SPECIFIC USRA STUDIES

Senator ANDREWS. Thank you very much.

Mr. Berger, what specific studies is the USRA responsible for during the rest of fiscal year 1985 and planned or anticipated for 1986?

Mr. BERGER. Mr. Chairman, as I mentioned, first we are required under NERSA to report to Congress on Conrail's financial performance. In order to do that, we have been conducting a series of ongoing studies both of Conrail's operations itself as well as a series of annually updating studies of other class 1 railroads for comparative purposes.

The results of that, for example, are part of the study that we released this week. In addition, I mentioned before some of the specific studies we are now conducting at the request of different congressional members or committees.

Senator ANDREWS. Do you feel that these requirements mean that you have yet another series of studies to release during the months yet to come?

Mr. BERGER. If we are to respond to the congressional requests that is certainly true. Clearly, as you know, we have not asked for additional funding. Obviously, if a transaction takes place and the railroad is sold, I absolutely agree with

Senator ANDREWS. So you feel the mandated studies are completed with the report that you issued a few days ago?

Mr. BERGER. No; the mandate continues until the railroad is sold. As long as Conrail remains in its present ownership position, I believe NERSA requires us to continue to study and continue to report to the Congress.

Senator ANDREWS. Are you not eventually going to get into a situation of reporting on reports? I mean, you have now finished a report on the outlook for Conrail in the future. How do you report yet again on the outlook for Conrail?

Mr. BERGER. Well, this comes to really a more central point about Conrail which we might get into in substance, and that is we are dealing not with a static situation but with a dynamic situation. We are dealing with a functioning company and we are dealing with changing economic conditions.

We point out in our report, for example, that if you look at the out years, while we were able to really update and change the early years of the study, the projections-the last 2 years of the report-are based on projections that were made several years ago.

As I have said to you before, Mr. Chairman, the question is whether the Congress believes that it is necessary and important to maintain an ongoing review of the situation. We are not dealing with a static situation.

I mean, just if you look at traffic changes, if you look at business. changes, if you look at problems in the Northeast, I believe that the intent of NERSA was that there would be a continuing monitoring of changes that take place.

CONCLUSIONS ON REPORT

Senator ANDREWS. Well, you have released the report you mentioned in your original testimony.

In summary, what are the major conclusions of that report?

Mr. BERGER. I was listening to both Mr. Crane and Mr. Burnley each quoting sections of the report. So I guess it is what we hoped it would be, which was reasonably objective.

Senator LAUTENBERG. There have been differences on the Bible, too. Mr. BERGER. I understand. It is a useful tool for arguing.

USRA CONRAIL REPORT

Senator ANDREWS. But you tell us that you can revise this report down the line because it is a constantly changing thing, so what we want to do is find out what this snapshot in time that you have just released does indeed and in fact show before you decide you are going to have to revise it 3 months from now.

So, what is the current status of your report?

Mr. BERGER. The current status is that when we began this process, when NERSA began the process which looked toward the sale of Conrail, we were looking at a corporation which we did not know whether it was really a viable or nonviable entity.

And by the way, the purpose of this report was not to comment on the sale, but to talk about Conrail as it exists now and as it exists as an entity. The major difference in the 4 years is that we are now not talking about a sick corporation.

We are talking about a functioning railroad which performs and operates within the range of class 1 railroads some place in the middle, and which has some stability and which has demonstrated competence. It is a railroad. It is not a growth company.

It is not a high tech company. This is a railroad with performing characteristics of railroads. It operates in a region in which the external economy is still very sensitive to a variety of potential changes.

What this snapshot says is that under Staggers and using the tools that the Congress gave Conrail, that you have the capacity in the railroad to respond to changing economic environment, to maximize what it has operating in its territory, and to function and to survive.

That is not to say whether it should be sold to the Norfolk Southern or stand as a public entity. The snapshot says this is a working corporation, leaving aside the issue of ownership and who owns the stock.

If you look at this as you would look at other railroads, Conrail is now a railroad which can be measured against normal standard performance, and in fact in a whole variety of characteristics it is doing pretty well.

AN INDEPENDENT CONRAIL

Senator ANDREWS. In other words, what you are telling us is that your current study backs an independent Conrail.

Mr. BERGER. It could. But on the other hand, you could also say that over the long term a sale or a transaction is one which might be in the

public interest. The issue-remember, if we did not have a healthy railroad. I am not trying to beg the question.

I mean, I said to you many years ago that if I had my ultimate druthers, I believe the national rail picture is going to work out so that ultimately we will have transcontinental railroads and additional mergers. That still is something that is coming.

But in the specific case you have here, you are talking about a company which is a functioning, surviving company. We have a lot of very wealthy and successful companies that are merged out these days in the American economy.

The crucial issue which is so easy to forget now, unless you were there at the outset, is that this is now a surviving railroad and should be treated as an economic entity. The judgments you make for an economic entity are ones you could make about other corporations.

There are service and policy issues you have to make which are the key questions as to whether this merger makes sense. Could Conrail be merged into something else? Of course it could. Can it stand as an independent company? I believe it probably could.

The reason I believe that is we are in a deregulated environment. I do not believe the situation in the Northeast is stable. That is changing. If you took away the deregulation from this environment, this railroad, like so many other railroads, would be in very deep trouble.

TRIGGER OTHER MERGERS

Senator ANDREWS. What you are suggesting to me is that if Norfolk Southern is permitted to buy Conrail, it looks like there is a real likelihood that this will trigger a railroad merger war unprecedented in our rail transportation history.

Mr. BERGER. I am not sure that is going to take place at this point. Senator ANDREWS. You were certainly leading up to that in your rhetoric a moment ago.

Mr. BERGER. No; I was leading up to the fact that I think the consolidation of the national rail picture is not over. What has been basically happening is that changes have been taking place in the West. You have had a sorting out, in a sense, without Government ownership and direct intervention.

You have had a sorting out in the West with the creation of more stable and more long-range lines. You have had some of that in the East as well with the CSX and Norfolk Southern merger.

CONRAIL SALE IMPACT

Senator ANDREWS. But you are bringing up the possibility that while such a merger might ultimately benefit one or two roads, other railroads and the shipping public could well be put in real jeopardy. Mr. BERGER. That is correct. I think you have to look at———— Senator ANDREWS. Well, I thought that was what I heard you say. Mr. BERGER. You have to look at each merger and ask questions as to whether that particular transaction has competitive and service impacts

in the region. That is the major question with this particular transaction. I do not think it is necessarily wrong that another railroad buys Conrail any more than I think it is absolutely right that it has to stand alone.

You have to look at this particular transaction, and you have to look at some of the issues that have been raised. My laundry list of people who helped make Conrail successful includes the people who have to be talked to as to whether or not this merger makes sense. I include the shippers who have been talking to me at the very top of that list.

CONCERN FOR SHIPPERS

Senator ANDREWS. I know, but when you suggest, as you just have, that other railroads and the shipping public could be put in real jeopardy, you are going down the line with today's Journal of Commerce editorial which, as you know, is critical of the Conrail sale proposal, and raises the issue of terminal shipping points and the prospect of Norfolk Southern's ability to restrict gate access, terminal switching agreements, and thus limit competition.

What has been the history of such activity by Norfolk Southern? Mr. BERGER. I did not use the word “jeopardy." I am not at the word "jeopardy." The Journal of Commerce got there before I did.

Senator ANDREWS. You pointed out a minute ago that you felt that the shipping public could well be put in real jeopardy, and that is, of course, what the Journal of Commerce concludes.

Mr. BERGER. The difficulty at this point is knowing in all frankness-for example, Congressman Florio has asked us a series of questions which would try to elicit a conclusion.

One of the difficulties that the USRA staff has at this point is that the kind of information-well, let me back up for a minute if I may, Senator.

The Justice Department-in traditional rail mergers-does a particular type of inquiry, and traditionally the ICC does another kind of inquiry, and the Department of Transportation does its study. The kinds of questions, for example, relate to the operating plan that a merger would result in, the operating plan of the different railroads, the Norfolk Southern operating plan, the PL&E operating plan, the Guilford operating plan.

If you ask, will there be jeopardy, and I cannot say there will, you have to take a look at the operating plan, what is the traffic, what will the diversions be, what will happen. There are some things you know will happen.

Gateways will change. Norfolk Southern has a Kansas City gateway. That has one impact. There will be diversions of traffic out of the Conrail territory. Traffic that now comes into Conrail either on the CSX or off the Seaboard or off the Southern-there will be changes.

I cannot tell you, frankly, at this point what those changes will look like, because we do not have those operating plans.

Senator ANDREWS. But the limiting of competition through these restrictions, what type of effect would that have on Midwest shippers?

Mr. BERGER. I can only speak hypothetically, since I do not know exactly what is going to happen. It could have an impact.

Senator ANDREWS. And that is what we want to get out on the table. Mr. BERGER. That is right. Those are exactly some of the kinds of studies we are looking at. I mean, I have people in my region, and I try to distinguish-Senator Lautenberg knows I am trying to distinguish, being someone from the New York-New Jersey region-between particular local regions with national policy.

THE OPERATING PLANS

Senator ANDREWS. But do you have those operating plans?

Mr. BERGER. No, sir.

Senator ANDREWS. Do you know anyone in Government who made the decision on this sale, who said the sale was in the interest of the general shipping public, who has those plans?

Mr. BERGER. No, sir.

DEPENDENCE UPON CONRAIL

Senator ANDREWS. Let me point out that we in North Dakota have a Philadelphia connection, and people might not realize that. But we do. I have a good friend, Allyn Fagerholt. He is a potato grower. His farm is about 90 miles north of mine. He ships a lot of his product to Philadelphia through Chicago. Now, he has written me, contacted me, and his concerns are primarily the existing freight rate, which is already a substantial part of the cost for those in Philadelphia who purchase his product.

Without effective competition, Allyn Fagerholt feels these costs could be somewhat higher. He is not sure that a sale to Norfolk Southern would provide him equal or better service. He feels that shippers outside the Northeast have been ignored, and frankly, he is concerned.

And having that contact from Allyn Fagerholt, potato producer from North Dakota, who is typical of the small shippers, who has got to get his product to Philadelphia, I am concerned about that Philadelphia connection.

If our colleagues, Mr. Heinz and Mr. Specter, are concerned, it also affects many more of us than just those who represent the Pennsylvania area and the Northeast, and when you say that you don't know what the operating plan will be, what happened to the assurances that we got from the Department of Transportation that the protection of the shippers had been assured in the negotiations and in the ground rules established for the sale of Conrail?

Mr. BURNLEY. Can the Department answer, Senator?

Senator ANDREWS. Oh, sure. That is why we have you on the panel. Mr. Berger's answers are, you know, sort of going along with my fears, so now you can contradict him.