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from the intention we stated in our last report to withhold approval of the unification of prosperous carriers where the evidence indicates that the potential advantages of the unified systems are outweighed by the injuries to the public and other carriers. The pending proceedings involving the Rock Island do include a carrier in a weak financial condition similar to, if not even more precarious than, the condition of the Baltimore & Ohio when we approved its control by the Chesapeake & Ohio.
The protection of employees abounds in problems. One arises in tailoring the protection to the individual circumstances of the proceeding. In the Northern Lines case employee organizations and the merging railroads bargained at length and agreed on "attrition” terms similar to those negotiated in the Norfolk & Western-Nickel Plate and the Penn Central mergers. They provide job security as well as monetary benefits to a degree that could hardly have been achieved except for the merger. Since section 5(2)(f) authorizes employees to negotiate for protection through their representatives, the Commission has no function with regard to the protection of employees covered by the agreements. In several instances, however, we have found the terms of such agreements to be fair and ordered that they be extended to employees not represented by employee organizations.
Other serious difficulties grow out of regulatory matters that are in constant flux or that defy conclusive definition, for example, overlapping concerns of this Commission and the National Labor Relations Board; labor-management controversies, and internal jurisdictional disputes of labor organizations which postpone or slow down the integrational activities needed to the success of carrier consolidation; the fact that protection costs fall heavily and erratically because of the various options afforded employees and the nonpredictability of how they will be exercised; work-rules disputes and the threat of strikes which seriously affect consolidation transactions but involve areas where the Commission has limited jurisdiction.
The rail unification provisions of the Transportation Act of 1940 now the governing law were intended to facilitate consolidation of properties and operations through transactions initiated by the carriers. They were an effort to overcome the obstacles to consolidation which were inherent in the policy enactment of 1920 wherein it was contemplated that the Commission would formulate a master plan to which the carriers would have to conform. The master plan requirement was eliminated but we now have provisions under which the Commission can actively participate in the rationalization of the rail plant by imposing conditions upon merger applicants even to the extent of requiring the inclusion of other carriers. Inclusion can occur in various ways, for example, by having the applicants acquire properties or operations of the carrier being included, by requiring the applicants to sell to another carrier some of their own properties or properties they are acquiring in the proposed transaction, and other ways.
In a recent case, Seaboard Coast Line Railroad Company--Merger—Piedmont & Northern Railway Co., 334 I.C.C. 378, the Southern Railway sought to be included in a transaction between Seaboard Coast Line and Piedmont in order to obtain authority to purchase a portion of the Piedmont line. Southern's petition for inclusion was denied.
In the Norfolk & Western-Nickel Plate merger, the Erie-Lackawanna, Delaware & Hudson and the Boston & Maine sought to become members of the merged system. Norfolk & Western objected to their inclusion on the grounds that their operation would be unprofitable as part of Norfolk & Western. It was then necessary to hold extensive hearings in order to decide the matter, which was decided in favor of the three smaller railroads. Erie-Lackawanna and Delaware & Hudson are now part of the Norfolk & Western system under terms imposed by the Commission. As noted previously, Boston & Maine did not accept our inclusion terms and has not become part of this system. It has, however, again petitioned for inclusion in the Norfolk & Western system in connection with the Chesapeake & Ohio-Norfolk & Western merger which is now pending. The hearing examiner in the latter case has recommended Boston & Maine's inclusion under terms which the carrier may consider more favorable than we found reasonable under the facts previously considered. This matter has not as yet reached the Commission for decision.
The duration of unification proceedings is still a great matter of concern to us. Since major unifications have wide-ranging effects on the economy they are not susceptible of summary disposition. We are hopeful that the public is becoming more aware that the mergers of large railroad corporations require thorough consideration of all aspects of these mergers before they can be either approved or diso approved. Nevertheless, we continue to seek new ways of reducing the disposition time involved in deciding major railroad mergers while preserving the rights of the parties to a full and complete hearing."
Motor carrier consolidation continues apace as a concomitant of technological progress, highway proliferation, economic growth, and intensified demand for specialized service. Many consolidations are regional and some national, in scope, raising important policy issues, involving such things as the economics of coast-tocoast, single-line trucking, economies of scale, intermodal coordination; and the relation of merger trends within the industry itself to congolomerate mergers involving outside interests; and the relation of mergers to intramodal and intermodal competition and transport coordination.
Other policy issues in this area include (1) coping with the increasingly complex, heavy caseload, (2) the problem of appraising the competitive effects of transactions, (3) common control of competing operating rights, (4) transfers and conversions of certificates of registration, and (5) alien ownership of one of the larger, expanding motor carrier systems.
(1) Modified Procedure.-In an attempt to meet some of the problems facing the Commission in dealing expeditiously with its heavy caseload, opposed finance applications are being placed on the modified procedure docket in lieu of the hearing docket, wherever possible. The more complex cases, and those which, for one reason or another, might be handled more expeditiously and effectively with an oral hearing are assigned to the hearing docket. To the modified procedure docket are assigned those applications in which an oral hearing is not deemed necessary for their proper disposition. Following the filing of all verified statements under the modified procedure, the cases are submitted to an employee review board for a final report. The board's decisions are subject to petitions to Appellate Division 3.
(2) Competitive Effects.One of the most troublesome areas is an appraisal of competitive impacts of the transaction. On the one hand are applicants' prior services; the undeniable convenience of, and shippers preference for, single-line over joint-line service; and efficiency, economy, and best use of applicants' facilities after the merger. On the other are protestants' claims of new service for which a public need has not been shown and adverse effects from traffic diversion to the merged company. No uniform basis exists for assessing the amount of traffic diversion which is likely to result from a transaction. This is a continuing problem to which there is no quick and easy solution.
(3) Duplicating Operations under Common Control.- While we have generally withheld authority where the result would be the creation, preservation, or extension of duplicate operations which, absent common control, would be competitive, we have on occasion departed from this policy where there are advantages to be derived under current tax provisions from postponement of mergers for limited periods. We have long held that tax savings lawfully attained were proper objectives in merger proceedings. While mergers are postponed, usually from two to three years, the duplications may be controlled by imposing conditions that duplicating rights shall be considered as a single right, not severable by sale or otherwise.
(4) Transfers and Conversions of Certificates of Registration.—Paragraphs (6) and (7) of Section 206(a) of the Act have provisions respecting Certificates of Registration designed to preclude transfer of such certificates apart from the underlying or corresponding intrastate certificates or certificate supporting the Certificate of Registration. We now use orders in connection with transfers of Certificates of Registration under section 206(a) (49 CFR Part 1132) with appropriate provisions designed to require evidence that the appropriate State board has approved the transfer of the underlying intrastate certificate to the acquiring party and that the transfer of the intrastate authority has been consummated.
To ensure that the same may be applied in principle to transactions approved under section 5, appropriate language is employed as a condition in the findings and affirmative orders in section-5 proceedings. This includes proceedings under section 5 where the acquiring party is a multiple-State carrier and is seeking a Certificate of Public Convenience and Necessity under section 207 designed to convert the operation being acquired from the holder of a Certificate of Registration under the procedures described and approved in T.I.M.E. Freight, Inc.Merger, 97 M.C.C. 310. If the record has evidence of such State Board approval, only advice that the intrastate aspect of the transaction has been consummated! is required.
(5) Alien Ownership.-Unlike the Communications Act of 1934, there is no statutory provision in the Interstate Commerce Act against control of a carrier by aliens. In Ryder Truck Lines-Control and Merger--Harris Express, 104 M.C.C. 328, we concluded that the differences were deliberate. Ryder is controlled by International Utilities Corporation, a holding company, of Toronto, the majority stockholders of which are not citizens of the United States. Several other domestic motor carriers are controlled by Canadian interests, and vice versa. We do not believe that the public interest or national defense are threatened thereby. 3. Carrier Diversification and Conglomerates.
The expansion of Commission-regulated carriers, particularly the railroads, into nontransportation activities has prompted considerable comment in the Congress, the press and elsewhere. While regulated transportation carriers have always engaged in a measure, often substantial, of nontransportation business, the recent trend is more pronounced and widespread. Corresponding to these diversification efforts has been the renewal of the noncarrier holding company whose use was widespread in the railroad industry in the early years of this century as a device for controlling other railroads. These holding companies are useful as a mechanism for controlling both the transportation and nontransportation activities under a common management. Very commonly, the resulting entity is referred to as a "transportation conglomerate.” Many of these holding companies are created by the carrier itself for diversification purposes and control only the carrier bringing them into being. As such, these one-carrier holding companies are exempt from section 5(2) of the Act which governs the acquisition of control of a carrier by merger or otherwise. In its present form, section 5(2) requires the prior approval of the Commission for acquisitions of a carrier, subject to that section, by a person other than a carrier (noncarrier) only in situations where the noncarrier seeks to acquire control of two or more carriers or else seeks to control a second carrier, having previously acquired control of one carrier. Legislation has been introduced in the present Congress (S. 1398, H.R. 7373, H.R. 7374) to amend section 5 so as to require prior Commission aproval of acquisitions of one carrier by a noncarrier. We are now in the process of preparing detailed comments on this legislation which will be transmitted to Congress in the very near future.
Because of these developments in transportation diversification and the use of the conglomerate holding company device, we initiated an internal staff investigation in this area in 1968 in order to keep ourselves fully informed of these developments. This inquiry considered the nature and extent of carrier diversification, the reasons for such diversification and possible effects of diversification into nontransportation activities and transportation conglomerates on the ability of the carriers involved to meet their service obligations to the public. Although initially confined to the railroads, this inquiry has been subsequently expanded to cover all Commission-regulared modes. While we have not completed the collection and analysis of all the relevant information in this field the subcommittee may find the following tentative discussion and conclusions of value. A more complete report will be made to you in connection with our forthcoming comments on S. 1398.
Of the carriers subject to our jurisdiction, the railroad and motor carrier industries have become the most heavily involved in the conglomerate movement. Water carriers, particularly some of the larger ones, have been diversified or subsidiaries of large national corporations for some time. Oil pipeline companies are in large part, subsidiaries of major integrated oil companies. Class I railroad companies which are or are reported soon to be, part of conglomerate firms own just under 50 percent of total class I railroad assets. For a summary of certain economic data relating to conglomerates, see Table 1.2
2 P. 56 infra.
TABLE 1.-CAPITAL STRUCTURE OF CONGLOMERATE HOLDING COMPANIES FORMED AND BEING FORMED WITH
MAJOR RAILROAD COMPONENTI
(Dollar amounts in millions)
Explanatory Notes To Table Re Boston & Maine: Based on Moody's Transportation News dated April 8, 1969, pages 1715 and 1716, Boston & Maine Industries, Inc. was incorporated in Delaware on May 31, 1968 to acquire Boston & Maine Corporation pursuant to an exchange offer. Since Industries does not come under ICC jurisdiction, data bearing on Industries are not readily available.
Re Denver and Rio Grande: Based on Moody's Transportation News dated December 3, 1968, page 1885, and May 9, 1969, page 1664, Rio Grande Industries, Inc., which has been formed (by D&RGW RR.) to take over the Denver & Rio Grande Western Railroad, has acquired through a share exchange offer 91 percent interest in the D&RGW RR.
Re Penn Central: Action is pending on F.D. No. 25660, filed April 28, 1969, wherein Penn Central Holding Company requests authority to acquire control of Penn Central Company and of carriers controlled by Penn Central. Applicant requests the Commission to subject it to the provisions of section 20(1) to (10), inclusive, of the I.C. Act relating to reports and accounting, but not to section 20a (2) to (11), inclusive, of such Act relating to the issuance and guaranty of securities.
Re Seaboard Coast Line: Based on Moody's Transportation News dated May 23, 1969, page 1646, Seaboard Coast Line Industries, Inc., which was formed May 1 as new parent of Seaboard Coast Line Railroad through a share-for-share exchange of stock, will hold talks with Atlantic Coast Line Company, Bridgeport, Connecticut, holding company that currently owns 15.25 percent of Seaboard Coast Line, aimed at possible merger or consolidation of the two companies.
Re Southern Pacific: Based on Moody's Transportation News dated May 16, 1969, page 1656, on May 14 stockholders approved formation of a new holding company, temporarily called S.P., Inc. Plan calls for merger of company into Southern Transportation Company, a wholly-owned subsidiary of holding company. Upon completion of merger, holding company would assume name Southern Pacific Co. (This action had not been submitted to the ICC for approval.)
Re Union Pacific: Based on Moody's Transportation News dated March 4, 1969, page 1763, Union Pacific Corporation was organized on February 3, 1969 to become the parent of the Union Pacific Railroad through the exchange of stock.
Status under I.C. Act of the tabulated companies:
1. Bangor Punta Corporation
5. Seaboard Coast Line Industries, Inc.
1. Penn Central Holding Co.-F.D. No. 25660
1. Rio Grande Industries, Inc.
4. Union Pacific Corporation
1. Illinois Central Industries, Inc.
3. Northwest Industries, Inc.
1. Pennsylvania Company The Penn Central Company, as it is presently constituted and prior to action by the Commission in F.D. No. 25660 (Penn Central Holding Company), is subject to all parts of sections 20, 20a, and 20b.
(a) Railroads.-Railroad companies appear to have joined in conglomerate ventures primarily to improve profits through diversification. In their diversification programs railroads have invested in a wide variety of enterprises, such as: chemical companies, real estate ventures, manufacturers of heavy electrical equipment, oil pipe lines, foundries, television stations, manufacturers of mechanical devices, oil companies, farm supplies, underground storage facilities, oil field services, concrete suppliers, cold storage facilities, wearing apparel manufacturers, sporting goods, steel mills, and coal companies. The low rate of return on railroad net worth over the past ten years has tended to restrict available railroad equity capital to cost saving projects with expected high pay out ratios, and investments required to prevent further decline in rail earnings.
Rail interest in conglomerates has also stemmed from prospective tax benefits. Some railroads have had substantial tax credits which might be used to offset nontransport earnings of affiliates. The probable existence of over capacity in rail plant favors railroad interest in conglomeration, for it presents opportunities to place the proceeds of disinvestment of unused capacity in investments producing higher returns. Regulation and the difficulty of liquidating the substantial sunk capital has tended to retard the outflow of capital to higher return enterprises. However, railroads are far from insulated from the capital market, and some appear to have funds for investment outside the railroad industry. Avoidance of the necessity for Commission approval of new security issues appears to have had some influence on the creation of holding companies to control the railroad as its management pursues diversification.
In the case of railroads that are reasonably profitable, there would seem to be minimal concern that railroad disinvestment would adversely affect the provision of adequate service to the public. On the other hand, it must be recognized that the conglomerate and its holding can be used for disinvestment in railroad property and reinvestment in nontransport enterprises.
With the power to control policies of the railroad subsidiary and not subject to regulation, the holding company may have scant regard for transportation obligations as it seeks to serve the interests of its stockholders.
Withdrawal of capital from physical plant by failure to replace worn out or obsolete components through transfers of unneeded assets (disinvestment) or withdrawal of useful assets (dissipation) may be achieved in many ways. Two primary methods are undermaintenance of plant and payment of excessive amounts for service to affiliates.
There is nothing in the Act which directly prevents a railroad from acquiring stock of nontransport companies, or any properties, so long as it is done without