NOW OR NEVER TIME FOR CONRAIL TESTIMONY

NOW OR NEVER TIME FOR CONRAIL TESTIMONY

After spending nearly 20 months and a record $10.2 billion, CSX Corp. and Norfolk Southern Corp. have one last chance over the next two days to demonstrate that their plan to partition Conrail Inc. should win regulatory approval.

NS and CSX - longtime rail rivals - will make that case before the Surface Transportation Board whose voting conference in five days will signal how successful the applicants have been.The STB is widely expected to approve the plan, which would create two rail systems with nearly equal revenue, market coverage and assets.

The two systems - with 44,000 route miles in 24 states and combined revenue of nearly $13 billion - would control virtually all rail freight service, routing and pricing east of the Mississippi River. Coupled with two major Western rail mergers in four years, the Conrail breakup leaves four mega-carriers with 90 percent of U.S. rail revenue.

The primary question to be decided appears to be what conditions CSX and NS must live with as their Herculean effort to complete the Conrail takeover winds down.

A written decision on July 23 triggers a 30-day countdown toward a late August takeover that would occur almost two years after CSX first launched its dramatic bid to acquire Conrail.

That October 1996 stratagem launched a six-month takeover fight that inflated the value of Conrail by more than 60 percent. Since NS and CSX made peace last spring, they have been building their case and planning for a smooth transition.

There is some doubt about the precise date when NS and CSX will split up Conrail. Some might see an element of doubt until the final decision is made, given the 1986 action by the Interstate Commerce Commission to reject the proposed merger of Atchison, Topeka & Santa Fe Railway and Southern Pacific Railroad that the applicants believed was a sure thing.

Because there is little question that the STB will approve the plan, the buyers can use their time to present arguments that look forward to an era of smooth merger integration, expanded competition and a stronger rail system in the region.

They also can reiterate assertions that rates will remain stable, safety will improve and that job losses will be modest: a net 2,000 jobs lost and approximately 2,000 transfers.

Part of the forward-looking approach is certain to include the buyers' insistence that Union Pacific Railroad's financial and service problems after its 1996 purchase of Southern Pacific will not be repeated. NS and CSX emphasize that their favorable experience in past merger transitions, their detailed integration planning and the fact they are starting from a position of strength with a healthy Conrail instead of the money-losing company that UP purchased.

NS and CSX can point to more extensive plans they have made to assure a smooth transition, including nearly 600 pages of safety integration steps.

With most of the Conrail purchase price financed through borrowing, NS and CSX have the financial incentive to make their plan work and avoid the disastrous experience of UP, which has seen decades of profitability turn into three consecutive quarters of losses.

Conrail's buyers also have an operational incentive to assure smooth integration, since angry shippers have expressed continued frustration with unreliable and inconsistent service throughout the rail system.

NS and CSX also have a regulatory motivation. Any major slip-ups could affect the future of rail regulatory policy, since Congress will be addressing possible legislative changes next year.

While NS, CSX and other railroads maintain that major changes would be disastrous, many of their opponents maintain those fears are overblown.

The Conrail breakup also will be a vessel to determine the scope of future rail competition.

After widespread criticism that the UP merger did not create enough competition and the initial prospect that a Conrail-CSX linkup would monopolize rail service in the Northeast, CSX and NS moved beyond the UP model and hatched a plan to introduce some new competition.

That approach centered on some of the busiest rail markets in the region, including Detroit, New Jersey and parts of Pennsylvania. Both carriers also proposed to offer intermodal service to the New York area, home to the largest North American consumer market and largest East Coast port.

The buyers also can cite strong backing in more than 2,000 letters. The effort to win backing for the NS-CSX plan has included dozens of agreements to avert opposition.

Among the parties reaching such agreements were railroads such as Canadian National and Canadian Pacific; states such as Pennsylvania, Maryland and Massachusetts; and the Port Authority of New York & New Jersey.

Cleveland area officials, who had been challenging the NS-CSX plan over environmental and safety grounds, had some of their fears allayed when they reached an agreement with NS Monday.

The NS-CSX plan also faces less extensive opposition than either UP or the 1995 merger that created Burlington Northern Santa Fe Inc.

However, the opposition that remains in portions of New York, Ohio, Indiana and a handful of other states is focused on two sensitive issues: competition and the impact that trains make on a community.

Opponents in places like Buffalo and Indianapolis maintain that not enough competition was created. A similar view is being pressed by New York City officials and members of Congress from the region.

NS and CSX have been maintaining that their efforts to increase business are an overall positive for the environment because shifting freight to rails from highways reduces air pollution and road accidents.

The STB's environmental review generally accepted that view, though it proposed some mitigating conditions.

The plan calls for NS and CSX to take more than 1 million freight shipments off the highways within three years. UP had a more modest goal of approximately 200,000 truck diversions, but its post-acquisition service problems have actually decreased traffic volumes and apparently put more freight onto the highways.

Steps to attract new traffic are a cornerstone of the financial plan to make the Conrail acquisition pay off for both companies. The NS-CSX plan calls for nearly half of merger-related benefits to come from revenue generated by new traffic.