While we believe that the "controlled transfer" approach may have some merit as a nationwide, restructuring approach, it does not appear to be feasible way of financing rehabilitation of the rail properties of the Northeas bankrupts in the short run. It could at best be a long-term solution to the problems now occurring in the Northeast and Midwest. The condition of the rail properties of the bankrupts has deteriorated over a long period, and especially since the Penn Central entered bankruptcy. Based on the collective experience of the ten companies submitting this statement, if that deterioration is not halted, rail service will be impaired to the point unemployment in majy industries could well increase furtther and overall production by users wil be reduced. Reduced employment and production can be avoided only if the rail properties of the bankrupts are transferred very soon to fully operating companies not restricted by the legal limitations of bankruptcy proceedings We are convinced that the reorganization and rehabilitation process must be well underway within the next year to avoid such results. The legal and financial difficulties of "controlled transfer" appear to be too formidable for timely negotiation of satisfactory agreements.

INDUSTRY STRUCTURE

In a statement filed with RSPO, the companies we represent indicated that a three-system structure could provide adequate and efficient rail service in the region. The two-system structure and the Mid Atlantic Railroad Company/ Erie Lackawanna" (MARC/EL) alternatives were also considered acceptable, subject to further analysis of the economic viability of the latter.

Considerable difficulties appear to be impeding negotiations with the solvent railroads in the region for acquisitions to help establish the three-system structure. We therefore propose a "fallback" position for the consideration of USRA and the Committee in the event satisfactotry agreements are not completed with solvent railroads in the region prior to the issuance of the FSP. Here is the alternative. All of the rail properties of the bankrupt railroads could be transferred to ConRai!, including those rail propertties proposed for acquisition by profitable railroads with respect to which agreements have not been negotiated. ConRail could be required under the FSP to enter into negotiations with the solvent railroads for leases or operating rights on those properties required to set up the three-system structure on an interim basis. As mentioned above, the FSP could also require ConRail to continue negotiations with the solvent railroads for permanent acquisitions. All agreements could require the approval of USRA before implementation. This approach might not be required in the event the MARC/EL alternative proves to be economically viable and is the alternative selected by USRA and approved by Congress.

We believe that this approach is preferable, if implemented in conjunction with the financing proposals previously outlined, to the ConFac or separate ownershsip approach. Again, such an alternative would not foreclose longerrange financing approaches, but it would permit the prompt and timely implementation of the FSP.

Moreover, such an approach would remove most of the major impediments to transfer of the rail properties from the bankrupt estates to operating railroads, thus avoiding the major risk of further deterioration in service and operations that is now occurring. We cannot stress too strongly our belief that the timely implementation of the FSP is absolutely necessary to preserve adequate rail service in this country in both the short and long term. CONRAIL BOARD

We would like to make a final recommendation for the Committee's consideration. We do not believe that a board of directors for Conrail controlled by government officials and Presidential appointees is necessary to protect the public interest or the Federal investment which is necessary to rehabilitate these rail properties. We agree with the evaluation of the PSP by the RSPO (pp. 83-85), which suggests that obstacles to long-range private financing and profitable operations be eliminated or restricted wherever that is feasible. We are particularly concerned about the potential conflicts of responsibility which would be borne by the Secretary of Transportation, the Chairman of the ICC and the President of USRA in trying to act as directors of ConRail. We therefore support an amendment to the Act which would allow all of ConRail's directors to be elected by and responsible to shareholders. Federal power to protect the public interest through control of the terms of financial assistance-grants, loans and/or guarantees-would be fully adequate.

CONCLUSION

The bankrupt railroads must continue to provide adequate rail service while the planning process is completed. The schedule for completion, approval and implementation of the FSP must be met if further deterioration of rail servic is to be prevented. It is our strong conviction that the FSP must propose an approach that will permit transfer of the rail properties of the bankrupt rai` roads to fully operating companies under new management by early next year if adequate rail service is to be maintained. The ConRail approach appears t be the only feasible program that can meet these goals.

Three major issues must be resolved by Congress and USRA. First, the light density line problems must be adequately dealt with. We believe that H.R. 63.4 offers a good approach to this problem, can be accomplished without delayin the implementation of the FSP, and would incur costs well within the limit: already provided in the RRRA.

Second, financing the costs of rehabilitation appears to be the major obstacle to ConRail's achieving profitability within a reasonable time. Loan guarantees alone will not provide an assured means of financing these costs and still allow ConRail to become profitable. A combination matching grant, loan and loan guarantee program can achieve this result at a reasonable cost and without permanent Federal involvement in the operations of ConRail. Further, such an approach, aimed only at the railroads in the region, can be accomplished at a lower cost to the taxpayer and consumer than nationalization or ConFac, and with greater certainty than "controlled transfer." It would allow the FSP to be implemented on schedule to resolve the short-range problems created by the bankruptcies, yet not foreclose longer-range solutions such as "controlled transfer," trust funds, or Federal ownership of roadbed as financing and restructuring devices for the industry, if such proves to be necessary. The combination matching grant, loan and loan guarantee approach would also give Congress. the Administration and other interested parties the time and opportunity to consider the benefits, costs and impact of these broader programs in other than a crisis atmosphere.

Third, the difficulties which are being encountered with regard to implementing the industry structure alternatives may require amendments to the RRRA if any one of them is to be achieved. The ConRail mechanism can be utilized to achieve this structure through mandated negotiations for interim leases and operating agreements as well as permanent acquisitions with the solvent railroads in the region. Agreements would be subject to approval by USRA and must be consistent with the FSP. This approach is preferable to a separate fixed plant ownership approach without the pootential costs and adverse effects on the solvents inherent in ConFac.

Finally, we agree with RSPO that the whole board of directors of Con Rail should be selected by and responsible to the shareholders. In our judgment, potential conflicts of responsibility of government directors outweigh any protection of the Federal investment which such membership might yield. The government interest can be adequately protected through the financing mechanisms themselves. Such a change in the RRRA would remove additional obstacles and restraints to the eventual success and profitability of ConRail. There is more than adequate precedent in loans of the Reconstruction Finance Corporation and other Federal assistance provided to railroads in the past.

We believe the ConRail approach can work. The PSP and the RSPO evaluation support this view. Some changes in the RRRA will be necessary, but we believe the proposals made here can achieve the goals of the Act at the least cost to taxpayers and consumers, while affording the greatest opportunity for a successful and timely reorganization of the bankrupt railroads. It is, in our judgment, far superior to any alternatives advanced thus far.

53-970 O-75-66

JOINT STATEMENT OF ALLIED CHEMICAL CORP., ALUMINUM COMPANY OF AMERICA, BETHLEHEM STEEL CORP., FORD MOTOR CO., GENERAL ELECTRIC CO., GENERAL MOTORS CORP., UNION CARBIDE CORP., UNITED STATES STEEL CORP., AND WEYERHAEUSER Co. BEFORE THE INTERSTATE COMMERCE COMMISSION RAIL SERVICES PLANNING OFFICE.

March 28, 1975

Analysis of USRA Preliminary System Plan

Under the Regional Rail Reorganization Act

INTRODUCTION

This statement is submitted on behalf of a number of major shippers utilizing the Nation's railroads. These shippers account for a substantial portion of the tonnage moved upon and revenues received by the bankrupt railroads in the Northeast and Midwest regions of the United States. They are: Allied Chemical Corporation, Aluminum Company of America, Bethlehem Steel Corporation, Ford Motor Company, General Electric Company, General Motors Corporation, National Steel Corporation, Union Carbide Corporation, United States Steel Corporation and Weyerhaeuser Company. While these companies have agreed to the submission of this joint statement, some may have additional views as to specific portions and may submit separate statements further amplifying their individual views.

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Much has been said concerning the effect of a loss or major disruption of rail service in the Northeast, not only with respect to these companies and industries but also on smaller shippers as well. Many of the operations of these companies would have to be sharply curtailed and in some cases shut down completely within days if the bankrupt railroads in this region were to stop running. The effects upon other companies in these critical industries would undoubtedly be similar. Both production and employment would immediately drop sharply in this seventeen-state region and the impact would quickly spread to all other regions of the Nation.

These facts are well known but are repeated here to emphasize the essential relationship of rail transportation to the productive capacity and overall economy of this Nation. It would be a grave error in judgment to assume that the problems created by the railroad bankruptcies in the Northeast and Midwest are only regional in scope. An adequate solution to putting the rail system in the Northeast back on its feet is essential not only to industry and other railroads but to the Nation as a whole.

The attempt to find a solution to the rail problems in the Northeast and Midwest, of which the United States Railway Association's Preliminary System Plan is an interim step, has focused attention on broad public policy issues. The companies submitting this statement believe strongly that these public policy issues can be successfully addressed, and that solutions can be found and implemented within the context of a privately owned and operated, publicly regulated rail industry. Adequate and essential rail service can be provided at substantially lower cost to taxpayers and consumers than is found in countries which have nationalized their rail systems.

SUMMARY

The companies submitting this statement are pleased with the Preliminary System Plan, they support the purposes and goals sought to be achieved, and they believe that the Preliminary System Plan is an important step toward their

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achievement. These companies believe that the Three-Carrier System proposed in the Preliminary System Plan will provide adequate, competitive service and that a railroad system structured along these lines can operate profitably. Implementation of the proposed Preliminary System Plan would restore adequate, privately owned railroad service in the Northeast region. The success of the Preliminary System Plan is dependent in large measure upon a considerable amount of rehabilitation and modernization of facilities and equipment as is contemplated by the Plan.

Existing competitive routes should be maintained to the extent they are feasible, thus balancing competition and assisting in the maintenance of the major and smaller solvent railroads.

It appears that light density lines have not been the major drain on profitability that had been heretofore thought, and it is suggested that a further 2-year period of operational review of the problem of light density lines should be provided.

The alternatives of a "Two-Carrier System" or a MARC-EL/Conrail System are acceptable, but not preferable, to the Three-Carrier System, subject to determinations of potential viability of the MARC-EL. The financial projection, while preliminary due to the lack of valuation figures on the rail properties, nevertheless indicates that Conrail can be profitable. There obviously is no quick solution, but the Preliminary System Plan does provide a solid beginning. The system structure recommended in the Final System Plan will depend in large part on negotiating acceptable conditions for acquisitions by solvent carriers, but the nucleus of a solvent private carrier solution has been presented. The proposed solution presented in the Preliminary System Plan should be pursued with such amendments to the Regional Rail Reorganization Act as are suggested in the Plan and as noted in this statement. Proceeding with the establishment of Conrail is clearly justified when compared to the risks and potential costs to taxpayers and consumers of moving now toward nationalization or greater Federal involvement.

ANALYSIS

I. General Comments.

A.

Purposes of RRRA and Summary of Essential Issues.

1. Purposes of RRRA.

The purposes and goals of RRRA are set out in Sections 101 (b), 206 (a) and (b) and the duties of USRA are established under Section 202 (b). These sections outline the tests and standards against which the Preliminary and Final System Plans are to be judged.

The companies signing this statement want to emphasize at the outset that they support these purposes and goals and believe that the Preliminary System Plan sets out a basis for their achievement.

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It is recognized that controversy exists among some people concerning the treatment of light density lines, establishment of three major rail systems in the region as the preferred industry structure, and the nature of financial projections of profitability. Alternatives are being discussed concerning ownership of the rail plant contrasted with operation of rail service, and the cost and best method to finance necessary rehabilitation of the rail system in the region. These issues will be addressed in this statement, but it must be stressed that the complexities of the problems do not lend themselves to simple or quick solutions. Those who would point only to potential weaknesses in the approach taken by the RRRA and the Preliminary System Plan should do so with great caution and a realization that the results and possible effects of various alternatives, such as separation of ownership and operation of plant, operating subsidies, capital grants, trust funds or nationalization, are less well known and understood. The concepts and goals embodied in the RRRA are desirable and, it is believed, achievable, but they will not come easily.

We should move forward now and attempt to achieve those goals within the real and present circumstances with which we are confronted.

2. Summary of Essential Issues as Seen by These Companies.

This group of companies commenced its review and analysis of the issues to be covered in the Preliminary System Plan in August of 1974. The hearings held by Rail Services Planning Office on the Department of Transportation "Zone Report" focused great attention on the light density line issue and several states and other organizations commenced extensive review and analysis of that issue. While this group of companies followed that issue closely, the decision was made to focus its primary attentions upon

(a) regional rail industry structure necessary to provide essential service;

(b)

primary factors affecting profitability, principally redundancy of plant and elimination or subsidy of uneconomic light density lines, rehabilitation, increased efficiency of operations to increase productivity of plant and equipment, management structure and approaches; and amount and method of financing required to rehabilitate, modernize and operate the rail properties of the bankrupts;

(c) rail service needs and competition.

It should be stressed that this analysis was conceptual only and designed to formulate guidelines upon which to base an analysis of the Preliminary System Plan. No effort was or could have been made to duplicate the actual planning process of USRA.