to 
keep an open mind about these possible mergers. I will give you 
a very concrete example that you will be able to relate to.
    I have here on my left a representative of Dow Chemical. 
Dow Chemical is one of the biggest customers of Canadian 
National. We serve them in two places. We serve them out of 
Edmonton in northern Alberta, where they have access to good 
feedstock, and we provide them a single line service, for 
instance, to your State where there is also a very large 
concentration of chemical production, Geismar. Why have we been 
able to improve the quality of service to customers like Dow 
Chemical? Because today Canadian National and Illinois Central 
are the same company--common ownership, common leadership, a 
single operating plan, and so on. So, therefore, although at 
this point in time we are not planning a big mega-merger, like 
John, I would say let us make sure that the rules are there and 
we keep an open mind.
    The analogy that I like to use--and Senator Rockefeller was 
using this analogy a few minutes ago questioning another 
witness--if you decide to fly anywhere in this country today, 
you will do your best to get a direct flight without a 
connection. And what mergers have achieved is that we can 
provide a customer like Dow Chemical a single bill of lading, a 
single invoice, a single tracking system----
    Senator Breaux. Mr. Tellier, I do not want to interrupt 
you, but I am going to do it anyway. I appreciate what you are 
saying, but you are talking about past mergers. The point I am 
making to you and Mr. Snow is you are saying there are not 
going to be any more new mergers. So, my question really to you 
is if there are not going to be any new mergers, why do we have 
to change the moratorium on no mergers?
    Mr. Tellier. Well, Mr. Chairman, if I may, respectfully.
    What I am saying is we do not see any one planned at this 
point in time, but it is very difficult to forecast the future.
    Senator Breaux. But you may have one in mind.
    Mr. Tellier. No, we do not. But I do not see why our 
industry should be treated differently from the other 
industries in the North American economy. So, the rules are 
there. What we say is that under the leadership of Ms. Morgan, 
we have a set of rules that make sense, and if at one point in 
time economic conditions, to better serve the shippers, make 
sense to have a merger, the rules would be out there. But I do 
not foresee the use of these in the foreseeable future.
    Mr. Snow. Mr. Chairman, if I could just comment. Based on 
the current environment, I think we have a de facto moratorium. 
I think to enact a moratorium or leave the moratorium in place 
at the agency would probably have exceeded the agency's 
regulatory authorities. So, I think there was a very good 
reason to put good rules in place because if you do not have 
good rules in place, you have the old rules. The new rules are 
better than the old rules. My understanding of the Act is that 
to leave the moratorium in place would have exceeded the 
regulatory authority of the agency.
    Senator Breaux. Thank you.
    Let me ask the railroads to comment on this. What in the 
new rules regarding mergers, from your perspective, is a 
greater burden or a greater standard that you have to meet in 
terms of accomplish a merger than existed in the old rules?
    Mr. Tellier. Well, in many different ways this is the case. 
For instance, the benefits. In some of the past mergers, you 
know, as well as I do, that the benefits of these mergers were 
overstated. Now the Board is telling us they are going to adopt 
a ``show us'' attitude. That is one example.
    Competition. The Board will not only be satisfied in the 
future that there is no reduction in competition, but they want 
to make sure that, to the extent it is desirable, competition 
is enhanced.
    So, I think the bar is being raised, and this is the right 
way to go about it. As a matter of fact, if I may say so, Mr. 
Chairman, when our aborted merger last year with BNSF took 
place, we were ourselves proposing to the regulator, to the 
STB, to raise the bar to make sure that the disastrous results 
of some of the past mergers would not repeat themselves.
    Senator Breaux. What in the new rules guarantee that we are 
going to have the same result in a future merger, though?
    That is what I am asking.
    Mr. Tellier. Well, the service assurance plan that Ms. 
Morgan has described is surely one. Any applicant would have to 
reassure the Board that there will not be the kind of 
disruption that has taken place in the last 5 years in the case 
of some mergers.
    Senator Breaux. Mr. Snow, do you agree with that?
    Mr. Snow. Yes, very much so, Mr. Chairman. As a former 
practicing lawyer, who practiced before the old Interstate 
Commerce Commission and was involved in merger proceedings, I 
think any lawyer who did not counsel his client that mergers 
are much more difficult would be failing to fulfill his duties 
to his client. It is the clear intent of the agency, as you 
read those rules, clear state of mind of the agency that 
anybody who comes before us with a merger proposal has got to 
jump through some more hoops, has got to show the public 
interest in more and compelling ways.
    So, if I were a practicing lawyer and two railroads came to 
me and said, I would like you to represent me, I would be very 
careful in making sure, before we filed it--in fact, my first 
advice to them would be right now, do not file any mergers. The 
agency has spoken pretty clearly. They are very inhospitable to 
mergers. That is the only way to read those rules, is that the 
agency is inhospitable to mergers, and you have to make a 
compelling case.
    So, I think the attitude expressed by the agency in the 
rules is in terrorem. It brings terror to any proposed 
application. And I think the bar will bring that to the 
attention of would-be railroad applicants.
    Senator Breaux. Mr. Haverty, I have to phrase the question 
to you differently because you are not part of the new rules.
    Senator Breaux. So, what in the new rules was so onerous 
that led KCS to say, we cannot be part of them and want an 
    Mr. Haverty. Well, I do not think that they were that 
onerous. All we were asking for was the right to be treated as 
the other Class I's had been treated under the previous rules--
because Kansas City Southern has never been involved in a major 
transaction ever in its history. The four big railroads in the 
United States, Union Pacific, Burlington Northern Santa Fe, 
CSX, and Norfolk Southern, have been in multiple mergers. All 
we were saying is because we were so much smaller, let us be 
judged under the same rules where they put their 30,000 mile 
systems together. That is what we were asking for.
    It was not that they were all this onerous. I agree that 
some of the hurdles are clearly higher, and I agree that they 
are mostly intended for transcontinental type mergers.
    But again, I fail to see, at some point in time, if we do 
something, that a 3,150-mile railroad in the United States is 
going to trigger transcontinental mergers. I just do not see 
    Senator Breaux. But you are the smallest of the Class I 
railroads under the old rules and you never requested an 
exemption from them based on your smaller size. Why not then?
    Why now?
    Mr. Haverty. Well, because we were not involved in any kind 
of merger proceedings. We have, as I think everybody knows, 
pursued a course of independence. It is no secret. As I think I 
mentioned in my testimony, we are building a new corporate 
headquarters. A couple of weeks ago, I was out trying to sell 
equity in the company. I think if we thought that somebody was 
going to gobble us up next week, we would not have been doing 
    But we have to be realistic about this, Senator. If it 
comes a point in time where our company cannot survive and for 
me to stand there and wave the flag of independence while the 
company goes under and the customers suffer and the employees 
suffer and the shareholders suffer, that is not in anybody's 
best interest.
    Senator Breaux. I do not understand why a Class I railroad, 
as you are, although the smallest of the Class I's, if you have 
a suitor out there that is looking for an acquisition, just 
hypothetically, you would feel, if that was to occur, you would 
not be able to meet the new standards under the new rules? The 
only thing that I see which is new is a plan that has to be 
agreed to between the two merging railroads that say they are 
going to somehow enhance service. What is wrong with meeting a 
standard that says we are going to have enhanced service if we 
have a merger?
    Mr. Haverty. Well, first of all, we did not----
    Senator Breaux. Regardless of the size.
    Mr. Haverty. We did not write the rules here.
    Again, I will say what I said earlier. There is a 
rebuttable presumption here. So, if someone thinks that Kansas 
City Southern is going to trigger the next round of mergers or 
what we are doing is going to stymie competition, clearly they 
have the right, I think as Vice Chairman Clyburn said, to come 
to the Board and say we think that this should be done under 
the new rules.
    Senator Breaux. Yes, but the point is apparently, I take 
it, that KCS did not want to be part of the new rules. Is that 
not true?
    Mr. Haverty. Well, that is no secret. As I said, you can go 
back 15 months and we said that. And we said, as you very 
correctly said earlier, if it was a friendly transaction, that 
we felt it should be a significant transaction, which basically 
would be completed in 12 months. If it was a hostile 
transaction, we said basically that it should be considered as 
a major. That was our position. That is not what was chosen, 
but that is what our position was. But clearly, we have made no 
secret for 15 months.
    And also, Senator, we supported Wisconsin Central back in 
November when they said that they wanted hearings held to talk 
about changing the classifications for Class I's. They wanted 
to raise the bar to $500 million. We said that we would like to 
be part of those hearings. We did not say that the number ought 
to be $500 million. I think we have been pretty clear that we 
have said that we think any railroad with less than $1 billion 
in revenue should be treated differently.
    Senator Breaux. That is a whole other question I want to 
    My final point. You got your exemption. Suppose with your 
exemption you are the subject of a hostile takeover. Are you 
going to come back before the Board and argue against your own 
    Mr. Haverty. I do not think there is much chance of doing 
    Senator Breaux. I said hypothetically.
    Mr. Haverty. It is hard for me to answer, Senator.
    Senator Breaux. Do you see the predicament you are in? You 
are arguing that if it is a hostile takeover, you ought to be 
treated as a major merger, but if it was a friendly takeover, 
you should be treated as a significant merger. And what you end 
up with is a complete carve-out of the new rules. If they put 
you under the old rules, whether it is a hostile or a friendly 
takeover, you are subject to the same rules. Is that correct?
    Mr. Haverty. First of all, what we proposed, the hostile 
versus friendly, was not accepted. That was number one.
    Senator Breaux. I understand that.
    Mr. Haverty. Again, I respectfully disagree that it is a 
carve-out because that would indicate that we are not subject 
to any rules. Again, any party, whether it be a shipper or 
whether it be a railroad or whoever, who wants to come back in 
and say that Kansas City Southern merging with somebody else 
should be considered under these rules.
    Senator Breaux. That certainly changes the burden of proof, 
though, does it not?
    Mr. Haverty. Well, it does. But it certainly does not keep 
that from happening. And the Board has every right to decide 
that they want to do that.
    So, that is why I think that this thing is--quite frankly, 
Senator, not that big of a deal. Also, I have not heard a lot 
of outcry from shippers or shipper organizations saying that 
they think this is outrageous that we were grandfathered under 
the old rules. In fact, many of them say that we understand 
because you are so much smaller and much closer to the 
Wisconsin Central that is being purchased, that we can 
understand that. So, I have not seen an outcry from shippers 
over this.
    Senator Breaux. Senator Rockefeller.
    Senator Rockefeller. Thank you, Mr. Chairman.
    I am one of those who tends to think that mergers kind of 
keep taking place until they cannot anymore. So, I make the 
presumption that there will be a merger. I cannot afford not to 
make that presumption. Therefore, I also cannot take the chance 
not to explore the whole concept of enhanced competition and 
what Chairman Morgan and I were sparring on in terms of 
    Mr. Tellier, in Canada when you have service problems, your 
customers have what form of redress?
    Mr. Tellier. There are several types of redress that they 
have. The simplest one is final offer arbitration, which is 
binding arbitration. Another one is interswitching arrangements 
where, within a radius of 18 miles, if a customer is off an 
interchange point, if the customer is not satisfied with the 
railroad that serves his or her plant, he can ask the other 
railroad to come and provide him with the service. And that 
interswitching arrangement is provided with the regulated rate.
    The so-called bottleneck situation that exists in this 
    Senator Rockefeller. You say with a related? You mean a 
spoken rate?
    Mr. Tellier. With a regulated rate. So, it is a fixed rate. 
So, basically the rate is fixed by the regulator and it varies, 
I think, from $160 to a couple of hundred dollars per car 
depending on the distance.
    Another remedy or shipper's protection that exists is what 
is called competitive line rates, which is to address 
situations that you describe on this side of the border--the 
bottleneck situation.
    So, these are the key provisions that do exist.
    Senator Rockefeller. So, in effect, it is a fairly 
streamlined and fairly varied approach that people have to try 
and find the service which is a part of enhanced competition, 
if they seek redress.
    Mr. Tellier. This is correct.
    Senator Rockefeller. There is a variety of ways to do it. 
In Canada, railroads do not have an exemption from review by 
your Ministry of Justice, do they?
    Mr. Tellier. No, they do not.
    Senator Rockefeller. I think it was you--or somebody--said 
``I do not see why any industry should be treated 
    Mr. Tellier. I said that.
    Senator Rockefeller. Would a shipper suffering from a 
bottleneck situation in Canada, in the sense of enhanced 
competition, ever just have to sort of have a ``take it or 
leave it'' rate put upon them because the government deferred 
to the wishes of the railroad?
    Mr. Tellier. Well, let us go back to one of the provisions, 
which is the final offer arbitration. Let us suppose, to use my 
example, our friends here from Dow Chemical are not satisfied 
with the rate proposal that we put on the table. What could 
happen is that if there is a breakdown in negotiations, the 
customer would put forward a package saying this is our final 
offer. This is what we are ready to pay Canadian National to 
move that traffic. And Canadian National would put its best 
offer on the table, saying this is the best rate that we can 
provide Dow Chemical for moving their shipment. And a third 
party basically decides in favor of package A or package B. 
Does this happen often? No. But when we sit down and negotiate 
with Dow Chemical, we know that this exists.
    Senator Rockefeller. It is because you have behind that the 
threat of the choice.
    Mr. Tellier. Yes. Senator, I know where you are leading, 
and let me just make that comment. The regulatory regime north 
of the border is quite different, and I would suggest that one 
has to be very cautious before we import south of the border 
that regulatory regime. If you are asking me why, I would say a 
somewhat different history, different economics, different 
situations. There are only two railroads and not seven as south 
of the border.
    Senator Rockefeller. And I understand what you are saying, 
but I also heard you, as you affirmed, say that no industry 
should be treated differently than another. We have one 
industry which has exemption under antitrust. You do not. 
Industries are treated here differently from another. Whether 
there are two in Canada and seven in North America is less 
important to me than the fact that there is a principle 
involved here of fair and equal treatment which I think is 
transnational or ought to be.
    Mr. Tellier. But the broad point I was making, Senator, is 
that I have shareholders. We have succeeded in convincing some 
people, some of the best money managers in this country, to buy 
shares of my company. Therefore, I have to be able to tell 
these money managers this is the regulatory regime within which 
we operate. Therefore, it makes sense to do an alliance or to 
do a merger. Yes, the regulatory regime will provide me the 
opportunity to do this. Otherwise, it would be a form of 
penalty toward our shareholders who have invested----
    Senator Rockefeller. And I understand that. In spite of, 
let us say, being nervous about where I am going----
    Mr. Tellier. I just said I think you have to be cautious.
    Senator Rockefeller. I know. But you affirm that you have 
this system in place, regardless of whether there are going to 
be mergers or not. It is here now. It not a question of new 
rules/old rules. It is your situation right now.
    I think that becomes very important because enhanced 
competition is not only a function of price, but it is a 
function of service. And that is exactly the point that you 
have made.
    Mr. Snow, first of all, I need to say I have another life 
actually in which I work on aviation, and one of the very best 
pieces of news in that life is that you are heading up a group 
of five very brave souls who are taking on how do we do 
aviation in the United States of America better, which is 
rationalizing the whole system and all the rest of it. It is 
going to be a difficult job, and we will work together on that.
    But having said that--and I can hear your answer, but I 
want to ask the question anyway. Why should shippers in the 
United States in a sense be at a disadvantage to shippers in 
Canada with regard to bottleneck prices, number one? Why is 
that in your interest or potential interest or disinterest?
    And second, what justification can CSX or other railroads 
in the U.S. give for a pricing system that would be illegal in 
any other industry in this country and, as it so happens, in 
    Mr. Snow. Senator, I am not an authority on the----
    Senator Rockefeller. Yes, you are, Mr. Snow.
    Mr. Snow. No, not on the Canadian system. You and Chairman 
Morgan lose me when you get into the intricacies of that 
bottleneck debate. So, you are talking to a relative layman 
    Senator Rockefeller. Mr. Snow, let the record show----
    Mr. Snow. But I will do my best.
    Senator Rockefeller. All right.
    Mr. Snow. As I understand the Canadian system, it has this 
provision for access under the conditions that were described 
by Mr. Tellier for the binding arbitration. We have a different 
system. I am not sure it does not give shippers just as good 
and perhaps better alternatives.
    Under our system, shippers are able to go to a regulatory 
agency, if they think they are being mistreated with respect to 
rates, and complain and say, our rates are too high. And they 
have done that with relative rarity I think because----
    Senator Rockefeller. Of high prices, cost.
    Mr. Snow [continuing]. Because they recognize that, by and 
large, the rates that railroads charge are not above some 
reasonable maximum level. The best evidence of that is simply 
the earning power of railroads.
    I know there is concern about monopoly power, but people 
who claim we have monopoly power often overlook, I must say, 
that the alternative forms of competition we face from 
different modes and from geographic competition and product 
competition and so on. Those are all arguments you and the 
Chairman have had.
    The shippers in the United States, Mr. Gebo suggested, 
should also have access to the antitrust laws. I think that is 
part of your question to Mr. Tellier about why should shippers 
be treated differently in one industry than in another. That 
may be a good argument. That is an open debate. Maybe shippers 
would feel they would do better under the antitrust laws than 
they do under the STB. That is an open debate. I do not know 
what the answer is.
    But I do not think we should be subject to two regulatory 
regimes, to two masters. One master is enough.
    I really do not know whether shippers would do better--
maybe you have a response to that--under the antitrust laws 
than they do under the STB. It seems to me it may be a good 
subject for the Subcommittee to debate.
    Senator Rockefeller. Well, I am going to call on Mr. Gebo, 
with the indulgence of the Chairman, because he and I both 
meant to be elsewhere.
    Let me just simplify it to North America. Why is it that 
you should be able to operate under exemptions and an antitrust 
situation would be illegal in any other industry?
    How does one describe that in 2001?
    Mr. Snow. Oh, I think you describe it, Senator, because the 
alternative was putting us under the antitrust laws and having 
the antitrust regime prevail. I think it was recognized that 
you do not want two regulatory regimes, and when the Staggers 
Act was passed back in 1980, it was determined that a 
regulatory regime that provided for maximum rates under an 
expert agency would protect and balance the interests of both 
shippers and railroads most effectively.
    Senator Rockefeller. Well, let me just say two things.
    One is that when you indicate that the redress for service 
under enhanced competition in a merger situation is simply a 
matter of going to the STB, the answer to that is you and I 
perfectly well know, if you want to take extreme examples, the 
McCarthy decision, but it is the cost of doing it. People know 
they cannot afford to. They know that you cannot afford to, 
that you will out-weigh them. That is not a criticism.
    This is the way of the world. But that is the answer to 
    As we have joked here before, I have in my lineage those 
who did well under monopolies, and in fact, one of the reasons 
that I think about that, it did not stop until the monopoly was 
99 percent, which is what makes me think that a further merger 
is still possible. And that was declared illegal by the United 
States Supreme Court. That was declared illegal.
    You can operate under rules that would be illegal for any 
other industry in this country to do. And I do not understand 
how you are comfortable with that. No, I understand how you are 
comfortable with that, but I do not understand how you justify 
    Mr. Snow. Senator, I really do not know, as much as I 
respect you, whether that statement is accurate. I think under 
the antitrust laws, our maximum rates, challenged under an 
antitrust action under the Clayton Act or Section 1 of the 
Sherman Act or under Section 2 or under the Federal Trade 
Commission Act, would probably fare at least as well as they 
fare under the STB. I really question the basic proposition 
that railroad rates or conduct in any way, including mergers, 
would be found invalid under the antitrust laws.
    Senator Rockefeller. Mr. Gebo, your thoughts, sir.
    Mr. Gebo. Yes, thank you. Our thought on the question of 
DOJ involvement was more with having a chance for DOJ to review 
the mergers, which they do not under the current system with 
any kind of power. So, it did not have to do necessarily with 
other aspects of antitrust per se.
    When you talk about the issues in Canada versus the U.S., 
though, I think you will see some very significant differences 
in terms of operating in both countries, which Dow does. We get 
involved commercially doing that.
    In actual fact, interswitching is fundamentally terminal 
access, as it is described under your bill. It is a tool that 
really does give, in almost all situations, shippers in Canada 
access to a second railroad. It has been in place, from my 
understanding, since 1908 because they have only had two 
railroads for almost all of their history. It may be a picture 
of what the U.S. will look like 10, 20, 30 years from now. But 
it is a very effective access tool in the sense that we do get 
a choice. It is not a choice that is available to shippers, for 
the most part, in the U.S., at least in the chemical industry.
    Senator Rockefeller. Getting the choice is important to 
chemical companies, steel companies, coal companies, granaries, 
et cetera.
    Mr. Gebo. You seldom have to even invoke that, although it 
is very simple to do. We do several hundred carloads a year out 
Fort Saskatchewan through that interswitching rule.
    But for the most part, our relationship with CN is very 
    It is probably the best of all the railroads that we deal 
with. Certainly part of that has to do with the management of 
the CN, but I also feel very strongly part of it has to do with 
the regulatory regime that is in place.
    Senator Rockefeller. I understand. I thank you, Mr. 
Chairman. I thank Mr. Snow, all of you, very much.
    Senator Breaux. Thank you, Senator Rockefeller, for your 
good questioning on this.
    I think that there is not a board or an antitrust office 
that is going to do more in providing good service to consumers 
than competition will. If you do not have competition, you have 
to have regulation, which is my main point. I do not want to 
have the government boards and bureaucrats in Washington 
determining that people get good service. I would rather the 
free market do that. I would rather competition do that. But if 
you do not have competition, you are going to have regulation, 
which I think is probably the worst way of guaranteeing good 
    Mr. Marshall, you have some plants that are served by only 
one railroad in Louisiana, and you have other locations where 
you have more than one railroad. What is the difference in the 
type of service you get?
    Mr. Marshall. Considerable difference, sir.
    Senator Breaux. In what way?
    Mr. Marshall. The facilities that we have in the United 
States with one railroad, it is basically a ``take it or leave 
it'' freight rate that is presented to you. There is no true 
spirit of cooperation in negotiating a rate. It is apparent at 
the two locations where we do have choices, there is an 
opportunity to sit down to discuss what we have, the reason we 
are trying to move various tonnages to various locations, and 
there is a chance to negotiate a rate that is acceptable to 
both the railroad and to Albemarle.
    Senator Breaux. So, in the case where you have one service 
and you do not feel like you are getting good treatment, in 
comparison to what you get in markets where you have 
competition, what is your relief?
    Mr. Marshall. It has been pretty much we roll over and take 
it. We have made attempts, where we can, to move tonnage to 
barge facilities. We have also made attempts to move tonnage to 
truck carriers. Part of the problem we are having there, as 
well, are ongoing regulations, municipal, State, and Federal 
regulations, that are limiting the amount of hazardous material 
going down various lanes.
    So, our options are few. The most damning option would be, 
as we experienced with previous mergers, sending people home 
and shutting down the plant.
    Senator Breaux. If you find yourself in that situation 
where you do not have a choice and you are getting what you 
consider to be bad service, why do you not just go to the 
Surface Transportation Board and tell them about it?
    Mr. Marshall. That is a fair question. Talking to various 
colleagues in the industry who have made those attempts, they 
were most often failed attempts. And I opted not to go that 
    Senator Breaux. Well, I want to thank all of you. We have 
got three good railroad people. You are probably the best, Mr. 
Haverty, Mr. Tellier, and John Snow. You all are outstanding 
railroad men. I mean that very sincerely. You do a terrific job 
running your companies in difficult circumstances.
    The purpose of this hearing is to express my concern and I 
think the Senator from West Virginia's concern. I am more and 
more concerned that more and more we have less and less: fewer 
airlines, fewer telephone companies, fewer oil companies, fewer 
railroads, fewer of everything. If that continues, we are going 
to have more regulation. When you have fewer competitors, you 
cannot have competition, and if you do not have competition, 
you have regulation. And I do not what the Government of the 
United States and the Congress setting the rates and the rules 
for everything. We have to have a competitive society.
    This Subcommittee is going to be aggressive in making sure 
that we try and create circumstances that lead to more 
competition, not less, because none of you want to be the only 
railroad alive and have Congress regulate everything you do.
    That would be much worse. That would be an impossible 
situation for you to have to deal with, and we want to make 
sure that does not happen.
    I think your testimony has been extremely helpful in 
shedding some light on where we are and where we are headed, 
and we thank you for being with us.
    That will conclude the hearing.
    [Whereupon, at 4:41 p.m., the hearing was adjourned.]

                Prepared Statement of Hon. Trent Lott, 
                     U.S. Senator from Mississippi
    I want to commend my good friend John Breaux for holding this 
hearing today in his new capacity as Chairman of this Subcommittee.
    Railroads are vitally important to both of our neighboring States. 
Mississippi is served by five class railroads and several short lines. 
With Mississippi's focus on increasing its manufacturing presence and 
serving as a gateway for Latin American trade, I am keenly interested 
in ensuring adequate railroad capacity and service. Generally, the 
railroads that serve Mississippi have been good partners in meeting the 
needs of my home State's manufacturers and ports. The State is working 
with Canadian National and CSX to provide service to the new Nissan 
manufacturing plant in Madison County, and with KCS to upgrade the 
track connecting the Port of Gulfport to Hattiesburg.
    The previous two hearings held this year on railroad issues made it 
clear that most railroads are having a hard time meeting their capital 
requirements to maintain their infrastructure and expand their 
capacity. As international trade flows increase across the United 
States, the railroad infrastructure will be under greater strain than 
ever. As we consider the Surface Transportation Board's recently 
adopted new merger rules, I urge this Committee to use caution before 
considering calls by some to legislate additional requirements that 
will make it even more difficult to maintain and expand the industry's 
    Aging railroad infrastructure is a problem for other besides the 
class I railroads. The regional and short line railroads, which feed 
and connect the class I railroads, are having an even harder time 
obtaining capital to maintain and upgrade their systems. Historic main 
line routes through the centers of cities and towns are increasingly 
encountering conflicts with local motor vehicle traffic and economic 
development needs. The development of high-speed passenger rail service 
to relieve increasing highway and airline congestion will require major 
investments in railroad infrastructure.
    The Columbus and Greenville Railroad in Mississippi is a good 
example of a short line that is struggling to obtain private capital to 
upgrade a portion of its network, but still has severe problems 
maintaining other parts of its system. Similar situations exist in 
almost every State. The House of Representatives may soon consider H.R. 
1020, which would help fund the regional railroad and short line 
infrastructure problem. It is my hope that the Commerce Committee will 
take up this bill shortly after it comes over from the House.
    Senator Kerry and I introduced S. 948, the Community Rail Line 
Relocation Assistance Act of 2001, to address municipal concerns with 
existing downtown railroad lines. Relocating those rail lines, 
including the use of tunnels or bridges, would improve safety, ease 
traffic congestion, and facilitate economic development. While the bill 
was referred to the Environment and Public Works Committee, this 
Committee may have a role in addressing that concern.
    Several Senators, including me, cosponsored S. 250, the High-Speed 
Rail Investment Act of 2001, which was referred to the Finance 
Committee. While Amtrak's management is struggling with meeting the 
requirements of the 1997 Amtrak reform legislation, the Nation needs to 
make a decision to either invest in the future of passenger rail to see 
if a nationwide system will work or get out of the business and let the 
States organize and finance their own systems.
    Addressing infrastructure requirements is complex and requires 
making difficult tradeoffs. All too often, it is easier to respond to 
the symptoms of inadequate infrastructure by imposing additional 
performance requirements rather than solving the underlying problem. 
Although energy, aviation, and railroad transportation are different 
industries with different regulatory issues and capital funding 
mechanisms, we are seeing similar effects of inadequate infrastructure 
and similar calls to treat the symptoms, not the causes, for all three.
    I urge my colleagues on this Committee to work together to 
facilitate the upgrading of our nation's system of private railroad 
infrastructure to handle the transportation needs of the 21st century. 
Let us make rational decisions regarding the regulation of the railroad 
industry. I look forward to listening to and working with today's 
witnesses, those from our previous hearings, and my colleagues on this 
Committee and in the Senate to address this nation's railroad needs.
Prepared Statement of Edward R. Hamberger, President & Chief Executive 
               Officer, Association of American Railroads
    My name is Edward R. Hamberger and I am President and Chief 
Executive Officer of the Association of American Railroads (AAR). The 
AAR is the primary trade association representing the interests of 
major North American railroads. Our members account for the vast 
majority of rail mileage, rail employees and rail revenue in Canada, 
Mexico and the United States. The AAR includes among its members all of 
the Class I railroads.
    The AAR is pleased to have this opportunity to express its views, 
in addition to those of its individual members, on the new rail merger 
rules issued by the Surface Transportation Board on June 11, 2001.\1\ 
Our overall assessment is that the Board accomplished what it said it 
was going to do in its October 2000 Notice of Proposed Rulemaking, 
which is to ``raise the bar'' for approval of proposed rail mergers. 
The bar appears to have been raised in at least two ways. First, the 
Board has imposed stricter standards on merger applicants in terms of 
the details and planning that must be included in future merger 
applications. The newly required Service Assurance Plans are a primary 
example of this. Second, and more significant, the Board has placed on 
the applicants ``a heavier burden to show that a major rail combination 
is consistent with the public interest.'' (Final Rules Decision at 9) 
The applicants' burden will be to show that the public benefits flowing 
from a major rail combination clearly outweigh any potential harms and 
do so by a substantial margin.
    \1\ STB Ex Parte No. 582 (Sub-No. 1), Major Rail Consolidation 
Procedures. Each of the AAR's Class I railroad members participated 
separately as a party in the proceeding before the STB and expressed 
its respective position on various aspects of the new merger rules. The 
AAR is addressing in this statement those issues of common concern to 
its members.
    It is apparent that avoidance of future merger-related service 
disruptions was a primary goal underlying the new rules. No one wants 
such disruptions to occur in connection with any future rail merger, 
and if the application process can be changed so that the likelihood of 
such disruptions are minimized, it should be.
    It is also apparent that the Board feels that any future rail 
merger proceeding between Class I carriers will be viewed as a high 
stakes proceeding.
    While we understand the impetus for the new rules, AAR does not 
agree with all the substantive changes adopted by the Board. We do 
agree generally with the increased emphasis on service planning and 
with the requirement that rail merger applicants submit detailed 
Service Assurance Plans. More troubling to AAR are certain aspects of 
the Board's treatment of competition issues in rail merger proceedings. 
Specifically, we are troubled by the idea that the Board will expect 
rail carriers to propose non-remedial enhancements to competition that 
are not an outgrowth of market forces as part of their merger 
applications. This concept is expressed in various places throughout 
the new merger rules, for example in new section 1180(c) (``Public 
interest considerations'': ``[T]o assure a balance in favor of the 
public interest, merger applications should include provisions for 
enhanced competition, and, where both carriers are financially sound, 
the Board is prepared to use its conditioning authority as necessary . 
. . to preserve and/or enhance competition.''
    Non-remedial restructuring of rail markets is not consistent with 
the public interest. The practice of the Federal agencies entrusted 
with carrying out competition policy underscores the point that non-
remedial enhancements of competition through government mandate is not 
consistent with the public interest. The Antitrust Division of the 
Department of Justice and the Federal Trade Commission are in the 
business of protecting competition and not of manufacturing it.
    While we are opposed to involuntary, non-remedial restructuring of 
rail markets, I want to make it very clear that AAR believes that the 
Board should recognize the voluntary, pro-competitive initiatives of 
merger applicants as public benefits.
    The Board has recognized in many contexts that voluntary, private 
sector initiatives prompted by market forces should be encouraged. 
Private agreements between merging carriers and other interested 
parties have been an important source of pro-competitive benefits in 
past rail merger proceedings. Apart from such negotiated agreements, 
there are powerful pro-competitive incentives that lead rail carriers 
to propose mergers in the first instance. In fact the predominant 
impulse driving rail mergers of the recent past has been the need that 
the merging carriers have perceived to compete more effectively in 
surface transportation markets.
    Railroading is a network industry. Railroads make themselves more 
effective competitors through mergers by strengthening their networks 
and expanding the reach of those networks. Expanded networks make 
railroads more effective competitors because they can provide their 
customers a greater range of service opportunities. Expanded networks 
and, in particular, extended single-line service enables railroads to 
compete more effectively with trucks. If merging carriers can show the 
Board that a proposed transaction will result in increased intermodal 
competition, the prospect of such increased intermodal competition 
should be recognized as a public benefit flowing from the merger. I 
believe the new merger rules as written would permit the Board to 
recognize increased competitiveness of merged railroads vis-a-vis 
trucks as a competitive enhancement, and I would hope the Board would 
interpret the new rules in this manner.
    With regard to remedying competitive harms, the new rules indicate 
that the Board will continue to be vigilant in remedying potential 
reductions in competition.\2\ This is clearly appropriate. The 
governing statute specifically instructs the Board to consider 
``whether the proposed transaction would have an adverse effect on 
competition among rail carriers in the affected region or in the 
national rail system.'' The Board's practice of identifying adverse 
effects on competition and remedying them through conditions that are 
narrowly tailored to remedy the identified harm is sound and consistent 
with the statute. The Board's standards for remedying competitive harm 
are so well known and understood that merger applicants generally try 
even before filing an application to identify areas where competitive 
problems are likely to arise and to propose solutions to those 
problems, typically through negotiated agreements with other interested 
parties. These negotiations often lead to voluntary structural changes 
beyond those needed to remedy specific harms.
    \2\ ``Our primary focus in imposing conditions--including 
competitive conditions--should and will continue to be remedial.'' 
Final Rules Decision at 31.
    It is appropriate that the Board decided to retain this remedial 
focus, and it is also appropriate that the Board rejected proposals of 
some parties that the new merger rules become the vehicle for 
widespread restructuring of rail markets that extended beyond the scope 
of rail mergers. AAR was very concerned that some of the parties 
participating in the merger rulemaking proceeding were promoting an 
agenda that went well beyond merger proceedings. These parties seized 
upon the Board's suggestion in its October 2000 Notice of Proposed 
Rulemaking that it might require non-remedial market restructuring as 
the point of departure for an array of proposals seeking imposition of 
broad pro forma conditions on rail merger applicants and even on non-
merging carriers. Those proposals were unrelated to the effects of 
particular mergers and lacked any foundation in the statutory public 
interest standard. We are gratified that the Board rejected the 
argument that the Board should use its conditioning power to force 
successful merger applicants to grant broad competitive concessions and 
to require such concessions of non-merging carriers.\3\ The Board was 
correct in concluding that its focus should be ``on ensuring that any 
mergers that are approved are in the public interest, not on imposing a 
new scheme of regulation upon the railroad industry through the back 
door of merger approval.\4\
    \3\ The Board explained that ``[c]ontrary to the arguments raised 
by numerous shippers and shipper groups, conditions should not be 
sought to fix competitive and other longstanding problems that have no 
nexus to the merger at hand.'' Final Rules Decision at 31.
    \4\ Final Rules Decision at 32.
    No one would expect that the Board's revised merger rules would be 
entirely satisfactory to any particular party. I have already suggested 
that we believe the emphasis on non-remedial enhancements of 
competition is misplaced. We are also pleased however that the rules 
retained a focus on markets within the scope of a rail merger 
transaction rather than looking to a restructuring of the industry.
   Prepared Statement of George Marshall, Director of Supply Cycle, 
                         Albemarle Corporation
    Thank you, Mr. Chairman, for allowing me the opportunity to submit 
this statement for the record as the Subcommittee examines the issue of 
rail mergers and the STB ruling.
    I am George Marshall, Director of Supply Cycle for Albemarle 
Corporation. Albemarle is a global supplier of specialty and fine 
chemicals that enhance consumer products. We serve markets for 
polymers, surfactants and biocides, pharmaceuticals, agricultural 
chemicals, photographic chemicals, water treatment and petroleum 
products. Thanks to the work of 3,000 employees worldwide, Albemarle is 
a leading worldwide supplier of chemical flame retardants for 
computers, TVs and other household products as well as manufacturers of 
bulk ibuprofen used as an analgesic. Our corporate operations group is 
in Baton Rouge, Louisiana and we spend over $6 million a year on rail 
    My comments about our relationship with the U.S. rail industry are 
many and varied. Today, your Committee is addressing one of the largest 
issues of concern to all who ship product by rail--rail mergers.
    In the past 20 years or so, we have seen the number of independent 
railroads shrink from around 30 to a total of four Class One railroads 
today. We can expect to have only two railroads in the near future as 
further consolidations are anticipated. While Bill has addressed the 
immediate issue of the STB merger rules just issued, I would like to 
take a minute to talk about the impact such mergers have had on 
Albemarle's business. I believe that the impact is similar to other 
chemical companies in Louisiana and elsewhere. Our fear is that the 
problems we have encountered with the mergers of the past will repeat 
themselves if something isn't done about future mergers.
    Albemarle has several facilities in the U.S. that are dependent on 
raw materials coming into the plant and immediately being turned around 
into product and shipped out to our customers around the country. We 
often do not have facilities for storage nor are we in some cases able 
to store product. This means rail cars are constantly coming in and 
going out. When the cars don't come in, we can't manufacture product. 
If we can't produce product, we have nothing for our employees to do so 
we find ourselves shutting the plant down until we can get raw supplies 
in to the facility. Needless to say, this is a costly venture.
    Immediately following the UP merger with the SP, we found ourselves 
week after week shutting our facility down in Magnolia, Arkansas, to 
cite one situation. Because we had no product to ship, nor any cars to 
ship in, we had late deliveries to customers and even lost business to 
competitors. Ironically, our employees in Magnolia could watch car 
after car go right by the plant without stopping heading for places 
unknown to us. When we were able to ship, rail cars full of our 
products were lost for weeks at a time.
    Even today, long after the merger, we are still confronted with 
problems with the UP ranging from their failure to deliver cars to the 
right place to incorrectly charging us demurrage when they place cars 
on Albemarle leased track. More frighteningly, again in our Magnolia 
facility, the county raised concerns about all of the derailments and 
the condition of the track. We inquired of the UP who responded that 
there have been no derailments since 1998 even though we have letters 
from the UP to the contrary. We continue to struggle with trying to get 
cars through Shreveport and Monroe, Louisiana.
    We met with the UP on the track condition at our plant in Magnolia 
and we found them to be confrontational and defensive. The UP 
representative was belligerent and had no interest in hearing our 
concerns and certainly felt no need to relate to us as customers. UP 
inspectors had found several rail ties to replace, but during this 
meeting, the UP representative said his inspector had ``gotten carried 
away with the paint can'' and he didn't think any ties needed to be 
replaced. We do not feel that given the hazardous nature and volume of 
rail traffic which Albemarle has to pass through that yard that any 
standard of track condition which could lead to derailments is not 
acceptable even though it is to the UP.
    I bring these issues to your attention because these are problems 
we have had to deal with ever since the UP merged with the SP. It 
continues to be such a horrific situation, that the thought of any more 
mergers is enough to give us real heartburn.
    I'm particularly glad to see the representative from the KCS here 
today because we continue to have a difficult time in Baton Rouge with 
KCS service. Suffice it to say, we have had numerous problems with the 
KCS in Baton Rouge. It takes over 30 minutes to get someone on the 
phone in dispatch and often takes up to three requests to get a car 
moved. Frequently, nobody shows up to move the car and we loss an 
entire day in transit time. KCS in Baton Rouge is unaware of what KCS 
is doing in Shreveport and we end up doing their work for them. While 
this is not the topic of today's hearing, we look forward to future 
opportunities to discuss the service issues.
    We are not opposed to railroads merging with each other. But unless 
certain conditions are met, such mergers (as the UP-SP proved) should 
not be allowed. The only way we feel we will have quality service is if 
the railroads compete with each other for our business. Today the 
carriers give you freight rates and you take it or leave it, no longer 
is there the spirit of cooperation. Our freight rates have increased 7-
46 percent over the past 2 years, and we are being informed by the 
railroads to expect additional increases while at the same time their 
customer service is deteriorating and services being offered are being 
reduced or simply eliminated. The shippers have to spend much more time 
shipping the same material today than we did 2 years ago due to 
deteriorating service conditions--adding to our overall costs. Very 
recently I was in a discussion with UP regarding freights rates, and 
how the increases are making it very difficult to remain competitive. 
The UP representative shared this point with me, he stated, ``UP 
recently had an opportunity to bid on moving a commodity for another 
chemical shipper, and UP elected to withdraw from the bid process 
because it was no longer profitable to UP''. This gentleman then 
pointed out the following, ``this example points out something we 
should consider as well, if the margins are this close Albemarle should 
consider not making the commodity anymore''. I then stated to this 
gentleman, ``This is exactly why I support measures underway today to 
stop any further rail mergers. Clearly, Union Pacific elected not to 
bid this because you had an option and the other chemical company 
thankfully in this case also had an option. But those shippers who are 
captive to one carrier must now also be forced to accept whatever 
ridiculous increases the railroad shoves to them, or we must stop 
producing the commodity. This is a real example that clearly points out 
that competition is the only thing that will improve service and thus 
the financial condition of the entire rail industry. Competition means 
our ability to have a railroad provide a shipper with a rate quote for 
any two points on their system. Competition means allowing shippers to 
seek competition at terminal facilities where railroads routinely 
interchange cars. That would have been very useful to Albemarle when 
the UP was not delivering cars into our Magnolia facility because they 
were so confused after their merger with the SP. We would have been 
able to have another carrier without the problems UP faced come in and 
deliver our raw materials.
    To conclude Albemarle has become a captive shipper for the most 
part that relies on a single rail carrier satisfying our transportation 
needs, and I truly fail to recognize whom other than the railroad 
benefits from this.
    One comment frequently made by many of us in the chemical industry 
is we would never be able to merge with each other the way the 
railroads have been doing and that is mainly due to the fact that we 
are subject to FTC review and anti-trust laws. It still amazes us that 
in the beginning of the new millennium, railroads are the only industry 
not subject to antitrust laws, so now it may be time to consider this, 
and then develop a ``Shipper's Bill of Rights'', when dealing with the 
railroads going forward.
    Each and everyone one of us who relies on the railroad to handle 
their transportation needs could suffer, and this will eventually reach 
each and every one of us as a consumer, resulting in higher costs of 
goods and services. We know better than anyone that if the railroads 
are not economically viable, we will not be economically viable. If 
they fail, we fail. Albemarle's motto is ``Don't worry about what's 
good for the company--worry about what's good for the customer''. We 
would like that to be the motto for the rail industry as well.
       Prepared Statement of The American Forest Resource Council
    The American Forest Resource Council (AFRC) respectfully submits 
testimony to the committee on the important issue of railroad mergers 
and consolidations. AFRC is a forest products trade organization 
representing nearly ninety forest product manufacturers and landowners 
in 12 states west of the Great Lakes. Our membership represents a cross 
section of the industry from large multi-national corporations to small 
family owned operations. AFRC and its two predecessor organizations, 
the Independent Forest Products Association and the Northwest Forestry 
Association were parties of record in the Surface Transportation 
Board's (STB) recent rulemaking effort on this important matter (STB Ex 
Parte No. 582 (Sub-No. 1)).
    Most of our members rely on railroads to transport a portion of 
their finished products to market. Some are located where they rely 
solely on Class 1 railroads for their shipping needs. Others utilize 
shortlines to connect with Class 1 railroads, while some truck their 
products to a reload usually located on a Class 1 railroad. On average, 
transportation costs are between 10 and 25 percent of sales value and 
are the third highest cost of production. Like coal and grain, the 
total tonnage of forest products relying on rail is large, however, our 
industry has many more producers and even more customers receiving the 
freight. This fact makes our situation somewhat unique and more 
vulnerable to changes in the railroad structure.
    Consequently, any changes in the existing railroad system would 
have a direct impact on our members businesses and for that reason AFRC 
has been actively engaged in making certain that our member's concerns 
regarding the subject of major railroad consolidations and the present 
and future structure of the North American railroad industry are 
    AFRC is generally pleased with the STB's recent issuance of a new 
merger and consolidations rule since it appears to reflect a major 
shift from pro-merger regulations to pro-service and competition 
regulations. We will continue to remain concerned though until the new 
rule is put to the test in evaluating the next proposed Class 1 
railroad merger.
    From the beginning of the STB's rulemaking process we have had 
three major areas of concern, which are: (1) The forest products 
industry cannot afford any more service disruptions or difficulties 
like those experienced in the last round of major railroad mergers; (2) 
Any future changes in the North American railroad structure should 
result in an increased level of competition among the railroads and not 
further oligopolistic situations that could negatively affect service 
levels and rates paid by shippers and; (3) Any changes in the North 
American railroad structure should be both market and trade neutral.
    Historically, our organization and its predecessors have focused 
its efforts on forest policy and regulatory issues at the Federal 
level, but in 1997 we became involved with railroad transportation 
issues due to our member's difficulties resulting from the Union 
Pacific/Southern Pacific merger. Forest product manufacturers from 
across the west came to us with horror stories of Union Pacific's 
failure to provide a reliable means of transporting their products to 
the marketplace. In response, we worked with our Congressional 
Delegation and Union Pacific to find a workable solution to this crisis 
situation. As part of this effort, we responded to the STB's January 
13, 1998, Service Order No. 1518, by conducting a survey of forest 
products manufacturers in Oregon and Washington and reported our 
findings to the STB.
    Even though, the Burlington Northern/Santa Fe's service history is 
somewhat better than Union Pacific's, our members continue to have 
problems with consistent and timely door-to-door service. Terminal to 
terminal transit times have been good and relatively reliable, but 
getting shipments to and from the terminals continues to be a problem.
    These types of service difficulties and disruptions have a direct 
effect on our members' bottom line. An inability to have a reliable 
means to transport their goods to the customer means higher costs and/
or lost opportunities. Unfortunately, some forest products companies 
are still recovering from the impact of the last round of railroad 
mergers. While market share that was lost may return, the financial 
losses suffered can never be recovered.
    Our ability to compete in the forest products marketplace should 
not be held hostage by incompatible computer systems or labor union 
conflicts resulting from mergers. Simply put, the forest products 
industry cannot afford anymore railroad mergers until shippers are 
receiving an acceptable level of service and are provided a guarantee 
that includes a form of measurement and remedy to the shippers.
    The STB's new rules require railroads that are proposing to merge 
to address service concerns. The new policy of the STB emphasizes 
service. Railroads are required to submit a Service Assurance Plan. We 
applaud this step, but are concerned that when the STB reviews a merger 
and then conducts oversight, that these plans be binding on the 
railroads, not something discarded because of changed economics or some 
oversight on the railroads' part in creating the Plan. We want to avoid 
service problems resulting from mergers.
    Critical elements of the Service Assurance Plan are the problem 
resolution teams, loss and damage claims handling process, service 
failure claims process, and alternative rail service options the STB is 
requiring the railroads to address. The STB should give these items at 
least as much weight as competitive concerns. Rail mergers should 
benefit the railroads' customers in addition to their investors. As has 
been said, poor service hurts present and future business, employees 
and the investors in the railroads' customers. The STB is seeking to 
avoid the poor planning and worse execution of the last several rail 
mergers with these new rules, but it must be vigilant when implementing 
the rules.
    Since the first crossties and rails were laid on North American 
soil, people have voiced concerns regarding railroad monopolies and 
competition. While mergers and consolidations in the business world 
promote corporate efficiencies, railroads have large fixed capital 
assets that prevent free market principles from operating ideally. This 
is one of the main reasons why the Federal Government regulates 
railroads and why there is a STB, but more important is that Congress 
and this subcommittee retain oversight of this critical form of 
commerce and transportation.
    Simply put, AFRC's members are concerned that any additional 
mergers would lead to less competition among the railroads and result 
in increased shipping rates. Without competition, the benefits of 
mergers, such as increased efficiencies, will not occur and in its 
place will be stagnation, complacency and disrepair. There needs to be 
a ``critical mass'' of service providers or there may be a need for 
some kind of intervention that promotes competition.
    We expressed concern during the rulemaking process that the 
approval of another major Class 1 railroad merger would result in the 
other major railroads attempting to forge their own deals and win STB 
approval. This process would ultimately lead to a North American 
railroad structure with only a couple of transcontinental lines. 
Shippers would be at the mercy of these oligopolies and ultimately 
sections of the nation's railroad system could collapse due to 
competition from transportation alternatives such as trucks, barges and 
container ships.
    The evaluation of proposed mergers must be based on whether they 
are in the public's interest and not whether they are in the interests 
of the railroads and their investors. A case in point is the Union 
Pacific/Southern Pacific merger approved by the STB in 1996. The 
Southern Pacific was in financial trouble and disrepair. The merger 
with Union Pacific and the influx of new capital saved the railroad. 
Therefore this merger benefited the public's interest.
    We feel that the STB's new rulemakes a strong effort to this end by 
requiring the proponents to prove that the merger will result in a 
financially sound railroad and that competition will not be sacrificed.
    A much more detailed and critical look at the resulting financial 
fitness of a merged railroad appears to be one goal of the STB's new 
rules. But, the STB and its predecessor required substantial financial 
information from the applicants under the old rules. However, over the 
years, the Interstate Commerce Commission and STB got away from making 
detailed financial analyses and started accepting the railroads' 
proposals, unless challenged by a party, without a searching and 
independent analysis. AFRC believes that the STB has an obligation to 
the American people to conduct an independent analysis of the proposed 
financial health of every railroad resulting from a merger, regardless 
of what the hired banking houses from Wall Street have said.
                       trade & market neutrality
    The wood and paper products industry is a highly competitive sector 
of our nation's economy. Nation-wide there are several thousand 
producers, with annual sales totaling approximately $200 billion. 
Products are shipped around the continent and the world, competing with 
products produced in the consumer's own local area. Therefore, since 
the forest products industry is so competitive, we cannot afford market 
externalities such as a railroad merger to affect individual producer's 
access to markets.
    As discussed above, a two transcontinental railroad system could 
limit which markets producers could sell to. For example: West Coast 
Company X has been a major supplier to East Coast Retailer A. Retailer 
A's distribution center is located on Railroad 1, while Company X's 
manufacturing site is located on Railroad 5. Today, rail shipments are 
transferred at a point along the Mississippi River. Unfortunately, due 
to several mergers, Railroads 1 and 5 are now parts of competing trans-
continental railroads and Company X looses its cost effective access to 
Retailer A. Such a scenario would be totally unacceptable to AFRC's 
    Like domestic markets, international trade is another area where 
railroad mergers could have a significant effect on individual 
companies' businesses. International trade is an important aspect of 
our nation's economy. Unfortunately, trade relationships and agreements 
are usually more political than based in economics and such is the case 
with forest products. For this reason, the STB should be weary of any 
decisions that may have international trade implications and that could 
have negative consequences on domestic producers.
    AFRC members feel that any proposed change in the North American 
railroad structure should be market and trade neutral--that is not 
benefiting one set of producers over another.
    The STB's rules also give it the ability to take a much closer look 
at the competitive impacts of a railroad merger. In addition to the 
traditional issues of competing parallel lines and 2-1 shippers, the 
rules give the STB the leeway to review geographic competition, 
bottleneck issues, and to enhance competition. AFRC does not read the 
rules to limit enhanced competition to proposals made by the merging 
railroads. AFRC believes that the STB does, and must, have the power to 
enhance competition where justified and necessary.
    We applaud the new feature of the STB's rules that require 
information about restrictions and preferences under foreign law. It 
goes without saying that there have always been disputes between the 
timber industries of the United States and Canada. AFRC believes that 
by requiring and considering this new information the STB will be able 
to prevent the acquisition of a US railroad to the detriment of its US 
customers while benefiting their competitors in another country. The 
STB must be vigilant in this area.
    In conclusion, given the concerns stated above, we believe that the 
STB's new merger and consolidation rule goes a long way in making the 
process for evaluating and approving shipper friendly, and thus in the 
public's interest. While we perceive that the new rule addresses our 
important concerns regarding service, competition and, market and trade 
neutrality, we will not know for certain until they are put to a test 
by the next merger proposal.
    Thank you for this opportunity to submit written testimony. AFRC 
would be glad to assist the Subcommittee in its oversight of this 
important issue.
      Responses to Written Questions Submitted by Senator Dorgan 
                            to Linda Morgan
    Question 1. You indicated in your testimony that the rules for 
small rail rate cases may still be too complex despite the Board's 
adoption of simplified rules in 1996, and that you would be willing to 
work with Congress to address these concerns. Particularly, you have 
suggested that a single benchmark test or some other simplified 
procedure for small rate cases might be the way to address those 
    Please prepare a list of all of the options you believe Congress 
could consider that might address these concerns, including specific 
details regarding how you believe those options could be applied. For 
example, what kind of test might work; who should qualify; how would a 
shipper make use of that test; what kind of information would be 
required; how long would it likely take to process such a case and what 
kind of expenses might be associated with bringing that case. Also, 
please give us your thoughts on the use of various forms of arbitration 
as a means of resolving these concerns.
    Answer. As I have testified before, I believe that the Board's 
small rate case rules are as simple as they can be, given the mandates 
of the statute. To further simplify our processes, we have excluded 
product and geographic competition as considerations in market 
dominance determinations. Yet, I know that certain shipper 
representatives have said that shippers do not use the rules because of 
the complexity and cost that they believe might be associated with 
making a small rate case and defending or challenging the agency's 
decision in court in such a case. Because I believe that smaller 
businesses should be assured meaningful access to the regulatory 
process, I have indicated that I would work with Congress in this 
    The following are some possible options for handling what some have 
called ``small rate cases'' that Congress could consider if it were 
    (1) A preset revenue/variable-cost (R/VC) percentage selected by 
Congress,\1\ above which a small shipper rate would be deemed to be 
unreasonable. This approach would involve system average costs 
developed through computer programs. A concern about this approach is 
finding a percentage level that would be satisfactory to shippers 
without undercutting carrier revenues to a point that would be contrary 
to the public interest.
    \1\ A bill introduced by Congressman Oberstar (H.R. 141, 107th 
Cong., 1st Sess. Sec. 103 (2001)), as well as bills introduced last 
term by Senator Rockefeller (S. 621, 106th Cong., 1st Sess. Sec. 6 
(1999)) and Congressman Quinn (H.R. 2784, 106th Cong., 1st Sess. Sec. 6 
(1999)), would have effectively capped at 180 percent of variable cost 
the rates charged to grain shippers that originate or receive no more 
than 4,000 carloads of grain annually.
    (2) A rate cap based on an R/VC percentage applied to similar 
movements. This approach is intended to deal with disparities in the 
treatment of different shippers having similar movements. It would 
require substantial regulatory involvement to resolve issues of 
    (3) A rate cap based on some sort of a formula that would attempt 
to measure a shipper's pro-rata share of the cost to operate a 
particular railroad and replace that carrier's rail assets. This 
approach would attempt to ensure that the shipper is not making too 
high a contribution to the carrier's revenue needs, but it could run 
counter to the concept of differential pricing. It could be difficult 
to find an inexpensive way of developing data under this approach.
    (4) A provision permitting small agricultural shippers to ``match'' 
contract terms obtained by other (possibly comparable) shippers. Such 
an approach would apply rates that carriers have themselves set, at 
least for certain shippers, rather than using a rate cap. But it also 
could discourage carriers from offering favorable terms to some 
shippers out of concern that those terms would have to be applied to 
    (5) ``Final offer'' (baseball-style) or other forms of binding 
arbitration. The Board can encourage arbitration, but arbitration 
cannot be mandatory without legislation. With respect to arbitration in 
general, issues regarding the authority of the arbitrator, the 
standards to be applied to an arbitration, and the applicability of an 
arbitral award would need to be resolved.
    All of these proposals would need to be more fully explored either 
by the Board in a rulemaking proceeding, or by Congress through the 
legislative process, before a full understanding of the pros and cons 
could be had. And there may be other options that we have not thought 
of. More details would need to be fleshed out before a firm conclusion 
could be reached and a comparison made as to the expense and processing 
time for each option. For any legislative small-rate case relief that 
the Congress may choose, it would need to carefully identify those 
small shippers or those types of cases that should qualify for special 
rate relief. If a carload-per-year standard were chosen, for example, 
Congress would need to select a reasonable dividing line. Congress 
would need to examine supporting traffic data at various levels, the 
amount and type of traffic that would be embraced by the various cutoff 
figures that could be selected, and the degree of revenue contribution 
(above variable costs) that this group of traffic now makes.
    Question 2. You testified that you believe what shippers want is 
open access, which you said assumes all shippers would have access to 
at least two rail carriers which would be permitted to operate on each 
other's tracks. You also have indicated in the past that the Board's 
decision in the bottleneck case was driven by the fact that the law 
does not allow for open access. However, the debate over the bottleneck 
decision focuses only on whether a shipper should be allowed to get a 
rate quoted for that portion of track--it does not provide for one 
railroad operating over another railroad's tracks.
    (1) Can you please explain why you believe that allowing rail 
customers to get a rate quoted to them over a bottleneck portion of a 
route is open access?
    Answer. Open access, as the term is commonly used, can refer to any 
regulatory regime whereby a railroad is required to share with its 
competitors traffic that it can handle directly to ensure that a 
customer has access to at least two carriers. Under existing law, as 
confirmed by the courts, a railroad that can provide direct service 
from an origin to a destination generally has the right to its long 
haul. Requiring a railroad to quote separately chargeable rates for all 
segments of its lines at which other carriers can interchange with it 
would be a form of open access because it would also force the carrier 
to turn over single-line traffic to its competitor at any given 
junction point.
    (2) Please explain why you believe the ICC's Midtec decision--which 
requires shippers to prove anti-competitive abuse before they can 
access the pro-competitive terminal area switching provisions allowed 
for in the law--is still appropriate in today's environment.
    Answer. As the courts have held in affirming the MidTec decision 
and the Interstate Commerce Commission's competitive access rules, the 
Staggers Rail Act of 1980 was not an open access law. I have testified 
on many occasions that, if Congress wants to change the law, it of 
course may do so. At the same time, I believe that the goals of the 
Staggers Act--eliminating unnecessary regulation and permitting 
railroads to take efficiency-enhancing actions that permit them to fund 
needed capital improvements without subjecting captive shippers to 
unreasonable rates--clearly remain relevant today. And I have expressed 
concerns about whether it would be a good idea to legislate a system 
whereby all shippers would be guaranteed that at least two railroads 
would be able to compete for their business. Although such a system 
might result in rate reductions for some shippers for the short term, 
railroads would still need to earn enough to cover all of their costs 
and to provide both monies and incentive for further investment, and so 
that approach could end up simply replacing rate regulation with 
regulation of carrier access fees and other terms (which, in turn, 
would affect the rates that carriers would need to charge shippers). 
Moreover, the Board has raised concerns in the past that small shippers 
particularly in rural areas would not necessarily benefit, in the long 
run, from such an access-on-demand system, because with less revenues 
coming into the system from lower rates the result could well be a 
smaller, more streamlined rail system serving only larger shippers in 
heavier traffic lanes.
    Question 3. Please describe what rationale the Board used in 
prescribing trackage rights over approximately 4,000 miles of track in 
the UP/SP merger, and how the UP and the BN are faring under this 
system. What were your expectations and is this approach working?
    Answer. The Board prescribed trackage rights, into which the Union 
Pacific (UP) and Burlington Northern Santa Fe (BNSF) railroad systems 
voluntarily entered, to mitigate the competitive harm that could have 
resulted from the departure of the Southern Pacific (SP) rail system as 
an active, independent competitor. The idea was that replacing a weak 
(indeed, a nearly failing) competitor (SP) with a strong competitor 
(BNSF) would protect shippers from any potential loss of competition. 
The trackage rights have been successful, and indeed, in some areas, 
BNSF has been competing with UP far more vigorously than SP ever could 
have done.
    Question 4. The proposed merger regulations would require 
applicants to list points where the number of serving railroads would 
drop from two to one and from three to two, respectively, as a result 
of the proposed transaction.
    (1) Does this mean that the Board will not place an enhanced 
emphasis on the preservation of three independent rail options for 
shippers who enjoy three options pre-merger?
    Answer. In the decision adopting final rules, the Board addressed 
the so-called ``3-to-2'' issue--which has to do with preserving, rather 
than enhancing, competition--that the agency had discussed in several 
prior merger proceedings. The Board indicated that it would continue 
its practice of always preserving 2-railroad competition where 
feasible, and that it would also continue to review 3-to-2 issues in on 
a case-by-case basis, but that it would not adopt the suggestion of the 
Kansas City Southern Railway Company that it should never permit any 
reduction in the number of railroads serving a particular shipper, 
regardless of the circumstances.
    The proposed merger rules State that future merger applications 
will have to demonstrate enhancement to competition in order to be 
found consistent with the public interest.
    (2) Given the fact that many markets, large and small are served by 
only two major independent railroads, does this mean that the Board is 
concerned that two railroads might not be enough to adequately serve 
the public?
    Answer. No. The Board has found that, where two railroads compete 
(for example, in handling coal out of the Powder River Basin), 
competition has been sufficient to spur railroads to continue to seek 
productivity gains and to pass along the majority of those gains to 
their customers.
      Responses to Written Questions Submitted by Senator McCain 
                            to Linda Morgan
    I commend the Board for initiating its rulemaking proceeding and 
recognizing the need to reassess its merger guidelines given the 
restructuring to date by the industry and the expectation that the next 
merger proposal will likely result in a transcontinental railroad.
    Question 1. According to your statement, the Board intends to now 
``take a more skeptical view of claims of merger benefits''. I had been 
under the impression the Board had always worked to carefully weigh 
merger benefits as it considered its public interest standards.
    (a) Does the Board feel that based on the actual implementation 
problems associated with recent mergers that it may have been somewhat 
remiss in its handling of prior merger decisions?
    (b) Does the Board feel that carriers have made promises that 
couldn't be kept just to receive the Board's approval?
    Answer. (a) The more skeptical view that the Board will be taking 
of claimed merger benefits is not based on a conclusion that the Board 
was remiss in its handling of prior merger decisions. Prior mergers 
were approved because the agency found that the proposals were in the 
public interest, and the benefits that were projected--many of which 
are in fact now being achieved, although in certain cases not as 
quickly as anticipated--related largely to eliminating excess capacity. 
The Board's current, more skeptical view of projected benefits reflects 
our conclusion that much of the excess capacity has already been wrung 
out of the rail system, and thus we will be requiring other types of 
benefits such as competitive enhancements. The service problems 
associated with recent mergers were largely the result of operational 
integration problems that we hope can be avoided in the future through 
the submission of service assurance plans and more contingency planning 
as required under our new rules, as well as through our oversight 
process, which has evolved during this last round of rail mergers and 
has been formalized under our new rules.
    (b) Although I cannot speak to the motivation of any particular 
party, it is possible that expected benefits were oversold for a 
variety of reasons, some of which could have been related to regulatory 
approval. Our new rules reflect the need for parties to be more careful 
in predicting benefits and in making sure that they take the necessary 
steps and precautions to ensure that the expected benefits materialize.
    Question 2. Please describe how the Board intends to interpret its 
new merger guidelines--how will carriers be held more accountable to 
their claims of merger benefits, as mentioned in your written 
    Answer. The Board will require the carriers to submit service 
assurance plans that address the service levels to be provided by the 
merged entity and potential service integration problems, and the 
agency has in place procedures to provide temporary access to other 
carriers in cases of severe service problems. Furthermore, because the 
risks of failure in an ``endgame'' situation would be high, the Board 
will require merger applicants to identify specific measures that can 
be taken in the event that anticipated public benefits should fail to 
materialize in a timely manner. The Board stated in its decision that 
if things do not work out (from either a service or a competitive 
standpoint), carriers should ``be prepared to try different 
approaches,'' and the Board ``would look with more favor on 
applications that provide back-up or contingency plans when we weigh 
projected benefits against harms.'' The new rules are designed to 
discipline the applicants to project benefits honestly and 
    Question 3. There has been much attention to the issue of 
``enhanced competition.'' Do the new rules clearly require a merger 
application to expand competition or can the Board envision that based 
on particular circumstances that a merger could be approved without 
increasing competition?
    Answer. It is possible that the benefits of a particular merger 
proposal could be so overwhelming--and the risks to competition and 
rail service so minimal--that a showing of enhanced rail-to-rail 
competition would not be required. But at this time, no such proposal 
comes to mind, and so the practical effect of the new rules is that 
applicants are fairly warned that they had better show enhanced rail-
to-rail competition if they want to have their applications approved, 
or the Board will use its conditioning power to ensure such enhanced 
    Question 4. To what extent was the Board unable to address 
proposals submitted throughout the rulemaking process? Are there 
particular areas in which the Board did not have statutory authority to 
include otherwise reasonable proposals?
    Answer. The Board addressed all of the concerns raised in one way 
or another, and it adopted appropriate proposals. It did not adopt all 
of the proposals submitted--for example, it did not revisit the recent 
``bottleneck'' decisions, and it did not provide for access to 
additional railroads on demand--given existing law. Whether those 
proposals that could not be adopted under current law are reasonable 
depends on what Congress believes the appropriate rail transportation 
policy to be.
    Question 5. By law, merger decisions involving two or more Class I 
railroads must be determined within 16 months from the date the 
application is filed. Given the Board believes it has issued much more 
difficult guidelines, do you foresee any necessity to lengthen the time 
period under which the Board reviews mergers?
    Answer. At this time, I do not foresee any necessity to lengthen 
the time period under which the Board reviews mergers.
    Question 6. Do you envision any future mergers occurring?
    Answer. I cannot say. It depends on a variety of factors, such as 
the economy, and on how carriers, customers, and the financial 
community view the industry's structure and our new rules.
    Question 7. Would any of the mergers approved by the Board in the 
last 5 years have been precluded if these new rules had been applicable 
at the time those mergers were submitted?
    Answer. I cannot answer that question, as each case is decided on 
the record made at the agency. The merger proposals that were before 
the Board in the past 5 years were developed and evaluated on the basis 
of the rules then in effect. If different rules had been in effect, 
different presentations would have been made.
    Question 8. How do you believe the new mergers rules will affect 
rail shippers?
    Answer. For considering new merger proposals, the new rules focus 
on enhancing competition, protecting service, and providing 
accountability for projected benefits. Additionally, I hope that the 
new rules remind railroads that mergers do not have to be the first 
choice or the only choice when they are considering ways to strengthen 
and improve their networks, and that their main focus should be on 
effectively and creatively running, day-to-day, the businesses that 
they now have.
    Question 9. When were the rail merger rules last revised? How many 
consolidations were approved by the Board, and previously, the ICC, 
under the former rules?
    Answer. The last major revisions to the merger rules and policies 
were issued in 1980 and 1982. The Board and its predecessor, the ICC, 
approved, with conditions, nine major consolidations under those rules. 
Those consolidations were: Norfolk & Western/Southern; Union Pacific 
(UP)/Missouri Pacific/Western Pacific; UP/Missouri-Kansas-Texas; Rio 
Grande/Southern Pacific (SP); UP/Chicago North Western; Burlington 
Northern/Santa Fe (BN/SF); UP/SP; CSX/Norfolk Southern/Conrail; and 
Canadian National/Illinois Central. A tenth, the Soo/Milwaukee, was 
assessed by the ICC under those rules in an advisory capacity in 
connection with a bankruptcy court proceeding. And another application 
involving two large railroads, the SF/SP proposal, was denied.
    Question 10. The Board's final rules provide a waiver for the 
Kansas City Southern Railway Company (KCS) from the application of the 
new major merger rules. I understand this waiver was not a unanimous 
decision by the Board--you dissented.
    (a) Please offer your perspective on this waiver. I am interested 
in hearing both perspectives.
    (b) I recognize the KCS is a smaller Class I carrier compared to 
others, but it is nonetheless a Class I carrier. If the specific size 
of the company is the issue, perhaps a more appropriate route would be 
for the Board to initiate a proceeding to revisit its classification 
guidelines. Has the Board considered taking such action and if not, why 
    Answer. (a) I believe that it would have been more appropriate to 
permit a carrier to seek a waiver from the rules on a case-by-case 
basis, rather than to assume that one large railroad would not be 
covered in the first instance. In my view, KCS is strategically 
situated, and a merger involving KCS could well set off the final 
round. Therefore, the KCS waiver is, as I see it, inconsistent with the 
entire thrust of the new rules, which were formulated to address the 
final round.
    (b) In late 2000, the Board initiated a rulemaking proceeding 
(which has not yet been concluded) to consider requiring consolidated 
financial reporting by related railroad systems. If such a proposal 
were adopted, it would potentially give Class I status to more 
railroads, rather than fewer. I see no reason why the agency would want 
to make KCS a Class II carrier, and in my view the carrier has 
presented no such reason other than its desire to be exempted from the 
merger rules that would apply to mergers that would trigger the final 
    Question 11. Did DOJ or DOT comment on your rulemaking proposal and 
if so, to what extent do the Board's new merger rules reflect the views 
of those Departments?
    Answer. The Department of Justice did not comment on the proposal. 
The Department of Transportation filed written comments, but at the 
oral argument its representative indicated that the agency wished to 
assume an essentially neutral position at that time principally because 
there had been a change in Administration.
    Question 12. I understand that this week, Senators Rockefeller, 
Dorgan, and Burns introduced a bill, S. 1103, intended to enhance rail 
competition. I haven't had the opportunity to study their proposal, and 
believe it will likely be discussed more at a future hearing. But, I 
would like to ask you to offer your views on the proposal for the 
    Answer. Among other things, S. 1103 would overrule the Board's 
bottleneck decisions to allow rate regulation by segment, and would 
provide a system in which access through terminal trackage rights and 
switching is the norm. The bill would eliminate or dramatically reduce 
the opportunity for carriers to engage in differential pricing, and 
could have substantial impacts on the extent of rail service and the 
size of the rail system. In a letter to Senator Specter last year (copy 
attached), I expressed my concern about the possible effects from 
changes to the regulatory system such as those intended by S. 1103.
      Responses to Written Questions Submitted by Senator Specter 
                            to Linda Morgan
    As you requested, I have reviewed the transcript of the hearing 
held before the Senate Appropriations Committee on September 12, 2000. 
At the hearing, you asked me whether I support provisions of the bill 
introduced by Senator Rockefeller. I answered that I could not say, 
categorically and without reservation, that I support that bill, which 
calls into question the fundamental tenets of the Staggers Rail Act of 
1980 (Staggers Act). You then asked me to review the hearing 
transcript, which I received last week, and further explain ``the pros 
and cons, policywise,'' of requiring rail carriers to open up their 
lines to their competitors. This letter will amplify the response that 
I gave in my oral testimony.
The Board's Hearings
    In 1998, at the request of Chairman McCain and Subcommittee 
Chairman Hutchison of the Senate Committee on Commerce, Science, and 
Transportation, the Surface Transportation Board (Board) held extensive 
informational hearings on access and competition in the railroad 
industry. Several parties testified about access, bottleneck relief, 
and other issues related to competition in the railroad industry. After 
reviewing the record on the issue, the Board concluded that changing 
current law and the policy behind the law to ensure that at least two 
railroads would be available to serve every shipper might, at least for 
the short term, reduce the rates paid by some shippers; at the same 
time, it could reduce carrier revenues and cause the carriers to 
abandon their less profitable traffic over time, which could degrade or 
cutoff service to smaller shippers and shippers in rural areas. If that 
occurred, then although cumulative railroad revenues would decline, the 
rates paid by those shippers that would continue to receive service 
could actually increase, because the overall traffic base from which 
costs would be recovered would be reduced. Ultimately, the Board found 
that ``it is quite possible that open access would produce a smaller 
rail system . . . that would serve fewer and a different mix of 
customers than are served today . . . .''
    Because the Board concluded that only Congress was in a position to 
determine whether it wanted that type of system--a smaller, more 
streamlined system that limited output and served a smaller customer 
base composed mostly of larger shippers in heavier traffic lanes--we 
did not make a specific recommendation on the open access issue at that 
time. I followed up with a letter in December 1998 to Chairman McCain 
and Subcommittee Chairman Hutchison explaining the Board's concerns and 
position, a copy of which is appended to the written testimony that I 
submitted for the September 12, 2000 hearing.
My Testimony
    At the hearing on September 12, you directed me to answer, yes or 
no, whether I personally supported opening up access (in particular, by 
reversing the Board's judicially approved ``bottleneck'' decisions and 
by eliminating the current judicially approved requirement that a party 
seeking competitive access must first show that the existing carrier 
engaged in some sort of anticompetitive behavior). My response--that I 
could not answer ``yes''--is consistent with past testimony before the 
Senate Commerce Committee and should be viewed in the context of the 
Board's decision in the Access and Competition proceeding and the 
available research on the issue. I am aware that a study commissioned 
by one of the shipper lobbying groups has concluded that forcing more 
competition in the railroad industry would actually increase carrier 
profits and produce across-the-board benefits, but the conclusions of 
that study are inconsistent with other recent studies of the industry.
    Meanwhile, the railroad industry has testified to the adverse 
consequences to the industry, its customers, and its employees 
associated with the significant revenue loss that would result from an 
open access scheme. Additionally, a recent study (``Efficient Access 
Pricing For Rail Bottlenecks,'' June 1, 2000) commissioned by the 
Federal Railroad Administration (FRA) has expressed concerns about the 
longer-term consequences of some of the proposals to change the 
approach to rail regulation, and has concluded that forcing down 
bottleneck rates by, for example, overturning the Board's bottleneck 
decisions, ``may not be taken as an unambiguous good. . . . Lower costs 
would be effected by reducing quantity or quality of service, or 
both.'' And many of those shippers that continued to receive service, 
the FRA study concluded, would face ``upward pressure on the price of 
rail service.'' In short, as of this time, a persuasive case has not 
been made that Senator Rockefeller's bill would produce uniformly 
positive results.
    The General Accounting Office found in a 1999 report that rail 
rates have declined substantially since passage of the Staggers Act. 
Nevertheless, certain shippers, at least looking to the short term, 
have apparently concluded that their rates would drop even further and 
that service would improve if every shipper were guaranteed service by 
more than one railroad. I could understand why they might not want to 
worry about the longer term, and would instead be willing to cross that 
bridge when they get to it. Notwithstanding any short-term effects, 
however, I am concerned that over the long-term, adding rail 
competitors throughout the system could have negative implications on 
railroads, rail customers, and rail employees that must at least be 
fully understood and fully embraced before such changes are made.
Basis For My Position
    Of course I understand the benefits of competition as a general 
matter, and indeed, the Board in revising its merger rules and policies 
is looking at enhancing competition in the context of new merger 
applications. And of course I recognize that a lack of competition can 
bring higher prices to certain consumers, and throughout my tenure at 
the Board, I have tried hard to assure fair treatment for all segments 
of the rail transportation community, particularly those with less 
leverage. But the Staggers Act concluded that, in order for the 
railroad industry to maintain its infrastructure and remain viable in 
the private sector, it must be able to recover its high fixed costs by 
setting rates sufficiently above the incremental or marginal costs 
associated with providing a particular service. Thus, under the 
regulatory regime that Congress set up in 1980, some shippers with 
fewer competitive alternatives must necessarily pay higher prices than 
other shippers with a greater range of options. More recently, the FRA 
study concluded that, if that approach to pricing (termed 
``differential pricing'') were altered in order to simulate a 
competitive market so that railroads could price and produce ``at the 
socially optimal level,'' the ``first-best'' solution would be ``a 
subsidy from government,'' to cover the costs of maintaining the 
infrastructure, which presumably would then allow railroads to charge 
rates at or near marginal cost and would thus produce some rates that 
are lower than what we have today.
    Therefore, unless Congress is willing to subsidize the railroad 
industry in the future to cover a capital shortfall or to ensure the 
retention of the type of system we have today, or until someone figures 
out some other way to protect the shippers that could be abandoned 
under an open access system, I am not prepared to say that I support 
some of the major regulatory changes that are being discussed, in 
particular those provisions in Senator Rockefeller's bill that you 
discussed in the hearing. Of course, if Congress were to conclude that 
it wanted major changes, the Board would carry out the law as Congress 
passed it.
    I hope that this clarifies my position in accordance with your 
Written Response to Question Submitted by Senator Smith to Linda Morgan
    Question. Some Oregon rail users, the railroads' customers, today 
have the option of using more than one railroad to pick up a shipment 
and deliver it to one of two railroads in the east. If there are two 
mergers, leaving just two transcontinental railroads, what will happen 
to the options available to Oregon rail users? What incentive would one 
merged transcontinental railroad have to keep the gateways open with 
the other transcontinental railroad? How would the Oregon rail user go 
about getting a price to transport goods across the country? Would 
there truly be price competition, or would the railroad that can 
provide single-line service always quote the lower rate? How do the new 
merger rules help an Oregon shipper in this situation?
    Answer. The new rules require merger applicants to include measures 
not only to preserve existing competitive options, but also, as part of 
their showing of merger benefits, to demonstrate ways in which new 
proposals will indeed enhance existing competitive options. Carriers 
could meet this burden by, for example, maintaining existing gateways, 
preserving opportunities to challenge ``segment'' rates in 
``bottleneck'' situations, and by providing trackage rights or other 
access to other rail carriers, or eliminating ``paper barriers'' to 
interchange by shortline carriers. In the absence of a specific 
application, it is impossible to know how a particular proposal would 
affect particular shippers. Because a new merger proposal would not 
likely be approved without competitive enhancements, however, any new 
proposals that are submitted should provide substantial competitive 
benefits for shippers overall.
    The addition of new competitive options should translate into lower 
rates, even if a shipper does not have direct access to two 
transcontinental railroads. I could not know the specific rates that 
particular carriers or combinations of carriers would quote. But in 
general terms, single-line service from origin to destination should be 
more efficient, and the savings should be passed on to the shipper 
because the shipper can threaten to use, and can indeed use, the new 
competitive options to which the merged carrier would agree in order to 
secure merger approval.
    Responses to Written Questions Submitted by Senator Rockefeller 
                            to Linda Morgan
    Question 1. As a very general matter, can you: (A) Explain to the 
Subcommittee what you see as STB's primary role in terms of its 
oversight of the freight railroad industry; and (B) Explain the 
statutory authority for the Board's position?
    Answer. In general terms, the Board's role in overseeing the 
freight railroad industry is to balance the variety of policy 
objectives identified in the Rail Transportation Policy of 49 U.S.C. 
10101. Those policies, which the courts have described as sometimes 
competing and conflicting, require the agency, among other things, to 
look at competitive issues, service, rate levels, the health of the 
industry, and employee issues, and to do that in a way that minimizes 
regulation and Federal involvement in the operations of the private 
    Question 2. During your tenure as Chairman: (A) How do you believe 
the Board has carried out this primary role; and (B) What decision or 
decisions best demonstrate the Board's understanding of its oversight 
    Answer. As reflected in its impressive record in court, the Board 
has carried out this role in an appropriately balanced and effective 
way. We have balanced the interests of all of the stakeholders in a way 
that has given effect to each of the RTP objectives and that has 
advanced the public interest by providing for a rail system able to 
meet the needs of not just a particular group of shippers, but of the 
shipping public overall. In the ``bottleneck'' cases, for example, the 
two reviewing courts found that we had construed the statute properly 
when we provided new opportunities for shippers to challenge bottleneck 
rates while maintaining the ability of originating rail carriers to set 
rates and routes in the first instance. In various rate cases, we have 
protected captive shippers from paying unreasonable high rates, and we 
have changed the ``market dominance'' rules so as to enhance access to 
the regulatory system. In our merger decisions, we have allowed market 
efficiencies but have ensured that no shipper that had two rail service 
options before a merger has been left with just one option as a result 
of the merger. And our new major rail merger rules reflect changed 
circumstances in accordance with our statute.
    The rail industry did, of course, experience severe service 
problems in recent years as a result of merger operational integration 
difficulties. But these problems were not products of the way in which 
the Board carried out its statutory mission, and indeed, the Board's 
responses to the service problems reflect the agency's understanding of 
its oversight responsibilities. In addressing the service crisis in the 
West, for example, the Board, recognizing the interdependence of the 
rail network, knew that a regulatory edict from the Federal Government 
would not make the trains run more smoothly or more quickly but rather 
could have the opposite effect by interfering with the marketplace in 
such a way as to cause further harm to shippers. During the crisis, the 
Board acted to ensure that all shippers were treated fairly and that 
one shipper group could not exploit the situation to the detriment of 
others. And while the Board did not use a suggested ``open access'' 
solution that the agency believed might aggravate rather than fix the 
problem, it did provide for cooperation among the involved carriers and 
other affected parties, altered the service through the Houston area on 
a temporary basis, directed on a permanent basis a clear route through 
the Houston area, ordered the filing of a plan for improving the 
infrastructure in Houston, and gave effect to the ``joint dispatching'' 
that helped relieve congestion in the Houston area and has since been 
used successfully to address operational issues elsewhere in the rail 
    Question 3. Recently, the STB issued a decision that suggested the 
Board should streamline its own procedures, including filing 
requirements, for stand-alone cost cases. Apparently, the Board 
believes staffing constraints are making it difficult for the Board to 
meet the demands of its current caseload. However, the President's 
budget request for the Board is $18.457 million (essentially the same 
as fiscal year 2001, adjusted for inflation and pay raises). How would 
you comment on how the Board plans to carry out its responsibilities 
under these tight budgetary constraints, including how the Board will 
carry out any proposed regulatory changes that might result from the 
current merger procedures rulemaking?
    Answer. In various Congressional hearings over the past several 
years, I have been asked whether the Board needs more resources, and 
how I would use them if we had them. My answers have been consistent: 
the workload is heavy, and if Congress were inclined to give the agency 
more resources, I would have no trouble deploying them. In the 
meantime, we will continue to work efficiently and productively with 
the resources we have. Because we are always looking for ways to be 
more efficient and productive, when we noticed a sharp increase in rate 
filings over the past several months--a workload that is a challenge 
regardless of agency staffing levels--we issued the recent order 
modifying, in a focused way, some of the procedures in stand-alone cost 
cases. We will continue to review our caseload and our processes and 
make any adjustments that we believe will improve the decisional 
process. At this time, I do not believe that the new merger rules 
present any new or unique resource challenges that the Board has not 
already faced in implementing its responsibilities.
    Question 4. How might the Subcommittee expect STB procedures to 
change if staffing levels were improved to more reasonably reflect the 
Board's caseload?
    Answer. As we are always looking to streamline and improve our 
processes and to expedite our decisional response time, I do not 
believe that increased staffing levels would produce a major change in 
how we approach the handling of our work.
    Question 5. Regarding the merger rulemaking, and the moratorium on 
rail mergers that preceded it, I believe it gave all those of us 
concerned with the current State of the freight rail industry a welcome 
pause to consider what should be done to create a system that better 
addresses the legitimate goals of financially viable railroads and a 
truly competitive rail environment. In light of the Board's hesitance 
to act in the past without explicit authorization of Congress, how 
would the Board explain to the Subcommittee the authority by which it 
acted on the moratorium?
    Answer. The Board imposed the merger moratorium because it 
concluded that the old merger rules were not appropriate for reviewing 
the final round of mergers, and that a moratorium was necessary to 
prevent the final round from beginning before the new rules were in 
place. The Board believed that its moratorium had a good chance of 
surviving judicial review because it did not contravene any substantive 
statutory provision or any recent court decision. As the reviewing 
court found in denying the petitions for review of the Board's action, 
in light of its express authority to review rail mergers, the agency 
has implied authority to put a temporary hold on further mergers when 
warranted to realize the broader goals of the statute.
    Question 6. Assuming for the sake of this inquiry that the STB's 
authority to call the moratorium was properly exercised, do you believe 
the Board is empowered also to review, and possibly reverse, its 
earlier decisions?
    Answer. As the reviewing court found, the Board did indeed act 
properly in imposing the moratorium under the particular circumstances 
prevailing at the time. The finding that an agency has implied 
authority to take actions necessary to effectuate its express 
authority, however, does not mean that there are no limits on how an 
agency interprets its governing statute. An agency can, of course, 
change its view, particularly on questions of policy. But where a 
particular statute has been expressly construed in court in affirming a 
prior agency decision--for example, where the D.C. Circuit specifically 
found that the Interstate Commerce Act is not an ``open access'' 
statute--the agency would have a hard time supporting in court a 
decision reversing that particular prior precedent. Or, where an 
agency's very recent decisions interpreting a particular statute have 
been found on judicial review to reflect the proper balancing of the 
various competing statutory policy objectives (as in the case of the 
bottleneck decisions), it would be difficult for the agency to sustain 
a new decision finding that the statute should be interpreted 
    Question 7. If so, what if any decisions would the current Board 
revisit, and on what grounds?
    Answer. As the various examples I have cited indicate, the Board 
revisits prior actions when it believes it is appropriate to do so. The 
new merger rules are a recent example of a situation in which the 
agency revisited prior precedent and made major changes in how the 
statute is administered in a way that will likely be defensible in 
court. The Board will continue to revisit prior actions where 
      Responses to Written Questions Submitted by Senator McCain 
                        to William Clyburn, Jr.
    Question 1. Please describe how the Board intends to interpret its 
new merger guidelines. How will carriers be held more accountable to 
their claims of merger benefits?
    Answer. The new rules were intended to be interpreted to provide 
all transportation stakeholders, including rail carriers, rail 
customers, consumers, and public entities with a more comprehensive 
application process to help ensure that the benefits projected in a 
future merger application are reconciled with the benefits actually 
realized shortly after that merger is consummated.
    The Board has consistently stated that these rules represent a 
significant change in direction from our previous rules. When the 
Staggers Rail Act of 1980 was passed, the railroads were experiencing 
excess capacity and the merger rules helped promote rationalization. 
Today, excess capacity is not the major issue--lack of competition and 
transitional service problems resulting from prior mergers are the 
foremost concerns facing transportation stakeholders. Accordingly, the 
Board intends to view any future mergers with those issues in mind and 
hold applicants to a heightened scrutiny in proving that an application 
is beneficial to competition and that any potential service problems 
are properly addressed.
    Applicants will have additional issues to address and higher 
expectations to meet. For example, the applicants should include 
provisions for enhanced competition to help ensure protection of the 
public interest. Applicants are required to make a good-faith effort to 
accurately calculate the net public benefits of their proposed merger, 
so the Board expects the application to include additional 
recommendations if the projected net public benefits fail to 
materialize in a timely fashion. The Board also will hold applicants 
accountable if they fail to act reasonably to achieve promised benefits 
when actual circumstances are different than those projected. 49 CFR 
Sec. 180.1(c)(1). Applicants must propose remedies to mitigate and 
offset competitive harms, including measures to preserve existing 
gateways, build-outs and build-ins, and shippers' opportunity to 
challenge bottleneck rates. 49 CFR Sec. 1180.1(c)(2)(i). The Board will 
require applicants to provide a detailed service assurance plan (see 49 
CFR Sec. 1180.1 (c)(2)(iii)) and are expected to explain how their 
transaction and conditions they propose would enhance competition (49 
CFR Sec. 1180.1(c)(2)(iv)). Applicants will be required to work with 
the Federal Railroad Administration to formulate and then submit a 
Safety Integration Plan to ensure that safe operations are maintained. 
49 CFR Sec. 1180.1(f)(3). Applicants also must provide evidence to the 
Board, for at least the first 5 years (on no less than an annual basis) 
following approval, to show that the merger conditions imposed by the 
Board are working as intended, that applicants are adhering to 
representations made, that no unforeseen harms have arisen 
necessitating the alteration or imposition of new conditions, and that 
the merger benefits projections are being realized in a timely fashion. 
49 CFR Sec. 1180.1(g). In addition, the rules encourage applicants and 
rail labor to enter into early negotiated implementing agreements and 
discourages management requests to override collective bargaining 
agreements 49 CFR Sec. 1180.1(e).
    Question 2. There has been much attention to the issue of 
``enhanced competition.'' Do the new rules clearly require a merger 
application to expand competition or can the Board envision that based 
on particular circumstances that a merger could be approved without 
increasing competition?
    Answer. Without prejudging the facts and circumstances of a 
specific merger proposal, theoretically a major merger proposal could 
involve a fact pattern where the competitive harm is so minimal as to 
not necessitate enhanced competitive access to ameliorate or offset 
those harms. The rules were promulgated for the express purpose of 
helping to ensure that if there is another major merger, the applicants 
provide the Board with the requisite information to address the 
increased concerns that transportation stakeholders have with 
additional mergers in an already highly consolidated industry.
    The Board, after obtaining testimony in hearings and oral arguments 
and in several rounds of written filings, has determined that while 
mergers can be beneficial, there may be competitive harms that result 
that cannot be mitigated by conditions. In such circumstances, the new 
rules require applicants to provide a plan for enhancing competition. 
It is clear that a filing absent such a plan would be less likely to be 
approved by the Board.
    Question 3. To what extent was the Board unable to address 
proposals submitted throughout the rulemaking process? Are there 
particular areas in which the Board did not have statutory authority to 
include otherwise reasonable proposals?
    Answer. There were some proposals submitted that arguably exceeded 
the parameters of our merger review. For example, there were 
recommendations for forms of competitive access and open access; 
imposition of conditions on non-applicants; removal of contractual 
agreements; changes to the Board's procedures regarding resolution of 
rate disputes which probably exceed the Board's statutory authority. 
While many debate how far the Board can go in terms of rail-to-rail 
competition or how feasible certain Board actions would be, the Board 
attempted to balance the need for rail customers to have reliable 
service at reasonable rates, and fair treatment of labor, with the need 
for rail carriers to be financially viable.
    Question 4. By law, merger decisions involving two or more Class I 
railroads must be determined within 16 months from the date the 
application is filed. Given the Board believes it has issued much more 
difficult guidelines, do you foresee any necessity to lengthen the time 
period under which the Board reviews mergers?
    Answer. As long as the Board has the necessary resources in terms 
of budget and skilled personnel, the Board should be able to maintain 
its record with respect to consistently issuing decisions in a timely 
    Question 5. Do you envision any future mergers occurring?
    Answer. I don't know whether additional major mergers will take 
place in the near future. The import of these new merger rules is to 
address the concern of the impact on our national transportation 
network of an additional major merger in an industry that has gone from 
30 independent Class I railroads in 1976 to arguably 7 independent 
Class I railroads today.
    Question 6. How do you believe the new merger rules will affect 
rail shippers?
    Answer. I believe the new merger rules will give shippers more 
information during the application process with which to respond 
regarding the benefits of a major merger proposal. The rules also 
provide for additional safeguards such as enhanced competition 
proposals, a service assurance plan, and higher accountability 
requirements to address harms and contingency measures. With the higher 
thresholds applicants must cross, railroads must think long and hard 
whether there are possibilities short of a merger which can accomplish 
their goals, and before an application is approved the heightened 
concerns of today's transportation stakeholders must be addressed.
    Question 7. When were the rail merger rules last revised? How many 
consolidations were approved by the Board, and previously, the ICC, 
under the former rules? What are the benefits of the new merger rules?
    Answer. The merger rules were revised in Ex Parte No. 282 (Sub-No. 
3), Railroad Consolidation Procedures, 363 I.C.C. 200 (1980) (decided 
August 8, 1980 and published on September 23, 1980, at 45 FR 62991). In 
addition, they were revised again to address the Board's exemption 
procedures in a decision printed at 366 I.C.C. 75 (1982) (decided 
February 19, 1982, and published on March 8, 1982 at 47 FR 9844. Nine 
major consolidations were approved under the former rules: Norfolk & 
Western/Southern; Union Pacific/Missouri Pacific/Western Pacific; Union 
Pacific/Missouri-Kansas-Texas Railroad Company; Denver and Rio Grande/
Southern Pacific; Union Pacific/Chicago and Northwestern; Burlington 
Northern/Santa Fe; Union Pacific/Southern Pacific; CSX/Norfolk 
Southern/Conrail; and Canadian National/Illinois Central. Also, the ICC 
assessed the Soo Line/Milwaukee Road in an advisory capacity in 
connection with a bankruptcy proceeding and denied the Santa Fe/
Southern Pacific proposal. The benefits of the new rules are that they 
address the needs of the public as they exist today, not 20 years ago. 
Accordingly, increased competition and accountability are stressed.
    Question 8. The Board's final rules provide a waiver for the Kansas 
City Southern Railway Company (KCS) from the application of the new 
major rail merger rules. I understand this waiver was not a unanimous 
decision by the Board--Chairman Morgan dissented. (a) Would you please 
offer your perspective on this waiver; (b) I recognize the KCS is a 
smaller Class I carrier compared to others, but it is nonetheless a 
Class I carrier. If the specific size of the company is the issue, 
perhaps a more appropriate route would be for the Board to initiate a 
proceeding to revisit its classification guidelines. Has the Board 
considered taking such action and if not, why not?
    Answer. The idea of treating KCS in a manner different from the 
other Class I railroads was initially sought by KCS itself. KCS has 
argued that any merger between itself and another Class I would not 
affect the national transportation system in the same manner as would a 
merger between two of the large Class I railroads. In considering this 
request, the Board considered the original purpose of our review of the 
old merger rules and recognized the unique status of KCS in the realm 
of Class I carriers.
    Following the December 20, 1999 notice of intent to file the 
proposed merger between the Burlington Northern Santa Fe and the 
Canadian National, the Board, in a decision served January 24, 2000, 
instituted a proceeding in STB Ex Parte No. 582, Public Views on Major 
Rail Consolidations, to conduct public hearings on the possible 
repercussions of such a merger which many believed would lead to a 
final round of mergers eventually leaving only two transcontinental 
railroads. After those hearings, by decision in Ex Parte No. 582, 
served March 17, 2000 (the decision whereby the Board initiated its 15-
month moratorium on major mergers), the Board recognized that only 6 
large railroads remain in the United States and Canada--Burlington 
Northern Santa Fe (BNSF), Union Pacific (UP), CSX Transportation, Inc., 
Norfolk Southern Railway Company, Canadian National Railway Company 
(CN), and Canadian Pacific Railway Company (CP). KCS was not included.
    It was recognized that two smaller Class I railroads, Grand Trunk 
Western Railroad Incorporated and Illinois Central Railroad Company, 
are affiliated with CN and that a third smaller Class I, Soo Line 
Railroad Company, is affiliated with CP. Finally, the Board stated that 
KCS was also a smaller Class I but was an independent entity. While 
technically meeting the revenue requirements to be classified as a 
Class I (annual operating revenues of over $250 million), KCS is much 
smaller than the other large railroads in revenue and miles of road 
operated. KCS had operating revenues of approximately $522 million in 
2000 and operated over 2,756 miles of road. By comparison, in the same 
year BNSF had operating revenues of approximately $9.2 billion and 
operated over 33,262 miles of road and UP had operating revenues of 
approximately $10.5 billion and operated over 33,341 miles of road. In 
fact, KCS is closer to the size of Wisconsin Central Limited (WC) 
(operating revenues of about $281 million in 1999) than the large 
railroads. Additionally, WC's proposed merger with Canadian National 
was deemed by the Board not to be a major transaction or a significant 
transaction, but a minor transaction--the least rigorous category. 
Accordingly, a majority of the Board was persuaded that KCS should be 
treated in a manner similar to WC.
    However, I was not fully persuaded by the KCS arguments. KCS sought 
a revision of the proposed rules to have the Board consider a merger 
involving a carrier with revenues of less than $1 billion to be 
considered as a significant transaction (involving lesser evidentiary 
requirements) rather than as a major transaction as mergers involving 
Class I railroads usually are handled. I did not see the basis for the 
presumably arbitrary $1 billion threshold. Also, by including such a 
high threshold and considering that KCS' proposal was framed in terms 
of Class I railroads, the Board would have to treat any major merger 
involving CN or CP as only a significant transaction, since they are 
Canadian carriers and technically not Class I railroads. (Our 
jurisdiction over a merger proceeding involving those carriers is 
dependent on our jurisdiction over their U.S. affiliates which are now 
Class I railroads but would also fall below that threshold under KCS' 
recommendation). In addition, the statute in 49 U.S.C. 11324(b) 
requires the Board to consider certain factors when reviewing a merger 
involving two Class I railroads. If such a transaction were considered 
a significant transaction rather than a major transaction some of these 
factors may not be considered, and therefore arguably run contrary to 
the statute. For these reasons, the Board did not incorporate a 
proceeding changing the classification threshold.
    KCS is a Class I carrier but as stated in 49 CFR 1201 (the Board's 
regulations defining the classes of carriers) those classifications are 
made for purposes of accounting and reporting. Class I railroads are 
required to file annual and quarterly financial report--s as well as 
other operational reports to the Board. The idea of classifications is 
to reduce the burden on smaller carriers. As a result of the Staggers 
Rail Act of 1980, the Interstate Commerce Commission (ICC) eliminated 
the reporting requirements for Class II and Class III carriers. Thus, 
although KCS is classified as a Class I carrier for accounting and 
reporting purposes, it is reasonable to consider the limited impact of 
KCS on the national transportation network as compared to the large 
    The procedure the Board has authorized is actually more stringent 
than that proposed by KCS (to be deemed a significant transaction) 
because any merger involving KCS and another Class I railroad will be 
considered a major transaction under the old rules and the factors 
listed in section 11324(b) will be considered. Finally, it must be 
pointed out that this waiver is not an outright exemption but a 
rebuttable presumption. If interested parties have concerns about a 
merger application involving KCS and another Class I, they will have an 
opportunity to file those concerns. If the Board determines that the 
rebuttable presumption is met, it would evaluate the proposal under the 
new rules, just like a merger with a large railroad. The Board will be 
involved at every stage to help protect the public interest.
    Question 9. Did DOT or DOJ comment on the STB's rulemaking proposal 
and if so, to what extent do the Board's new merger rules reflect the 
views of those Departments?
    Answer. DOJ did not file any comments in this proceeding. While DOT 
did participate in all phases of the proceeding, DOT's representative, 
at the oral argument in this proceeding held on April 5, 2001, 
testified that because of leadership changes, DOT, except for a few 
specific issues, could neither support nor oppose the positions it had 
taken in its previously filed written comments. DOT stated it agrees 
with the Board's imposition of the 15-month moratorium. DOT also 
supports the Board's development of new standards to evaluate Class I 
mergers which take into consideration the impact of those standards on 
all interested parties in the transportation community.
      Responses to Written Questions Submitted by Senator McCain 
                           to Wayne O. Burkes
    Question 1. Please describe how the Board intends to interpret its 
new merger guidelines. How will carriers be held more accountable to 
their claims of merger benefits?
    Answer. The new merger rules impose many specific requirements on 
future merger applicants, which should not be subject to much 
interpretation by the Board. For example, the new rules establish 
detailed procedures that must be followed and list specific information 
requirements that must be submitted by future applicants.
    The major area in the new rules that could be subject to Board 
interpretation is in the area of preserving and enhancing competition. 
The new rules do not specifically require the applicants to preserve 
the existing level of rail to rail competition nor do they define what 
the Board will consider when determining whether a particular 
transaction enhances competition. There are many ways to enhance 
competition and our new rules leave it to the applicants to propose 
such enhancements. The decision (but not the new rules) states that 
enhanced competition ``could be'' the enhancement of ``intramodal'' or 
rail-to-rail competition, such as the establishment of shared access 
areas, the granting of trackage rights, the removal of so-called 
``paper barriers'' and other approaches. However, enhanced competition 
also ``could be'' the enhancement of ``intermodal'' competition (e.g. 
rail-truck or rail-barge competition) or some other type of competition 
that may not even be related to transportation.
    The decision leaves it to the Board's discretion as to what 
constitutes enhanced competition. It is my hope that future railroad 
merger applicants will not only preserve the existing level of rail-to-
rail competition, but also focus on enhancing rail-to-rail competition.
    In terms of holding the railroads more accountable to their claims 
of merger benefits, the new rules require the applicants to identify 
additional measures or contingency plans that would be used in the 
event anticipated public benefits should fail to materialize in a 
timely manner. These additional measures were designed as a regulatory 
mechanism that should encourage applicants to carefully consider and to 
limit the exaggeration of potential benefits and, at the same time, 
provide a possible solution to problems if and when they might arise.
    Question 2. There has been much attention to the issue of 
``enhanced competition.'' Do the new rules clearly require a merger 
application to expand competition or can the Board envision that based 
on particular circumstances that a merger could be approved without 
increasing competition?
    The changes to the Board's major railroad consolidation rules and 
procedures set forth in our decision correctly shift the focus away 
from a policy that encouraged mergers to one that raises the threshold 
for approving a new merger, including considerations of 
enhanced.competition. However, Class I railroads will not be 
specifically ``required'' to include provisions to enhance competition. 
Enhanced competition is an encouraged goal rather than a mandated 
    I am not in favor of a mandated enhanced competition standard, 
absent a definition of that term in the rules. As previously stated, 
the new rules do not define enhanced competition. If we are to impose 
an enhanced competition standard, future merger applicants should know 
what steps they need to take to meet that standard and shippers should 
know what to expect.
    Nonetheless, I do not believe that a future merger will be approved 
unless it contains elements that increase competition. It is my hope 
that the Board will closely scrutinize future applications and use its 
conditioning power, if necessary, to preserve and enhance competition 
in a way that promotes a competitive and healthy railroad system.
    Question 3. To what extent was the Board unable to address 
proposals submitted throughout the rulemaking process? Are there 
particular areas in which the Board did not have statutory authority to 
include otherwise reasonable proposals?
    I believe that the Board carefully evaluated and addressed all 
proposals submitted during the rulemaking process. A few parties 
commented that the Board should condition every future major railroad 
transaction in a way that would allow any shipper to request its 
serving carrier, whether or not that particular carrier was involved in 
the transaction, to allow a second carrier to use the incumbent 
carrier's facilities in order to provide competitive rail service. I do 
not think the Board would have statutory authority to enforce such an 
open access proposal.
    Question 4. By law, merger decisions involving two or more Class I 
railroads must be determined within 16 months from the date the 
application was filed. Given the Board believes it has issued much more 
difficult guidelines, do you foresee any necessity to lengthen the time 
period under which the Board reviews mergers?
    Answer. I do not foresee any necessity to lengthen the time period 
under which the Board reviews mergers.I should note the new rules 
require a substantial amount of planning by future merger applicants, 
e.g., the service assurance plan, which will require a substantial 
amount of work by the future applicants prior to the submission of the 
application and, therefore, should not adversely affect our timetable.
    Question 5. Do you envision any future mergers occurring?
    Answer. There are currently seven (7) Class I railroads. Therefore, 
there remain twenty-one (21) possible merger combinations, some of 
which are more likely than others. For example, it is very unlikely 
that the two eastern (i.e., CSX and NS) or the two western carriers 
(i.e., UP and BNSF) would attempt mergers. I do not envision any more 
mergers in the near future, but would expect another merger in the next 
two to 5 years.
    Question 6. How do you believe the new merger rules will affect 
rail shippers?
    Answer. Shippers, of course, will not be directly affected by the 
new merger rules until a merger is proposed and the rules are 
implemented. However, I believe that rail shippers did benefit from the 
Board's moratorium and rulemaking, which helped stabilize the railroad 
    The primary benefit, in my opinion, is that new rules encourage the 
enhancement of competition, whereas the former old rules actually 
encouraged railroad mergers. For example, the former rules encouraged 
private transactions that lead to ``rationalization of the nation's 
rail facilities and reduction of its excess capacity.'' Conversely, the 
Board's new rules encourage the enhancement of competition. The new 
rules substantially increase the burden on applicants to demonstrate 
that a proposed transaction would be in the public interest, by 
requiring them, among other things, to demonstrate that the transaction 
would enhance competition where necessary to offset negative effects of 
the merger, such as competitive harm or service disruptions.
    I should note that rail shippers could benefit from future railroad 
mergers, under the new or former rules. Single-line, transcontinental 
rail service could substantially reduce transit and cycle times for 
certain shippers, which would reduce equipment and inventory costs. For 
example, I understand that it currently takes approximately 30 hours to 
move railroad traffic through the congested Chicago area. Mergers could 
substantially reduce this time and congestion, which would benefit 
    However, the benefits from future mergers may be very limited and 
competitive harms may be difficult to remedy. Consequently, mergers 
could also harm some shippers. There is a substantial amount of overlap 
between the remaining large Class I carriers. As a result, rail 
shippers could lose the benefits of direct competition and indirect 
competition. Hopefully, the Board, as it has in past mergers, will 
continue to strive to remedy direct competitive harm and other 
competitive harms would be offset by competitive enhancements.
    Question 7. When were the rail merger rules last revised? How many 
consolidations were approved by the Board, and previously, the ICC, 
under the former rules? What are the benefits of the new merger rules?
    Answer. The railroad merger rules were last revised by the 
Interstate Commerce Commission (ICC) in 1980 and 1982 in Ex Parte No. 
282 (Sub-No. 3), Railroad Consolidation Procedures. Major revisions to 
the merger rules were issued in a decision in this proceeding decided 
August 8, 1980, printed at 363 I.C.C. 200 (1980) and published on 
September 23, 1980, at 45 FR 62991. Major revisions addressing the 
exemption procedures were issued in a subsequent decision decided 
February 19, 1982, printed at 366 I.C.C. 75 (1982) and published on 
March 8, 1982 at 47 FR 9844.
    A review by Board staff indicates that there were nine (9) Class I 
railroad consolidations approved, with conditions, by the ICC/STB under 
the former rules. There was only one (1) Class I railroad merger that 
was denied by the ICC/STB during this period. It should be noted that 
ICC assessed another Class I merger in an advisory capacity connected 
with a bankruptcy proceeding.
    It should also be noted that there were many other railroad 
consolidations and transactions approved by the ICC/STB during this 
period, however, these did not involve two (2) Class I railroads and, 
therefore, were not classified as ``major'' transactions. These 
consolidations or transactions were classified as either significant, 
minor or exempt transactions. The rules regarding these transactions 
were not specifically addressed or significantly changed by the Board's 
most recent rulemaking, which focused on major transactions.
    In terms of the benefits of the new rules, see my response to 
Question No. 6.
    Question 8. The Board's final rules provide a waiver for Kansas 
City Southern Railway Company (KCS) from the application of the new 
major rail merger rules. I understand this waiver was not a unanimous 
decision by the Board--Chairman Morgan dissented. (a) Would you please 
offer your perspective on this waiver? (b) I recognize the KCS is a 
smaller Class I carrier compared to the others, but it is nonetheless a 
Class I carrier. If the specific size of the company is the issue, 
perhaps a more appropriate route would be for the Board to initiate a 
proceeding to revisit its classification guidelines. Has the Board 
considered taking such action and if not, why not?
    Answer (a). Our rules establish four criteria for reviewing 
railroad mergers: major, significant, minor, and exempt. The size of 
the carrier and the type of transaction determines which category the 
merger fits into and what burdens such railroad applicants must meet 
for their merger to be approved. The standards for a ``significant'' 
transaction are less rigorous than the rules for a ``major'' 
transaction and the time period to review such ``significant'' 
transactions is almost half of that for ``major'' transactions. The new 
rules focused on ``major'' transactions and changed what would be 
required of merger applicants in such ``major'' transactions.
    During the entirety of this proceeding, KCS requested that the 
definition of ``major'' merger transaction be limited to include only 
Class I railroads that had annual operating revenues in excess of $1 
billion per year and that any merger involving a Class I railroad under 
that threshold be treated as a ``significant'' transaction rather than 
a ``major'' transaction. In addition, KCS asked that if it was involved 
in a hostile transaction it would like to be treated under the 
``major'' rules. KCS asked for this differential treatment throughout 
the entire 15-month process and other parties provided comments both in 
support and opposition of the proposed rule.
    In merger proceedings, the ICC and the STB have a long history of 
treating railroads differently based upon their size. In reviewing the 
record in this proceeding, I determined to continue that tradition and 
suggested we adopt the rule requested by KCS. The final rule adopted by 
the majority of the Board, however, decided to treat a merger with KCS 
as a ``major'' transaction, but applied the old rules for such 
``major'' transactions involving KCS rather than the new rules. It 
should be noted that, in adopting this rule, the Board actually imposed 
a higher burden on KCS than that requested by KCS, although not as high 
a burden as imposed on the other Class I carriers, which are 
substantially larger than KCS. Future transactions involving other 
Class I carriers must comply with the new rules for ``major'' 
    Answer (b). The current rules regarding the classification of 
railroads are set forth in 49 Sec. 1201, General Instructions 1-1. 
These rules were last revised by the ICC in 1992 in Ex Parte No. 492, 
Montana Rail Link, Inc. and Wisconsin Central Ltd., Joint Petition For 
Rulemaking with Respect to 49 C.F.R. Part 1201, served June 17, 1992. 
In that rulemaking, the ICC raised the revenue threshold for Class I 
carriers status from $50 million (1978 dollars) to $250 million (1991 
dollars). Under the current standards and indexed to a current level, 
carriers having annual operating revenue of $261.9 million or more are 
considered Class I carriers. Class II carriers are those with revenues 
from $31.4 million to $261.9 million in revenue. Class III carriers 
have revenues less than $31.4 million.
    It may be time to revisit the classification standards. On November 
14, 2000, Wisconsin Central (WC) petitioned the STB to open a 
proceeding to consider amending the rail carrier classification 
regulations. WC suggested that the threshold for Class I carriers 
should be adjusted upward to $500 million dollars. KCS filed in support 
of the WC's request to open a proceeding and urged the Board to 
reevaluate the threshold classifications between carriers. To date, the 
Board has not acted on WC's request.
    Question 9. Did DOT or DOJ comment on the STB's rulemaking proposal 
and, if so, to what extent do the Board's new merger rules reflect the 
views of those Departments?
    Answer. The Department of Transportation (DOT) submitted comments 
in our rulemaking, but the Department of Justice (DOJ) did not submit 
comments. In addition to DOT, the Department of Agriculture (DOA) and 
the Department of Defense (DOD) submitted comments.
    In remarks at the oral argument held in the rulemaking proceeding 
on April 5, 2001, DOT indicated that, because its leadership had 
``changed significantly'' after the filing of DOT's written comments, 
DOT could neither support or oppose positions it had taken in written 
    Responses to Written Questions Submitted by Senator John McCain 
                            to John W. Snow
    Question 1. If the STB had not initiated a moratorium on mergers 
and rewritten the rules on major rail mergers, do you believe the Board 
would already be facing the final round of mergers?
    Answer. Yes. The proposed merger that precipitated Ex Parte 582 
would have significantly altered the competitive environment. Had the 
STB not initiated the moratorium, the remaining major roads likely 
would have put forward their own responsive merger proposals, leading 
to the premature and final restructuring of the nation's rail network.
    Question 2. Do you believe the new merger rules will lead to any 
merger approvals in the next 5 years? When do you think we can expect 
to see movement by any carriers in an attempt to consolidate?
    Answer. I do not anticipate any major merger proposal being 
submitted to the Surface Transportation Board (STB) in the next 5 
years. I believe future merger proposals will emerge only when rail 
customers support and have faith that the new carrier's expanded single 
line system service will achieve the benefits anticipated from the 
merger in an efficient, timely manner.
    Question 3. Based on your experience, do you think it will be 
possible to complete a major rail merger under the new rules?
    Answer. The Board has appropriately raised the bar on future 
mergers. While overall I believe the requirements under the new rules 
are achievable and do not represent an insurmountable barrier to future 
consolidations, there are more risks. For example, future Boards might 
seek to impose conditions that appear pro-competitive but actually 
limit the merged carrier's ability to foster single system service 
enhancements that produce the economic efficiencies which are shared 
with the shipper community. In addition, the new rules impose on 
railroads seeking mergers additional costs, including more analysis and 
planning on top of an already strenuous process.
    Response to Written Question Submitted by Senator Gordon Smith 
                            to John W. Snow
    Question 1. Some Oregon rail users, the railroads' customers, today 
have the option of using more than one railroad to pick up a shipment 
and deliver it to one of two railroads in the east. If there are two 
mergers, leaving just two transcontinental railroads, what will happen 
to the options available to Oregon rail users? What incentive would one 
merged transcontinental railroad have to keep the gateways open with 
the other transcontinental railroad? How would the Oregon rail user go 
about getting a price to transport its goods across the country? Would 
there truly be price competition, or would the railroad that can 
provide single-line service always quote the lower rate? How do the new 
merger rules help an Oregon shipper in this situation?
    Answer. It is customary in the rail system for competing carriers 
to maintain longstanding joint line routes. The STB in its new rules 
requires merging carriers to explain how they will ensure that 
customers will continue to have available for some time existing 
routings through major gateways.
    Some customers prefer to separately negotiate with each carrier 
that may be involved in a joint line movement; other shippers prefer to 
negotiate a through (or single) rate with their originating or 
terminating carrier. I anticipate that those options will still be 
    By and large, rail prices today are set by the marketplace with 
truck competition a key factor in the development of rate and service 
packages. In the past, expanded single system service has permitted 
merging carriers to operate more efficiently and economically, to 
reduce rates and to compete more effectively with the much larger 
trucking industry.
    The new merger rules require development of extensive service plans 
designed to ensure that disruption experienced during implementation of 
recent consolidations does not occur in future transactions. The rules 
also impose a higher standard of proof of anticipated benefits. By 
meeting these thresholds, shippers in Oregon and elsewhere will be able 
to receive the benefits of single line service and pricing without 
facing major disruptions in operations.
      Responses to Written Questions Submitted by Senator McCain 
                           to Paul M. Tellier
    Question 1. In your testimony, you point out that you are pleased 
that the final rules provide equal treatment for both domestic and 
internationally headquartered railroads and that you believe that, if 
properly implemented, the rail industry can operate effectively. 
However, you also stated that, ``we may not agree with all aspects of 
the new merger rules.''
    Question (a). Can you inform the Committee about the areas you 
still have concern with and why?
    Answer. Throughout the course of the deliberations of the Surface 
Transportation Board (STB) on its new merger rules, our concerns 
focused on four major issues First, we were very concerned about the 
Board's proposed requirements related to transnational mergers, which 
would have required foreign applicants to meet a greater evidentiary 
burden than domestic carriers as part of the initial merger 
application. In the final rules, however, the Board states that it will 
apply higher public interest standards for mergers equally to all 
applicants--both domestic U.S. companies and foreign-headquartered 
    Second, CN has urged that efforts to enhance competition as part of 
a rail merger not be used as a means to artificially introduce 
competition where no competitive problems exist. In our view, 
conditions related to competition should focus on remedying competitive 
harms that may arise from a merger so that a transaction will be 
consistent with the public interest. The Board's final rules have 
allayed some of our concerns by clarifying that applicants would be 
required to demonstrate that a proposed transaction would enhance 
competition where necessary to offset merger-related harms that cannot 
be directly or effectively mitigated. As the Board noted in its 
decision, its focus in requiring competition-related concerns ``is on 
ensuring that any mergers that are approved are in the public interest, 
not on imposing a new scheme of regulation upon the railroad industry 
through the back door of merger approval.'' Third, we have been 
concerned about the Board's proposed analysis required with respect to 
the ``downstream'' effects of a proposed transaction. As initially 
proposed, this analysis would have been highly speculative and 
impractical and would not have served to respond effectively to 
shippers' concerns about the prospect of two transcontinental 
railroads. In the final rules, the Board declined to require merger 
applicants to present alternative merger benefit calculations based on 
specific alternative possible responses of other carriers. Instead, the 
Board will require applicants to generally discuss the likely impact of 
future Class I mergers on the anticipated public benefits of their own 
merger proposal. So long as these rules are not used as a means to 
extend merger inquiries unreasonably or to over-manage the market for 
railroad control in a search for the hypothetically ``perfect'' set of 
railroad combinations, they should not diminish the Board's capacity to 
efficiently review merger proposals.
    Last, we have been concerned about the Board's new requirements 
regarding voting trusts. Under the previous merger rules, the decision 
as to whether to assume the regulatory risk of unauthorized control 
during the pendency of a merger proceeding was left to the applicants, 
who had the option of obtaining informal staff review of a proposed 
voting trust agreement. The new rules, however, require applicants to 
obtain formal Board approval of voting trusts at the outset, with the 
Board applying a public interest standard in addition to the no-control 
test. Depending on how the rule is applied, it could require the Board 
to make a decision on elements of a merger's merits prior to receiving 
evidence on all relevant aspects of the proposed transaction, rather 
than at the conclusion of a merger proceeding.
    Question (b). How would you change the new rules to alleviate these 
    Answer. On three of our four major concerns--treatment of 
transnational mergers, enhancement of competition, and analysis of 
downstream effects--implementation by the Board of the requirements in 
the final rules will be key to determining whether the provisions are 
having their desired effect. It is essential to the future of the 
railroad industry that the merger rules serve as a mechanism to promote 
efficiency and service, not a way to induce artificial, economically 
unsustainable competition or to protect some carriers from competition 
with others.
    With respect to voting trusts, we would prefer that the Board 
revert to its prior practice. In the alternative, the Board should 
limit its inquiry into whether the proposed trust, rather than the 
transaction itself, is consistent with the public interest. The notion 
that the use of a voting trust somehow limits the Board's authority 
ultimately to protect the public interest is unsupported.\1\ 
Application of the Board's traditional tests for control in a review of 
trust proposals initiated at the option of applicants would continue to 
fulfill the proper function of aiding applicants seeking to avoid 
unauthorized control. Even under the new rules, we would hope that the 
Board would not seek to limit the workings of the capital markets with 
respect to the absorption of risk by an acquiring carrier or to 
handicap the market for control by giving the Board the right to pre-
judge the merits of a merger. Instead, the Board's focus should be on 
whether a voting trust itself is likely to have any serious impact on 
the public interest. CN supports a more rigorous examination by the 
Board of a transaction's financial impacts on the ability of the 
merging carriers to maintain and improve service. The examination of 
financial terms, however, like the examination of any other element of 
the public interest, should occur during and not prior to the merger 
    \1\ As an example, the Interstate Commerce Commission denied an 
application involving a voting trust in the proposed Santa Fe/Southern 
Pacific merger.
    Question 2. Do you believe the BNSF/CN transaction that you 
intended to submit to the Board for review last year would have been 
approved under the new rules?
    Answer. Our proposed combination with Burlington Northern Santa Fe 
(BNSF) was a pro-competitive, largely end-to-end transaction. I am 
convinced that the CN/BNSF combination would have been good for 
shippers and the rail industry.
    Our commitment to service was consistent with the goals of the 
Board's new merger rules. As part of this transaction, CN and BNSF had 
made a commitment to shippers to provide service to our customers at 
least as good as, or better than, the service they were receiving prior 
to the combination. Importantly, CN and BNSF also pledged to keep 
gateways open for customers following the combination. Not only do the 
Board's new rules strongly emphasize the importance of providing good 
service to customers, but they also incorporate this concept of open 
    While it is impossible to State with certainty what the fate of 
this proposed transaction at the Board would have been under any 
circumstances, the basic spirit of this proposed combination, the 
overall rationale for the transaction, and our commitment to customer 
service were consistent with the Board's goals and objectives stated in 
the new merger rules. I am confident that we would have been able to 
successfully address the Board's concerns related to continued 
financial viability, competition, and fulfilling our customer 
commitments, and believe the transaction would have merited the Board's 
    Question 3. You briefly discuss in your testimony the impact the 
economy at large has had on shaping the railroad industry in the past 
and assert that this will continue to be the case and as such, there is 
no ``certainty'' to the future make-up of the rail industry. This would 
seem to disagree with the STB's assertion that one more Class I to 
Class I rail merger will likely kick-off the final round of mergers.
    Question (a). With ever-increasing traffic volumes moving in and 
out of North American ports and more traffic moving north and south, 
what do you believe we should expect to see with regard to Class I 
mergers in the next several years? What about smaller mergers?
    Answer. It is clear that the rail industry has an important role to 
play in the North American transportation system given high traffic 
volumes moving throughout the continent, particularly north-south 
trade. There is no clear answer, however, as to how individual carriers 
will choose to meet this challenge.
    As I noted in my testimony, CN believes that no particular industry 
structure is inevitable. What is important is that the rail industry 
must emphasize responsible growth and responsive customer service. We 
need to help our customers increasingly find rail to be the best 
transportation choice. The rail industry overall has found it difficult 
to divert freight from other transportation modes; in fact, the 
railroad industry's share of the freight transportation market has 
declined relative to the trucking industry in every year since 1980. 
Railroads must increase our market share if we are to remain a viable 
sector over the long run.
    In CN's case, we undertook our 1999 merger with Illinois Central 
precisely for the purpose of capitalizing on the expanding market for 
north-south trade that has arisen as a result of the North American 
Free Trade Agreement. More recently, we announced earlier this year our 
proposed merger with Wisconsin Central, which is currently under review 
by the Surface Transportation Board. By acquiring WC, we seek to secure 
and to increase to the maximum extent possible the efficiency of our 
important NAFTA route connecting western Canada and the central U.S. 
Outside of these merger activities, we also are continuing to seek new 
ways to improve our performance and enhance our customer service.
    It remains to be seen whether Class I railroads will propose 
further mergers between them to enhance efficiency and whether such 
proposals would warrant approval. The Board should welcome progress 
toward more efficient railroads if it is possible.
    Question b. How has your view on what might happen with regard to 
mergers changed as a result of the STB's new rules?
    Answer. The Board's new rules appropriately raise the bar for 
future rail mergers by emphasizing the importance of customer service. 
The Board also will be examining more rigorously the effects of a 
proposed transaction on the financial ability of the merged carriers to 
maintain and improve service. Any carrier wishing to pursue a merger 
will have to be prepared not only to demonstrate the expected benefits 
associated with the proposed transaction, but also to identify how 
these benefits in fact will be realized and what actions will be taken 
should the expected benefits not materialize.
    An important change from past precedent is the Board's more 
skeptical attitude toward claims of merger benefits as opposed to the 
previous presumption that a merger is in the public interest. The Board 
is placing greater emphasis on enhancing competition as well as on 
obtaining information on ``downstream'' impacts of a transaction.
    Mergers may still have an important role to play in helping the 
industry reduce costs and improve service, thereby enhancing 
competition. If the Board's new rules are properly applied, applicants 
with a solid business case for their transaction, consistent with the 
public interest, should be able to successfully pursue a merger at the 
    With respect to smaller mergers, these may well prove to be more 
appealing to carriers, particularly in the short-run. Smaller mergers 
are less likely to raise significant ``downstream'' concerns, and there 
are likely to be fewer competitive implications surrounding such 
transactions. However, each rail carrier will have to examine its own 
strategic goals, market position, and other factors before determining 
whether any merger--large or small--should be pursued.
    Question 4. In your written testimony you commented that your 
annual operating revenues in the U.S. are approximately $3.5 billion. 
What are CN's ``total'' revenues and track mileage, including your 
Canadian side of the operation?
    Answer. The figures cited in my written testimony applied to CN's 
operations in both the United States and Canada. CN's total operating 
revenues for the year 2000 were C$5.428 billion, which equates to 
approximately US$3.5 billion. Approximately US$1 billion of these 
revenues are attributable to our operations in the United States. With 
respect to track mileage, CN operates over a total of approximately 
15,500 route miles, roughly 3,000 of which are in the United States.
    Question 5. You indicated CN and other carriers are undertaking 
initiatives to expand service, such as through alliances and marketing 
agreements with other carriers. What can't be accomplished by these 
approaches that only can be produced as the result of a merger?
    Answer. CN has had excellent experiences with alliances with a 
number of different rail carriers. Major examples include the 
    (a) Our most extensive alliance to date is our 15-year Strategic 
Marketing Alliance with Kansas City Southern, which we announced in 
April 1998. Through this alliance, we are able to offer shippers 
extended reach through a coordinated network linking points in Canada, 
the Midwest and southern U.S. markets. Through KCS affiliates, the 
Marketing Alliance provides customers access to Mexico's largest rail 
system, effectively linking all three NAFTA nations.
    (b) We have in place three co-production agreements with Canadian 
Pacific Railroad (CP): (i) directional running of CN and CP trains over 
a 155-mile stretch of track through the Fraser Canyon in western 
Canada; (ii) an agreement under which CN has access to CP's 
Northeastern U.S. network; and (iii) an agreement providing CP access 
to CN's Toronto--Chicago main line.
    (c) Most recently, we announced in May 2001 a new range of services 
with CSX Intermodal connecting major Canadian and U.S. markets. These 
services should be attractive to shippers of high-value consumer goods 
in Canada and the U.S., as well as international shippers.
    Alliances can be an important part of a carrier's effort to enhance 
its service offering and to meet customers' needs. However, the full 
congruence of interests that common control provides is not possible in 
an alliance. While it is fully expected that each carrier will seek to 
maximize its own performance, this behavior tends to prevent an 
alliance from achieving the higher level of performance that is 
possible with common control. An alliance member may find it necessary 
to deploy resources in such a way that maximizes its own profits or 
level of service, without regard to the combined profits or service 
levels of other alliance members.
       Responses to Written Questions Submitted by Senator Smith 
                           to Paul M. Tellier
    Question 1. Some Oregon rail users, the railroads' customers, today 
have the option of using more than one railroad to pick-up a shipment 
and deliver it to one of two railroads in the east. If there are two 
mergers, leaving just two transcontinental railroads, what will happen 
to the options available to Oregon rail users? What incentive would one 
merged transcontinental railroad have to keep the gateways open with 
the other transcontinental railroad? How would the Oregon rail user go 
about getting a price to transport its goods across the country? Would 
there truly be price competition, or would the railroad that can 
provide single-line service always quote the lower rate? How do the new 
merger rules help an Oregon shipper in this situation?
    Answer. At the present time, the U.S. rail industry is 
characterized by two Class I carriers in each of the Western and 
Eastern regions--Union Pacific (UP) and Burlington Northern Santa Fe 
(BNSF) in the West and CSX and Norfolk Southern (NS) in the East, with 
CN, Canadian Pacific (CP), and the Kansas City Southern (KCS) operating 
in portions of these regions. The options available to Oregon rail 
users if two transcontinental railroads emerge from any next round of 
rail mergers--should that occur--would depend largely on the conditions 
that the Surface Transportation Board (STB) would impose on future 
mergers, as well as the extent to which competition exists from other 
modes and, with respect to some traffic, short-line rail carriers. The 
Board has stated clearly in the new rules that it views not only the 
preservation of competition, but also the enhancement of competition, 
as essential in future mergers. Future merger applicants will be 
required to demonstrate not only that the proposed transaction will 
improve economic efficiency and lead to improved service, but also that 
competition will be enhanced as a result.
    With respect to gateways, the Board's rules require merger 
applicants to present an effective plan to keep open major existing 
gateways. The Board has stated that it will impose conditions on any 
approved mergers to ensure that the gateways indeed remain open. The 
Board's decision also notes that parties may identify gateways that 
require specific protection other than those initially identified by 
the merger applicants and the Board will determine whether conditions 
are necessary to protect any such gateway from closure.
    As to the processes available to a shipper to determine the price 
of rail services, there should be no change from current practices. 
Shippers can go to rail carriers, either to sales representatives or to 
a variety of on-line options, to obtain price and service information. 
Unless Congress chooses to make a substantive change to the Interstate 
Commerce Act, the common carrier obligation still would remain in 
force, requiring a rail carrier to quote a rate for its services. In 
addition, as at present, shippers would have the option of seeking to 
enter into contractual relationships with carriers to meet their rail 
service needs.
    With respect to price competition, merger rules that preclude any 
reduction of competition and require its enhancement should, at a 
minimum, assure no diminution of price competition between rail 
carriers and between modes.
    Last, as to the impact of the new merger rules on Oregon shippers 
with respect to pricing, in addition to the pricing constraints imposed 
by the marketplace, I believe the major impact is that the Board's new 
rules emphasize the importance of customer service resulting from rail 
mergers. The Board has made it clear that it will hold carriers to the 
promises they make in their merger application and throughout the 
review process; if these promises are not fulfilled, the Board will 
take appropriate action. In addition, the traditional rate complaint 
procedures will continue to be available to shippers at the STB.
    Question 2. One of the problems we have in Oregon is congestion on 
I-5. One way to reduce that congestion would be to divert some truck 
traffic to the railroads. The last two mergers in the west have created 
single-line routes along the entire I-5 corridor, but there has not 
been a substantial diversion of truck traffic to the railroads. Part of 
this must be based on the service problems that everybody involved with 
the rail industry has suffered through. As I understand, it takes a 
tremendous commitment from management and a huge effort to divert any 
truck traffic to the railroads. Doesn't it make sense to concentrate on 
the traffic that is available to the railroads, such as the I-5 
corridor in the west, and, I understand, the I-81 corridor in the east, 
and get that right before diverting the attention and limited resources 
of railroad and management to putting together another merger and 
resolving the problems and addressing the opportunities of that merger? 
Shouldn't the problems of past mergers have been solved and the 
promises of past mergers kept before the railroad industry embarks on 
another, and apparently final round of mergers? How will we know when 
that time has come?
    Answer. A key goal of railroads is to enhance the industry's 
competitiveness vis-a-vis other transportation modes. While important 
opportunities for generating rail traffic clearly exist in areas such 
as the I-5 and I-81 corridors, railroads throughout the country seek 
opportunities to make rail their customers' first choice as a 
transportation service provider. Despite service and productivity 
improvements over the years, however, the industry has found it 
difficult to divert freight from other transportation modes. For our 
part, CN is aggressive in seeking new service opportunities and finding 
ways to enhance our service offerings to customers.
    With respect to past mergers, it is clearly important that problems 
from past mergers be solved and promises kept. However, it is not 
necessary--nor is it fair--to preclude rail carriers that have not 
suffered merger-related difficulties from pursuing future merger 
opportunities, should there be a strong business case and good public 
interest rationale for so doing.
    As an example, in 1999, the STB approved the CN/IC merger. We have 
been successful in integrating our two railroads in an essentially 
flawless fashion, with no disruptions to our customers. If the Board 
approves our proposed merger with Wisconsin Central, which currently is 
under regulatory review at the agency, we have every expectation of 
implementing that transaction in a similarly successful fashion. Let me 
hasten to add that CN has no plans at this time to merge with another 
rail carrier beyond our ongoing transaction with WC. If an appropriate 
opportunity should present itself, however, we should be free to pursue 
it, subject to the rules established by the Board.
    As to when we will know when the time has come for more mergers, I 
do not believe it is a certainty that any particular industry 
structure--such as two major North American railroads--is inevitable. 
Nor is it likely that there will be one defining moment when it will be 
clear that future mergers are inevitable. As in the past, each rail 
carrier will need to assess opportunities that may present themselves 
in the context of the carrier's current financial and operational 
condition and competitive status, along with the public interest and 
general competitive implications of a potential transaction, before 
deciding whether to pursue a merger.
      Responses to Written Questions Submitted by Senator McCain 
                         to Claudia L. Howells
    1a. National Rail Policy should first establish a framework for 
public actions related to or affecting the railroad industry. Others 
may have their own thoughts about what should be included, but I offer 
the following as a starting point.
    1. Railroads are an essential part of the National Transportation 
System and should be considered a valued national resource.
    2. It is in the public interest to retain private ownership of 
railroads and rail property, because it reduces the burden on the 
public sector. Public policy should encourage private ownership.
    3. Effort should be made to reduce competitive disadvantages 
created by direct or indirect subsidizes to other private, competing 
commercial modes of transportation.
    U.S. DOT's National Freight Policy should be viewed as a document 
that addresses all modes and not just those that use the highway 
system. Much of what is in that policy statement can be mirrored in a 
statement governing rail policy, with the understanding that railroads 
can and should move people.
    Currently the Federal Government collects 4.3 cents diesel tax. I 
am well aware of that the Class I railroads want the tax eliminated, 
but it is reasonable to use that revenue to protect the overall 
integrity of the rail system. I can understand the railroads being 
uneasy about the precedent of creating a Railroad Trust Fund, but it is 
entirely unreasonable to suggest that Highway Trust Funds or general 
revenues should be used to create a Railroad Fund.
    There are some small changes that can be made that would help 
create a ``safety net.'' As an example, FEMA funds cannot be used on 
privately owned railroads (though they can on publicly owned railroads) 
for disaster relief. Particularly for short lines, a flood can destroy 
a line and isolate businesses and communities. Making railroads 
eligible for FEMA grants would be a small step toward creating a safety 
    Highway funds should contribute to the maintenance of crossing 
signals and surfaces. Again, a small contribution that would relieve 
the railroads of a financial burden created by highway users.
    1b. First, we need to acknowledge that railroads continue to be 
regulated more than any other transportation industry for both service 
and safety. This is not necessarily bad. I would not suggest that we 
return to the pre-Staggers days of regulation, but because the 
railroads are so profoundly essential to the nation's economy they 
deserve protection from others, and sometimes protection from each 
other and themselves. A good regulator, and I believe that can exist, 
should function as referee. Government doesn't need to be coach or 
player but things can get very chaotic without a mediating or even 
adjudicating body. A specific role I see the STB playing is to 
arbitrate disputes between freight railroads and the growing commuter 
rail interests. In my opinion, that is no different than arbitrating 
disputes between the railroads, which is one reason the ICC was created 
in the first place. I also believe that both railroads and shippers 
continue to need a referee on rail line abandonments, mergers and 
general service issues, to protect both the interests of the customers 
and the public.
    In my testimony, I don't believe I suggested additional regulation 
as much as I did the need for the STB and the FRA to better anticipate 
problems rather than react to a crisis, often after the damage has been 
done. As Commissioner Morgan has pointed out, the statutes that govern 
the STB were developed for a very different railroad industry than the 
one we have today. It is a good time to think about a future of the 
rail industry and how best to structure regulations to encourage 
redevelopment railroads.
    1c. On the issue of multiple agencies involved in railroad 
business, there needs to be a study of how best to define how each 
agency works with the railroads and how the agencies work together.
    The various Federal statutes need to be evaluated to determine 
where statutory conflicts exist. Presumably, all should have the same 
``prime directive,'' something that does not exist now. Suggesting the 
restructuring agencies always sends people into panic mode, so I am 
reluctant to jump to that as a solution. What I can say is that after 
many years working with all three agencies, I am convinced that the 
cultures and direction of each agency are profoundly different. STB 
needs to be independent and separate, and the FRA and Department of 
Justice, both need to participate in STB proceedings. That kind of 
public debate is important and constructive.
    The FRA needs a clarity of mission, particularly in the policy 
area. Where I think we need to take a hard look is which agency, the 
FRA or FTA, is more appropriate to oversee and fund commuter rail (not 
to be confused with Light Rail.) There is little difference now between 
commuter rail and regional intercity passenger rail, yet funding is 
with FTA for commuter rail, FRA for ``high speed rail,'' and Amtrak for 
everything else. FRA is the safety enforcement agency for all railroad 
operations, including freight, passenger and commuter, but excluding 
Light Rail systems, which further muddles jurisdictions and missions.
    There are other agencies involved as well. As an example, FHWA 
funds highway-railroad grade crossing improvement projects. As the FRA 
increasingly becomes involved in grade crossing regulations, there is a 
disconnect between the only funding source, FHWA, and FRA's regulatory 
initiatives. FRA's quiet zone initiative is one example.
    All of these agencies are within U.S. DOT, and I hope that the 
Secretary will provide encouragement for all of the agencies to work 
together and to forge a common understand of how government relates to 
the railroad industry.
    2a. I agree that the predictions I made are contrary to what the 
STB said prior to issuing the moratorium. The moratorium allowed cooler 
heads to prevail. I have no doubt that without the moratorium the 
mergers would have continued. I think many railroads believe that the 
moratorium was illegal, but were relieved when the STB called halt. The 
moratorium had exactly the affect intended, and the process in 
developing the rules was healthy for the industry and the public.
    As to how I arrived at my conclusions, I can only say that I pay 
close attention to the railroad industry and to rail shippers. Every 
indication I have is that proposals for any more major mergers would 
create a firestorm within the shipping community. With perhaps one 
exception, the railroads seem to realize that additional mergers will 
not make the industry financially better off, and if anything, will 
distract from the business of railroading.
    2b. The issues I listed as being the next wave facing the railroad 
industry included spin-offs of the weaker parts of the mega-Class I's, 
consolidation of short line companies and the abandonment of short line 
    1. Creating economically weak Class I's could be as catastrophic as 
creating huge semi-monopolistic Class I railroads. The STB needs to 
hold such transactions to not only a competitive test, but also a test 
to insure the financial viability of both systems. I am not saying that 
these split-ups will occur, but the financial pressures on the industry 
will make it tempting to concentrate resources on the strongest parts 
of the system.
    2. Consolidation of short line railroads has very little impact on 
competition, but these transactions have the potential for being 
financially risky and also could put at risk service to our most 
economically challenged parts of the state. Like the big railroads, 
publicly traded short line holding companies may need to jettison less 
productive properties to keep Wall Street happy.
    3. Many of the short lines desperately need money for capital 
investment. Despite having respectable traffic levels, the heavier cars 
are escalating damage to the infrastructure. The first line of defense 
is to provide financial assistance to these lines. The STB also needs 
the authority to place a higher public interest standard on these 
abandonments. Typically, these are handled as Exempt proceedings making 
it almost impossible for shippers, communities or states to effectively 
protest. Put another way, the current process clearly favors line 
abandonments, notwithstanding the public interest.
    4. A long time transportation manager once told me that you don't 
tell railroads how to run their business, just tell them what you want. 
I don't think it's my business or the STB's to tell the railroads how 
to deliver service. I do think that we (government) can, as 
representatives of shippers and the public, tell the railroads what we 
expect in terms of safety and service. As I mentioned earlier, the most 
important role the STB can serve is as referee. The STB also needs to 
insure a financially stable industry. If we assume that railroads are a 
vital national resource then we need to protect that resource.
    Furthermore, service problems are almost always an indicator of 
safety problems, and vice versa. Unsafe railroads can have a tremendous 
impact on communities, as the recent tunnel fire in Baltimore 
    The STB has been very clear in saying that it does not want to run 
the railroad industry. In fact, if the railroads were providing good 
quality service the STB would have very little to do, because the STB 
and the ICC before it, have been remarkably restrained in directing the 
    5. Policy makers, at all levels of government, seem to have no 
problem at all partnering with the airline industry, the trucking 
industry and the maritime industries, all of which benefit from 
publicly funded infrastructure. On the other hand, investment in the 
rail industry, even in Amtrak, seems to send shudders through public 
    If we can all agree that the railroads are still an essential part 
of the transportation system, rather than a ``transportation has-
been'', we can begin to reestablish the public/private partnership that 
built the railroads a century ago. As the railroads like to say, they 
need to level the playing field. We need to look at how we tax 
railroads, how we contribute to them, and how we create competitive 
disadvantages relative to other commercial modes. We need to recognize 
that moving freight by rail is as important as moving people. As an 
example, the contribution of public funds for commuter rail is enormous 
compared to public funds for moving freight by rail. Why?
      Responses to Written Questions Submitted by Senator McCain 
                            to William Gebo
    Question 1. What factors do you and other members of the American 
Chemistry Council consider when choosing to locate new facilities? To 
what extent does location to a rail line play in such a decision? Does 
the proximity to two railroads weigh heavily in such decisions?
    Answer. Chemical facilities are located on a number of factors. 
These include availability of labor, energy, raw materials, access to 
customers, and transportation. Many chemical plants were located in 
areas with more than one railroad, but mergers over the past 20 years 
have limited the current rail-to-rail competition. The Houston, Texas 
area is a good example of this situation.
    When looking to build or expand a chemical facility in North 
America today rail-to-rail competition is certainly a factor that is 
    Question 2. Can you tell us if any of your members have seen 
competition cease as a result of a merger--has any facility experienced 
a loss of a carrier option where prior to a merger, two carriers 
provided service but after a merger, only one carrier provided service? 
Have any of your members decided to relocate due to a loss in service?
    Answer. Rail mergers definitely diminish competition between 
railroads. That problem is masked by the Surface Transportation Board's 
overly narrow focus on ``two-to-one'' points. A two-to-one point is a 
particular location that is served only two railroads, which happen to 
be the two carriers seeking merger approval.
    To focus on two-to-one situations, is to overlook many types of 
other merger-related reductions in competition that shippers have 
experienced. Merged railroads close ``gateways'' to prevent shippers 
from choosing alternative routings that may offer favorable rate-and-
service packages. Relatively short ``bottlenecks''--where one of the 
merging railroads controlled the traffic between a captive shipper 
facility and the nearest interchange with a different railroad--become 
longer bottlenecks, leaving shippers with fewer competitive options. 
Mergers eliminate independent railroads, which provide shippers with 
such benefits as ``geographic competition,'' which in some instances 
may mitigate the market power of other railroads. Because STB generally 
does not address three-to-two situations, over time many customers lost 
competitive carrier options. Post-merger service problems are 
exacerbated if only one railroad controls the infrastructure in a 
region, because there is no longer head-to-head competition to serve 
new industrial facilities.
    As stated in my written testimony: ``For several years--coinciding 
with the most recent wave of rail mergers--the Council and its member 
companies have become increasingly concerned about the lack of direct 
head-to-head competition between railroads. For the Council's 
membership as a whole, 63 percent of all rail-served chemical plants 
are restricted to service by a single railroad. In other words, when it 
comes to rail transportation, nearly two-thirds of our industry is 
``captive'' and therefore has no opportunity to obtain competitive 
price quotations or service options. Member companies that have 
competition available at some of their facilities report that their 
freight rates are much higher (ranging from 15 percent to 60 percent 
more) where the railroad has a monopoly over the shipper's traffic. Nor 
is it surprising that the Council's members report that railroads are 
less responsive to customer service concerns at locations without rail-
to-rail competition.''
    Question 3. What is your view on the new rules? Do you believe the 
Board has gone far enough in its merger rule revisions?
    Answer. The Council's views on the new rail rules are stated in my 
written testimony. We ``asked STB to make competition the centerpiece 
of its new merger guidelines. Unfortunately, however, STB declined to 
enhance competition when railroads merge. To be sure, STB invited--and 
perhaps, to some extent, may be said to have encouraged--railroads to 
`talk the talk' about competition and improved customer service when 
they file their next round of merger applications. But STB clearly did 
not adopt any rules that would require railroads to `walk the walk' by 
competing directly with each other at all points on their merged 
    Question 4. What is your view regarding the Board's blanket 
exemption for the KCS?
    Answer. The Council has no view on STB's decision in Ex Parte No. 
582 (Sub No. 1) regarding the Kansas City Southern Railway Company.
      Responses to Written Questions Submitted by Senator McCain 
                           to Michael Haverty
    Question 1. Why should KCS receive preferential treatment under the 
STB's rules? Would you support an exemption of the new rules for any 
other Class I carrier?
    Answer. Different treatment of rail carriers based upon the size of 
the company has been a main stay under the STB's, and the former ICC's, 
rules and regulations for over fifty years. Grandfathering KCS under 
the ``major'' transaction review of the old rules, as was done by the 
Board, is simply a continuation of that policy and recognizes that a 
merger with KCS does not involve the same geographic scope and market 
power as mergers involving the other Class I carriers.
    KCS is the smallest of the Class I railroads with approximately 
$564 million dollars of operating revenue in 1999. In comparison to 
KCS, the next largest Class I carrier, Canadian Pacific Railway 
(``CP'') (including its U.S. subsidiary, Soo Line Railroad), had annual 
operating revenues of approximately $2.4 billion dollars. The largest 
Class I carrier, the Union Pacific Railroad (``UP''), had operating 
revenues of $10 billion dollars in 1999. As a result, the other Class I 
carriers are between nearly 18 times and 4 times the size of the KCS. 
Indeed, KCS more closely resembles the Wisconsin Central System 
(``WC''), which had combined operating revenues around $400 million 
dollars in 2000. Earlier this year, the STB agreed to treat a 
transaction involving the WC as a ``minor'' transaction, a level of 
review far below that of a ``major'' transaction review that KCS would 
have to meet if it were merging with another Class I under the proposed 
rule. Given KCS's closeness in size to the WC, as compared to the other 
much larger Class I railroads, it is hard for us to see why we would be 
treated so differently than the WC.
    KCS's north-south market reach makes it impossible for any merger 
of KCS and another Class I carrier to result in an east-west 
transcontinental merger that is the type of merger that the STB was 
addressing in the new merger rules. Nor, I believe, would a merger with 
KCS and another Class I carrier trigger the final round of 
consolidations that could result in only two large carriers serving the 
entire United States. Grandfathering KCS under the previous rules, 
given the huge size disparity between KCS and the other Class Is, and 
given its lack of market power as compared to the much larger Class I 
railroads, is entirely consistent with Board precedent.
    Throughout the STB's rulemaking, KCS asked that the definition of a 
``major'' merger transaction under the new rules be changed so as not 
to include carriers with operating revenues under $1 billion dollars. 
KCS drafted its proposed rule in such a manner to include other Class I 
carriers that were significantly smaller than the big Class I carriers. 
For example, WC would have become a Class I carrier on January 1, 2002 
if the recently announced acquisition by the Canadian National Railway 
had not occurred. KCS's proposal would have included WC in this 
proposed treatment. KCS would support different treatment in mergers 
for any Class I carrier similar in size to KCS or WC.
    Question 2. Am I correct that you wish to retain the waiver 
exemption granted to KCS by the Board so that any merger that your 
company is involved in would be easier to receive Board approval?
    Answer. KCS does agree that it should be grandfathered under the 
previous merger rules as imposed in the STB's recent new merger rules. 
As stated in response to question one, the differential treatment of 
rail mergers based upon the size of the rail carrier is an established 
precedent of the STB and the former ICC. KCS does not view the 
treatment it has received as necessarily making any KCS merger easier 
to receive Board approval.
    Under the grandfathering provision, a merger involving KCS will be 
thoroughly reviewed and commented on by any interested party under the 
same timeframes and standards that were applied to all mergers 
involving Class I carriers since 1980, including the most recent 
mergers of Burlington Northern/Santa Fe, Union Pacific/Southern 
Pacific, Canadian National/Illinois Central and the CSX/Norfolk 
Southern/Conrail transaction. In fact, because the Board's rule 
requires a KCS merger to be treated as a ``major'' merger, the Board 
has actually imposed a higher burden on KCS than what KCS asked for in 
the rulemaking. KCS requested consideration as a ``significant'' 
transaction rather than a ``major'' transaction. Besides, the rule as 
written, is a rebuttable presumption and gives other parties the right 
to challenge it if KCS were to become involved in a merger with another 
Class I carrier.
    Question 3. What do you believe is the appropriate revenue 
threshold for classification as a Class I? Does the KCS want to be 
classified as a Class II and if so, why, and if not, why not?
    Answer. On November 14, 2000, WC petitioned the STB to open a 
proceeding to consider amending the rail carrier classification 
regulations. WC suggested that the threshold for Class I carriers 
should be adjusted upward to $500 million dollars. KCS filed in support 
of the WC's request to open a proceeding and urged the Board to 
reevaluate the threshold classifications between carriers. At that 
time, KCS did not comment on the appropriateness of the threshold 
suggested by WC. KCS believes that the appropriateness of the threshold 
can and should be determined in the context of a proceeding to examine 
all of the issues. KCS has suggested a $1 billion revenue threshold for 
``major'' transactions in its comments on the proposed new rules. That 
may also prove to be an appropriate threshold for classification as a 
Class I.
    Most important in this process is that KCS is committed to 
protecting the interests of its employees, shareholders, and the 
service it provides to its shipper. Nevertheless, it is undeniable that 
the mega-Class I railroads play a far different role in the national 
rail transportation scene than do regional railroads such as KCS, WC, 
Montana Rail Link (``MRL''), and Florida East Coast Railway Company 
(``FEC''), who all serve a vital but more limited role as regional