Context: 1973–1976
In the years leading to 1973, the freight railroad system of the Northeastern United States was collapsing. Although government-funded Amtrak took over intercity passenger services on May 1, 1971, railroad companies continued to lose money due to extensive government regulations, expensive labor costs, competition from other transportation modes, declining industrial business and other factors.
The largest railroad in the region, Penn Central (PC), declared bankruptcy in 1970, after less than three years of existence. Formed in 1968 by the merger of the New York Central Railroad and Pennsylvania Railroad (and supplemented in 1969 by the New York, New Haven and Hartford Railroad), the PC was created with almost no plans to merge the varied corporate cultures, and the resulting company was a hopelessly entangled mess. At its lowest point, PC was losing over $1 million a day and trains were becoming lost all over the railroad.
In 1972, Hurricane Agnes damaged the rundown Northeast railway network and threatened the solvency of other railroads, including the somewhat more solvent Erie Lackawanna (EL). In mid-1973, officials with the bankrupt Penn Central threatened to liquidate and cease operations by year's end if they did not receive government aid by October 1. This threat to US freight and passenger traffic galvanized Congress to quickly create a bill to nationalize the bankrupt railroads. The Association of American Railroads, which opposed nationalization, submitted an alternate proposal for a government-funded private company. Judge Fullam forced the Penn Central to operate into 1974, when, on January 2, after threatening a veto, President Richard Nixon signed the Regional Rail Reorganization Act of 1973 into law.[1] The "3R Act," as it was called, provided interim funding to the bankrupt railroads and defined a new Consolidated Rail Corporation under the Association of American Railroads' plan.
The 3R Act also formed the United States Railway Association (USRA), another government corporation, taking over the powers of the Interstate Commerce Commission with respect to allowing the bankrupt railroads to abandon unprofitable lines.[2] The USRA was incorporated on February 1, 1974, and Edward G. Jordan, an insurance executive from California, was named president on March 18 by Nixon. Arthur D. Lewis of Eastern Air Lines was appointed chairman on April 30, and the remainder of the board was named on May 30 and sworn in on July 11.
Under the 3R Act, the USRA was to create a "Final System Plan" to decide which lines should be included in the new Consolidated Rail Corporation. Unlike most railroad consolidations, only the designated lines were to be taken over. Other lines would be sold to Amtrak, various state governments, transportation agencies, and solvent railroads. The few remaining lines were to remain with the old companies along with all previously abandoned lines, many stations, and all non-rail related properties, thus converting most of the old companies into solvent property-holding companies. The plan was unveiled on July 26, 1975, consisting of lines from Penn Central and six other companies—the Ann Arbor Railroad (bankrupt 1973), Erie Lackawanna Railway (1972), Lehigh Valley Railroad (1970), Reading Company (1971), Central Railroad of New Jersey (1967) and Lehigh and Hudson River Railway (1972). Controlled railroads and jointly owned railroads such as Pennsylvania-Reading Seashore Lines and the Raritan River Railroad (1980) were also included (See list of railroads transferred to Conrail for a full list).[3] It was approved by Congress on November 9, and on February 5, 1976, President Gerald Ford signed the Railroad Revitalization and Regulatory Reform Act of 1976, which included this Final System Plan, into law.[4][5]
The EL had been formed in 1960 as a merger of the Erie Railroad and Delaware, Lackawanna and Western Railroad. It too was bankrupt, but was somewhat stronger financially than the others. It was ruled reorganizable under Chapter 77 on April 30, 1974 (as had the Boston and Maine Railroad), but on January 9, 1975, with no end to its losses in sight, its trustees reconsidered and asked for inclusion. The Final System Plan assigned a major section of the EL, from northern New Jersey west to northeast Ohio, to be sold to the Chessie System, which would help spur competition in Conrail's territory. Chessie, however, could not reach an agreement with EL labor unions, and in February 1976 announced that it would not be buying the EL section. The USRA hurriedly assigned large amounts of trackage rights to the Delaware and Hudson Railway, allowing it to compete in the Philadelphia, Pennsylvania, and Washington, D.C., markets. The State of Michigan decided to keep operational the full Ann Arbor Railroad, of which Conrail would run only the southernmost portion. Michigan bought it and the whole line was operated by Conrail for several years until it was sold to a short line.
Breakup: 1997–1999
With Conrail's increasing success, it decided to merge the company with another railroad, so it approached CSX Transportation about buying Conrail. CSX's bid for Conrail, however, drew the attention of Norfolk Southern Railway which, fearing that CSX would come to dominate rail traffic in the eastern US, made a bid of its own leading to a takeover battle between the two railroads. In 1997, however, the two railroads struck a compromise agreement to jointly acquire Conrail[32] and split most of its assets between them, with Norfolk Southern acquiring a larger portion of the Conrail network via a larger stock buyout.[33] Under the final agreement approved by the Surface Transportation Board, Norfolk Southern acquired 58 percent of Conrail's assets, including roughly 6,000 Conrail route miles, and CSX received 42 percent of Conrail's assets, including about 3,600 route miles.[34]
The buyout was approved by the Surface Transportation Board (STB) (successor agency to the Interstate Commerce Commission (ICC)) and took place on August 22, 1998. Under the control of lawyer-turned-CEO Tim O'Toole, the lines were transferred to two newly formed limited liability companies, to be subsidiaries of Conrail but leased to CSX and Norfolk Southern, respectively
