STATUS OF PLANNING PROCESS

Mr. McFALL. As you indicate in your statement, USRA came into being on February 1, 1974. The first appropriation, $6 million, was made in January and another $12 million was provided in the second supplemental.

I think that you have gone into this in your general statement, but it will make the record clearer if you could tell us how far along you are in the planning process. Do you still intend to publish your preliminary plan by October 29? As I understand it, you expect it will be delayed for 120 days.

Mr. JORDAN. 120 days, Mr. Chairman, from October 29 to approximately the end of February. The final system plan which was to go to Congress at the end of March, would also be extended for 120 days from its original due date.

STRUCTURAL OPTIONS

Mr. McFALL. You indicate, on page 7, that you have designed the basic models for predicting revenues and costs under various configurations and financial structures. What are the options which you are considering?

Mr. JORDAN. At the level of strategic structural options we are considering six or seven possibilities. First, a Conrail which would include all of the railroads in reorganization, but excluding the Erie-Lackawanna and the Boston & Maine, which are to be handled under section 77. A modification of the first option includes the concept of two neutral terminal companies in the New York and Philadelphia metropolitan areas.

The third option is what we have called the Atlantic seaboard feeder system, plus a Penn Central West. The concept behind this option as well as modification of the big Conrail with two neutral terminal companies is to confine within the Atlantic seaboard feeder system the heavy passenger service, commuter service, and the complex terminal operations represented in those two major metropolitan markets, as well as provide egress to the permanent markets on the part of the solvent railroads in the region who are concerned about their access to that market.

With the exception of the Erie-Lackawanna, no other railroad would have access to the eastern seaboard if we have simply one large Conrail.

The fourth option would include a reorganized Penn Central to the West, a line-haul operation.

A fifth option has been called controlled liquidation. This option contemplates the possibility that Conrail would be set up as an Eastern seaboard neutral operator and the lines west would be sold to the solvents, creating simply three railroad systems in the West, without Penn Central as it exists today in the West.

A sixth option includes what we have called the Consolidated Facilities Corporation, which contemplates the ownership of the right-ofway and terminals by a Government-sponsored corporation with the line-haul operations undertaken by a private company. The purpose behind this would be to confine the role of Government, if it has any lasting involvement, to a passive role in the ownership area, as opposed to an operating company in competition with solvent railroads.

The seventh option now being considered by the Board of Directors is one which is called "unmerging" the Penn Central. This is a descriptive phrase for the possibility of dividing on a north-south split the Penn Central into two approximately equal sized corporations, each with about $1 billion in revenue.

The basic presumption behind this, as suggested by a number of people in the past, is that the two railroads should never have been merged. It is too large to manage, and it should be divided into two systems to provide roughly equivalent competition to the solvent railroads in the Northeast and a manageable company in the future.

I might add that when the Penn Central's bankruptcy occurred. 40 percent of the rail service in the Northeast was threatened. By creating two companies of approximately equal size, the potential for total disruption of rail service in the Northeast would at least be somewhat mitigated.

These are the strategic options which the Board has under consideration.

OPERATION WITHOUT FEDERAL SUBSIDIES

Mr. McFALL. Will any of these systems be able to operate without a Federal subsidy?

Mr. JORDAN. The presumption of our analytical work is that subsidies will not be available to Conrail. The analysis is going forward on that basis, the act proposes that we reorganize into a viable company or, as we noted in these alternatives, companies. Whether or not subsidies will be required is premature at this time.

We are still doing the detailed financial analysis which is sequential to the whole question of which facilities, what size the system will be, what operating improvements one could contemplate, and what managerial improvements can take place. Coming down to what the numbers look like from an analytical point of view, we just do not know as yet.

RAIL SERVICE REPORT

Mr. McFALL. What is your evaluation of the Secretary of Transportation's rail service report?

Mr. JORDAN. The January CORE report?

Mr. McFALL. Yes.

Mr. JORDAN. I would make two comments, if I may, about it. First, it made much easier the analytical task of the identification and examination of potentially marginal light-density lines. It made it easier for us by collecting together in one report all of the lines which need to be examined.

Second, I would say that from the viewpoint of the analysis itself, that the report was one dimensional and it did not, in fact, include any of the kind of analysis that we are doing now in our work. Therefore, any conclusions that one might want to draw from it I think are unsubstantiated. It does not do anything more than identify further work, and that is what we are doing at this time.

REPORT OF RAIL SERVICES PLANNING OFFICE

Mr. McFALL. What was your reaction to the ICC's evaluation of the Secretary's report?

Mr. JORDAN. I think the Rail Service Planning Office's report of early May was an excellent statement for us to use not only in the examination of the Secretary's report but in broadening the scope of our analysis and making certain that we were covering all the options and alternatives possible.

For example, within that report the possibility of a terminal operation on the eastern seaboard was suggested. As indicated by my earlier remarks, this is one of the alternatives that we are now examining.

I might add, we have worked closely with the RSPO in organizing the material from the hearings which they held. As I remember, the hearings involved several thousand people and 20,000 pages of testimony that they are just publishing. We have been able to put it together on a computer with their assistance so that the hard information that was collected is part of our analytical process now.

COURT DECISION ON REGIONAL RAIL ACT

Mr. McFALL. What effect will there be on your planning as a result of the court decisions which declared certain parts of the Regional Rail Act to be unconstitutional?

Mr. JORDAN. From a planning viewpoint we are able to continue our work without any unreasonable interruption.

Mr. McFALL. Specifically, what parts were declared unconstitutional?

Mr. JORDAN. I could comment on the generalities but I think it would be inappropriate for me to comment on specific legal issues. I would like to ask Mr. Siegel to speak to that.

Mr. McFALL. Outline it briefly.

Mr. SIEGEL. Two principal provisions were affected by the constitutional decision: One, section 304(f) of the act, which authorizes the association to permit abandonments or discontinuance of service while the system planning process is going forward. The decision enjoined us from exercising authority to deny permission to abandon where to do so would, in substance, violate the constitutional rights of the applicant. The court felt that our action would involve an unreasonable erosion of the assets of the bankrupt railroads' estate.

Mr. YATES. Could you give us an example of that?

Mr. SIEGEL. I don't think I could. As a matter of fact, the position we have taken on appeal is that we would never exercise our authority in that way. It was an unnecessary thing for the court to put into its order.

The other point underlying the court's conclusion on section 304 (f) was that the final system plan we will issue under section 303 of the act could require the bankrupt railroads to transfer their property for compensation that did not include an allowance for interim erosion caused by the requirement that they continue to operate. So we were enjoined from certifying the final system plan. We can get up to the point in our planning that produces a final system plan but there is a hold on its implementation. On a point raised by the creditors as to whether its fair to provide for property transfers in advance of valuation and compensation determinations, the court deferred decision until the consequences of that final system plan are known and can be looked at by the special court.

SUMMARY OF COURT DECISION

Mr. McFALL. Put a summary in the record of the decision and the points involved.

Mr. SIEGEL, Glad to.

[The information follows:]

The order of the three-judge constitutional court, issued on June 25, 1974, summarized the court's decision and the points involved. All of the points listed are also alluded to in Mr. Siegel's testimony, except for paragraphs 3 and 4(c) of the order holding a part of section 207 (b) of the Regional Rail Reorganization Act unconstitutional. The decision on that point was a response by the court to a claim by security holders in the bankrupt railroads that the act, and section 207(b) in particular, was unconstitutional as violative of the constitutional requirement that bankruptcy laws be uniform. The order follows:

ORDER

And now, this 25th day of June 1974, for the reasons set forth in the foregoing opinions, it is ordered:

1. That the defendant, United States Railway Association, is enjoined from certifying a final system plan to the special court pursuant to section 209(c) of the Regional Rail Reorganization Act of 1973.

2. That the defendants are enjoined from taking any action to enforce the provisions of section 304(f) of the Regional Rail Reorganization Act of 1973, with respect to any abandonment, cessation, or reduction of service which has been or may hereafter be determined by a court of competent jurisdiction to be necessary for the preservation of rights guaranteed by the U.S. Constitution.

3. That all parties are enjoined from enforcing, or taking any action to implement, so much of section 207 (b) of the Regional Rail Reorganization Act of 1973 as purports to require dismissal of pending proceedings for reorganization under section 77 of the Bankruptcy Act.

4. That a declaratory judgment be entered, declaring:

a. That section 303 of the Regional Rail Reorganization Act of 1973 is null and void as contravening the fifth amendment of the U.S. Constitution insofar as it fails to provide compensation for interim erosion pending final implementation of the final system plan pursuant to the statute.

b. That section 304(f) of the Regional Rail Reorganization Act of 1973 is null and void as violative of the fifth amendment of the U. S. Constitution, to the extent that it would require continued operation of rail services at a loss in violation of the constitutional rights of the owners and creditors of a railroad. c. That so much of section 207 (b) of the Regional Rail Reorganization Act of 1973 as requires reorganization courts to dismiss pending proceedings under section 77 of the Bankruptcy Act under the circumstances set forth in said section 207(b) is null and void, as violative of article I, section 8, clause 4 of the Constitution of the United States.

5. That the respective motions of the plaintiffs for partial summary judgment are granted in part, as set forth above, and in all other respects are denied. 6. That the defendants' motions for summary judgment are denied.

RUGGERO J. ALDISERT,
JOHN P. FULLAM,
LOUIS C. BECHTLE, J.

Mr. YATES. What did the Court mean by the use of the term "fair"? As I understood your response, you said that the Court held unconstitutional parts of the plan which it thought might operate unfairly? Mr. SIEGEL. It was not the plan; it was the process that was called into question.

Mr. YATES. What do you mean by that?

[The following was supplied for the record:]

The act provides for the formation of a new Consolidated Rail Corp. and the transfer or conveyance of the property of the bankrupt railroads in exchange for securities of that corporation. These conveyances were to be made prior to the date the values to be placed on the property or on the securities would be known-and there are other details as to how this system of compensation would

operate. The Court deferred consideration of whether this constituted a fair process-that is one that would provide just compensation to the bankrupt estates.

Mr. YATES. Is there a question of watered stocks and other things involved? Is that what the Court had in mind?

Mr. SIEGEL. The question was whether there would be enough value in the assets given to pay for those received.

Mr. JORDAN. If I may add, there are two separate litigation paths going forward, one from a three-judge court in Philadelphia, which has been appealed to the Supreme Court, which is the Connecticut General case. We will include that in the record. The second one is an appeal on the 180-day hearing held by the judges involving each of the railroads in reorganization. The result of those hearings provided that only two of the railroads in the region were held to be subject to the act, that is, the Reading and the Ann Arbor, the biggest, Penn Central, and the others were held not to be subject to the act.

We have a rather complex series of questions surrounding the legislation at this point because of the litigation.

IMPACT OF COURT DECISION ON PLANNING

Mr. McFALL. What impact does this have on your planning and what would be the impact if these decisions are not reversed by the Supreme Court?

The third option, I suppose, would be that if they are not reversed, could they be clarified by changes in the legislation?

Mr. JORDAN. Well, if I may respond to this question of impact, we are proceeding in our planning on the presumption that the railroads already held not to be reorganizable under section 77, principally the Penn Central and others that I mentioned, will at some point either by judicial or legislative mandate become subject to the act and subject to the planning process.

We have two reasons for that. First, the work which we are doing from a business analysis viewpoint, how to better organize and operate the system, we believe is pertinent no matter what the final conclusion is.

The second aspect of it is that the question will probably revolve around the methods used for conveyance of property. Would we have to go out in the open market and purchase it? If the Supreme Court upheld the lower decision, and there was no legislative change, then that would be the process. If rail service were to be maintained, we would have to examine the question of simply purchasing the properties.

That is a very complex issue and I don't think there is any way we can at this point anticipate from a planning viewpoint precisely how to go about acquiring the properties. As you can imagine, the costs involved, the nature of the transaction would be entirely different than that now contemplated by the act. In the meantime there is the question of whether or not we would prevail in the Court. I think, third, there is a feeling-and I believe it has been stated by a Senator intimate with the issues that Congress will have to reaxamine the act in several significant respect if parts of it are held to be unconstitutional.