other external financial assistance by October 1, 1973, would have permitted continued rail service for not more than 1 year therefrom. Cessation of the debtor's service would be phased over a 10week period beginning October 31, 1973. Upon the cessation of any or all rail services, fixed rail assets, and freight, passenger, and work equipment which may be required if provision is made to later resume such services would be preserved for 9 months after October 31, 1973, for sale or lease to others, preferably for continued rail operations. Respecting this latter feature, a trustee, Langdon, testified that while additional expense may be entailed by this "mothballing," he believes that there is a distinct possibility of improving the position of the debtor's creditors through continued availability of rail operations for acquisition by interested parties. Informal discussions with officials of the Norfolk & Western and the C&O-B&O systems in this respect have been unproductive, according to Langdon, because of the possibility of congressional action to restructure the the northeastern railroad system. In his view, however, the continued existence of rail freight service in the territory served by Penn Central is required.

The plan provides for the trustees to entertain offers for the purchase or lease of rail properties for not more than 6 months after October 31, 1973. Purchase or lease offers involving continued rail operations would require interim use or rental payments adequate to cover State and local taxes plus a reasonable return on the value of the assets pending final approval thereof by this Commission and the reorganization court. The debtor's trustees would report the offers with their recommendations thereon to the Commission in one or more transfer reports during the 6-month period. Generally, the proceeds of such sales together with the proceeds from the disposition of the debtor's nonrail assets would be placed in a holding company whose securities would be distributed among the debtor's claimants on a fair and equitable basis.

Upon the receipt of the trustees' transfer reports, this Commission would be required to promptly hold hearings in order to determine whether the purchase or lease offers satisfied the plan's criteria

(footnote 2 continued)

Company, The Connecting Railway Company, The Delaware Railroad Company, Erie and Pittsburgh Railroad Company, The Michigan Central Railroad Company, The Northern Central Railway Company, Penndel Company, The Philadelphia, Baltimore & Washington Railroad Company, The Philadelphia and Trenton Railroad Company, The Pittsburgh, Fort Wayne and Chicago Railway Company, The Pittsburgh, Youngstown and Ashtabula Railway Company, and Union Railroad Company of Baltimore.

relative to fairness of the offer price; whether these offers would be consistent with the standards of section 1(18) of the Interstate Commerce Act, and section 77 of the Bankruptcy Act; and whether acceptance of an offer would detrimentally affect the viability or value of the debtor's remaining rail assets. In the latter respect, those offers to purchase or provide adequate support for continued freight service which would permit realization of the trustees' goal of a theoretical 11,000-mile freight core system would be accorded a preference in consideration by the Commission and the reorganization court over those offers which would fragment the 11,000-mile core system. Similarly, those offers for continued passenger service within the so-called northeastern corridor (Penn Central mainline between Boston, Mass., and Washington, D.C.) which provide for adequate support as detailed by the trustees of the record complied before the Commission in Finance Docket No. 27353,' would be accorded a higher priority.

The debtor would immediately consummate those offers approved by the Commission and the reorganization court. The plan, it is noted, empowers the trustees to sell any line of railroad which the Commission has authorized for abandonment under section 1(18) of the act, or "over which fewer than 34 carloads of freight per mile were carried during the next preceding 12 months that the line was in operation."

Within 12 months after the completion of the procedures for the purchase or disposition of the debtor's rail and nonrail assets previously described, the trustees would supplement their plan of reorganization with specific recommendations for the disposition of the debtor's remaining assets. Absent changed circumstances, the completed plan would propose the creation of a real estate company to which the trustees would convey certain of the debtor's real estate and receive in exchange therefor securities of said company or other consideration; the creation of a holding company which would be the repository for the common stock of Pennsylvania Com

George P. Baker, Richard C. Bond, and Jervis Langdon, Jr., Trustees of the Penn Central Transportation Company, Debtor-Compensation for Passenger Service, embracing Finance Docket No. 27353 (Sub-No. 1), Determination of Compensation under Section 402(a) of the Rail Passenger Service Act of 1970, decided September 21, 1973.

"By order of the Commission dated January 14, 1972, entered in Ex Parte No. 274 (Sub-No. 1), a procedural rule was adopted providing a rebuttable presumption that the public convenience and necessity does not require continued operation and warrants abandonments of all or a portion of a line of railroad or its operation upon proof that, on the average, fewer than 34 carloads of freight per mile were carried over the involved line during the 12 months preceding the filing of the application seeking said abandonment pursuant to section 1(18) of the act. Our order is presently the subject of an appeal pending before the United States Supreme Court.

pany (Pennco, the debtor's subsidiary holding company), the stock of the debtor's motor carrier affilitates, and the stock of any other new or retained companies, and other assets or proceeds of their sale in exchange for the securities of the holding company, and the creation of one or more equipment leasing companies which would acquire railroad equipment owned by the principal and secondaary debtors or their affiliates and subsidiaries, and any commitments or lines of credit which the trustees have for the acquisition of equip

ment.

In summary, the Penn Central trustees essentially propose: the liquidation of the debtor's rail assets to the fullest extent possible, the concurrent termination of the debtor's common carrier obligations, and the retention and restructuring of the debtor's nonrail assets and those rail assets which have not been disposed of or the operation of which has not been assumed by third parties.

In support of the plan, Langdon indicated that it is the trustees' intention to modify the plan in the event that Federal financial assistance becomes available, stating:

Well, if we could-assuming financial assistance during the interval-be able to use that [abandonment] procedure and come to an answer as to an 11,000 mile core within a year, then I should think this might be satisfactory.

He reiterated the trustees' position, however, that barring such relief, reorganization in the manner they propose is necessary to preclude a further diminution in the value of Penn Central's estate beyond December 31, 1973, which, they assert, would result in an unconstitutional taking of Penn Central's estate.

Langdon maintains that four conditions are essential to continued rail service under an earnings-based reorganization plan, and that these are presently beyond Penn Central's attainment. Among them is an alleged need for rationalization of Penn Central's rail plant, e.g., reducing it to an 11,000-mile freight core. Viability studies undertaken in behalf of the trustees and discussed herein indicate that such a reduced freight system configuration could retain the bulk of Penn Central's present freight business. However, the trustees conclude that this high density configuration is unworkable without massive governmental help in view of the resulting cost of labor protection and the costs likely to be incurred by Penn Central in attaining that core pursuant to section 1(18) procedures. In this respect, approximately 6,400 miles of line have been studied by the trustees to determine whether all or any are appropriate candidates for abandonment. Of these 6,400 study miles, it was concluded that 307 miles would not satisfy the statutory abandonment standards, and that 4,000 miles would fall within the Commission's "34-car rule." Following approval by the reorganization court of requests for

abandonments of line, Penn Central has, in fact, sought the abandonment of 3,742 miles of line, of which some 1,400 miles of line have been authorized for abandonment."

A second condition which the trustees perceive essential and which they say cannot be satisfied is elimination of Penn Central's passenger service burden. As stated, the question of whether and to what extent the present service agreement between Penn Central and Amtrak requires adjustment is a matter dealt with in the proceedings referred to in footnote three. Respecting commuter or suburban service, the interim reports of the trustees to the reorganization court which are of record herein indicate that appropriate agreements between Penn Central and public authorities in the State of New York provide for full compensation including a 7percent return on investment as regards commuter service rendered over Penn Central's New York Harlem Railroad line, and between the debtor and public authorities in New York and Connecticut covering full compensation for commuter service between New York City and New Haven, Conn. Negotiations towards the effectuation of similar agreements covering certain commuter services to and from Philadelphia and Boston are underway with the appropriate authorities. The extent to which other commuter or suburban services of Penn Central are covered by similar arrangements is not clear on the present record.

The third condition pertains to the removal of what the trustees term unnecessary labor costs. One aspect of this pertains to work rule changes which would permit Penn Central to reduce train crews in freight service to one brakeman and one trainman. Collective bargaining under the Railway Labor Act has failed to resolve this matter. Langdon indicated in these hearings that Penn Central's unilateral promulgation of this work rule change would most certainly result in a strike, and its cash position is such that the debtor could not withstand the effects of a work stoppage. The second aspect of this matter involves the overall cost to Penn Central of labor | protection (as negotiated by the carrier and its employees as a condition to labor's support of the Penn Central merger), if the carrier were to reduce its configuration to the theoretical 11,000-mile core. These labor protection costs are discussed in detail in later portions of this report. The trustees are of the view that the debtor here too

"However, since July 1973, the Commission has been virtually enjoined against authorizing rail abandonments by order of Judge Frankel in Harlem Valley v. Stafford, 5 ERC 1503 (S.D.N.Y. 1973). Though procedures are being developed to satisfy the terms of the injunction, they have not been finalized and rail abandonments in the United States are generally at a standstill.

lacks the necessary financial resources. By a petition filed on July 16, 1973, the trustees have requested this Commission to relieve Penn Central of the merger attrition-type protection just referred to. In view of our findings hereinafter, consideration of the petition will be held in abeyance.

Last, relative to satisfaction of each the preceding three conditions, is the matter of adequate funds to maintain Penn Central's plant and equipment in such a manner that present traffic will be retained and there will be traffic growth sufficient to permit economical and efficient operation. A later portion of our report deals with Penn Central's present and foreseeable financial needs.

Evidence with respect to the physical condition of Penn Central roadway property essential to train movement (rails, ties, ballast, bridges, tunnels, signal, power transmission for electric propulsion and track maintenance machines) was presented by witness Jackman, an engineering consultant. Based upon his inspection of the roadway and examination of engineering and financial data of the debtor, he concludes that its property has been inadequately maintained over the last 10 to 15 years and is not receiving adequate O maintenance at present.

Considering the 11,000-mile core, Jackman estimated that a total of $364 million spent over 8 years is needed to rectify deferred roadway maintenance, and annual expenditures of $200 to $205 million will be needed to provide normal maintenance. Considering the 15,000-mile core proposal, he estimated that a total of $451 million spent over 8 years would be needed for deferred roadway maintenance, and annual expenditures of $225 million would be necessary to provide normal maintenance.

A large part of the cost of both deferred maintenance and annual maintenance results from maintenance for rails and ties. Jackman used a service factor of 850 million tons to determine when rail is worn to the extent that it must be replaced and a 40-year tie life as regards his cost estimates for maintenance of rails and ties.

Evidence concerning the financial results of continued operations of Penn Central over the present system was presented by witness Varalli, Director of Budget Planning for the debtor.

The base plan formulated by Varalli, and subsequently revised on four occasions since the original plan in 1972, assumes a relatively normal operation and encompasses only those changed conditions which would lie within the control of the trustees including such matters as projected wage increases, tariff increases, increases in cost as a result of inflation, force reductions, and certain increases