DATE: Thursday, October 23, 1997            TAG: 9710230547

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER 

                                            LENGTH:  117 lines

FEDS QUESTION CONRAIL DEAL JUSTICE DEPARTMENT WANTS CHANGES TO BOOST COMPETITION IN SEVERAL MARKETS.

The proposed division of Conrail by Norfolk Southern and CSX has been endorsed by several former opponents, but the U.S. Justice and Transportation departments are pushing for changes.

The Justice Department's antitrust unit said the break-up of Conrail's northeastern freight rail network poses ``significant competitive problems'' for several electric utilities.

The Department of Transportation is calling on Norfolk Southern Corp. and CSX Corp. to develop plans to be sure safety isn't compromised in the takeover.

The $10.2 billion deal is being opposed outright by the Chemical Manufacturers Association and the Society of the Plastics Industry.

However, Canadian Pacific Railway endorsed the takeover after reaching a settlement with Norfolk Southern and CSX. And the deal also received the surprise endorsement of Pennsylvania and Philadelphia, despite projected job losses of about 2,500 for the state, including 1,600 in the city.

These are just a few of the comments filed with the Surface Transportation Board on Tuesday, the deadline for proponents and opponents to comment on the Conrail takeover. The federal panel is reviewing the plan to take over Conrail and is expected to rule next June. The

STB has the power to approve, alter or reject the deal.

The Justice Department, which has opposed some past rail mergers, is not calling on the STB to block the transaction.

Instead an antitrust economist suggested the board require additional access for competitors to rail lines into at least three markets where competition will be reduced for utilities consuming more than $100 million of coal a year.

Those utilities could see their costs increase as their rail service is reduced from two railroads to one by the takeover, the Justice Department said. They include Indianapolis Power & Light Co. in Indianapolis and Potomac Electric Power Co., which serves the Washington area.

``Nowhere do (Norfolk Southern and CSX) explain why the public interest would be better served by denying the affected shippers continuation of effective two-rail carrier service,'' said Michael P. Harmonis, a Justice antitrust attorney.

CSX and Norfolk Southern have proposed giving each other some access to tracks to preserve competition, but Harmonis said the companies ``have not gone far enough, for their remedies would leave either CSX or NS in sole control of a number of critical rail links.''

Norfolk Southern spokesman Frank Brown declined to comment on Justice's position, saying ``we're in the process of receiving the various comments filed yesterday at the STB, and we will, of course, give them thorough review before responding.''

The railroads are to formally respond with the STB by Dec. 15.

The Department of Transportation is asking the STB to require Norfolk Southern and CSX to develop safety implementation plans to assure the safe integration of Conrail into their systems.

In the light of past mergers, the department said its Federal Railroad Administration has identified specific safety concerns that have not been addressed by Norfolk Southern and CSX. Just last week, the administration formally criticized CSX's safety practices.

Norfolk-based Norfolk Southern, which is also being reviewed by the Federal Railroad Administration, touted its record as the nation's safest railroad in its earnings press conference Wednesday.

Meanwhile, Norfolk Southern and CSX announced they have reached an agreement with Canadian Pacific to gain its support for their division of Conrail. Canadian Pacific had been saying it would ask the STB for guarantees of rail access for its Delaware and Hudson Railway subsidiary, which operates in the Northeast.

While terms of the settlement were not disclosed, Norfolk Southern and CSX agreed to give rail shippers around Buffalo and Philadelphia, in New Jersey and in several smaller areas effective access to and from Canadian Pacific markets via the Delaware and Hudson.

CSX also agreed to let Delaware and Hudson compete for truck traffic in New York City and Long Island in exchange for reciprocal access to Montreal.

``This agreement is an important step toward securing STB approval,'' said John W. Snow, chairman of Richmond-based CSX.

So were the surprise endorsements of Pennsylvania and Philadelphia, which is Conrail's headquarters. The city and state are two of the biggest losers in terms of jobs in the Conrail takeover.

Norfolk Southern, which is taking over much of Conrail's lines in Pennsylvania, announced a $50 million development program for the city and state on Wednesday.

The railroad committed to spending $25 million in the next five years to buy land and build industrial and rail facilities to encourage rail-served businesses to locate in Pennsylvania, said Brown, the Norfolk Southern spokesman.

Brown said $15 million will be spent on developments at the former Philadelphia Naval Shipyard, where the railroad is building an auto unloading facility and will operate an intermodal terminal.

The remaining $10 million will be spent to help bring Kvaerner ASA to Philadelphia, Brown said. The Norwegian shipbuilding conglomerate agreed Tuesday to redevelop part of the naval shipyard to build commercial vessels.

This spending is in addition to the $235 million of investments Norfolk Southern already said it would make in Pennsylvania.

Norfolk Southern also announced that its Mid-Atlantic Regional headquarters, to be located in Philadelphia, will have 75 employees. The railroad also said an estimated 150 railroad jobs will be created in the region within three years of the Conrail division.

The outright opposition to the Conrail deal by the chemical and plastics industries' associations were as shocking as the endorsements of Philadelphia and Pennsylvania.

``We were a little perplexed by the severity of their positions,'' said Robert Fort, a Norfolk Southern spokesman.

Neither organization could be reached Wednesday. Both may be reacting to service problems in the west stemming from the Union Pacific Railroad's year-old merger with the Southern Pacific.

``As with all concerns raised about the transaction, we hope to address these in this process before the Surface Transportation Board,'' Fort said.

MEMO: The Associated Press contributed to this story. ILLUSTRATION: THE CONRAIL EFFECT

GRAPHIC

The Virginian-Pilot

SOURCE: Norfolk Southern

[For a copy of the graphic, see microfilm for this date.] KEYWORDS: CONRAIL CSX NORFOLK SOUTHERN MERGER

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