# Appendix — RAILWAY LABOR EXECUTIVES' ASSOCIATION v. UNITED STATES (Nos. 80-1439, 80-1434, 1632) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1383%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1981 ## Text ta 0 = 1 4 $ 9 Office-Supreme Court, _ EILED ee y FEB 23 1981 : STEV CLERK IN THE Supreme Court of the United States OCTOBER TERM, 1980 RAILWAY LABOR EXECUTIVES’ ASSOCIATION, Petitioner, V. UNITED STATES OF AMERICA, ETAL., Respondents. Se SUPPLEMENTAL APPENDIX OF THE PETITIONER RAILWAY LABOR EXECUTIVES’ ASSOCIATION JOHN O’BRIEN CLARKE, JR., ESQUIRE HIGHSAW & MAHONEY, P.C. Suite 210 1050 - 17th Street, NW Washington, DC 20036 _ (202) 296-8500 Attorneys for Petitioner Railway Labor Executives’ Association Date: February 23, 1981 PRESS OF BYRON S. ADAMS PRINTING, INC., WASHINGTON, <> » D.C, TABLE OF CONTENTS Page Finance Docket No. 28583 (Sub-No. 1F), Burlington Northern, Inc. — Control and Merger — St. Louis-San = Railway Company, 360 I.C.C. 783 (April 17, l AP: ier Served April 17, 1980 F-98 51 INTERSTATE COMMERCE COMMISSION FINANCE DOCKET NO. 28583 (SuUB-NO. IF) BURLINGTON NORTHERN, INC.—CONTROL AND MERG- ER—ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY INDEX TO THE DECISION The applicants---------------------------------0-cceeenenenneeeeeneneeneneensenenneeees anne Burlington Northern, Inc------ cccccnccesersecececcecesccccsecococcosccccscce St. Louis-San Francisco Railway Company ------------------------------------ Transaction -----------------+----0e-nnnnnnnnnnnencnnnnnnnnnnceceenenarenenecenenneneeneenee Assumption of Control of the Alleged benefits of obligations and liabilities -----------------------------+------ MOLOL CALPiCL ----------------------enwnn nnn nn nnn nnnnnnnnenenene MEMES -------nnnn-nnnnnnnnennnnnnnnnnnnnnnnwnnnennnennnnnnannnnnne Applicants’ underlying studies ------------------------------0-0eseeeeereesenenenene Back ground --------------------+----00e----nenennennnnennncennenenecsseeeenecceesneees Cost studies (traffic) ---------------------------eennennenveenecnenecnnncennnnnnneee Operating studies -------------------------------0--ennceeeenneneenenensnennecnennees Purchasing and MALCTIAIS ---------------0---0---nnnnneennnenennnnnnennnnnnneneenne Information systems -----------------ccccececceneeewnnenncecenescccscscscncceneeneee The public interest benefits claimed by applicants ---------------------- Stock exchange -------------------------------e-eeneeeeneecseenenenennennseneenenenee Employee impacts --------------------0--s0se-ceeeecencncncncenceceesncececcecesenes Traffic volume studies---------------0----ce-seeenennenenneeecesescecerenseceees Common poi nt consolidation studies -------------------------------+------ Comparison of studies—labor and operational-------------------.------ Overhead study ------------------------+0+eeceennnnnnnnnnnsncnnnnnenneeeeeeenneees Labor—scheduled ----------------------000e--eeee--nnnnennnnnnnncenennnneeeneeees Labor—exempt---------------------------0e--enennnnnnnnnnnneeennneneeneenenenees National defense ----------------------0+---00---eececneennnennneneeeseneneneceenenes Shipper support sreceensenssooosconessosonossessoeensssooooeooosoosescooonscsosoonses Financial analysis -----------------------------------0-esseeneeneeeennneennnnnnceeeneees Positions of parties Milwaukee Road Summary of M SFOS ESSE SESE ESE SE SSE ESSE S SESE SEES ES ESE ESE EE EESESESE CESSES SECSS tate ee ilwaukee Road's position ------------------------------------ Scope of operations-----------------------0----0--e--seceeeeencennenncenncenneeenee Traffic diversion and net impact of merger -------------------------------- Impact on shippers—loss of service --------------------------+0--eeeee-eeenee Impact on employees ----------------------------000--0ee-enennnennneeneceeneeeeees Protective CONditiONS -----------------------0e---eeeneeenennneneecenseceecenecenees Access to COalfields-----------------------0-----eeeeeneenenenennnnceceeneeesenes Indemnification --------------0---.-ccceceeceveeneoecencecsccccnccccccscceceseccees Liquidated damages ----------------2-.0---s--e-eeccccccceccsccncecescceceeecesee Revision of joint facility agreements------------------------------ 797,900 653,288 O48 S84 068.248 Long-term disability----------- > 729.000 787.120 751.660 791.270 Dental plan -rrss--s--eeeseeererrne 904, 500 853.654 847 $22 847.084 Travel accident --------eeesceeeee: 19.500 45.388 45,062 45.0” Total annual Cost «-...s-e8 seen 20,64 1,450 21,204,286 21,051,738 21,080,819 Increased Cust! ------ecseeeeee cee S60.8 408,285 7 wae ‘Table 6. item (Mm). Note: Reductions in costs tor particular benetits are the result of jobs being abulished during the ‘year period, Total net costs resulting from impacts on nonunion employees (i.e., wages saved, protection costs and increased costs for providing a unified benefit program) amount to $1.6 million in the first year, followed by saving of $5.9 million and $6.9 million, respectively, in each of the next two years following merger. National defense The applicants believe that no defense-related service presently provided by either BN or Frisco will be hindered by the proposed merger, but in fact, will be improved to the same degree as for shipments by the public. 360 LCC. 50 Shipper support A dozen shippers testified in support of the merger. Combined they paid over $1 billion for rail transportation services in 1977. Their testimony is detailed in appendix C. The reasons for their support vary; however, the overriding factor is their belief that the merged company could provide better service. This service ranges from faster transit times to easier tracing of shipments. The combined car fleet, and particularly the ability to have BN equipment available in the South and Southeast and Frisco equipment available in the Northwest and North Central regions, are considered particularly important. FINANCIAL ANALYSIS Burlington Northern BN has reported net incomes in each year since the Northern Lines merger, with the exception of 1971 dve to an extraordinary item of $67.5 million. While net railway operating income has been substantial, other income has been greater than $50 million annually since 1973. The carrier has reported positive working capital each year since 1968, with a working capital ratio ranging from a high of 1.68 to a low of 1.15. In 1976, the base year, BN earned a net income of $72.6 million on railway operating revenues of $1.5 billion. The rate of return averaged 2.24 percent for the period 1968-78, with a return of 2.40 percent for 1976. The carrier's debt-to-equity ratio has averaged in the low thirties for the period 1968-77. Fixed charges have been covered rather well, with an average coverage of slightly over 2.0 times for the 11-year period and a good 2.3 times for 1976. St. Louis-San Francisco Railway Company Frisco has been profitable in each year since 1968, and reported a net income of $12.0 million for 1976. The carrier had positive working capital in each year from 1968-77, with an average working capital ratio for the 10 years of 1.22. Frisco’s rate of return averaged 4.86 percent for the |1-year study period. In 1976 the carrier reported a return of 4.51 percent. The debt-to-equity ratio has been acceptable, ranging from a low of 43.9 percent to a high of 49.6 percent. The average fixed charges coverage for the period 1968-78 was a good 2.33 times. A 2.1 coverage was reported for the base year, 1976. 360 L.C.C. 5] Financial benefits to merged company The applicants’ pro forma income statement indicates that the third year after the merger, the merged company expects a net increase in railway operating revenues of $65,328 million, for combined railway operating revenues of $1,918.2 million. This projection was made using a base year of 1976, thus taking no economic considerations into account. The applicants anticipate that railway operating expenses would increase by a net amount of $27.113 million, for combined railway operating expenses of $1,524.5 million. The estimated profit is $112.9 million, of which $28.4 million is attributable to the merger. Impact on the exchange offer on income Statement.—Because the purchase price is less than the net book value, the depreciable assets of the Frisco will be written down to purchase cost, hence reducing the depreciation base. In so doing, the depreciation expense to be recorded in the income statement will have a lesser impact on earnings, thus adding to net income. As an offset, the long-term debt will be written down to its present value. Since long-term debt is retired at par value, the difference between book value and the restated value will be amortized over the life of the debt. This will result in an increase in fixed charges that will more than offset the decrease in depreciation expenses. The additional fixed charges required ($6.6 million) exceeds the $4.7 million decrease in depreciation expense, so that the overall effect on the income statement is to reduce net taxable income by $1.9 million in the first pro forma year. This decrease in taxable income should not be looked upon as detrimental, since it does not require any cash outlay and reduces the cash outlay required to pay Federal income taxes. The table below presents fixed charge coverage for the base year and each of the first three years after the merger. 360 1.C.C. 52 TABLE 12 Fixed charge coverage Merged company BN Frisco 1976 1976 Year One Two Three Thousands Income available for fixed CNALBOS ++ = en nn ennnewnwnen nnn $131,829 $25,367 $168,389 $185,904 $190,311 Fixed charges ----------------- 59,241 12,049 77,328 76,462 76,024 Coverage (times) ---------+++- 2.23 2.11 2.18 2.43 2.50 The net increase in fixed charges resulting from the proposed merger is estimated to be $6.04 million in the first year of merged operation. This increase is the result of two factors. The first is the discounting of the principal amount of debt and capitalized lease obligations to reflect current interest rates. The increase so computed does not result in any increase in the cash payments for existing fixed charges because this is purely a purchase accounting change in interest rates. Second, to accommodate the projected increase in traffic volume, it is estimated that the merged company will acquire 17 new cabooses. The resulting increase in fixed charges will be offset, at least in part, by the avoidance of certain locomotive and freight car purchases. In the case of the BN-Frisco merger, the most important impacts are a reduction in depreciation due to a writedown of the historical cost of depreciable property to allocated purchase cost and an offsetting increase in accounting fixed charges due to the writedown of long-term debt to present values. Since such long-term debt must be retired at fixed or par value, additional fixed charges are required to amortize the discount created by the purchase accounting adjustment. The operating expenses, equipment rents and fixed charges in the pro forma income Statement reflect adjustments for the adoption by Frisco of accounting for leases as provided by Financial Accounting Standards Board Statement (FASB) No. 13. This accounting already is reflected in BN statements. Improved revenues, additional costs, and Savings are expressed in additional cash receipts and reduced cash expenditures. In 360 1.C.C. 53 preparing the pro forma financial statements, however, it was necessary to give different treatment to certain of those amounts which are in the nature of additions and betterments rather than expenses, as well as the effect of purchase accounting. Thus, pro forma operating expenses must reflect the reduction in depreciation expense resulting from purchase accounting as well as the additional costs of handling increased traffic and the merger savings. Other portions of the pro forma income statement reflect additional fixed charges, again resulting from purchase accounting. The increase in pro forma net income is on an after-tax basis. » The following table indicates cash flow for each applicant for 1976, the base year, and the merged company for the first 3 years after the proposed merger. This table demonstrates the ability to repay debt and make necessary capital investments. TABLE 13 Cash flow and debt coverage Merged company BN Frisco 1976 1976 Year One Two Three Thousands Ordinary income ------------- $72,588 $11,956 $89,699 $108,080 $112,925 Depreciation and retire- MENL -+---20-eeeeweeennnnnnnne- 66.874 14.450 76,371 76,091 75,812 Deferred income taxes ----- 2,847 1,635 4,482 4,482 4,482 Undistributed earnings ----- (7,621) (143) (7,990) (8,096) (8,113) TOL --eeeeeeenee nnn eeneeee 134,688 27,898 162,562 183,557 185,106 Long-term debt due within TYCO wnnrnnenwnnnneennnnnnnne 50.911 13,935 66,438 66,438 66,438 Coverage (times) ------------- 2.65 2.00 2.45 2.76 2.79 Each carrier had adequate cash flow to cover its long-term debt due within | year for the base year. The coverage of debt maturity after merger should allow an adequate contribution toward future capital investments. Impact of the exchange offer on balance sheet.—The con- sideration given by BN is the fair value of the common and preferred shares which it proposes to issue plus the fair value of the liabilities 360 1.C.C, ” 54 to be assumed. The fair value of the liabilities assumed is the discounted value of debt at current interest rates and the present value of certain other liabilities, such as that for unfunded pensions. The fair value of the consideration given must be apportioned to the assets acquired. Briefly, current assets are reported at book value and the remaining fair value of consideration given is apportioned to other assets, including investments and road and equipment property, in proportion to the fair values of assets. The pro forma balance sheet illustrates this technique. Using the valuation figures estimated by Salomon Brothers, the book value was reduced by $88.6 million. The pro forma balance sheet reflects the purchase accounting adjustments as wel! as the pro forma adoption by Frisco of accounting for leases as provided by FASB No. 13. The working capital position of the applicants and the merged company is presented below. TABLE 14 Working capital BN Frisco Merged 1976 1976 company Thousands Current assets ----------- HAtenanennannneeeeeeneanenateneeananenannenns $388,482 $59,946 $448,428 Current liabilities! -------+---------------seeeees-onecenneeeeeeseoeees 357.934 68,959 423,519 Working capital ----------------------- wtereneeneneeeenseeeennsennns 30,548 (9.013) 24.909 Working capital ratio ---------------------0ee-ss-eeeeneeerenecneee 1.09 0.87 1.06 ‘Includes long-term debt due within | year. It is expected that the anticipated growth in cash flow and earning power of the merged company would lead to a stronger working capital position that either road could attain alone. ’ The pro forma balance sheet indicates that the merged company will have a debt-to-debt plus equity ratio of 38.0. This ratio is slightly higher than BN’s ratio of 35.6 for 1976 and-below Frisco’s 48.4 for 1976. A ratio of 38.0 should not have an adverse impact on the merged company’s future financing. Normally a carrier will have capitalizable assets in excess of total capitalization, as in the case of the merged company as shown below. 360 1.C.C. 55 TABLE 15 Capitalizable assets of merged company Working capital ------------------sssssseeeecsnennesececccnsneccccceseececeeeseececees $91,347,000 Carrier operating property less depreciation ------------------+----------0-- 2,739,251 ,000 Investment in transportation subsidiaries plus undistributed earnings- 363,453,000 Total capitalizable assets -------------------------0-eeec-eeeecceeeencesescenennes 3,194,051 ,000 Total capitalization’ ---------------------00-ceesessenneeccnneneceeeeseceseeccenenes 3,094,218,000 Capitalization assets in excess of capitalization ----------------+------------ 99,833,000 ‘See schedule of capitalization of merged company below. Since the merged company will have Capitalizable assets in excess of capitalization, the attendant pressures of overcapitalization Should not be felt and further expansion of Capitalization is possible. TABLE 16 Capitalization of Burlington Northern, Inc. after merger, December 31, 1976 BN Frisco Adjust- Pro forma ments Thousands Short-term borrowings—notes payable (1) --e----nwereneneennnennnnennceneeecencenenns $17,343 wneceeenncnneeene eneneeees ones $17,343 Current portion of long-term debt and capitalized lease obligations (2)------ 55,877 $13,935 $(3,374) 66.438 Long-term debt and capitalized lease obligations: Mortgage and collateral trust bonds i) 471,597 105,608 (40,018) 537,187 Equipment and other obligations (4)- 323,249 104,101 6.471 433,821 Capitalized lease obligations (5)------- 3O,3OS --2 220-22 -nnnweee 12,287 48,592 Due to affiliated cost --------------------- $9,712 278 -nn--nnnnennnnnne 59,987 Convertible debentures (6)-------------- 65,000 --enenerecccecece cenenceeeeeseeees 65,000 Tal ------0--0e seen eneneneenneeneenee 955,863 209,984 ------2-n-nnnnens 1,144,587 Stockholders’ equity (7) and (14): Preterred stock: $10 par value; authorized, 2,978,875 Shares; outstanding, 2.899.326 SNALES -----------20-eennennweneneneeeeecenee 7. ke 28,993 No par value, authorized, 5 million shares (8), outstanding: Series A, 344,850 shares------------- 10,346 -----n-enceeenene cereneeneneeeeees 10,346 $2.125. $25 redemption value (10) -reccrcccccrsnsnnsenscccccncsescceccecs sencccrencsernece sescssececseceses 32,642 32,642 360 1.C.C 56 Capitalization of Burlington Northern. Inc. after merger. December 31, 1976—Continued BN Frisco Adjust- Pro forma ments Thousands . Preferred stock—Continued: $100 par value; authorized 1,500,000 Shares, issued. MoMe (11 )-------seecee- caccenceeeceeccee ceccenee $10,000 par value, redeemable pref- erence shares; authorized 3,000; shares issued, none (9) see seeeeccenssescoes oe Common stock, without par value au- thorized. 25 million shares; out- standing. 12,457,876 shares (12)------ $544,329 ----------e-neeee $104,370 $648,699 Common stock, without par value; authorized, 6 million shares; issued 2,611,436 shares: outstanding, 2.611.386 shares (13) ------c--ceeecceeeee seocceecccesecees 113,967 (113,967) -----0--eenennnne Capital surplus (13) ------------------+--- fo ceennennnaeensane 19,019 (19,019) ------nennnnnne Retained carnings (13) ----------------++- 1,145,170 90,554 (90,554) 1,145,170 TWA) ------00neennnennecenneneeneneneeenee 1,728,838 223,40 ------2---0000000 1,865,850 Total capitalization -------------..--- 2.757.921 447,489 -------0--enennne 3,094,218 Explanatory notes (1) BN short-term borrowings (historical) consisted of $16,388 of notes payable and $1,000 ‘ commercial paper. The average interest rates at December 31, 1976 were 4.76 percent and 4.75 percent for notes payable and commercial paper, respectively. (2) Frisco’s historical current portion of long-term debt and capitalized lease obligations have been adjusted to reflect the fair value of long-term debt maturities and capitalized lease obligations in arriving at the pro forma amount. (3) Interest rates on BN obligations range from 2.625 percent to 8.60 percent and are due from 1978 to 2047. Interest rates on Frisco's obligations have been adjusted to reflect, on a pro forma basis, fair value at December 31, 1976, resulting in a pro forma reduction of $40,018,000 in Principal amount; accordingly, such amounts included in the pro forma column have interest rates ranging from 8.25 percent to 13.16 percent and are due 1978 to 2006. (4) BN’s equipment and other obligations bear interest ranging from 3 7/8 percent to 9 3/4 percent and are due 1978 to 1993. Interest rates on SLSF's obligations have been adjusted tw reflect, on a pro forma basis, fair value at December 31, 1976. resulting in a pro forma increase of $6,471,000; accordingly. such amounts included in the pro forma column have an interest rate of 8.25 percent and are due 1978 to 1992. (5) BN's long-term capitalized lease obligations are due 1978 to 1991. Frisco’s capitalized lease obligations (long-term portion of $12,287,000 at December 31, 1976) have been included in the pro forma column in order to reflect the adoption of FASB No. 13. Such lease obligations are due 1978 to 1993. (6) BN's covertible debentures bear interest at 5 1/4 percent and are due 1992. The convertible debentures may be converted into common stock at $55 per share, subject to antidilution Provisions, at any time on or before January 15, 1992. The debentures are redeemable at the option of BN at 103.7 percent of principal amount in 1977, at declining percentages through 1988, 360 1.C.C. & 57 Explanatory notes—Continued and at par thereafter. Beginning in 1983 and continuing through 1991, BN is required to retire annually $5 million principal amount of debentures, subject to adjustment for debentures previously converted, acquired, or redeemed. In addition, during such period BN has the noncumulative option annually to provide cash for the retirement at 100 percent of the principal amount, of up to an additional $5 million of outstanding debentures. BN has reserved 1,181,818 shares of its authorized but unissued common stock for issuance upon conversion of the debentures. (7) On May 12, 1977, BN stockholders approved an amendment to the restated certificate of incorporation creating a new class of redeemable preference shares consisting of 10,000 shares having a par value of $10,000 each. On the same date, the stockholders approved the 1977 stock option incentive plan, authorizing the granting of nonqualified options to purchase up to 600,000 shares of BN common stock officers and key salaried employees of BN and its subsidiaries. Pursuant to such authorization, the board of directors on May 12, 1977 granted options to 451 persons, covering 125,850 shares of common stock at a price of $48.50 per share. (8) On July 7, 1977, BN issued 2 million shares of $2.85 convertible preferred stock at a price of $50 per share and accrued dividends for $96,932,000 net of issuance costs. The shares are convertible at any time into common stock of BN, unless previously redeemed, at a conversion rate of 0.8889 shares of common stock for cach share of preferred stock subject to adjustments in certain events. BN may, at its option, redeem such preferred stock, in whole or in part, upon at least W days’ notice at $52.85 per share prior to July |, 1979, at decreasing prices thereafter prior to July |, 1987, and thereafter at $50 per share. (9) On May 11, 1976, Frisco stockholders approved an amendment to the articles of association creating a new class of redeemable preference shares consisting of 3,000 shares having a par value of $10,000 each. (10) For pro forma purposes it is assumed that |,305,693 shares of BN $2.125 no par value preferred stock, $25 redemption value, were issued December 31, 1976, at par at an exchange ratio of one-half share of preferred stock for each outstanding share of Frisco common stock. The pro forma share amount assumes no cash payments for fractional shares. Such payments are provided for in the merger agreement. The ultimate issuance of such stock is subject to approvals of the merger by BN and Frisco shareholders and the ICC. For *** the ICC, (Ina letter to the Commission dated October 29, 1979, attorneys for the applicants stated that 1,347,785 shares of the new preferred stock would be issued or reserved for issuance). (11) None of the Frisco $100 par value preferred stock ($1,500,000 shares authorized) has been issued. (12) For pro forma purposes, it is assumed that an additional 2,480,817 shares of BN’s common stock were issued December 31, 1976, at an exchange ratio of 0.95 BN share for each outstanding share of Frisco common stock. The pro forma share amount assumes no cash payments or fractional shares. Such payments are provided for in the merger agreement and are reflected in the adjustments and pro forma columns at a price of $41.25 per share. the closing market | ice of BN common stock on the date the respective boards of directors agreed in principle to the terms of the proposed merger. In addition, $2,036,000, which represents the assumed conversion of all outstanding Frisco stock options at the merger conversion rate less the grant price ($23.44) of such options, has been added to the common stock. For *** common stock, (In a letter to the Commission dated October 29, 1979, attorneys for the applicant stated that 2,560,791 shares of BN common stock are anticipated to be issued or reserved for issuance). (13) The proposed transaction will be accounted for as a purchase and, accordingly, the Frisco common stock will be retired and Frisco capital surplus and retained earnings of prior to the date of merger are eliminated. (14) Does not include: 1.181.818 shares of BN common stock initially reserved for issuance upon conversion of BN's 5 1/4 percent convertible debentures, due 1992; 580,545 shares of BN common stock reserved for issuance pursuant to the BN stock option incentive plan, 287,375 shares of BN common stock initially reserved for issuance upon conversion of the series A no par 360 1.C.C, 58 Explanatory notes—C ontinued value preferred stock; |,777,800 shares of BN common stock initially reserved for issuance upon conversion of the BN $2.85 convertible preferred stock issued on July 7, 1977 (see (8) above); and 540 shares of BN common stock held in the treasury. Also not included are 79,974 shares of BN common stock and 42,092 shares of $2.125 no par value preferred stock which may be reserved for issuance at the exchange rate for the merger transaction, for Frisco common stock. pursuant to the Frisco stock option plan. POSITIONS OF PARTIES Supporting the merger application are the U.S. Department of Defense (DOD), Boise Cascade Corporation, Care-Nicky Corporation, International Mineral and Chemical Corporation, Proctor and Gamble Company, Farmlands Industries, Inc., American Cast Iron Pipe Company, Amax Coal Company, Lamb- Weston, Weyerhaeuser Company, Shell Oil Company, Nabisco, Inc., and the Pacific Northwest Traffic League. The U.S. Department of Justice (DOJ) does not oppose the merger. If the Commission imposes the stipulated conditions negotiated with applicants, the following carriers do not oppose the merger: the Atchison, Topeka and Santa Fe Railway Company (Santa Fe), Chicago and North Western Transportation Company (CNW), Illinois Terminal Railroad Company (ITC), the Family Lines, Southern Railway Company (Southern), Kansas City Southern Railway Company (KCS), Southern Pacific Transportation Company (SP), St. Louis Southwestern Railway Company (Cotton Belt), Union Pacific Railroad Company (UP), and Missouri-Pacific Railroad Company (Mopac). The stipulated conditions are set forth in appendix K. BN and Frisco support these conditions. Six railroads are opposed to the merger. They are Chicago, Rock Island and Pacific Railroad Company, William M. Gibbons, trustee (Rock Island), Chicago, Milwaukee, St. Paul and Pacific Railroad Company, Richard B. Ogilvie, trustee (Milwaukee Road or MILW), Soo Line Railroad Company (Soo Line), Illinois Central Gulf Railroad Company (ICG), Missouri-Kansas-Texas Railroad Company (MKT or Katy), and Denver and Rio Grande Western Railroad Company (DRGW or Rio Grande). Additionally, the Railway Labor Executives’ Association (RLEA); John W. McGinness, Illinois Legislative Director of the United Transportation Union (UTU-IL); Railway Employees’ Department, AFL-CIO (RED); M. S. Stuckey, General Chairman of United Transportation Union on Illinois Central Gulf Railroad Company (UTU-ICG); M. M. Winter, General Chairman of United 360 I1.C.C. 59 Transportation Union on BN (UTU-BN); lowa Department of Transportation, Transportation Regulation Board (IA-DOT); Illinois Department of Transportation (IL-DOT); Kansas City Board of Trade (KC Board); Montana Wheat Research and Marketing Committee (MT-Wheat); Wyo-Ben, Inc.; Riceland Foods; Superior Corp.; and John W. O'Neil oppose the merger. No parties support Soo Lines’ requests for trackage rights over BN between Superior, WI, and (a) McGregor, MN, (b) Schley, MN, and (c) Bald Eagle, MN. BN, Frisco, DOJ, and UTU-ICG oppose the request. BN and Frisco also oppose all other relief requested by Soo Line (set out in appendix K). ICG's proposal for trackage rights over Frisco between Memphis, TN, and Jasper, AL, and terminal operations over Mopac in Memphis is opposed by BN, Frisco, DOJ, and UTU-ICG. BN and Frisco also oppose the other conditions sought by ICG. The CNW proposal for trackage rights over BN between the Twin Cities and the Twin Ports over the White Bear Lake route is supported by BN and Frisco. However, DOJ opposes these trackage rights. SP’s proposed trackage rights in Portland, OR, are supported by BN, Frisco, and Crown Zellerbach. UP, DOJ, and UTU-ICG are opposed. Milwaukee Road's proposed trackage rights to serve coalfields in eastern Montana are supported by the Wisconsin Power and Light Company (WI-P&L), Northern States Power Company, and the Westera Energy Company, but opposed by BN, Frisco, DOJ, and UTU-ICG. BN and Frisco oppose other conditions sought by Milwaukee Road. Rock Island's proposal for trackage rights over BN between Denver and Golden, CO, is supported by the Adolph Coors Company, the major shipper on the line. BN, Frisco, DOJ, and UTU- ICG oppose the trackage rights. Rock Island's use of the DRIKNW line is opposed by BN, Frisco, Termicold, Lamb-Weston, and Alcoa. Applicants oppose all other proposed protection for Rock Island. The indemnity protection sought by MKT is supported by the Lower Colorado River Authority, La Barge, Inc., Breton Corporation, Clareden, Inc., the Denison Area Chamber of Commerce, and Gifford-Hill & Co., Inc. This condition is opposed by BN, Frisco, and DOJ. DOJ also opposes the proposed indemnity conditions sought by Milwaukee Road and Rock Island. 360 1.C.C. 60 The impact of the merger on each rail carrier participating in the proceeding and the relief requested are discussed separate below. MILWAUKEE ROAD Summary of Milwaukee Road's position MILW contends that applicants have not shown the merger to be in the public interest. Many of its benefits could be accomplished without merger. Milwaukee asserts that 50 percent of all merger benefits attributed to the transaction would be derived from diverted traffic. MILW notes that applicants contend there is insufficient traffic to justify run-through operations short of merger; however, when diversions add to applicants’ traffic base, such operations will commence. MILW questions some of the anticipated benefits of the merger. It believes that applicants’ “improved car supply” is an un- substantiated claim, particularly in view of the impossibility of estimating the effect of internal traffic reroutings. Applicants’ proposed minor reductions in overhead staff conflict with the BN chairman’s offer of continued employment to all Frisco senior management, thereby destroying a prime merger economy. MILW also contends that another claimed economy, joint purchasing, could be done now without merger, but BN policy stands against it. MILW contends that the supporting shippers agree that they could not count on applicants’ innovative ratemaking policies, which could occur without merger. MILW points to other shortcomings in applicants’ case. MILW notes that applicants failed to calculate any benefit from increased productivity, one of the foremost problems of the railroad industry. MILW points out that terminal congestion directly affects railroad productivity and that applicants’ proposal does nothing to relieve the general problem at their Kansas City interchange. MILW fears that, with the elimination of applicants’ interchange at Kansas City, the situation may become worse. It believes that the same result may occur at St. Louis. MILW contends that problems may stem from the necessary conversion of applicants’ incompatible informa- tion/computer systems. MILW stresses that the slightest miscalcula- tion easily could cause the monumental foul-up experienced follow- ing the Penn Central merger. MIL W asserts that neither applicant needs the merger to saves its service as each is a large, strong, and prosperous railroad. MILW 360 L.C.C, 61] believes that BN’s low rate of return for its transportation division must be considered in conjunction with its line-upgrading and construction investments, which would provide the rate of return relied upon by investors. MILW contends that merged, the applicants will be able to expand their return on investment exponetially, not arithmetically, to an extent overwhelming to competitors. Even if reorganzied, MILW asserts that its competition would disappear in the Chicago-Kansas City market and diminish in other markets as a result of this merger. MILW submits that the public interest will not tolerate that result and that the proposal must be denied. Should the merger be approved, Milwaukee Road seeks imposition of conditions for its benefit. On brief Milwaukee Road abandoned its request to use BN's Dayton's Bluff Yard. It maintains its request for the following conditions: (1) access to BN's coalfields near Colstrip and Kuehn, MT, through trackage rights over BN lines from Miles City, MT; (2) indemnification for traffic losses since 1970 as a result of the Northern Lines Merger and losses from this merger, including the cost of labor protection, reduced by Milwaukee Road revenue gains as a result of conditions imposed for its benefit; (3) liquidated damages of $100,000 for every violation by the new company of any condition which may be imposed upon the merger, (4) revision of all joint-facility agreements between Milwaukee Road and BN to allow free assignment by Milwaukee Road of its rights; and (5) modified traffic conditions similar to the standard “DT&I conditions.””° Scope of operations In 1976, Milwaukee Road operated in Idaho, Illinois, Indiana, lowa, Kentucky, Michigan, Minnesota, Missouri, Montana, Nebraska, North Dakota, Oregon, South Dakota, Washington, and Wisconsin. It entered bankruptcy on December 19, 1977. Since that date, Milwaukee Road has engaged in a massive abandonment program. Recently a majority of the Commission recommended to the bankruptcy court that Milwaukee Road be permitted to abandon all lines west of Miles City, MT (2,497.7 miles). The scope of future MILW operations will depend on the reorganizability of the carrier and the resulting configuration. “Detroit, T. & LR. Ca. Control, 278 LC.C, 488 (1980) 360 L.C.C, 62 Traffic diversion and net impact of merger Milwaukee Road contends that applicants seriously understated the gains that will be achieved by the merged company, as well as the losses to competing carriers. Applicants admit that MILW will sustain a loss of $3,054,960. Milwaukee Road estimates that its losses as a result of the merger will be $14,089,930. Milwaukee Road firmly believes that the new company, with its inherent advantages of single-line service, abundance of equipment, and combined sales force, will have the ability to “outsell” its competition. Milwaukee Road's traffic study shows a $5.7 million loss in the first year after the merger is consummated and an $8.3 million loss in the second year. Milwaukee Road points out that applicants’ traffic study excludes traffic that was moving entirely over other rail carriers’ lines. Neither applicant studied traffic which did not appear in their records. Milwaukee Road contends that the Commission should not regard as mere rhetoric applicants’ boasts of the “synergistic effect” of the merged railroads’ future success in wresting traffic from competitors. Milwaukee Road maintains the traffic losses it projected from the Northern Lines Merger fell far short of what actually occurred. (Milwaukee Road projected a loss of $16 million per year and claims that, at todays’ average revenue per car to Milwaukee, its losses from that merger exceed $19 million.) BN’s testimony reveals that new traffic not presently carried by applicants is a target of the merger. Milwaukee Road contends that the judgmental error made by Frisco as to divertibility (based on the existing Frisco system rather than on the merged railroads) is sufficient cause to discard the applicants’ traffic study. Additionally, Milwaukee Road objects to the reliance by applicants on subjective factors such as “good relations” with customers to justify diversion estimates. Applicants show a revenue loss of $3,054,960 in diverted traffic from Milwaukee Road, in contrast to the Milwaukee Road study Showing $5,775,340 for divertible traffic. Milwaukee Road has submitted a chart of traffic movements which alleged accounts for $2,037,634 of the $2.7 million difference between Milwaukee Road's divertible traffic and applicants’ conceded diversions. Milwaukee Road notes that the understated amount. coupled with applicants’ admitted revenue diversions, results in a total loss of $5,091,794 on divertible traffic only. A comparison between applicants’ and MILW's traffic studies shows that a difference of 360 1.C.C, 63 only $682,746 exists. MILW contends that the close correlation between the traffic studies, as corrected, proves that applicants’ traffic study was deliberately understated and is of no evidentiary weight. MILW contends applicants were remise in not considering the long-term effects of the merger on competing railroads. In its study, MILW identified and quantified traffic not presently handled by either BN or Frisco, but subject to diversion upon consummation of the merger. It concluded a vulnerable category to identify the long- term impact of the merger. Milwaukee Road asserts that the merger will strengthen only applicants and their share of the transportation market at the expense of competing carriers. Further, as the strength of the applicants increases with the advantages the merger will create, the more vulnerable MILW’s traffic becomes. In MIL W's traffic study, full value was given to the merged status of the applicants. MILW's traffic Study shows that 10,480 cars and $5,775,340 in revenues were classified as vulnerable traffic. The total amount of cars to be diverted exceeds 23,000: the revenue diversions exceed $14 million. Abandonment of Milwaukee Road's lines west of Miles City, MT would reduce Milwaukee Road's system substantially.‘' However, even with this reduction, Milwaukee Road alleges $7,991,635 will be either divertible ($3,740,224) or vulnerable to diversion ($4,211,411) as a result of the proposed merger. Milwaukee Road points out that additional Single-line service between points such as Minneapolis-Chicago and Houston-Dallas-Oklahoma City, and Houston and Argo, IL only intensifies its problems. MILW notes that applicants took the Position that all but three railroads could survive the revenue loss caused by the traffic diversion by making a few economies. The three systems which concededly would not be able to adjust to diversions, but are candidates for liquidation, are Milwaukee Road, Rock Island, and MKT. Although MILW operations currently produce a large deficit, MILW is endeavoring to reorganize so as to minimize dislocations and the possibility of Federal intervention. Loss of $14.1 million or more in annual revenue is a lethal attack upon the foundation of the trustee's reorganization plan. MILW submits that it has exhausted the possibilities of practicing economies in operations. It has been ‘A majority of the Commission recommended to the bankruptcy court that it permit Milwaukee Road to abandon these lines in AB? (Sub-No. 86), Richard & Ogilvie, Trustee of the Property of Chicago, Milwaukee, St. Paul and Pac Vic Railroad Company—A bandonment—Por tions of Pacific Coast Extension in Montana, Idaho. Washington. and Oregon (nor printed), decided January 29. 19RO 360 LCC. 64 in bankruptcy since December 19, 1977, thus, deferring most prior debts. It is striving to abandon its money-losing lines, and 55 sepa- rate abandonment applications have been filed with the Commission since December 1977. Milwaukee Road expects most of the revenue it loses as a result of the merger to be translated directly to net loss. It suggests that such a loss could be disastrous, for it amounts to fully 5 percent of the revenues forecast under the trustee's reorgani- zation plan. Applicants address Milwaukee Road's arguments that (1) approval of the merger will interfere with the trustee's efforts to reorganize the Milwaukee Road, and (2) by diverting traffic from the Milwaukee Road, the merger will impair its ability to compete effectively with the new company. Applicants assert that neither of these arguments address the proper issue of whether the proposed merger will improve transportation services to the shipping public, but instead are premised on preservation of Milwaukee Road as a corporate entity. As to the first argument, applicants assert that progress in railroad industry restructuring through end-to-end mergers must not be impeded while the reconfiguration or liquidation of bankrupt carriers is determined. Applicants suggest that the problems of bankrupt carriers are unrelated to this merger and that in the case of the Milwaukee Road there is substantial doubt as to whether it is reorganizable at all. Applicants state that Milwaukee Road's second argument is also unfounded. The Milwaukee Road claims that diversions to the new company will impair its ability to compete with the new company in the corridors which both presently serve assumes that Milwaukee Road is today a viable competitor. Applicants dispute that assumption. Milwaukee Road is engaged in an ambitious abandonment program that may involve one-third of its system. Plans for abandonment include, according to applicants, the line between Muscatine, IA, and Kansas City, thus, removing Milwaukee Road from the Chicago-Kansas City market. Applicants also note that Milwaukee Road is involved in negotiations for the sale of substantial parts of its system. By its own withdrawal from transportation markets, Milwaukee Road has allegedly established that it is not presently a viable competitor and that the protective conditions it seeks would not serve the public interest. Applicants also argue that Milwaukee Road has grossly exaggerated the impact of the proposed merger. Applicants estimate 360 1.C.C. 65 that Milwaukee Road will lose $3,054,960 in gross revenue, with a resulting net revenue loss of $353,571 a year. Even the $3 million figure is said to be overstated because it is based on 1976 traffic. Since that time, Milwaukee Road has lost considerable traffic it formerly carried due to service deterioration and inadequate equipment. Applicants assert that a substantial portion of the predicted losses Milwaukee Road attributes to this merger have already taken place and will continue as a result of factors entirely unrelated to this merger. Therefore, applicants argue, the plight of Milwaukee Road should not be used as a basis to deny the merger. Impact on shippers—loss of service Milwaukee Road asserts that depletion of its revenue base caused by the merger directly will cause cessation of service. Milwaukee Road states that continued service on its Chicago-Kansas City route presently is justifiable. However, it is highly probable that the revenue losses over the Kansas City gateway seriously will deter MILW's participation in this competitive market. Retention of MILW's Chicago-Kansas City route despite loss of interchange traffic from the BN-Frisco merger would place Milwaukee Road in immediate jeopardy. MILW points out that IA-DOT believes that in the present proceeding, important rail service may be lost and competition eventually retarded and, in many areas, lost altogether. MILW believes that the opinion of IA-DOT should be afforded particular weight because of the State's familiarity with the economic problems of MILW and other of its serving railroads and the State's knowledge of the needs of its commerce. MILW notes that continued service over its main line to lowa interior points (Chicago-Omaha) is not a part of the trustee's reorganization plan. However, permutations of the trustee's reorganization plan may permit continuance of MILW service in the grain gathering areas. MILW service along eastern lowa on the Chicago-Kansas City route would continue if the Kansas City interchange traffic does not disappear through the diversionary impact of this merger. Applicants state that Milwaukee Road has failed to introduce any evidence that its claimed traffic diversions will impair any essential transportation services offered to the shipping public. Appticants argue that there is considerable excess rail capacity in the Midwest and that, in the event of cessation of service or liquidation of a bankrupt carrier such as Milwaukee Road, other viable carriers will 360 L.C.C. 66 be available to provide service over economically feasible lines. As support for this position, applicants cite Milwaukee Road’s own program of sale and abandonment of trackage. These activities, according to applicants, indicate that other viable carriers will be called upon to assume Milwaukee Road's services regardless of this merger. Applicants suggest that by emphasizing the need to preserve its Current corporate structure instead of preservation of essential transportation services, Milwaukee Road has failed to present a case against the merger. Applicants also argue that Milwaukee Road's reliance on Iowa as an example of lost service is misplaced, for Milwaukee allegedly plans to dispose of most of its facilities in lowa as part of its reorganization plan whether or not the merger takes place. Moreover, applicants assert that other midwestern railroads have expressed great interest in purchasing Milwaukee lines in lowa. Impact on employees Milwaukee Road suggests that its expected loss of $14,090,000 a year will result in a general reduction in its employment of about 5.5 percent. Milwaukee Road estimates that reductions will involve the following: 26 executive personnel, 137 professional and administrative, 116 maintenance of way and structures, 115 maintenance of equipment and stores, 42 transportation, and 215 train and engine. Milwaukee Road states that a specific element to be considered separately is train and engine service. Where a reduction in switch engines or some road trains is made, affected engineers would be permitted under labor agreements to fill presently unneeded and unfilled fireman positions. While a job would thus, exist for such individuals, Milwaukee Road would incur the additional cost. Brakemen and switchmen involved in train crew reductions would exercise seniority to take unfilled second brakemen or second yard helper positions not then being filled under “Crew Consist” agreements, thus, resulting in additional costs. In addition, certain labor agreements provide outright protection to employees, such as the February 7, 1965 agreement covering maintenance of way and signalmen; the September 25, 1964 agreement covering shop crafts; the June 16, 1966 agreement covering train dispatchers; and an agreement on Milwaukee Road covering dispatchers, clerks, agents and operators. Milwaukee Road could be faced with certain labor protection costs under these 360 L.C.C. 67 agreements when reductions would be necessary to offset lost revenue due to a BN-Frisco merger. The “ripple effect” of the merger could also affect the operation of specific trains, the loss of this business resulting in the possible reduction of train and enginemen service assignments or pool crews in the territory feeding into, for example, Kansas City. The reduction could take the form of outright discontinuance of a train or annulment of a train on certain days, reducing the number of crews. Other crafts supporting the train operation could also be| affected by the reduction in train service. Applicants do not believe they should bear any of the labor protection costs claimed by Milwaukee Road since those costs arise from agreements negotiated between Milwaukee Road and its employees independently and are not related to the merger. Protective conditions If the merger is approved, MILW urges the Commission to exercise its power to improve MILW's position and enhance its essential rail services. MILW contends that if this merger is approved without the conditions it seeks, its Chicago-Kansas City market is placed in jeopardy despite its use of Rock Island trackage in that corridor. Several of the conditions Originally requested by Milwaukee Road were dismissed or otherwise disposed of during the hearing. On brief, Milwaukee Road withdrew its request to use BN’s Dayton’s Bluff Yard. The conditions which are still actively sought by Milwaukee Road are discussed below. Access to coalfields.—Milwaukee Road requests trackage rights over BN from Miles City, MT to the coalfields near Colstrip, MT and Kuehn, MT, a distance of 138.9 miles. MILW would be authorized to serve only movements to its own destinations on connecting lines that are not served by BN. The condition is designed to permit MILW direct access to the mines for coal traffic presently delivered to MILW customers at Twin Cities and in Wisconsin. MILW now receives this traffic from BN at Miles City and Twin Cities. The traffic is controlled by BN as origin carrier so that no more than one-half of the traffic is allowed over MILW from its first junction point with BN. If the Commission imposes this condition, MILW would be able to provide single-line service to its customers. Since the additional traffic is expected to yield in excess of $12.7 million annually, MILW’s financial Stability would be improved and its position as an intramodal competitor enhanced. 360 1.C.C. 68 MILW notes that its line between Miles City and the Twin Cities is underutilized and can accommodate the increased traffic immediately. MILW contends that these operations would offset partially the reductions in employment otherwise caused by the merger. MILW asserts that applicants’ rebuttal evidence is entitled to little or no evidentiary weight. MILW believes that its projected $12.7 million annual revenue gain may be expanded to reflect current traffic, but will not divert the $51 million “vast coal revenues” projected by applicants. MILW urges us to compare the diversion of $12.7 million (1976 traffic base) to BN’s 1978 coal transportation revenues of $499 million. Three shipper witnesses support Milwaukee Road's application for trackage rights. Western Energy Company, a coal mining concern, supports the application as a means of introducing direct competition in a transportation market substantially served by BN alone. Northern States Power Company uses coal from the Montana fields in the generation of electricity in Minnesota. Northern States Power Company feels that such competition is necessary to insure an adequate supply of equipment in good working order, coordination of train movements with mine and powerplant schedules, and optimal carrier efficiency. WI-P&L supports the request to insure the continued operation of Milwaukee Road's line from Miles City to St. Paul. Presently 50 percent of this shipper’s coal shipments from Montana move over the Milwaukee Road line from Miles City; the balance moves over BN. WI-P&L seeks to maintain the flexibility offered by the alternate route as well as insure capacity to move expanded volumes of coals in the future. It also recognizes a potential savings in an alternative single-line haul from the mine. Milwaukee Road asserts that imposition of this condition would be in the public interest, and that competition for BN in this market is amply justified by the record. To assure that trackage rights operations commence immediately upon consummation of the merger, MILW suggests that the Commission mandate the terms of trackage rights using the model contract proffered by MILW. Applicants argue that the proposed trackage rights would divert vast coal revenues from the merged company, would result in uneconomic duplication of resources and impairment of existing BN service to the public detriment, and if granted, would preclude consummation of the merger. ’ 360 L.C.C. 69 Applicants vigorously contest the $12.7 million revenue gain projected by Milwaukee Road from access to BN’s coalfields. Applicants conclude that the pool of traffic subject to diversion is much greater. Northern States Power Company and WI-P&L, two utilities which would be served by Milwaukee Road if the condition were granted, project a need for 6.8 million tons of coal in 1980. At current rate levels, BN states, that would equate to $51 million. BN notes that Milwaukee Road also would be able to serve Central Illinois Lighting Company if the condition were granted. Divertible annual tonnage for this shipper amounts to | million tons, or revenues of $14.7 million. Shipments to Montana Power Company could also be diverted. This movement currently involves 600,000 tons of coal and produces $1.2 million annually. Applicants suggest that cash flow pricing would compound Milwaukee Road's diversion of Montana coal traffic. BN argues that Milwaukee Road's unsound financial condition will force Milwaukee Road to underprice its coal service in order to generate needed Short-term revenue. When such pricing drops below normal fixed costs it allegedly becomes destructive because a loss is incurred on each car shipped. BN points out that other carriers cannot reduce prices to such an unprofitable level on a sustained basis and would therefore lose a greater portion of the traffic. Applicants argue that below-cost pricing is inconsistent with the public interest, particularly when practiced in a capital intensive industry. Applicants point to past instances where Milwaukee Road shippers have opposed Milwaukee Road rate reductions as evidence of the possibility of destructive pricing. Applicants also assert that Milwaukee Road's coal rates to the utilities supporting the proposed condition are presently depressed and that this may explain the shipper support. Applicants’ second reason to deny the proposed condition relates to duplication of facilities. BN has undertaken major capital expenditures to develop capacity for the Montana coalfields. By 1982, BN projects that it will have spent $130 million in coal- related capital improvements such as track and siding improvement, Signaling, and car repair facilities. BN asserts that these extraordinary expenses will not be recoverable if the requested condition is imposed. BN questions Milwaukee Road's ability to upgrade its facilities to the extent required to handle this coal traffic. Even if Milwaukee Road can finance the necessary improvement of its plant, BN argues the result would be an uneconomic duplication of the investment 360 L.C.C. 70 already committed by BN. BN alleges that such duplication would create excess capacity and is contrary to the public interest. Additionally, as traffic is diverted from BN and its volume decreases, rates on remaining coal shipments would have to rise partially to offset BN’s investment in improvements. Thus, applicants argue that the impact on coal users and consumers of electricity ultimately will be adverse. Finally, BN asserts that the high level of diversion to be expected on this traffic, which BN projects will eventually reach $50 million a year depending on factors such as timing of equipment acquisition, would completely erode the financial benefits of the merger and preclude its consummation. Indemnification —MILW notes that idemnification has been imposed by the Commission as a condition on previous mergers.** MILW contends that this record demonstrates the need for indemnification to be imposed again. MILW requests monthly cash indemnification of its traffic losses as a result of the Northern Lines Merger (since 1970) and the BN-Frisco merger, including absorption by BN of the cost of labor protection for MILW employees furloughed as a result of traffic losses to BN. MILW Suggests that the Commission could enforce indemnification for traffic losses and labor protection, requiring special reports of applicants and those railroads it has found would be likely to incur traffic losses. The offset of revenue gains from trackage rights and other conditions could be accommodated in a reporting system to be implemented and maintained by the Commission. Applicants argue that: (1) Milwaukee Road has submitted no factual evidence to support its requests for indemnification for diversion resulting from the Northern Lines Merger or costs of labor protection; (2) revenue indemnification is an inappropriate remedy for a bankrupt carrier because it is a short-term remedy, calculated to allow an affected carrier to adjust to a merger, and cannot be a means of revitalizing a bankrupt carrier; and (3) Milwaukee Road has not suggested any method of administering its proposal, foreclosing proper evaluation. For these reasons, as well as the objections set forth in the discussions of the Rock Island and MKT indemnification proposals, applicants argue that these conditions should not be imposed. Liquidated damages.—MILW Proposes that BN be required to pay MILW $100,000 in liquidated damages for each violation of any “Chicago & N. W. Ry. Co.—Control, 347 LC.C. 556, 616-617 (1974): and Pennsylvania R. Co.—Merger—New York Central R. Co., 327 LC.C, 475, 561-563 (1966) 360 L.C.C. 71 merger condition. This would supplant the present method of litigation, including proof of damages. MILW has found that the cost of litigation and difficulty of proof outweigh the likelihood of success in a merger violation case. MILW considers $100,000 an appropriate amount due to the large revenues involved in ary recurring movement and the lapse of time inevitably occurring before a violation comes to the attention of the deprived carrier. Applicants describe the proposed liquidated damages as an incredibly one-sided power to confiscate property, a penalty, regardless of the nature of any violation or injury caused. Applicants state that they will abide fully by any conditions imposed by the Commission and if Milwaukee Road feels that such compliance is not forthcoming, it should be able to establish that fact before an impartial arbiter and recover its actual damages. Finally, applicants assert that Milwaukee Road has introduced no evidence that $100,000 approximates any damages it might sustain from a violation. Revision of joint facility agreements.—MILW contends that a revision of its joint facility agreements is needed for its restructuring process and to prevent BN’s abuse of its power. MILW points out that BN’s practices regarding a successors and assigns clause has varied widely and that BN uses its bargaining power to determine terms. MILW wants the right to allow other railroads to use, lease, sublease, or buy its rights in all joint facility agreements with BN. MILW explains that this condition simply would require a normal “successor and assigns” clause in any present or future joint facility agreement with BN. MILW notes that a clause requiring prior consent to any operations by a successor or assignee is used by BN as a powerful competitor. As MILW pursues reorganization, its efforts increasingly are inhibited by BN’s refusals to permit assignment to purchasers of MILW property. MILW notes that the Commission has continuing jurisdiction over the reformation of trackage rights agreements that it has approved. However, with respect to agreements executed before the 1940 Transportation Act, Commission jurisdiction does not vest until the agreements expire by their own terms. Many of MILW's trackage rights agreements with BN were executed prior to 1940. MILW believes that imposition of Commission jurisdiction over such agreements, whether or not entered before 1940, as a condition of the merger would materially assist MILW’s reorganization and restructuring efforts. 360 LCC. 72 Applicants argue that existing agreements in the industry normally prohibit assignment without agreement of both parties because unrestricted assignment of rights renders it impossible accurately to assess the costs and benefits of such arrangements. Applicants believe the Commission should not rewrite existing contracts negotiated freely between the parties. Nor should it mandate the use of a successor and assigns clause in future contracts. To do so would impede efforts to reach joint facility agreements. Applicants suggest that imposition of such terms in trackage rights conditions is particularly unjustifiable because conditions are imposed for the benefit of the protected carrier. Permitting a condition imposed for the benefit of one carrier to be assigned to another would result in an open-ended condition incapable of analysis. Standard traffic conditions.—MILW seeks to reform the so-called “DT&I conditions” to eliminate the alleged frequent evasion of that set of conditions with respect to traffic, industries, and rates not existing prior to merger. MILW also points out that the DT&l conditions do not speak to the quality of service afforded and do not give protection as to schedules affording effective connections or other factors important to maintaining service on a competitive basis. MILW believes that the Commission should terminate controversy where possible by reforming its conditions toward certitude. Applicants argue that Milwaukee Road has shown no reason to depart from the standard traffic conditions and, therefore, only those conditions should be imposed. Applicants’ response to Milwaukee Road According to applicants, the problems confronting the bankrupt Milwaukee Road are both complex and longstanding, and clearly unrelated to this merger. Whether or in what form the Milwaukee Road has a viable future can only be addressed in the separate reorganization proceedings which will alone determine the ultimate fate of this carrier. Applicants argue that it is speculative to predict the nature or extent of the impact of this merger on a reorganized Milwaukee Road (assuming the road is not liquidated) or to attempt to formulate protective conditions to adjust to such impact. Applicants further argue that Milwaukee Road has based its case on the need to maintain it as a corporate entity. Milwaukee Road has ignored the basic question of whether continuation of its 360 1.C.C. 73 services is essential to the public interest or whether other carriers could furnish those services. Applicants assert that the conditions proposed by the Milwaukee Road are unsupported by the evidence and that there has been no showing that they are consistent with the public interest. If granted, applicants state these conditions would severely undermine the feasibility of the merger. Granting the proposed trackage rights to Montana coalfields would preclude consummation of the merger, they maintain. Rock ISLAND Rock Island operated in Arkansas, Colorado, Illinois, lowa, Kansas, Louisiana, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, Tennessee, and Texas. Its main routes were between: Chicago and Tucumcari, NM, via Kansas City; St. Louis and Tucumcari via Kansas City; Memphis and Tucumcari via Little Rock, Oklahoma City, and Amarillo; Chicago and Denver via Council Bluffs and Omaha; St. Louis and Denver via Kansas City; the Twin Cities and Galveston via Des Moines; Kansas City, Fort Worth, Dallas, and Houston; and Chicago and Minneapolis and Galveston. Rock Island sought protection under the Bankruptcy Act on March 17, 1975. In September 1979 the Commission found that Rock Island was unable to continue operations, and directed another carrier to provide temporary service over Rock Island's lines. The reorganization plan filed December 28, 1979 was rejected by the bankruptcy court in a January 25, 1980 order that also required the trustee to file a plan of liquidation by February 19, 1980. Rock Island's present status as a carrier which has failed in its attempt to reorganize and has been ordered to present a plan of liquidation disqualifies it from Protection in this proceeding. However, Rock Island's evidence is on record and will be considered insomuch as it affects the rail transportation system as a whole. . Summary of Rock Island position Rock Island believes that this end-to-end merger of two financially strong railroads should be denied. It argues that the merger will not allow abandonment of redundant tracks, will offer 360 1.C.C. 74 no new service, preserve no essential service, is ultimately anticompetitive, and should not be approved. Rock Island fears that the impact of the merger will be disasterous on the already troubled midwestern railroads. The creation of _ applicants’ proposed system would place in jeopardy of extinction an even larger network of carriers now operating. It suggests that to some undetermined extent, diversion resulting from the Northern Lines Merger are responsible for the present difficulties of the midwestern railroads, including Rock Island. In arguing against approval of the merger, Rock Island points to expected massive diversion from existing carriers, creation of an economic giant able to work its will through sheer size, and creation of an unlawful common control situation among Rock Island, Frisco, and potentially, the merged company. Rock Island seeks primarily a denial of the merger, but argues that if the merger is granted it must be conditional for the protection of protesting carriers. Rock Island seeks imposition of conditions allowing it trackage rights; opening a line of railroad to reciprocal switching; indemnification; alteration of existing routes and division; divestiture of certain interests of shareholders in Rock Island who are associated with applicants; and modified traffic protective conditions. Traffic diversion Applicants concede that about $4.5 million of traffic will be diverted from Rock Island as a result of the merger. This figure reflects test period traffic in which either BN or Frisco participated. Rock Island estimates that it will lose another $4.1 million in diversion from traffic which the applicants’ study did not consider. Further, these figures do not reflect the synergistic effects of the merger. Rock Island expects the cost savings from this diverted traffic to be small and provide little effective offset to the revenue losses. It predicts that no savings in costs related to train-miles and switch engine tricks will be possible due to widespread dispersion of its traffic losses. As an example, the Kansas City-Topeka-Herington, KS, line segment wil! feel the maximum impact of the merger. Traffic losses on this segment are expected to total 17,600 cars annually (consisting of 9,700 loads and 7,900 empties). On a daily basis the reduction will total 13 loads and 11 empties in each direction. Rock Island states that this is insufficient to permit 360 1.C.C. 75 reductions in the number of trains operated. No savings are projected in switching costs because reductions in volumes at its terminals is insufficient to allow reduction in switch engine tricks. Rock Island expects a savings of approximately $959,000 a year based on reduced fuel consumption. It also expects savings of $122,000 in joint facility expenses which are proportionate to the number of cars handled. Car and trailer-hire expenses should be reduced $1,545,000. Combining all these, Rock Island expects a total merger-related savings of $2,626,000. The net impact will be a loss approximately $5,974,000. Applicants reject Rock Island's reputed add-on diversion study on four grounds. First, they consider the concept unrealistic. Applicants are now competing in the markets which will be served after merger and consider the likelihood of diversion of traffic in which they do not now participate to be low. Second, Rock Island attributes to the merger extensive losses on traffic which it has already lost for various other reasons. Rock Island has been in bankruptcy since 1975, and, applicants allege, its system began to deteriorate several years prior to that time. Accordingly, a substantial amount of the projected losses have already occurred. Moreever, Rock Island predicted losses on its “Tucumcari” line between Santa Rosa, NM, and St. Louis, which Rock Island has agreed to sell to SP,”" with SP taking over all traffic on the line. Third, the Rock Island study includes specific movements which applicants consider nondivertible. Applicants point out that the Rock Island analysis was of traffic for which the applicants competed in 1976, but which they were unable to obtain despite Rock Island's poor condition following bankruptcy. Applicants cite as specifically unjustified Rock Island's claimed loss of $1.2 million on local traffic; $1.6 million on interline received traffic on which Rock Island provided termination service; and nearly $600,000 on interline forwarded traffic where Rock Island provided origination services. Applicants point out that 312 study movements, on which Rock Island claimed $2,622,121 in losses, were claimed to be divertible, with the most common reason for diversion being the merged “Now pending in Finance Docket No, 28799 (Sub-No. 1). Temporary authority for SP's subsidiary, the Cotton Belt, to operate over the Tucumcari line was granted December 6. 1979 in St. Louis S. W. Ry. Co.—Temp. Authority—C hicago, 460 1.C.C. $39 (1979). 360 1.C.C. 76 company’s new single-line haul or improved transit times. Applicants state that such diversion are unjustified in light of the comparable service presently offered over the study movement routes by Santa Fe, Mopac, Rock Island itself, and the existing BN and Frisco. Another $582,138 of claimed losses came on traffic on which Rock Island was the switching carrier for either the shipper or the consignee, and $547,820 on traffic moving in Rock Island equipment. Finally, applicants argue that the Rock Island study deserves no weight due to the inconsistencies attributable to the lack of a true final evaluator. Applicants point out that the Rock Island's final evaluator was not selected for that role until 5 months after the study was conducted. Applicants also disagree with Rock Island's estimates of the potential savings in costs of handling diverted traffic. Applicants applied Rail Form A costing methodology to reach a net diversion of $932,725. Common control Rock Island argues a unique adverse impact of the merger regarding one of its stockholders, Henry.Crown. Rock Island alleges that Crown presently controls, or has the power to control, Frisco and the Sioux City and New Orleans Barge Line (SCNO Barge), a regulated water carrier, and that he formerly exercised a high degree of control over the Rock Island through his positions on its board of directors and finance committee and ownership of common stock and bonds.** According to Rock Island, Crown has used his status as a Rock Island shareholder to obstruct and delay its attempts to reorganize. Rock Island suggests that, if the merger is consummated, Crown will be the largest single stockholder in the new company, with holdings amounting to approximately 2.7 percent of the merged company’s stock. Additionally, Rock Island finds evidence of control of Frisco in the fact that Elliot H. Stein, a director of Frisco, a member of its finance committee, and chairman of its executive committee, is president of a brokerage firm which has the Crown holdings in its street name. Mr. Stein voted the Crown shares in favor of the merger. “Crown's interests are us follows, according to Rock Island: (1) approximately 9 percent of Rock Island common stuck, 17 percent of Rock Island first mortgage bonds, and 48 percent of Rock Island income debenture bonds; (2) almost all the stock of SCNO Barge, and (3) approximately 17 percent of the outstanding Frisco stock, the largest single holding. 360 LCC, 77 Rock Island argues that it is against the public interest to permit Crown to acquire control of the new company, while maintaining his ability to frustrate Rock Island. Applicants argue that Rock Island has endeavored to inject longstanding, but unrelated, controversies between itself and its stockholders into this merger proceeding. They maintain that Crown has not been shown to control either Frisco or Rock Island. They state that the Commission has denied a petition seeking a finding of unlawful control of SCNO Barge, Frisco and Rock Island.” Applicants conclude that Rock Island's Position is based on unfounded statements and innuendo and should not impede the merger. Additional issues Rock Island has raised two additional issues. First, the transfer of Frisco’s motor carrier subsidiary is assertedly unsupported by the evidence. Rock Island notes that traditionally a greater burden has been imposed upon applicants ina proceeding in which a rail carrier seeks to acquire motor carrier operating rights than upon other types of applicants. Ruck Island suggests that the Commission may only approve such a transfer if it finds that the transfer is consistent with the public interest, that the applicant can use the rights to public advantage, and that the transfer will not unreasonably restrain competition. No public witnesses supported the transfer of the motor carrier operating rights. An exhibit was introduced to show that the motor carrier subsidiary will continue to operate as it has in the past, in support of the Frisco’s rail operations. Applicants contend that the only change will be that the motor carrier's parent rail company will be stronger. Specifically, applicants envision no substantial change in traffic flows as a result of BN’s affiliation with FTC. Additionally, Rock Island renews its objections, made at the hearing, that the motor carrier transfer application was not timely filed. The Administrative Law Judge correctly denied this objection and we will do the same. The second additional issue raised by Rock Island involved the detailed environmental impact report (DEIR) submitted as part of the application. Since the DEIR only studied applicants’ operations “Finance Docket No. 24660, Investigation of Control of Sioux City and New Orleans Barge Lines (not printed), decided December 9, 1968. 360 LCC. 78 and failed to reflect the impacts of the merger upon other railroads, Rock Island contends that it is inadequate. Applicants maintain that Rock Island's attack on the DEIR is inappropriate since Rock Island was given an opportunity to comment on environmental issues which it felt were not properly considered. Additionally, applicants note that Rock Island's objections were premature, coming as they did prior to the filing of a final environmental impact statement by the Commission's Section of Energy and Environment. We agree. The environmental impacts of the merger are discussed in this deaision. Employee impact Rock Island estimated that 300 employees would be laid off as a result of the merger, based on 1976 operations. Applicants questioned the methodology used to reach this number and Rock Island's failure to consider other mitigating factors. Proposed protective conditions Compensatory conditions Rock Island has asked for four compensatory conditions: entrance into Golden, CO; opening of industries along the DRI&NW line between Davenport and Clinton, IA, over which Rock Island presently operates with closed doors; a formula for direct monetary offset; and division and routing changes. A. Trackage rights.—Golden, CO is part of the metropolitan Denver area, 11 miles from Denver itself. Rock Island presently serves Denver but is unable to serve Golden since it is outside the Denver switching district and not subject to reciprocal switching. Entrance to Golden would eliminate an interchange and generate longer hauls for Rock Island. The elimination of the interchange will improve Rock Island service and permit expedited service from Golden to the Denver interchange with UP and D&RGW. Additionally, Rock Island has trackage rights over D&RGW to reach its own tracks. The Rock Island's entry into Golden was supported by Adolph Coors Company (Coors), which operates a brewery at Golden. Coors is unhappy with present service and considered building its own short-line railroad to connect with other roads at Denver. Rock Island suggests that this condition would not only relieve the impact of the merger, but also serve a public need. 360 LCC. 79 Rock Island claims that the use of the existing tracks into Golden along the C&S, a BN subsidiary, will not interfere with existing operations. BN currently generates only 10 to 15 cars a day along this line from industries other than Coors. There are three round trips a day to Coors in the heavy season and two a day in the light season. Rock Island states that it could communicate with the merged company to prevent any interference on this line. Prospective Rock Island operations can be accomplished with present force and power, with the addition of one crew. It is estimated that this condition will gain Rock Island $750,000 for longer hauls on 1,100 cars in the first year, $2 million on 5,000 cars in the second year and another 10 percent in year three. Applicants contend that the trackage rights would not accomplish the benefits claimed and would result in severe operating problems for applicants and deterioration of service to shippers. They also argue that the proposed rental of $1 a year is inadequate in light of the benefits Rock Island expects to receive ($1,290,608 a year). The benefits from this condition are alleged to be improved service to Coors and increased road-haul revenues on traffic to or from Golden. While Coors received less than optimal service in 1978, the problem was due to a nationwide demand for railroad cars and, according to applicants Rock Island could provide no better service in this circumstance. Major commitments of equipments are required. Applicants also dispute the alleged interchange benefits with UP and D&RGW. Applicants note that Rock Island can presently participate in Coors movements without trackage rights if its service merits use, for Coors can control the routing of its traffic. Thus, applicants maintain that the requested trackage rights would result in greater switching, require construction of a passing siding to minimize interference with existing operations, require closer control of operations, and obstruct applicants’ operations at their Golden Yard. Finally, since Rock Island is negotiating the sale of its Kansas City to Denver line, applicants suggest that this condition, if granted, should be made nonassignable. B. Reciprocal switching.—Rock Island also seeks the opening of industries along DRI&NW, which is owned jointly by BN and Milwaukee Road. Rock Islar ' »resently operates over this line with closed doors except as to service to the lowa Illinois Gas and Electric Company. If Milwaukee Road would not agree to the 360 1.C.C. 80 proposed rights, Rock Island seeks transfer of BN’s interest in DRI&NW. The value of switching these industries to Rock Island is estimated at $738,534 a year. Milwaukee Road has expressed its opposition to any such condition. Thus applicants find the initial condition is not feasible. With regard to the alternate condition of a transfer of BN’s interest, applicants allege Rock Island has introduced no evidence that such a transfer would be consistent with the public interest. In fact, shippers along this line oppose the substitution of Rock Island service for BN service. Finally, applicants note that the proposed alternative condition is ambiguous and unable to be implemented. C. Indemnification.—Rock Island has also requested an indemnification condition as compensation for merger diversions as set forth in appendix K. The formula suggested by Rock Island will produce $1,328,000 a year based on Rock Island's traffic estimates, and, according to Rock Island, would produce only a partial restoration of the expected diversions. Applicants vehemently oppose the revenue indemnification proposal for seven enumerated reasons. First, Rock Island’s business has steadily deteriorated over the past several years for reasons unrelated to the merger, and applicants assert this trend will continue whether or not the merger is consummated. They argue that it is inappropriate to require the merged company to guarantee to the Rock Island a premerger level of business when, without the merger, Rock Island's revenues would progressively deteriorate. Second, the request for forwarded diversionary losses raises serious practical problems. This request places the merged company in the position of indemnifying the Rock Island for something over which the merged company has no control, the shortfall in the number of cars Rock Island itself delivers to the new company. Third, severe administrative problems arise from the number of interchange points at which annual calculations would be required. Fourth, revenue indemnification formulas as proposed by Rock Island have never been tested. Fifth, the formula requested is inflexible and provides no basis upon which to distinguish traffic losses caused by the merger from those caused by other events, such as a recession or crop failure. Sixth, the formula is inherently anticompetitive since it guarantees the Rock Island a predetermined level of business regardless of its performance. It also interferes with the allocation of 360 1.C.C. "a 81 traffic between carriers because the merged company will deliver as many cars as feasible to Rock Island in order to minimize indemnification payments. Seventh, imposition of such an open-ended financial obligation will make it impossible to determine the financial feasibility of the merger proposal. D. Divisions. —Rock Island seeks alteration of existing divisions and routings as set forth in appendix K. Applicants state that Rock Island's request for modifications in divisions and routing is both inappropriate and unsupported. It is not based on potential effects of the merger but rather on perceived inequities in existing divisions. Specific procedures exist for altering divisions, and applicants suggest that the Commission should not allow Rock Island to evade these procedures. Divestiture As a condition to merger, Rock Island requests that Henry Crown, who is not a party in this proceeding, be required to divest himself of all interest in Rock Island. Applicants argue that without evidence to support a finding of control by Crown of the involved carriers, the Commission does not have jurisdiction over Crown or the Crown interests. Further, since applicants cannot control Crown's actions, a condition requiring the divestiture of Crown holdings would block consummation of the merger. Traffic protective conditions Rock Island also seeks imposition of the standard DT&I traffic conditions. These conditions are designed solely to preserve Rock Island’s opportunities to compete with the new company and are not compensatory. Rock Island asserts that these conditions do nothing to mitigate the impact of the anticipated diversions and, while they should be imposed, must be strengthened. Rock Island has specifically requested imposition of the modification of the DT&I conditions agreed to by applicants in the protection of Mopac. These conditions also are set forth in appendix K. Applicants offer to submit to “standard” DT&I conditions in favor of the Rock Island, but vigorougly oppose imposition of conditions similar to those agreed to with Mopac. Applicants note that the Mopac conditions were part of a stipulation with that carrier 360 1.C.C. 82 reflecting circumstances different from Rock Island, notably a projected $7.75 million merger-related revenue loss to Mopac, compared to $4.5 million for Rock Island. Applicants’ response to Rock Island Applicants argue that: (1) a merger proceeding is not the appropriate forum in which to resolve the complex, unrelated problems of a bankrupt carrier which is presently the object of reorganization, (2) the arguments advanced by Rock Island opposing the merger are unpersuasive and fail to consider the benefits to the public accruing as a result of this merger; and (3) the conditions sought by Rock Island, if granted, would not resolve the problems of that carrier, but would undermine the feasibility of the proposed merger. Applicants assert that Rock Island has failed to show that essential transportation services are threatened by the merger. On the contrary, applicants assert that Rock Island's current service will not be impaired because Rock Island already has far more business than it can handle adequately. Even if Rock Island allows some service to deteriorate, the question remains whether such service is essential. Applicants argue that Rock Island's service has already deteriorated to an unacceptable point and that if it were discontinued, other carriers would step in and continue profitable services. Applicants claim that the Rock Island's performance of services is not essential and does not qualify for protection in this proceeding. Applicants also argue that the Rock Island has failed to demonstrate that any of its five conditions are consistent with the public interest. On the contrary, they assert the requested conditions are inimical to the public interest. MISSOURI-KANSAS- TEXAS RAILROAD COMPANY Summary of Katy’s position Katy argues that the proposed merger is predatory and not only will adversely affect the entire rail transportation system in the United States, but will be particularly harmful to Katy. Katy argues that BN will be invading the Kansas City-Texas corridor, where an adequate number of carriers already provide service. Katy believes that in territories such as this, where there is little or no evidence of dissatisfaction with service, the harm to existing carriers and the public they serve outweighs the benefits. Therefore the merger should be denied. 360 LCC. 83 Katy believes that if merger is authorized, Katy will require protection, and traffic conditions will not suffice. Katy rejects inclusion as a remedy because it is too extreme a measure in the face of the more reasonable alternative of indemnity. Katy maintains that indemnity is an appropriate price for the opportunity to attract other carriers’ traffic while at the same time reducing operation costs. Katy believes that indemnification is a proper remedy for Katy since its ability to provide adequate service will be jeopardized as a result of the financial harm the merger will cause Katy. It does not believe it could withstand diversion of the amount anticipated. Katy argues that its indemnity formula is fair, just and reasonable. Katy believes that its revenue base should include traffic that will be diverted that is currently interchanged with nonmerging railroads, as well as traffic that is currently interchanged with the merger applicants. . Scope of operations Katy serves Kansas, Missouri, Oklahoma and Texas. The carrier's main lines extend from Kansas City (Missouri and Kansas) and St. Louis, MO through Parsons, KS, Fort Worth, and Dallas, to San Antonio, Houston, and Galveston, TX. Major branch lines extend from (1) Garvin, KS, to Joplin, MO; (2) Chase, through Tulsa to Sand Springs, OK; (3) McAlester to Oklahoma City, OK; and (4) Fort Worth through Wichita Falls, TX, to Altus, OK. The heaviest traffic density route is from Kansas City to Houston via Parsons, McAlester, and Fort Worth. The density on this route in 1976 and 1977 ranged between 6 and 13 million gross tons per mile annually. Traffic is roughly twice as heavy southbound as northbound. All other MKT lines handled less than 5 million gross tons per mile in 1976 and 1977. Katy’s principal points of interchange in the northern portion of its system are Kansas City and St. Louis, at which 71,857 and 28,467 carloads respectively were interchanged in 1976. All other major Katy gateways (at Jeast 5,000 carloads) are in Texas. Kansas City is the carrier's most important interchange point for traffic moving between South-Central States on the one hand, and Northwest and North-Central States as well as British Columbia on the other hand. This traffic accounted for over 32,000 of the 71,857 carloads interchanged; approximately 46,000 carloads (60 percent 360 L.C.C. 84 of the total movements) were received from connections and terminated on Katy. Almost 16,000 of the carloads interchanged at Kansas City moved on Katy as bridge traffic. Three railroads accounted for the bulk of Katy's interchange at Kansas City—BN, CNW, and UP. In 1976, UP interchanged 20,171 carloads with Katy, of which over 12,000 terminated on Katy. BN and Katy interchanged over 14,000 carloads, of which nearly 9,600 terminated on Katy and nearly 2,000 originated on Katy. CNW and Katy interchanged 10,627 carloads, of which 7,315 terminated on MKT. In addition, Milwaukee Road and N&W each interchanged approximately 8,000 carloads with Katy, and in each instance about 60 percent of the movements terminated on Katy. The St. Louis gateway serves Katy mainly as an interchange point with eastern district railroads. Katy interchanged less than 1,000 carloads with applicants at St. Louis in 1976. In Texas, MKT interchanges with Frisco at Denison and Dallas- Fort Worth. Katy and FW&D interchange traffic at Dallas-Fort Worth and Houston, the latter point involving only 472 carloads in 1976. Theinterchanges between Frisco and Katy amounted to about 5,000 carloads, divided almost equally between the Denison and the Dallas-Fort Worth gateways. Approximately 80 percent of this traffic terminated on Katy. At least 3,556 of of the 5,000 carloads moved wholly within the South-Central States. Approximately 60 percent of the 3,537 carloads interchanged between MKT and FW&D at Dallas-Fort Worth either Originated or terminated on Katy. This data reflects 1976 operations and therefore excludes joint FW&D-Katy unit coal train operations instituted since that year. No station on Katy originated more than 8,000 carloads annually in 1976. As for terminations, four stations were the destination for 10,000 or more carloads. (This includes Tulsa, which actually was the destination of 9,668 carloads in 1976.) Leading the list of destination stations in 1976 were Houston (48,836 carloads), Dallas (26,656 carloads), and Kansas City (10,951 carloads). Fort Worth, Galveston, and San Antonio, TX, and Pryor, OK, were each the destination for 5,000 to 7,000 carloads in 1976. From 1973 through 1976, Katy’s overall traffic generally has consisted of 14 to 17 percent local, 18 to 23 percent interline originated, 49 to 53 percent interline terminated, and 11 to 13 percent overhead (bridge) movements. Over the same period, annual revenue tonnage has remained in the range of 15 to 16 360 1.C.C, 85 million tons, while revenue ton-miles have consistently ranged between 4.7 and 6.1 billion. Overall, Katy’s traffic volume and operations over existing lines have changed little since the 1950's.” Three commodity groups have constituted Katy’s principal source of freight revenue since 1967—food and kindred products, farm products, and chemicals and allied products. Year-to-year shifts have occurred in the relative revenue contribution of the three groups, apparently due to grain production and export levels. In any event, each of the commodity groups discussed here have normally contributed from 9 to 20 percent of total freight revenue. Since 1973, nonmetallic minerals have played an increasingly important role in Katy’s traffic mix, reaching 10 percent of total revenue in 1975 and 1976. However, Katy is clearly dependent on agribusiness traffic. With respect to equipment, MKT'’s freight car fleet since 1967 has been comprised mainly of leased cars. In the period 1967-76, the total number of owned and leased cars remained rather stable (11,000 to 13,000 cars) through 1972. In each succeeding year the number decreased, reaching 8,570 cars in 1976. The aggregate capacity of Katy's freight car fleet was 758,000 tons in 1967, increasing to 899,000 in 1968, and declining each year thereafter, to 638,000 tons in 1976. Changes in the number of Katy's four major car types are shown below: Car type Number of cars 1967 1976 TBA coccecccesccsscossnscccococccsscccssccsescssscsocosssecesoseceosoenessccooncsosesesnsocses §.192 4.6% GDenGala-coccccscccscscscsccccesccccccccscscscccccocccscosccncscasscocesecccsccosocesecescceces 1.758 1,279 Open Ut 0) | ae eo ercecceccccecccccsccccscescsescoscccces 1,935 795 Covered ROIPPES occcccccccccscccccscccccccccsccccccessosscoscscccocsoccsesccosccsococcoccece 1.181 1,473 Katy’s position as a protestant MKT asserts that its gross revenue loss due to diversion of traffic resulting from the merger will be severe. Applicants estimate that Katy's gross revenue loss will be $6.5 million, while Katy estimates “See Chicago & N. W. Ry. Co.—Control, 347 L.C.C. $56, 793-797 (1974). 360 L.C.C. 86 its loss will be $11.5 million. MKT feels that regardless of whether one uses the applicants’ or MKT’s figures, these diversions will be severe and will necessitate suitable compensation. Katy asserts that the importance of its role in the national transportation system is demonstrated by the commitment of the United States Government through loans to Katy of $19 million in 1975 and 1976, primarily to effect rehabilitation of the railroad’s essential main line. As of January 1979, some $6 million of this loan had been repaid. Katy's importance is further confirmed, it claims, by approval of over $16 million in additional loans in 1977 and 1978 which expressly required that the financing be: justified by the present and probable future demand for rail services to be rendered by the applicant and will serve to meet demonstrable needs for rail services and to provide shippers with improved service. According to MKT, these loans followed the designation of Katy's main line as one of the principal corridors and primary lines in the national transportation system inthe “Classificationand Designation of Lines of Class I Railroads in the United States” submitted to Congress by DOT. Katy claims that this designation was influenced by the fact that it has the short-line miles between Kansas City and north Texas and serves a large industrial area of considerable economic potential. Katy serves over 160 cities and towns and directly serves over 1,500 industries, a significant number of which are served only by Katy. Katy claims success in locating not only several large industries but a number of smaller industries dependent on rail service. MKT asserts that many have located on MKT mainly because of its assurance that it would rehabilitate the railroad. Katy asked them for the traffic in sufficient volume to supply the revenue necessary for its rehabilitation projects. MKT presented the following examples of major industries served only by Katy. There are two large coal-fired powerplants under construction, one by the Lower Colorado River Authority (LCRA) near La Grange, TX, to go on line in 1979. Coal began to move to this plant in the latter part of 1978 using one unit train; another unit train is scheduled to begin operations in June 1980. The second coal facility is the Grand River Dam Authority (GRDA) facility at Pryor, OK, anticipated to be operational in 1981, Each of these powerplants have the claimed potential of using 8 million tons of coal per year as additional units are added with potential capacity of 360 L.C.C. 87 2,400 megawatts. In 1979, LCRA expected to use approximately 2 million tons of coal in its first unit. During the following year LCRA expects to add a second unit, which would double this amount. The third and fourth LCRA units are expected in the future. Each unit represents 20,000 carloads annually at $516 revenue per car. Much of these deposits lie along Katy’s line. GRDA also contemplates up to four units in the future. Two large ammunition facilities are located at Parsons and near McAlester on Katy’s line. These plants, located near the geographic center of the United States, must be served for national defense purposes. A bomb casing plant on Katy’s line at Waco, TX, in full production during the Vietnam War, is ready for immediate reopening should it be necessary. This plant too must be served. Katy feels that the usual protective devices, such as trackage rights and traffic conditions, would not afford it the protection necessary to overcome the losses resulting from this proposed merger. There are no territories or facilities of either of the applicants’ lines that Katy feels would help it offset its losses and maintain dependable and reliable service. Katy feels that because the merger will affect it so severely, it should be reimbursed. For this reason, if the proposed merger is approved, Katy seeks a condition requiring that the merged company indemnify Katy in cash on an annual basis for the financial loss from diverted traffic. With the indemnification condition as outlined, Katy feels it can complete its rehabilitation project on schedule and repay prior obligations. Katy asks that indemnification payments be continued until the year 1997, at which time it will have discharged its Federal loan obligations. Katy feels that the Federal Government, as well as Katy’s bondholders and other creditors, are entitled to this protection, as are the shippers and employees who depend on Katy. Katy claims that it seeks only to maintain its present financial position as a viable part of the national transportation system. As part of the 1975 Katy rehabilitation loan agreement with the United States Railway Association (USRA), Katy’s parent, Katy Industries, Inc., must remit to the railroad any tax benefits received from continuing to include the railroad’s operations in the parent's consolidated Federal income tax return. Payments received by the railroad under the tax allocation agreement are remitted to USRA to be applied to the unpaid principal installments in the reverse order of maturity. 360 L.C.C, 88 The Federal loan agreements may be amended with respect to the timetables for repayment. Also, USRA may waive any covenant and impose any reasonable condition on any such waiver. Hence default for failure to perform covenants is expressly conditioned on USRA's consent to such failure. Two defaults have in fact occurred under the two agreements, but have been cured by waivers. Traffic diversion Katy’s estimated traffic losses to the merged company are analyzed in appendix H. We conclude that Katy stands to lose between $8.6 and $8.9 million in gross revenue. MKT developed estimated expense reductions by costing the labor or nonlabor service units which would not be performed. A standard application of a 1976 Rail Form A was run for MKT, except that all expense inputs were first taken at their full 1976 reported amount rather than the usual variable percents contained in appendix F of “Rail Carload Cost Scales, 1975.” Two categories of accounts were excluded from the run: (1) those accounts where a determination was rnade that the projected traffic loss would not result in any reduced expenses in 1976 dollar amounts; and (2) those accounts, or portions of accounts, which would be subject to direct special studies and were not included to avoid duplication. MKT takes the position that the use of a standard Rail Form A application to cost the gain or loss in traffic related to the merger is inappropriate without supporting “data to justify the major assumptions built into the formula and its use. Katy maintains that Rail Form A costs fail to provide for losses that will be felt in the short term. Rail Form A also assumes long-term variability of costs occurring at average density on systemwide averages. Katy states that use of operating ratios is also an inappropriate measure for determining costs because that method assumes that all operating costs would vary proportionately with the particular traffic involved. Katy believes that its short-term losses will require immediate relief and that merger induced costs will be unevenly distributed over its system. Katy argues for use of incremental costs, which it believes will provide for short-term losses and which present a more factually sound representation of actual operating conditions. Katy delineated 26 segments of its rail lines which were determined by traffic flow, train operations, and junction points and potential diversions. The expanded annual losses of traffic were 360 1.C.C. 89 analyzed to determine the average monthly loss of loaded and empty cars by line segment over which such traffic moved in 1976. The estimated losses were separated into grain and other traffic. Complete and partial losses were distinguished—a loss was deemed partial if a particular movement moved over only part of a line segment. The following table presents MKT’s summary of cost reductions. Katy’s estimated total expense reduction was $5,455,863, or 47.3 percent of the estimated $11,540,299 total revenue loss. TABLE 17 Summary of cost reductions—MKT Amount Expenses associated with: 1. Gross ton-mille --------20---eecceessccncccenccceccsccenccceesceceeoeeees. $797,691 2. Locomotive wnit-mile ------cc.---ecsccccccceccsececeececcseseeases..., $27,627 9. TEAIMMNG: CFBW -cncoceccenccecccocecensecccececesseoceesccoseesseess., 309,982 4. Tralm-mille: Other --cc-----secccecceesconccccccccescereceeccoceeseee.s. 41,311 9. Station clerical, carload -----------.escc-cccccsceecceeseeeceeeess....., 39,975 6. TOPC clerical ------.----c-c-csecescscseceseseceeaceseeceeeececes-.-..... 8,305 7. Station platform, carload---------.--.--00-e0eeee---0-e 3,284 ©. Special service, carload ---c--c--ccs-ccceccecccecceeecercceceseee...., 1,099 9. TOFC tie downs and SPCCial SCrViCE----------..----ceneeeeeeneee 77,185 10. Train supplies: CULL) Se 34,694 11. Train supplies: terminal ---------0.---0c.--cceesscesecececeeeeeeee... 27,046 12. Loss and damage, carload ---------.--0--cceeeceeeeceoeeeeeese..... 101,038 13. Mileage car inspection ----------.-0--ccesccesseeseeeeeeeeeeeeese... 13,894 14. TOPC trailers ---0-.2c-.-eccccccccsesscccccccccccecseserccesseeeess.... 162,469 1S. Car Costs: Mon-MKT---e---ccccccencceccceccccecececesececeseee...... 1,540,513 16. Car costs: MKT “demand” ----.-...-..-scccsecceseeeeeceeenecesees.. 154,331 17. Car costs: MKT “SUPPIUS” -----2---neeeeccceneneenccccesssecccnceeces 12,166 18. Switch engine minutes ---------.+--sccescceecsesecereecececeeeeeese... 577,894 19. Trackage charges -------....-..sccsccceccecsseececenccenceceecesees.. 121,333 20. Terminal railroad CUI) Soe 434,866 21. Locomotive investment -----+-+--0+-0--es+ec-seseeceeeeeeeeeeeeee..... 143,530 22. Caboose investment ----------0+----c+eccsseseeeeeceeeeeeese 3.638 23. Yard labor: transportation --------+----c-0seeseseeeeeeeeeee.-..... 196,158 24. ACCOUNLING ---------00-eeceeneescenseeesenscentersccerereccccece 56,442 25. Yard labor: maintenance ----------...-0--eeeceeeeeeeeeeeeeees...... 25.555 26. TOFC: pickup and delivery------+------s-s+se-sceeeseeceeeeeee..... 30,049 27. TOFC: INterchange--------------.0...000.cseeeeeeeeensssccccecceeceees. 13,788 28. Total expense reduction------------.--ccecceeseseeeeeeeeeeeeeees.... 5,455,863 29. Total revenue 1088 ----0---ccecce.ccescecccceccenccesercsceseess..... 11,540,299 30. Percent expense to revenue -----------ceeceeeeeeeeeeeeeeeee-......, 47.3 Note: The second year, line 21, Locomotive investment, increases to $200,942 based on locomotives in lieu of five locomotives 360 L.C.C. seven iy —— 90 Impact on shippers and employees Katy states that the merger would adversely affect its ability to meet government debts. Katy believes that its customers who do not have convenient access to other rail lines, or for whom Katy is the shortest or best route, would suffer a loss of service and higher costs as a result of Katy having to reduce service in order to avoid default on its loans. Several Katy shippers’ state that they depend on and are satisfactorily served by Katy. They fear that the financial strain from diversion caused by the merger would cause Katy to curtail its services. Hence they support Katy's request for indemnification. Katy’s supply of equipment to its customers requires substantial capital investment. With tke loss of income expected from the merger, Katy would be forced to curtail its maintenance program, its regular service, or its equipment program in order to meet its financial obligations. Katy states that its employees will be adversly affected by the proposed merger through reductions in work force or hours of employment to the extent that: (a) train crews will be reduced by an average of 11 positions per day as a result of a reduction of the number of trains operated; (b) switch crews will be reduced by an average 13 positions per day, and the number of hours of certain switch crew assignments also will be reduced; and (c) account clerical positions will be reduced by three. Katy es- timates that 65 percent of these reductions will occur in the first year following merger and that they will reach 100 percent in the second year and thereafter, except as mitigated by attrition. Relief sought by Katy Indemnification —MKT seeks indemnification from the merged system for the financial losses expected to result from the diversion of traffic to the merged system. The indemnification formula proposed by Katy is set forth in appendix K. Under its proposal indemnity would not be paid (1) if BN did not actually divert traffic presently moved by Katy; or (2) should grain and merchandise traffic be diverted, if BN would include Katy in “Verified statements were filed by LCRA; La Barge. Inc.. Tubular Division, Breton Cor- poration, Clareden, Inc., Denison Area Chamber of Commerce (Texas), and Gifford-Hill & Co. 360 L.C.C. — 9} new traffic which might develop (other than coal shipments destined to LCRA near La Grange, TX, and GRDA near Pryor, OK) and thus compensate Katy by sharing different traffic producing revenue equivalent to that loss due to diversion. Katy claims it needs protection against the loss of both traffic interchanged with BN and Frisco and traffic not interchanged with the applicants which would be lost nonetheless as a result of the merger. Indemnity would be payable if Katy’s annuai gross revenue on traffic interchanged with the merged system (excluding traffic destined to LCRA and GRDA, because this coal traffic did not commence until after the base year 1976) is less than the sum of (a) the gross revenue received by Katy in 1976 on such traffic ($13,140,208) and (b) the Commission's one-time estimate of the Katy loss of gross revenues on noninterchanged traffic (estimated at $4,771,000 in the study year). If the Commission makes such a finding, Katy claims, then indemnity would be payable to the extent to which MKT annual gross revenues from traffic interchanged with the merged system fall below $17,911,208, based on 1976 revenues. Because Katy, BN, and Frisco agree that only 65 percent of the estimated losses will be felt in the first year after merger, the amount to be added under clause (b) of the formula should be only 65 percent of the amount the Commission estimates Katy will lose on noninterchanged traffic. The formula also provides for recomputation of 1976 revenues and revenue losses to take into account any general freight rate increases effected thereafter. The amount of the indemnity would be a percentage of the deficiency in gross revenues determined under the formula. The formula provides for the Commission to determine the percentage of the gross revenue losses that will be savable. The remaining percentage will be the indemnification factor which, when multiplied by the deficiency in Katy’s gross revenues resulting from the merger, will determine Katy’s net revenue loss. It is this . -t revenue loss which would be paid to Katy. Katy argues that prior Commission decisions support its indemnification factor. On reconsideration of the Penn Central case," DH demonstrated its out-of-pocket freight ratio to be 49.73 percent, which the Commission concluded required an indemnification factor of 50 percent. The Commission also rejected use of an unadjusted Rail Form A, indicating that its use would be improper unless gross revenue losses substantially exceeded 10 percent. “Pennsylvania R. Co.—Merger—New York Central R. Co., SMO LCC 328 (1967) 360 L.C.C. 92 Modified DT&I conditions.—Katy states that the merged company will enjoy advantages due to its ability to furnish single- line service and single-line rates, its expanded solicitation and marketing forces, and its consolidation of fleets. Absent conditions providing for maintenance of open gateways, joint rates, and routes, the merged company will have absolute power to preclude competing carriers from participating in traffic from and to the Southwest. Also, maintenance of competitive service requires prompt interchange at junctions with competitors on an equal and neutral basis. To insure such equality, Katy believes it is necessary to impose on the merged company the conditions applying to present routes, gateways, schedules, and service, and to all postmerger routes, rates, transit privileges, schedules, and services which extend the merged company’s present routes, rates, transit privileges, and schedules beyond junctions where Katy is a connecting carrier. Katy believes the merged company would publish single-line rates, excluding Katy from participating in traffic now routed BN- Katy or Frisco-Katy. Katy has therefore prepared a list of specific conditions which would require the merged company to keep open present routes, junction points, and rates, and also permit Katy to participate in joint rates with the merged company on the same basis as any of the merged company’s single-line rates in existence now and in the future. To insure neutrality with respect to service, especially prompt interchange at junction points, Katy proposes essentially the same conditions as imposed by the Commission in previous merger proceedings. The requested conditions are listed in appendix K. Applicants’ response to Katy BN and Frisco point out that traffic diversion, where brought about by improved service to the shipping public is in the public interest and is not a valid reason for denial of a merger. Applicants also argue that Katy's continued viability will not be impaired by the merger because: (1) the merger will not realistically be consummated before late 1980 at the earliest, allowing MKT to meet its loan obligations for 1979 and 1980 while continuing its rehabilitation program, (2) Katy will remain viable and able to meet its debt obligations in the first full postmerger year because only 65 percent of the diversion will occur, not the full 100 percent pro- jected by Katy; and (3) MKT’s financial position in the 1980's will 360 LCC 93 improve because of (a) new coal traffic to LCRA and GRDA generating facilities, local on MKT, which will require at least 60,000 carloads of coal annually and generate $26,840,000 in gross revenue, (b) major increased chemical and crushed stone traffic, and (c) completion of Katy’s rehabilitation program in 1982, significant- ly reducing expenses to the much lower normal cycle maintenance expenses. Applicants argue that Katy’s proposed indemnification formula is overly broad in scope, inflexible, unfair, impossible to administer, and anticampetitive. They point out that there is no definition of probable annual loss, savable costs, and indemnification factor; therefore, the true impact of the condition cannot be assessed. Also, the formula excludes Katy’s future profitable traffic and reduction in rehabilitation expenditures. This, it is argued, presents a skewed picture of Katy’s ability to provide service. Applicants do not believe the benefits of the merger should be reduced by an indemnity provision. Among the practical obstacles they see in Katy’s indemnity formula are: (1) the failure to take into account a comparable decline in merged BN revenue; (2) a lack of consideration of growth in coal traffic; (3) the duration for 20 years; (4) loss of incentive for MKT to compete for traffic; and (5) the further Balkanization of the railroad industry. ILLINOIS CENTRAL GULF RAILROAD COMPANY Summary of ICG position ICG opposes the merger unless certain conditions are imposed for its protection. ICG argues that the merger, if approved, should be conditioned on a grant of trackage rights between Memphis and Birmingham. Such a grant would offset the adverse impact of the merger, would reduce ICG's route between these points by 153 miles; would reduce transit time by 13 hours eastbound and 36 hours westbound; would not permit ICG to serve new points or industries as a result; and would not impair current users’ handling of their own traffic. To connect its track with Frisco, ICG also requests terminal operations over Mopac in Memphis. As another condition to approval of the merger, ICG requests that the Commission modify terms of a joint terminal agreement covering operations as East Thomas Yard in Birmingham to end discrimination against ICG traffic. 300 L.C.C oa 94 ICG requests that modified DT&I conditions be imposed to better protect nonmerging railroads from traffic losses that would otherwise occur as a result of merger. This includes a condition for keeping the Centralia gateway open. Scope of operations ICG operates 8,877 miles of road in Alabama, Illinois, Indiana, lowa, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Nebraska, South Dakota, Tennessee, and Wisconsin. With three major exceptions, the ICG system is composed of north-south lines, extending from Chicago, IL, to Birmingham, Montgomery, and ; Mobile, AL, and Baton Rouge and New Orleans, LA. The ) exceptions are the routes between (1) Chicago and Omaha-Council Bluffs, (2) St. Louis (also Chicago) and Kansas City, and (3) Shreveport, LA, and Meridian, MS. The north-south routes are geographically divided between a northern region and a southern region. For the northern region, several parallel routes extend from Chicago to Fulton, KY, where they converge and where several other parallel routes fan out southward through the southern region to gulf coast points. The heaviest density route on ICG is between Chicago and New Orleans over the following route segments (data are for 1976): Millions of Route segment gross tons per mile 1. Chicago-Edgewood, IL ----------+--+++-+00+ 38 to 44 2. Edgewood-Fulton: Via Centralia, IL -------------00eeeeeneennns 22 to 49 Via Bluford, IL ----------+--ceeeeeeneneennns 12 to 23 3. Fulton-Memphis ----------------+----0-00e00ees 40 4. Memphis-Jackson, MS --------+-0-0seeeeee-+- 28 5. Jackson, MS-New Orleans----------------+- 25 In the northern region, several routes in 1976 had traffic densities of 5 to 15 million gross tons per mile of road: (1) Chicago-Omaha; (2) Chicago-St. Louis-Kansas City; (3) St. Louis-DuQuoin, IL (on the Chicago-Centralia-New Orleans route); and (4) Fulton- Louisville, KY. Similar traffic densities in the southern region existed on the Shreveport-Meridian, Fulton-Birmingham, Fulton- Meridian, and Baton Route-New Orleans routes. The principal points of interchange between ICG and BN are at Chicago, Peoria, Centralia, St. Louis-East St. Louis, Council Bluffs, 360 L.C.C. 95 and Kansas City. Major ICG interchanges with Frisco occur at St. Louis-East St. Louis, Kansas City, and Memphis. (ICG and Frisco also interchanged less than 500 carloads at Birmingham and Mobile in 1976.) Other major pertinent ICG gateways are Corinth, Meridian, Hattiesburg, and Gulfport, MS, Jackson, TN, Monroe and New Orleans, LA, Louisville, and Montgomery. Chicago is ICG’s largest volume gateway (274,208 carloads in 1976). ICG interchanged 6,052 carloads with BN at Chicago in 1976, of which 2,821 originated on ICG and another 2,836 terminated on ICG. Among western district carriers, ICG’s interchange volumes with CNW, Soo Line, and Milwaukee Road were the largest (22,196, 20,700, and 11,893 carloads, respectively). All other interchanges with western district carriers amounted to less than 3,500 carloads each. The bulk of ICG’s Chicago inter- change moved in connection with eastern district carriers. At Council Bluffs, 3,464 carloads were interchanged with BN. ICG’s most important connection at Council Bluffs is UP, with which 37,901 carloads were interchanged. Over 25,000 carloads of the UP traffic were bridge movements over ICG. At the St. Louis-East St. Louis gateway 7,178 carloads were interchanged with BN and 12,871 carloads were interchanged with Frisco. Of the BN carloads, over 6,000 originated on ICG. Some 5,300 of the total carloads interchanged with BN Originated in Illinois and terminated in Missouri. Of the 12,871 carloads interchanged with Frisco, over half were bridge movements for ICG. Over 8,000 carloads interchanged at the St. Louis gateway with Frisco moved between the Northeast and the South-Central States. ICG’s most important interchange with BN is at Centralia, IL. In 1976, the volume of traffic interchanged between ICG and BN amounted to 16,529 carloads, based on ICG data. Of this amount, 14,578 carloads either originated or terminated on ICG. The flow of traffic through the Centralia gateway between ICG and BN is widely dispersed among pairs of regions. Of the 14,223 carloads interchanged between ICG and connecting carriers at Peoria, only 1,508 were interchanged with BN. Over half of this traffic moved between the northeast and the north-central regions. Approximately half of the carloads interchanged by ICG at Peoria were with Rock Island. At Kansas City, ICG interchanged 49,276 carloads in 1976, of which over 32,000 were with Santa Fe and UP. ICG interchanges with BN and Frisco amounted to 2,457 and 1,153 carloads, respectively. 360 1.C.C. 96 South of Fulton, KY, ICG had only one large-volume interchange point with Frisco in 1976, Memphis, where 16,537 carloads were interchanged between the two carriers. Over 15,000 of these carloads either originated or terminated on ICG. ICG’s total Memphis interchange amounted to nearly 83,000 carloads. ICG interchanged 7,712 carloads with L&N and 9,435 with Southern at Memphis. The balance of the Memphis traffic (over 49,000 carloads) was interchanged with carriers operating west of the Mississippi River (Mopac, Rock Island, and Cotton Belt). ICG's largest interchanges in the southern region are with: (1) Family Lines (New Orleans, Birmingham, Jackson, TN, Gulfport, Montgomery, and Mobile); (2) Southern (New Orleans, Birmingham, Corinth, Hattiesburg, and Meridian); and (3) the SP-Cotton Belt system, Mopac, and the KCS-L&A system (at various points in Louisiana). Two short line railroads are also major connec- tions—Meridian & Bigbee Railroad Company (MBRR) at Meridian, MS (22,670 carloads in 1976), and Arkansas & Louisiana Missouri Railway Company (ALM) at Monroe (12,881 carloads). ICG submitted freight traffic data in its trackage rights application reflecting operations not only for itself but also its predecessor companies. The first full year of merged ICG operations was 1972, and the application data extends through 1977. The following table summarizes the traffic data for the 1972-77 period [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1383%3A2. Public record. Not legal advice.