So, we would like to begin this hearing to try to address those issues, and also talk to a certain extent about the intermingling of one type of transportation with the other.

We found out yesterday, and Senator Lautenberg was here, that while we are going to have 17,500 people thrown off Amtrak in the Northeast corridor in and around New York, the FAA has no way of taking care of them if they move to air transportation. This shows a lack of planning.

We have the same interesting subject here. What happens with Conrail? Where are we really going to go, and what kind of service guarantees are we going to give to those small communities?

And what protection do we give to the Federal Government that we are not going to have to come back in and do a multibillion-dollar bailout all over again?

So, hopefully, gentlemen, we can explore that. I will be asking each of you individually about your organization's role in and perspectives on the proposed sale. The panel format, we feel, provides a better opportunity for full discussion of the issue, because people can comment back and forth instead of having one sterile presentation followed by yet another sterile presentation.

Following examination of Conrail issues, Deputy Secretary Burnley and Assistant Secretary Derman will cover the budget request for the Office of the Secretary.

Now, Senator Lautenberg, do you have any introductory remarks?

OPENING REMARKS OF SENATOR LAUTENBERG

Senator LAUTENBERG. Just briefly, Mr. Chairman.

I agree with the concerns that you have expressed certainly about what happens to the total transportation network if we make the wrong decision and how we deal with Conrail.

I think that it is quite apparent that I have tried to look at this issue in some depth, trying to remain neutral in terms of the decision of how, if we privatize, do we do it. I say that I encourage seeing Conrail returned to the private sector, but I am not in a hurry to do this, because as time passes, events take place. The type of transaction to privatize develops more or less credence.

So, Mr. Chairman, this is an essential for my State, for my part of the country. It is critical that we have an operating Conrail system, and I am concerned about the strength and viability of that system, regardless of who the owners might be.

So, I am interested to hear from the witnesses. I commend you for holding this hearing. It is a critical issue as far as New Jersey is concerned, and as I hear you talk, Mr. Chairman, it is a critical issue as far as your area is concerned, too.

Thank you.

PREPARED STATEMENTS

Senator ANDREWS. Thank you, Senator. We will insert your prepared statement in the record. We also have opening statements from Senators Chiles and D'Amato which will be made part of the record.

[The statements follow:]

STATEMENT OF SENATOR LAWTON CHILES

The sale of Conrail to Norfolk Southern has generated a great deal of comment and concern among several of the other railroads. The charge has been made that the sale will be anticompetitive and concern has been expressed that the congressional process will not permit a full review. I am interested in hearing the witnesses address these issues as well as the appropriateness of the sales price.

Secretary Dole has placed high priority on the transfer of the two federally operated and owned airports to a State-local compact. I am personally concerned about the proposed sale. I want to learn what alternatives exist to all the problems we hear about Federal ownership and see how these problems can be solved without a transfer before I am willing to support a transfer.

I look forward to hearing the testimony of this morning's witnesses.

STATEMENT OF SENATOR ALFONSE D'AMATO

Mr. Chairman, I thank you for this opportunity to offer my statement on the sale of Conrail. I appreciate this opportunity to submit my comments on a transportation issue of great importance to the State of New York.

The sale of Conrail will have significant impacts on the economic health of New York, as well as that of other Northeastern States. Conrail's transfer to the private sector, as intended by Congress, must be accomplished with the public interest foremost in mind. It is our job to protect the interests of workers, industries, communities, and shippers during the sale process.

As you know, Conrail was created by Congress in 1975 as a result of the bankruptcy of the Penn Central and six other Northeastern railroads. The Federal Government holds 85 percent of Conrail's common stock and the remaining 15 percent is held in an employee stock ownership plan.

Until 1981, Conrail operated at a loss and Federal aid was required to keep the company operating. That year, Congress enacted the Northeast Rail Service Act [NERSA], which enhanced Conrail's ability to become profitable and provided for the orderly return of Conrail to the private sector. Nonfreight service responsibilities were removed from Conrail under NERSA and there has been an end to Federal subsidies in recent years. NERSA also provided that the sale plan should promote competitive bidding, ensure continued rail service, and maximize the return to the Federal Government on its investment.

The Department of Transportation contacted more than 100 companies about bidding for Conrail between 1982 and 1984. The possibility of a public offering was also examined. As a result of this process, 15 bids were received by the Secretary of Transportation by June 1984. The list of bidders was narrowed down during the negotiations process and the Secretary again reviewed the public offering option after Conrail management submitted its plan.

Norfolk Southern Corporation has been selected as the Secretary's choice for owner and operator of Conrail. The Department of Transportation and the Norfolk Southern Corporation have signed a nonbinding Memorandum of Intent concerning the proposed sale. This document embodies the major terms of provisions to be included in the Definitive Agreement, planned to be executed and delivered following passage of the required implementing legislation.

The Conrail Sales Amendments (S. 638) legislation has now been introduced and referred to the Senate Committee on Commerce. It is vital that Congress closely examine the many complex issues raised by this transfer and ensure the protection of the best interests of the 15 States which Conrail serves, as well as the long-term national interest in healthy rail freight transportation. We must remember that, in the private sector, Conrail will be stripped of special tax exemptions, expedited abandonment procedures, and other Federal aid. One of Congress' prime goals must be to reduce the risk that Conrail will ever again become a Federal responsibility.

I would like to state for the record that I support Secretary Dole's efforts to transfer Conrail to the private sector. Secretary Dole deserves to be congratulated for the responsible and diligent manner in which she has handled the tremendous duty of selling Conrail. A negotiated sale to a responsible bidder is the best approach to this most difficult task. I believe the Secretary has done an outstanding job of soliciting bids and seeking financially sound bidders who present the smallest possible risk of Conrail again requiring Federal subsidies.

Conrail is now the only effective means of moving freight by rail into New York State. With approximately 6,000 New Yorkers employed by Conrail and with the railroad providing an essential freight link to our region, it is imperative that the best possible buyer be found for Conrail. New York and the Northeast must be assured quality rail service over the long term-a viable, healthy rail system is vital to the economic health and well-being of our industries and our communities. The public interest demands that the buyer be financially sound and possess the clear intent to operate a profitable rail freight system and not merely to reap the rewards of a financial investment.

When the Justice Department completed its evaluation of the antitrust implications of a sale to the Norfolk Southern Corporation, it identified Buffalo as one of the four cities (Pittsburgh, St. Louis, and Chicago were also included) most heavily impacted by a proposed sale. Local officials and shippers have told me that the impact upon Buffalo could be devastating; however, they also view this critical stage in the sale process as one which provides the opportunity to enhance rail competition in the area. Since the contract of sale must remove any objectionable, anticompetitive results of the purchase by Norfolk Southern, it can serve as the basis for improved service and increased access to the Buffalo area.

Currently, there are five railroads serving this area; however, Conrail has severely limited their access to customers located on tracks it owns. Since Conrail has controlled 90 percent of the rail freight service in the region, there has been little competition in the past. The time is ripe to improve this situation.

I urge the Secretary to meet with New York State Transportation officials, as well as with local officials and shippers, to work out a plan which could become part of the sale agreement. There are various options available for increasing competition among the railroads in the Buffalo-Niagara Falls region. For example, we could transfer portions of the Conrail lines to a neutral regional carrier which would help reduce costs, open up competition, and maintain rail employment; we could open the gateway to Buffalo by instituting reciprocal switching on terms more favorable than under current rules; we could sell off pieces of the Conrail tracks to various competing rail carriers. It is also critical that the new owner of Conrail continue the existing levels of service to the New York City area and be willing to add needed services in the future. During the past 25 years, New York City, like the rest of the Northeast, has endured a steady decline in rail service, as well as the deterioration of the physical condition of its rail network. The bankruptcy of the region's major railroads left New York City shippers with abandoned rail yards and clearance restrictions which have become increasingly more of a problem as railroads move to more modern, larger equipment. New York State and the Port Authority of New York and New Jersey have developed a capital improvement program totaling $150 million that is well under way and seeks to address some of these concerns.

We must now assure that the transfer of Conrail to the private sector does not harm the competitive abilities of the Port of New York and New Jersey. New York City, which is captive to Conrail, must not have its gateways or interchanges closed, neither must joint rates and through rates available to New York City shippers be increased or canceled. The continuity and integrity of the city's rail freight network must be maintained.

In addition, I believe we must assure continued service on Conrail's Southern Tier route. This service is important to many communities and shippers. Competitive main line operations on the major east-west and north-south routes now operated by Conrail, must be continued. Service and maintenance on these vital lines must continue without harmful cutbacks or abandonments.

The long-term protection of Conrail employees is also of great concern to me. We must assure that Conrail continues to be a profitable, strong rail system with plenty of traffic. This is the best way to guarantee the continued existence of jobs. Congress has been assured that Conrail headquarters will remain in Philadelphia, which is significant to maintaining its reflection of the interests of Northeastern States. I would also like to add that Conrail employees, through their sacrifices, played a major role in Conrail achieving profitability. Many of these employees suffered through the collapse of the Penn Central and the other bankrupt carriers. We in Congress must remember that there are many working men and women who deserve prompt action and an answer to the current uncertainty as to what will happen to Conrail.

It is also important that the sale of Conrail yield the highest possible return on the taxpayers' investment in the system, consistent with the paramount public interest of preserving service and leaving Conrail in the strongest possible financial condition after the sale. A financially sound buyer is the best insurance to guard against Conrail ending up once again at the Federal doorstep looking for a public subsidy.

Finally, the sale of Conrail will mean that it will once again become a taxpayer worth over $30 million annually to the Northeast and Midwest. New York State alone is losing $4.6 million per year in State taxes because Conrail is now exempt from State taxes.

There has been much talk about a public offering of Conrail stock. I have serious questions about whether it is feasible to sell such a huge volume of Conrail stock and get a return greater than, or even equal to, the price a negotiated sale can offer. Moreover, I am concerned that a public offering would leave Conrail in a vulnerable and financially weakened position. After all we have endured with the rail crises in the Northeast, we must not support a sale plan that contains an unreasonable element of risk. Our considerable efforts to assist Conrail and the expenditure of taxpayers' money must not be undone with another railroad business failure in the future. Thank you, Mr. Chairman.

STATEMENT OF SENATOR FRANK R. LAUTENBERG

Mr. Chairman, we today take up the important issue of the sale of Conrail to the private sector as provided for in the 1981 Northeast Rail Services Act. Few issues are of more importance to my part of the country.

I have tried to look at this issue in some depth and from as neutral a position as possible. I have stated that I am not adverse to seeing Conrail returned to the private sector. I am, however, in no hurry. The right deal for Conrail can be in the long-term interest of my State and region. The wrong deal could be a disaster.

The Senate should take its time and do this right. Of late, the proposed sale to Norfolk Southern has resulted in extensive controversy. It is in everyone's best interest, including Norfolk Southern's, to answer the questions that have been raised about their offer in terms of price, competition, loss of jobs, and impact on States in the Conrail region.

This Senator has a very big stake in this matter. I have the port of New York and New Jersey on my north, the home of Conrail, Philadelphia, on my south, and many important industries who ship with Conrail in between.

Stan Crane comes before us with a challenging offer: To sell Conrail via a public offering, something the Department of Transportation has rejected. No one knows Conrail better than Stan Crane; he's done a terrific job with this railroad. We should give his views careful attention.

Mr. Chairman, we all know the controversy this issue has engendered. Today, perhaps we can extract some wisdom from these witnesses to guide our decisions. Let's hope so.

STATEMENT OF STEPHEN BERGER

Senator ANDREWS. We will proceed in the order of witnesses of Mr. Berger, Mr. Crane, and Mr. Burnley.

Let me assure all three of you that your introductory remarks will appear in the record as though you uttered every word of them. You may summarize in any way you wish. Or you may read the whole statement. Mr. Berger.

Mr. BERGER. Thank you, Mr. Chairman.

I am delighted to be here to talk about Conrail. If you would like at any point I would be delighted to come back and talk to you about the impacts of some of the cuts on urban mass transit funding, wearing another hat, at some other time.

Senator ANDREWS. We know you wear all those other hats. What we are getting is kind of a blending together, an overall concern for transportation, and somehow or other in the last year or two we have seen some of the sharpest potential steps backward from the national transportation policy, and of course that concerns us.

Senator Byrd expressed it so well yesterday. Other members of the subcommittee have expressed it. And what we want to make sure of is that we have the proper type of information so we can make sure we do, in deed and in fact, invest the Federal dollar where it will keep as much of a national network going as we possibly can.

You know, we are not afraid to do a little legislating on appropriations bills. We have done that before. We may do it again.

Senator LAUTENBERG. That is why I am here, Mr. Chairman.

ROLE OF ASSOCIATION

Senator ANDREWS. It may be just what the subcommittee wants to do, but they have some pretty definite ideas, and I have to go along with my subcommittee's wishes. But we want to make sure that we get the information from you so what we do is based on fact rather than fantasy.

Mr. BERGER. Thank you, sir.

Perhaps just one way for me to summarize a little bit about where the U.S. Railway Association is at this point is to perhaps tell you a little bit about some of the work that we are doing and have been asked to do for different Members of Congress and different committees, because I think in describing it quickly gives you some sense of where we think the direction of the questions ought to be, or I believe the directions ought to be.

We have just completed a report for the House Energy and Commerce Committee on Conrail's outlook through 1988. It is based on a series of studies we have done of the financial condition of the railroad.

We have been asked to do three different kinds of reviews. We have been asked by Senator Metzenbaum, for example, to do a study of the effectiveness of the divestiture plan related to Conrail.

Congressman Florio has asked us to do two studies for his House Subcommittee on Commerce, Transportation, and Tourism. One is on the impact of the Conrail sale on Philadelphia, the impact of a merger on Philadelphia. He has also asked us to do a much broader study which deals with the competitive aspects and competitive effects of a merger, including diversions.