THE VIRGINIAN-PILOT
Copyright (c) 1997, Landmark Communications, Inc.
DATE: Sunday, January 26, 1997 TAG: 9701250543
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 209 lines
The STB has the power to impose a settlement in any railroad dispute, bypassing state and federal laws, and voiding contracts that may stand in the way.
When Linda Morgan spoke, the chairmen of three Fortune 500 railroads listened.
She isn't the daughter of E.F. Hutton, but Morgan is chairman of a federal board with sweeping powers over the nation's railroads.
She used that bully pulpit two weeks ago when subtly warning CSX, Conrail and Norfolk Southern to settle their ownership dispute - voluntarily - or risk having the transportation board do it for them.
Two days later, the three sides agreed to negotiate.
``The message that filtered through was that it would be sensible for these gentleman to get together and come up with an equitable solution,'' said Robert Banks, a railroad consultant whose firm R.L. Banks & Associates is in Washington.
Established last year, the Surface Transportation Board inherited the mantle of the once all-powerful Interstate Commerce Commission, the first agency set up by Congress to regulate business.
The STB has the power to impose a settlement in any railroad dispute, bypassing state and federal laws, and voiding contracts that may stand in the way. However, the board prefers to see private settlements.
Norfolk Southern Corp., which is pursuing a $10.3 billion hostile bid for Conrail, heeded Morgan's warning. It invited merger partners CSX Corp. and Conrail to the negotiating table. Richmond-based CSX and Conrail promptly agreed.
Norfolk Southern launched its bid for Conrail after Conrail agreed to the CSX merger, which is now worth $9.7 billion. The combination would control 70 percent of the East's rail freight, dwarfing Norfolk-based Norfolk Southern. The fight is at a stalemate since Conrail shareholders rejected in a landslide on Jan. 17 the CSX merger.
After four months of bitter wrangling, at least the parties are sitting down. Neither side is conceding its offer for Conrail going into the talks. Both are behaving as if they have the upper hand, though both seemed willing to give the other some access to Northeastern markets, where Conrail has enjoyed a monopoly for more than 20 years.
Talks haven't been scheduled, but are likely to start in the coming week.
The negotiations may have been prompted as much by the lopsided shareholder vote as by Morgan's comments, but both sides acknowledge her comments provided an incentive.
``History has shown us that private-sector negotiations do result in benefits for the participants and for the public that are superior to government-imposed resolutions,'' Morgan said.
Running amuck
Morgan, a longtime Democratic Washington insider, holds one of three STB board seats. California businessman Gus Owen has the second and the remaining seat is vacant. President Clinton is expected to nominate someone soon to fill the seat.
Both Morgan and Owen are holdovers from the Interstate Commerce Commission's board. Congress dismantled the ICC in 1995 as part of the Republican revolution and its drive to streamline government and eliminate agencies.
As the nation's oldest regulatory agency, it epitomized federal regulation, Morgan said.
``It was associated with large, cumbersome, over-reaching bureaucracy,'' she said. ``Ironically, all the ICC did was what Congress told it to do; however there was a continuing impression that a lot of what we did there was unnecessary.''
Congress established the ICC in 1887 to rein in the nation's railroads, then the largest industry with a near monopoly on the movement of freight and people throughout the land. Well aware of their power, the railroads often charged excessive rates, or ``what the traffic will bear.'' Large shippers in big cities received preferential rates, while small shippers and farmers in rural areas frequently paid through the nose.
The ICC had broad authority to approve and set rail rates. In 1920, in a move to save the industry, which suffered through government control during World War I, the commission gained its broad powers over rail mergers.
``The railroads were the backbone of the whole economy and the country couldn't run without them,'' Banks said. ``But the railroads were really running amuck.''
Railroads were made a separate class of industry. They still have their own labor laws and a retirement fund separate from Social Security.
Rail's dominance began to slip mid-century as highway and air travel gained momentum. Despite that shift, rail regulation continued as if the industry still had a monopoly, said Tom White, a spokesman for Association of American Railroads.
Pressured by the airplane and cars, passenger rail virtually disappeared. Trucks easily out-competed the railroads for hauling many goods. By the 1970s more than 25 percent of the nation's tracks were in bankruptcy, White said.
In 1976, Congress created Conrail from the remains of six bankrupt Northeastern railroads. Further relief came in the form of the Staggers Act of 1980.
The law deregulated rail pricing, giving railroads the flexibility to set rates, and allowed the railroads to change services and to more easily abandon under-used lines.
``Deregulation freed them,'' White said. ``The result has been a substantial revival in the railroad industry.''
Era of consolidation
Surviving railroads slashed inefficient networks, cut payrolls and worked to compete against trucks. The cost of shipping by rail has actually decreased since 1980.
Ongoing consolidation is seen as the next logical step in the industry's growing efficiency. In the West, four major railroads merged into two. The Norfolk Southern-CSX battle for Conrail will likely result in two competitively balanced Eastern railroads. In a decade, the nation could have just two rail systems stretching from coast to coast.
The Staggers Act unleashed forces of consolidation and marked the beginning of the end of the ICC. The commission had about 2,000 staffers in 1980, but shrank to about 600 a few years ago.
Congress administered the coup de grace in 1995, but transferred the ICC's authority over rail mergers and some other issues to the Surface Transportation Board, which has 135 staffers.
STB Chairman Morgan called the devolution ``government streamlining in the raw.''
But size has little to do with the board's residual powers. The board is now essentially a court that judges mergers and rail-related disputes in terms of the public interest.
``We have very broad authority to determine whether a merger is appropriate in the public interest,'' Morgan said.
Maintaining control
The board's power relates to industry's economic impact. Rails still move the majority of the basic commodities the economy needs to function. That includes coal for power plants, grain, chemicals, timber and steel.
``It's pretty fundamental to the nation's economy,'' Morgan said.
``We have not just rubber-stamped these mergers. . . . We have, where necessary, added conditions to prevent competitive harm that might result.''
The STB can require merging railroads to give trackage rights to another railroad, essentially leasing use of its lines. It can require the outright sale of lines to another railroad. It can also void contracts, opening them up to competition.
Indeed, in a recent decision against Norfolk Southern, the STB reserved the right to void the merger agreement between CSX and Conrail if necessary to permit a board-approved transaction to occur.
``A person can simply not preclude our approval of a transaction from going forward simply by entering into a contract that purports to prevent all alternatives to its own preferred outcome,'' the STB decision read.
The statement came in a board decision against voiding part of the CSX/Conrail merger that prevents Conrail from talking to any other buyer until 1999. The STB called Norfolk Southern's petition premature.
``The STB decision gives us some optimism,'' said Henry C. Wolf, Norfolk Southern's chief financial officer, in a interview two weeks ago. ``We can file an application for control of Conrail regardless of ownership.''
Competitive balance
CSX has said it will apply for control of Conrail by March 1 and that it will do ``whatever it takes'' to get the board's approval. Norfolk Southern intends to file a competing application.
The board can take any application and deny it, grant it or reformulate it. Morgan called the STB's power ``permissive.''
``We do not force people to merge,'' she said. ``We give people the authority to merge and they can merge if the shareholders want to.''
But Conrail shareholders don't appear to want to let the railroad merge with CSX. Conrail's management and board do.
All Morgan would say is ``this pending matter is full of very interesting corporate matters we're going to be in the middle of.''
The board's decisions can supersede antitrust laws and other federal and state laws, she said. They can only be appealed to federal Circuit Court of Appeals in Washington on certain grounds.
Shippers have been a frequent critic of the STB and its decisions.
``We don't think the STB has lived up to its potential to bring about rail competition in the nation,'' said Robert Voltmann, director of policy for the National Industrial Transportation League. ``We would love every rail shipper in the country to have a choice between two railroads.''
In a recent merger out West, the STB focused on preserving competition for shippers that would lose it, rather than ensuring it for all shippers, Voltmann said.
Morgan's recent comments emphasized competitive balance. The recent decision made sure there were two relatively equal, viable competitors in the West.
``The question that will be before the board soon is `what is the competitive balance in the East and what will need to be done to preserve competitive balance?' '' Morgan said.
Railroad executives in Norfolk, Richmond and Philadelphia are pouring over maps now trying to find the answer to that question.
``They ought to be able to resolve it if they really wish to do so,'' the consultant Banks said. ``All they're doing by prolonging this agony is making a lot of lawyers, consultants and Wall Street types very wealthy.'' ILLUSTRATION: Graphic
THE STB REVIEW SCHEDULE
CSX will file its application for control of Conrail by March 1
with the Surface Transportation Board. Norfolk Southern will file a
competing application by May 1. The board has a 300-day schedule for
handling such merger applications in which events should occur a set
number of days after the filing date.
30 days: notice of acceptance of primary and related applications
published in Federal Register
45 days: anyone who intends to participate must notify the board
60 days: notification of planned alternative proposals due (like
Norfolk Southern's)
75 days: comments, protests, requests for conditions due
90 days: U.S. Justice Department and Department of Transportation
opinions due
105 days: responses to comments, protests and requests for
conditions due
120 days: alternative proposals due
135 days: notice of acceptance of alternative proposals published
in Federal Register
150 days: responses to alternative proposals due
165 days: rebuttal supporting alternative proposals due
190 days: briefs from all parties due
235 days: oral arguments before the board
240 days: board holds voting conference open to the public
300 days: board issues final written decision reflecting vote
Source: Surface Transportation Board.