WASHINGTON — The Interstate Commerce Commission, in a surprise move, today rejected the proposed merger of the Santa Fe and the Southern Pacific railroads.
The commission said anti-competitive problems outweighed the public benefits of joining the two Western rail systems into the nation's third largest rail line.
The merger, which had been before the commission for more than 2 1/2 years, had been strongly criticized by competing railroads and the Justice Department.
Santa Fe Industries and Southern Pacific Corp. agreed to merge in December, 1983, forming a new holding company, Santa Fe Southern Pacific Corp.
Must Sell One Railroad
But federal law prevented the merger of the two railroads pending an ICC decision. The ICC's rejection of the merger will require the holding company to divest itself of one of the railroads, commission officials said.
The ICC rejected the merger by a 4-1 vote, with only commission Chairman Heather Gradison favoring the merger.
While the commission said the combining of the two railroads might be in the public interest, the "substantial adverse effect" the merger would have on competition outweighed any public benefits.
The Santa Fe and the Southern Pacific have extensive parallel operations in California and across the Southwest to the Mississippi River.
Last May, executives of Santa Fe Southern Pacific Corp. told the ICC that if the merger was not approved, Southern Pacific and possibly Santa Fe as well might be forced into bankruptcy. Since 1982, Southern Pacific has either lost money or made very little profit each year.
At a news conference after the ICC decision, John J. Schmidt, chairman of Santa Fe Southern Pacific, called the rejection of the proposed merger "a horrible mistake" that would harm shippers in the West and Southwest.
Schmidt said no decision has been made on which of the railroads will be divested or whether one of the railroads might be sold in pieces.
It's 'Not Doomsday'
"This is not doomsday. . . . There are many things we can do with one or both of the railroads. We will regroup," Schmidt said.
He suggested that with cost-cutting, both the Santa Fe and the Southern Pacific will be able to survive. Last May, Schmidt suggested in testimony before the ICC that neither of the railroads was healthy enough to survive independently.
The rejection of the merger caught ICC staff members by surprise, and Schmidt said he and other railroad officials sat in "stunned silence" as the vote was taken.
Donald Shaw, the ICC's acting director of the rail section, told reporters that the commission staff had recommended that the merger be approved with some conditions that he said the staff believed would solve the competition problem.
Shaw, however, declined to provide details of the staff proposal except to say that the conditions included requirements that other railroads be allowed to use some portions of the Santa Fe and Southern Pacific track.
Gradison, who cast the only vote in favor of the merger, suggested that ways could be found to deal with the competition issue.