Iowa Department of Transportation

The IA-DOT is opposed to the merger.

There are approximately 7,219 miles of rail line in Iowa, consisting of 3,562 main-line miles and 3,657 branch line miles. Iowa ranks fourth in the Nation in rail mileage, and twenty-fifth in land area and population. Class I railroads comprise 97 percent of the Iowa rail system, with class II railroads serving the remaining 3 percent. Iowa is served by eight class I railroads-CNW, RI, Milwaukee Road, BN, ICG, N&W, Santa Fe, and UP. CNW, RI, Milwaukee Road, and ICG operate approximately 84 percent (6,046 miles) of the State system. BN's east-west line is located mainly along the southern two tiers of Iowa counties and comprises about 11 percent of the total railmiles. Santa Fe, N&W, and UP provide feeder service to Iowa, with minimal mileage.

Twenty-four percent of CNW's system, 27 percent of RI's system, and 17 percent of Milwaukee Road's system are located in Iowa. Iowa is a major agricultural State. Compared with other States, Iowa ranked second in corn and soybean production in 1977 and first in corn production in 1978. Iowa provided 20.7 percent of the total corn production and 15.6 percent of the soybean output in the United States in 1978. The export of Iowa farm products in 1978 contributed $2,040 million toward offsetting the national balance of payments deficit, ranking Iowa second among the 12 Midwestern States in agricultural exports. Over 7,322 Iowa agribusinesses employ 140,000 Iowans.

IA-DOT states that there is a symbiotic relationship between Iowa shippers/receivers and RI, CNW, Milwaukee Road, and ICG. Both need and depend upon the other. These four carriers serve the major grain growing and gathering areas and mesh with the fertilizer distribution patterns. Also, the vast majority of the State's multicar grain loading facilities (over 50 cars per train) are located in the areas these four railroads serve.

BN's role in Iowa agriculture and agribusiness is relatively minor. The southern tier of counties in Iowa produce the least crops, require the least fertilizer, and have only one unit-train (75 cars) grain facility.

IA-DOT's interest in this proceeding is to see that its rail transportation remains available. It opposes the proposed merger, having concluded that the merger's impact on the railroads serving Iowa and the resulting impact on their service to Iowans will be disastrous.

According to applicants' forecasts, Rock Island, CNW, Milwaukee Road and ICG will experience 22 percent of all carload diversions, or 40,425 carloads annually. Two of these carriers are in reorganization and will suffer 33.4 percent of the diversions of those four railroads. ICG, a marginal carrier economically, will suffer onehalf of the Iowa carrier losses.

Gross carload revenue losses will probably not be offset by cost reductions. The carload loss will not mean fewer trains or reduced numbers of power units or crew numbers in most instances. Instead, these diversions will result in reduced financial return on existing trains and further economic strains on the carriers.

Even though losses suffered by protestant railroads (40,425 carloads annually) will occur largely outside Iowa's borders, the impact of weakening the railroads and their operations will be felt within the State.

IA-DOT believes that the merger application should be denied. If the Commission approves the merger, however, IA-DOT request that the Commission retain jurisdiction for not less than 5 years. IADOT believes that by retaining jurisdiction, appropriate relief can be provided where necessary and general direction can be given to rationalizing the midwestern rail system.

IA-DOT contends that before a rail merger is approved, there must be convincing evidence that it will serve the national interest and that terms are prescribed so that the congressional objective of a rail system serving the public more effectively will be carried out. Not every merger or consideration that may be agreed upon by private interests can pass the statutory test. 12

BN and Frisco argue that their merger is not the proper vehicle to improve the viability of the four weak railroads serving Iowa, and it is not within the Commission's power to restructure the rail situation in the Midwest.43

Applicants point out that IA-DOT has not requested Milwaukee Road to operate in Iowa as part of its reorganization plan. Applicants conclude that IA-DOT is concerned with the preservation of essential services, not corporate entities.

Applicants also argue tht the logical reaction for carriers harmed outside of Iowa, but not in Iowa, is to concentrate their resources (such as cars and locomotives) in Iowa and other areas where they do not compete with the merged company to develop a competitive edge in these areas.

BN finally points out that the problems of ICG, CNW, Rock Island, and Milwaukee Road do not stem from the merger, and that "Penn Central Merger and N&W Inclusion Cases. 389 U.S. 486, 500 (1978). St. Joe Paper Co. v. Atl. Coast Line R. Co., 347 U.S. 298, 312-321 (1954).

the standard for judging the proposed merger is not the revitalization of bankrupt or marginal railroads.

Illinois Department of Transportation

The IL-DOT notes that the parties to this proceeding account for a significant portion of the rail system in Illinois. BN and protestants ICG, CNW, Rock Island, and Milwaukee Road account for over half of the total rail mileage and the greater portion of light density rail mileage in Illinois. Frisco, while not directly serving Illinois, serves St. Louis on the southwestern Illinois border. IL-DOT suggests: that Illinois' pattern of development was shaped overwhelmingly by its rail system; that a mutual dependence exists between the Illinois rail system and present Illinois economic activities, including agriculture, manufacturing and coal; and that the present system represents the level necessary to sustain the current level of economic activity within the State.

IL-DOT's prime concern is retaining rail service within the State. It claims no particular interest in the corporate entities which provide that service. However, an economically viable private sector rail system is necessary. Railroads seeking to operate highspeed, high-efficiency overhead routes through Illinois without integrating local service into that system do not benefit Illinois.

IL-DOT has analyzed the various positions of applicants and protestants and drawn three conclusions. First, the negative impact of the merger will not be the decisive factor in determining the survival of the weaker midwest rail carriers, and applicants' arguments regarding the weakness of those carriers appear justified. Nonetheless, the merger will divert revenue and traffic away from the weaker carriers presently serving Illinois, which are ill-prepared to withstand this.

Second, IL-DOT doubts applicants' claims of improved service in Illinois. It is argued that applicants never linked their ability to provide continued and improved local service in Illinois with the likelihood of providing such service.

Finally, IL-DOT sees this merger as the first stip in a radical restructuring of the national rail system. Taken together with other mergers which IL-DOT feels will follow, the cumulative effect will be the elimination of the marginal midwest carriers. IL-DOT fears that Illinois may find itself served only by transcontinental and north-south through routes which are not dependent upon, or interested in, local service to Illinois.

OTHER PROTESTANTS

Kansas City Board of Trade

The KC Board has requested that its conditions (in appendix K) be imposed if the merger is approved. It believes the conditions approximate the standard routing conditions and that it is beneficial to retain existing routes and transit on grain and grain products at Kansas City.

The KC Board does not believe BN should be permitted to insert a lower single-line rate between Kansas City and the gulf; all routes should be available. It also believes Frisco's current transit arrangements should be protected so that no rate penalty is incurred on outbound traffic after the merger.

Montana Wheat Research and Marketing Committee

MT-Wheat opposes the merger unless conditions to strengthen BN's competitors in the Northwest are imposed.

MT-Wheat perceives weak intramodal competition in the Northwest. It believes that Milwaukee Road should be provided with lucrative trackage rights to foster intramodal competition. MTWheat states that the public interest requires that Milwaukee Road be assisted at every turn so that it may reasonably rationalize its plant, reorganize its debt, restructure its competitive posture in the market place, and rehabilitate its remaining plant so that it may become a viable, privately owned, class I railroad.

Car supply is also very important to MT-Wheat. It believes the merger will worsen the car supply problem in Montana, and that this is contrary to the public interest, which requires that transportation service after the merger be on a par with existing service.

John W. O'Neil

John W. O'Neil contends that the proposed merger is not just and reasonable to Frisco stockholders because Frisco's controlling stock ownership interest in New Mex was undervalued. Mr. O'Neil notes that Frisco's New Mex stock was valued at $14,211,639 as of December 31, 1976. Since that time, New Mex stock has split twofor-one.

Mr. O'Neil estimates New Mex's fee-owned land and improvements are worth $70 million, based on the ownership of

497,700 acres of land in fee, including mineral rights in all but 660 acres, and 850,000 acres of mineral rights on land in New Mexico and Arizona. A 1970 study estimates that 4,000 to 5,000 acres will lend themselves to future commercial or industrial uses. Although land subdividers in New Mexico have increased the value of raw land beyond its worth for cattle grazing, New Mex has agreed to sell 20,770 acres, less mineral rights, for $50 an acre. Improved properties include an apartment complex in Flagstaff, AZ, three conveninence markets, a distribution center, an outlet and lapidary shop for petrified wood in Phoenix, and a retail store near the Petrified Forest National Park. In addition to the value of the real property, Mr. O'Neil contends that New Mex income from minerals on its properties amounts to $492,800,000 and the company's total income amounts to $562,800,000.

He urges the Commission to require an independent valuation of the assets and land holdings be made (at Frisco's expense) and an adjustment of the merger terms to take into account the true value of New Mex. Alternatively, he urges the Commission to order Frisco to spin off its holdings in New Mex to the Frisco shareholders.

BN and Frisco point out that the stock exchange was negotiated at arm's-length and overwhelmingly approved by shareholders. Applicants point out that they were valued without regard to their natural resource holdings. Applicants conclude that the stock exchange is fair and not contrary to the interests of Frisco's stockholders.

Mr. O'Neil notes that the appraisers, in their letter to Frisco of March 28, 1978, do not state that they have made an evaluation either of New Mex or of Frisco's stock interest in that company. He contends that approval of the proposed transaction was voted by Frisco shareholders without knowledge of the true value of Frisco's interest in New Mex.

EMPLOYEE ORGANIZATIONS

Railway Labor Executives' Association

The Railway Labor Executives' Association (RLEA) believes the merger is contrary to the public interest because its benefits can be obtained through other means, such as run-through trains, and it is motivated by self-interest instead of the public interest. RLEA opposes the merger, but asks for specific provisions for the protection of railroad employees if the merger is approved.