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BEFORE THE SURFACE TRANSPORTATION BOARD ______
DOCKET NO. FD 36472 ______
CSX CORPORATION AND CSX TRANSPORTATION, INC., ET AL. —CONTROL AND MERGER— PAN AM SYSTEMS, INC., PAN AM RAILWAYS, INC., BOSTON AND MAINE CORPORATION, MAINE CENTRAL RAILROAD COMPANY, NORTHERN RAILROAD, PAN AM SOUTHERN LLC, PORTLAND TERMINAL COMPANY, SPRINGFIELD TERMINAL RAILWAY COMPANY, STONY BROOK RAILROAD COMPANY, AND VERMONT & MASSACHUSETTS RAILROAD COMPANY ______
EXHIBIT 22-F ______
Amended and Supplemented Verified Statement of Dr. William Huneke
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AMENDED AND SUPPLEMENTED VERIFIED STATEMENT OF
WILLIAM F. HUNEKE, Ph.D.
I am Dr. William Huneke. I was employed at the Surface Transportation Board (“STB” or “Board”) from 2001-2017 and served as the STB’s Chief Economist and Director of the
Office of Economics. I hold a PhD in economics from the University of Virginia. While at STB,
I advised STB members and staff on the following mergers and acquisitions: Canadian National
Railway Company and Grand Trunk Corporation—Control—EJ&E West Company (Finance
Docket No. 35087); Norfolk Southern Railway Company—Acquisition and Operation—Certain
Rail Lines of the Delaware and Hudson Railway Company, Inc. (Finance Docket No. 35873);
and Norfolk Southern Railway Company, Pan Am Railways, Inc. et. al.—Joint Control and
Operating/Pooling Agreements—Pan Am Southern LLC (Finance Docket No. 35147). I also
advised Commissioners and STB staff on the economics of proposals in Review of Rail Access
and Competition Issues Renewed Petition of the Western Coal Traffic League (aka
“Paper Barriers”) (Ex Parte 575); Petition for Rulemaking to Adopt Revised Competitive
Switching Rules (Ex Parte 711); and Reciprocal Switching (Ex Parte 711) (Sub. No. 1). Since leaving the STB, I have advised Class I railroads on STB access fees litigation and merger and acquisition issues. I have advised the Mexican Rail Regulator (Agencia Reguladora del
Transporte Ferroviaro) on rail regulatory policy. A copy of my vita is attached to this statement.
I previously submitted a verified statement and an amended verified statement with submissions by CSX notifying the Board of CSX’s intent to seek authority to acquire Systems and with CSXT’s April 26, 2021 Amended Application. In a decision dated May 26, 2021, the
Board found that CSXT’s April 26, 2021 Amended Application did not have sufficient supporting information. CSXT is filing an Amended and Supplemented Application with the
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additional information identified by the Board. I am submitting this Amended and Supplemented
Verified Statement in support of CSXT’s Amended and Supplemented Application.
In this Amended and Supplemented Verified Statement, I address the competitive effects
of CSXT’s proposed acquisition of Pan Am Systems, Inc. (“Systems”) and Pan Am Railways,
Inc. and its subsidiary railroads, (“PAR”), with a particular focus on the competitive effects of
agreements that CSXT has negotiated with Norfolk Southern Railway Company (“NSR”) and
Genesee & Wyoming Inc. (“G&W”) since announcing the intention to acquire PAR. The two
agreements are a Settlement Agreement between CSXT and NSR and a Term Sheet Agreement
among CSXT, NSR and GWI. Those agreements are attached to the Verified Statement of
CSXT’s witness Mr. Pelkey.
As I explain below, the agreements address any potential competitive concerns arising
out of CSXT’s proposed acquisition of PAR. My overall conclusion is that these agreements not
only address any potential competition concerns, but also seek to substantially enhance rail
competition in New England. As it is now currently structured, CSXT’s acquisition of PAR will be strongly pro-competitive.
After discussing some background, I will discuss four points as to why this transaction
ensures and enhances sustainable and competitive freight rail and transportation in New England:
1. The settlement agreement in this case modifies a cap on movements to and from New
England through Ayer in a way that will enhance competition;
2. The applicants are committing to improving Ayer’s infrastructure and facilities to
increase efficiency and support sustainable traffic growth;
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3. NSR’s ability to provide double-stack intermodal transportation over CSXT’s lines in
place of the single-stack service provided today over the Pan Am Southern LLC (“PAS”)
mainline will enhance NSR’s ability to compete for intermodal traffic; and
4. Pittsburg & Shawmut Railroad, LLC, doing business as Berkshire & Eastern Railroad
(“B&E”) operating PAS will likely improve PAS operations and enhance PAS’s role as
an independent vehicle for rail transportation to and from New England.
Background
With the adoption of new merger rules in 2001, the STB declared that it would require
that future class I rail mergers enhance competition, although the requirement was not extended
to mergers or acquisitions that do not involve two Class I railroads.1 Nevertheless, the STB has
often looked with approval on non-class I transactions that have the potential for enhancing
competition. Indeed, the STB’s decision that approved the creation of PAS noted:
[R]ather than adversely affecting competition, it appears that the Transaction would significantly increase competition between railroads by providing an upgraded east-west main line route to compete with a parallel main line route operated by CSXT.2
Similarly, the STB approved the acquisition by NSR of some Delaware & Hudson lines, which was intended to “preserve and enhance competition in the Northeast surface transportation market.”3
In this Amended Verified Statement, I do not focus on the numerous reasons why the
transaction does not harm competition. However, as seen throughout the Amended and
1 See Major Rail Consolidation Procedures, EP 582 (Sub-No. 1), slip op. at 10, 14 (STB served June 11, 2001). 2 Norfolk Southern Railway Company, Pan Am Railways, Inc., et al.—Joint Control and Operating/Pooling Agreements—Pan Am Southern LLC (PAS Formation Decision), FD 35147, slip op. at 5 (STB served March 10, 2009). 3 Norfolk Southern Railway Company—Acquisition and Operation—Certain Lines of the Delaware and Hudson Railway Company, Inc., FD 35873, slip op. at 2 (STB served May 15, 2015).
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Supplemented Application, among other things, the end-to-end nature of CSXT’s acquisition of
the rail lines owned by PAR ensures that competition will not be harmed. There is very little
overlap between the CSXT and PAR networks. Where there is a potential for reducing a
shipper’s competitive options, CSXT has made commitments that will eliminate any potential
competitive harm. Specifically, CSXT has committed to providing multi-carrier access to the
small number of shippers north of Boston that currently have shipping options on CSXT and
PAR. In addition, CSXT and NSR have committed to having PAS maintain current rates for the
small number of shippers in Vermont who currently have shipping options on New England
Central Railroad (“NECR”), an independent corporate affiliate of B&E, and PAS, which will be
operated by B&E. CSXT has also made several commitments to Vermont Railways to ensure
that it has multi-carrier access.4 These commitments, along with competitive enhancements
described below, should mean that under the existing legal standard the transaction should be
approved.
The Board’s concern in smaller transactions such as this one is whether the transaction is
likely to harm competition. This standard ensures that the Board will let the market govern
railroad transactions to the maximum extent possible, limiting Board intervention to those
circumstances where competition must be protected. And as discussed above, the transaction
here will not harm competition. While the Board does not require a showing of competitive
enhancement in transactions such as this one, when a proposed transaction has the potential to
enhance competition, as it does here, the Board should view such a transaction as a unique
opportunity to advance the public interest in a competitive and strong rail network. CSXT has
gone far beyond merely addressing competitive harm in structuring the proposed transaction.
4 These commitments are discussed further in the Verified Statements of CSXT’s witnesses Mr. Pelkey and Dr. Reishus.
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As discussed below, the agreements that CSXT has reached with NSR and with B&E will
produce a realignment and restructuring of the rail network in New England that will ultimately
produce a stronger rail network that enhances competition among railroads and with other
transportation modes. This transaction enhances the competitive positions of both NSR and
CSXT and thereby has substantial pro-competitive benefits for stakeholders in the New England
rail network.
The background facts of this transaction are covered in other materials. In brief, CSXT’s
acquisition of PAR will combine CSXT with a number of railroads owned by PAR, most of
which simply own or lease rail lines and do not operate themselves. Most important for my
analysis is the acquisition of Springfield Terminal Railway Company (“Springfield Terminal”),
one of the rail carriers owned by PAR. Springfield Terminal is the sole operator of the PAR network. In 2009, PAR and NSR created PAS, a 50/50 joint venture between the Boston and
Maine Corporation (“Boston and Maine”), a PAR Railroad, and NSR. PAR donated rail lines and operating rights to PAS, and PAS hired Springfield Terminal on a contract basis to operate and set rates on the PAS network. PAR and NSR created PAS primarily to allow for needed capital investment in PAS’s lines and to give NSR assured access to the Boston area.
CSXT’s proposed acquisition of PAR is mostly end-to-end, with little potential for adverse competitive impacts. The PAR network, not including PAS, is a mostly north-south rail network extending north from Boston into Maine. CSXT’s acquisition of PAR will allow CSXT to extend its network reach north of Boston and bring efficient service into that part of New
England. In addition, CSXT will acquire (1) Boston and Maine’s 50% interest in PAS, and (2) the railroad, Springfield Terminal, that PAS has hired to operate and set rates for PAS. PAS operates an east-west line extending from Rotterdam Junction, NY into the Boston area. CSXT
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also moves traffic on a more southerly east-west CSXT line that is roughly parallel to the PAS line. Because PAS owns a route that is roughly parallel to an existing CSXT route from upstate
New York into the Boston area, CSXT’s acquisition of a 50% interest in PAS and 100% ownership of Springfield Terminal, the contract operator and rate-setter for PAS, could have given CSXT some influence over competition for movements into New England. However,
CSXT entered into agreements with NSR, the other 50% owner of PAS, and with G&W to replace Springfield Terminal with B&E as the contract operator of PAS in order to ensure that
PAS would be independently operated and would continue to be a fully competitive alternative to CSXT’s southern parallel line. And, in reaching these agreements, CSXT has ensured that rail competition in New England will actually be strengthened and enhanced.
In accordance with the Board’s May 26 decision,5 this Amended and Supplemented
Verified Statement, in conjunction with other parts of the Amended and Supplemented
Application, provide additional support for the conclusion that the settlement agreements will enhance competition among railroads and with other modes of transportation by describing four ways in which competition in New England will be enhanced because of the agreements that have been reached with NSR and G&W as part of the Proposed Transaction. These competitive enhancements would promote and strengthen a competitive rail network in New England and provide the benefits of robust competition to current and future users of the rail network.
5 CSX Corporation and CSX Transportation, Inc.—Control and Merger—Pan Am Systems, Inc., Pan Am Railways, Inc., Boston and Maine Corporation, Maine Central Railroad Company, Northern Railroad, Pan Am Southern LLC, Portland Terminal Company, Springfield Terminal Railway Company, Stony Brook Railroad Company, and Vermont & Massachusetts Railroad Company (Decision No. 3), FD 36472, slip op. at 11 (STB served May 26, 2021).
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1. Modification of Ayer Island Line Rights
The backdrop to the formation of PAS was a concern by NSR over the adequacy of
investment in the facilities later to become PAS that were previously owned by a PAR subsidiary
and operated by Springfield Terminal. To form PAS, PAR contributed lines extending from
Rotterdam Junction, NY in the west to a point just beyond Ayer, MA in the east (referred to as milepost CPF 312), as well as facilities along the “Knowledge Corridor” between White River
Junction, VT, and New Haven, CT. PAR retained a line segment between Barber Station, MA
and Harvard, MA, just south of Ayer. That line segment was being, and has continued to be used
to move traffic from CSXT to and from New England on PAR lines to the east and north of
Ayer. However, that traffic must also move over a PAS line through Ayer between Harvard and
CPF 312 to connect PAR’s Barber Station-Harvard line and PAR’s lines east of Ayer beginning
at CPF 312. This PAS line segment is referred to as the “Island Line.” The schematic below shows the Island Line in the vicinity of Ayer.
- csx - ST
Island line
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PAS granted PAR overhead trackage rights to move traffic over the Island Line, subject
to a volume cap, established in an agreement between PAS and Springfield Terminal. The
Springfield Terminal Joint Use Agreement dated April 9, 2009, provides in Section 3(j) that:
In its exercise of the Trackage Rights grant, Springfield Terminal may not move, in any one calendar year, over the Subject Trackage more than one hundred twenty percent (120%) of Cars, loaded or empty, in the aggregate (counting each one-way movement as a single movement) that moved over the Subject Trackage in 2007, unless and until: (i) Springfield Terminal funds fifty percent (50%) of a study (the “Springfield Terminal Capacity Study”, to be conducted by an independent third party) to identify the capacity improvements (“Springfield Terminal Capacity Improvements”) necessary to handle the potential additional traffic with no negative impact on Pan Am Southern, and (ii) the Springfield Terminal Capacity Improvements are constructed at Springfield Terminal’s sole risk and expense. Should the Springfield Terminal Capacity Improvements be constructed, the number of Cars, loaded or empty, Springfield Terminal may move over the Subject Trackage in any one calendar year shall be expanded only by an amount equal to the added capacity. Pan Am Southern agrees to fund fifty (50%) of the Springfield Terminal Capacity Study. Pan Am Southern shall have the right to approve the individual Springfield Terminal Capacity Improvements constructed, but such approval shall not be unreasonably withheld, provided the Springfield Terminal Capacity Improvements conform to the recommendations of the Springfield Terminal Capacity Study.6
The PAS Formation Decision does not discuss the reason for setting a cap on the volume
of traffic moving over trackage rights through Ayer, but the Joint Use Agreement set out a
cumbersome and time-consuming process for increasing the cap that could itself act as a
constraint on movements through Ayer. In their settlement agreement in this proceeding, CSXT
and NSR have agreed to eliminate the carload cap and replace it with a process that will allow
current traffic volumes to move over the Island Line and to enable the development of capacity
in Ayer to handle any future increase in traffic. The modification of the trackage rights cap will promote competition by allowing CSXT to develop and enhance the movement of rail traffic into and out of New England, as seen in the data set out below.
6 NSR & Pan Am. Appl., Ex. 2G at 8-9, May 30, 2008, Norfolk Southern Railway Company, Pan Am Railways, Inc., et al.—Joint Control and Operating/Pooling Agreements, FD 35147.
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The volume cap was set at 120% of the 2007 actual traffic volumes over the relevant line
segment.7 But over the years, the traffic using the trackage rights increased and has apparently
exceeded the cap consistently beginning in 2010. I obtained from CSXT, the following figures
showing the volume of loaded cars interchanged from CSXT to Springfield Terminal at Barbers
Station for routing over the Island Line from 2007 to November 2020:8
{ }}
Two observations are in order: First, volumes have been fairly stable recently. The basic
stability of this traffic supports CSXT’s conclusion that traffic levels are not expected to change
significantly in the near future. Second, the 2007 cap was exceeded as early as 2010 and has
been consistently exceeded since then. If enforcement of the cap were to return traffic moving
onto and off of PAR to the 2007 levels, reducing traffic by about {{ }} loaded cars, there would be an {{- }} reduction in PAR movements. {{ -
7 Id. at 8. (“In its exercise of the Trackage Rights grant, Springfield Terminal may not move, in any one calendar year, over the Subject Trackage more than one hundred twenty percent (120%) of Cars, loaded or empty. . . .”) 8 2020 volumes annualized based on Jan-Nov actuals.
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2019.9)}} Modification of the cap as the parties have provided will ensure that demand will continue to be met and will allow New England rail traffic to grow in a manageable and sustainable manner over the competitive CSXT and PAS parallel routes that will support the future New England economy.
2. Applicants are committing to improving Ayer’s facilities
As discussed above, Ayer is an important gateway for movements to and from New
England both on PAS and on PAR. The total carloads moving on PAS through Ayer were
{{ }} in 2019. The total carloads moving on PAR through Ayer were {{ }} in 2019. This-- amounts to about {{ }} of total carloads moving on PAR and PAS to and from New England locations.10 - Given the importance of Ayer to the New England rail network, it is necessary to ensure
adequate rail capacity to support robust inter- and intramodal competition in New England.
Recognizing the importance of Ayer to a vibrant competitive market, CSXT has committed,
through its settlement agreement with NSR, {{
}}11 to ensure that Ayer can handle the present and future traffic moving into and -through Ayer.
3. NSR’s ability to move double-stack intermodal traffic will enhance competition
The Settlement Agreement between CSXT and NSR enhances NSR’s competitive
position because the agreement gives NSR the capability to provide double-stack intermodal
service into the Boston area by avoiding a tunnel constraint that exists on PAS today. Today, for
a double-stack intermodal train arriving in New York on NSR for movement into the Boston
9 Based on the STB 2019 Confidential Carload Waybill Sample. 10 Based on the STB 2019 Confidential Carload Waybill Sample. 11 Pelkey V.S. at 13.
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area, NSR must remove a layer of intermodal containers before moving on PAS. To do this (an
operation referred to as “filleting”), NSR incurs substantial extra cost and delay. I estimate that
the additional costs are approximately {{
12 - By avoiding these extra costs and the time required to fillet the intermodal trains, NSR will be a stronger competitor for New England intermodal traffic. This is important for
competition in the New England region because intermodal traffic is the dominant traffic moving
into the region, as discussed by CSXT’s witness Dr. Reishus.13 Moreover, NSR already has a significant share of the intermodal traffic in New England.14 Below, is a summary of 2019
traffic into New England by Corridor and Commodity Type.
{{ }}
{
13 See, e.g., Reishus V.S. at 23, Para. 62. 14 See Reishus V.S. at Sec. III. 15 Based on the STB 2019 Confidential Carload Waybill Sample.
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I expect that the improved efficiency and reduced costs of NSR’s intermodal traffic resulting from the settlement agreement with CSXT will enhance competition in two ways.
First, NSR will be a stronger competitor to CSXT, {{
}} Second, a more efficient and competitive intermodal route into and out of the Boston area will eventually allow railroads to divert traffic from trucks.
4. PAS will be strengthened by B&E’s operations CSXT and NSR have agreed that if the Board approves CSXT’s acquisition of PAR, the
B&E will replace Springfield Terminal as the contract operator and rate-setter of PAS. The operation of PAS by B&E will enhance competition in several ways.
First, PAS is currently operated by Springfield Terminal, which also operates and sets prices for movements on PAR. When B&E replaces Springfield Terminal as PAS operator,
B&E’s operating and marketing attention will be exclusively focused on PAS and not divided between PAS and any other rail operations. B&E will be obligated under the contract with PAS to operate, price and market PAS in the interest exclusively of PAS as an independent entity.
B&E will be required to set rates that are “competitively neutral” and not discriminate in favor of any carrier, including B&E’s G&W affiliates. Competition will be enhanced by ensuring the independence and neutrality of PAS from CSXT as a means to reach New England rail shippers.
Second, adequate maintenance of PAS lines will be ensured by the replacement of PAR by CSXT as a 50% owner of PAS. Adequate maintenance of the PAS lines is essential to the availability of PAS as an independent competitor, as the STB acknowledged when PAS was formed. The STB noted that the creation of PAS “would significantly increase competition between railroads by providing an upgraded east-west main line route to compete with a parallel
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main line route operated by CSXT.”16 Under the existing arrangements, Springfield Terminal is responsible for maintaining PAS. But as discussed above, Springfield Terminal also has the responsibility for operating PAR lines, creating potential distractions and conflicts for
Springfield Terminal’s maintenance of PAS. But B&E will focus its attention exclusively on the maintenance of PAS. Moreover, adequate funding of maintenance is assured because the two owners of PAS will be large Class I carriers that are committed to maintaining PAS as a viable and independent rail route into New England, and who have reserved the right to perform capital maintenance work of the PAS lines.
Third, B&E is owned by G&W, and G&W has proven expertise in operating regional railroads. Separating PAS operations under B&E from operations of PAR will make PAS more efficient and cost-effective in many ways. For example, the overhead costs of operating PAS are incurred today by Springfield Terminal which also incurs overhead costs for operating PAR.
Since a portion of the combined PAR/PAS overhead costs must be allocated to PAS, PAS’s overhead costs are now influenced by costs associated with PAR operations. This creates potential volatility in overhead costs, where cost changes are driven by events and circumstances on other lines, i.e., on PAR. It is also much harder to manage overhead costs when those costs are part of a larger rail network because those costs are not strictly linked to operations on PAS.
B&E will be able to manage and control overhead costs much better with PAS operated separately from PAR.
PAS will also be more efficient in the areas of pricing and operating decisions. Under the current PAS structure, Springfield Terminal makes all decisions regarding PAS pricing and
16 PAS Formation Decision, FD 35147, slip op. at 5.
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operations. For movements that use both PAR and PAS, there is currently a formula for allocating the through revenue between PAS and PAR.17 As an independent operator of PAS,
B&E will be able to efficiently price movements on PAS in the interest of PAS as an independent rail carrier, subject to the commitments the PAS co-owners have made to shippers and connecting railroads. Similarly, as to operations, B&E will be able to make operating decisions, including the many factors that influence efficient operations like maintenance, based solely on the needs of PAS and its customers (as well as passenger carriers with which it shares facilities).
B&E also can be expected to improve PAS operations because it is part of a larger corporate family that has broad experience in running smaller railroads in different regions, including New England. The safety and operating record of G&W railroads is very encouraging.
The G&W railroads operating in New England (NECR, St. Lawrence & Atlantic Railroad,
Providence and Worcester Railroad and Connecticut Southern Railroad) had an FRA reported injury ratio of {{ }}—{{ .}}18
In comparison, PAR’s combined ratio was {{ }} for the same period.19{{ - }}20 Improved operations on PAS will make PAS a more competitive route for traffic into and out of New England.
Fourth, as Dr. Reishus has pointed out in his statement, PAS will remain viable even with the diversion of NSR intermodal trains to CSXT’s line. Indeed, PAS’s financial condition is
17 See Am. & Supp. App., July, 1, 2021, Vol. II, Trans. Agreement Assignment & Div. Allocation Agreement, Sec. 4. 18 Wagner V.S. at 7. 19Id. 20 Id. at 8-9. 14
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likely to improve. As Dr. Reishus explains, the diverted NS intermodal traffic generates only
{{ }}
Moreover, all NS intermodal and automotive traffic will still come to Ayer and PAS will receive compensation for handling this traffic. PAS will also receive an increased reciprocal switch fee for certain traffic in the Ayer switching district. Finally, under Term Sheet Agreement (Section
III.1), B&E will charge PAS a fixed rate to provide equipment and certain corporate services that will give PAS the opportunity to substantially reduce PAS costs.
* * * * *
In conclusion, the STB has been presented with a transaction that enhances competition.
It strengthens three railroads as competitors for rail movements to and from New England --
NSR, PAS, and CSXT -- and provides shippers to and from New England with improved service.
These competitive enhancements should mean more robust intramodal and intermodal competition, which translates into better rail service and fewer trucks on the highway with the accompanying environmental benefits. It warrants approval by the STB.
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VERIFICATION
I, William F. Huneke, declare under penalty of perjury that the foregoing is true and correct. Further, I certify that I am qualified and authorized to file this Amended and
Supplemented Verified Statement. Executed on July 1, 2021.
/s/ William F. Huneke
William F. Huneke
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