STB calls time-out on rail mergers

Following four days of testimony, the Surface Transportation Board imposes a moratorium on rail mergers while it revamps its policy.

By -- Logistics Management, 4/1/2000

First came an unprecedented four days of hearings before the Surface Transportation Board (STB), in which railroads, shippers, regulators, and others had their say about railroad consolidations and the future structure of the North American rail industry.

Next came a surprise decision that infuriated some in the industry and heartened others. In that decision, the STB imposed a moratorium on large railroad mergers while it adopted new rules governing merger proceedings. The board said it would issue those rules in 15 months.

The decision came only weeks before the Burlington Northern Santa Fe and Canadian National railroads were to file their formal merger application with the board, which would have launched a yearlong approval process. If successful, that merger would create the largest railroad in North America. Combined, the two carriers currently operate about 50,000 route miles of track and have revenues of about $12.5 billion.

The railroads' top executives reacted harshly to the board's decision. Robert D. Krebs, chairman and chief executive officer of BNSF, said, "It is hard to believe that a federal agency can change the rules and deny us a forum established by law to have our case heard."

BNSF and Canadian National filed a petition for review with the federal District Court for the District of Columbia circuit. That document puts the federal government on notice that the railroads will later file a formal appeal. The carriers also intend to file a request for a stay of the STB's order.

If the railroads fail to win a stay and the review does proceed, it could prove to be the most important review of railroad policy since the passage of the Staggers Rail Act in 1980. "This is a key moment in the history of rail policy," says Bob Szabo, executive director and counsel for Consumers United for Rail Equity (CURE), a lobbying group that represents utility and chemical shippers. Szabo says the STB's review of its merger policy is crucial. "Shippers and railroads have never had a worse relationship. The railroads are not providing good service, they are not innovating, and their rates are too high for captive shippers," he says. He expects that the STB proceeding will address shippers' concerns and promote competition between railroads.

The depth of interest in and concern about rail policy was demonstrated anew at the STB hearings in Washington last month. The board initially planned to hold two days' worth of hearings, but expanded that to four to accommodate the more than 160 parties that asked to participate in the session. These included members of Congress, officials from the U.S. Department of Transportation and other federal agencies, railroads large and small, investment houses, shipper groups, labor, and intermodal companies.

Most of the testimony centered on the proposed BNSF/CN merger. Many of those who testified took their comments beyond that issue to address what they characterized as a long history of problems that resulted from previous mergers. They outlined worries that the latest proposal could set off yet another round of mergers and their deep concern over the concentration of market power with a diminishing number of major railroads. Many shippers also cited the service problems that followed the merger of the Burlington Northern and Santa Fe in 1995, the Union Pacific and Southern Pacific in 1997, and the absorption of the Conrail system by CSX Transportation and Norfolk Southern last year.

Deep-seated frustration

The extent of shippers' frustration with rail service was evident from a survey of its members conducted by the National Industrial Transportation League (NITL) last December. In that survey, 91 percent of the Norfolk Southern customers and 89 percent of the CSX customers who responded said that service since Nov. 1 was worse than it had been prior to the June 1 Conrail breakup. The league says the survey results also show that earlier mergers have failed to produce promised results. In a written statement submitted to the Surface Transportation Board, the NITL warned, "For many rail shippers, any future railroad merger will be viewed through the lens of experience in previous mergers. With rare exceptions, that experience has been unsatisfactory."

Some of the nation's largest shippers have expressed concern over the timing of the proposed CN/BNSF merger. For example, United Parcel Service, which spent $680 million on intermodal rail services last year, told the STB that despite promises to the contrary, rail consolidations had not resulted in lower rates and had led to "seriously problematic" rail service for two to three years after each of the mergers. "For what is ultimately achieved, the cost to UPS of rail consolidations is extremely high," the company said in a written submission to the board. Although it did not take a position on the BNSF/CN proposal, the company did say that it feared such a merger would trigger others. "Disruptions across the entire rail system from any such megamergers will be innumerably worse than anything yet experienced," the statement said. "Clearly, any additional consolidation of the industry appears premature." UPS further called for postponing any additional mergers until at least mid-2002.

Nicholas P. Matich, a senior executive in General Motors'North American Operations-Production Control/Logistics, wrote in a statement to the board that GM had reduced the percentage of vehicles it shipped by rail in recent years as a result of the declining quality of rail service. After citing a long list of service problems that followed previous mergers, he said, "GM ships approximately 24,000 vehicles a day-including the first day following any rail merger-and it cannot willingly accept years of disruption and uncertainty to reap the promised long-term benefits of rail consolidations."

Diane Duff, executive director of the Alliance for Rail Competition, also submitted a statement expressing her group's concern about the potential for the BNSF/CN merger to set off additional industry consolidation, with the possible outcome of a two-railroad system in North America. She called that a "frightening proposition."

She wrote, "No major merger-whether it's the proposed BNSF-CN merger or [one that would affect] two other Class 1 carriers-should be considered without systemwide changes to rail policy that would address what has now become an extensive record of customer complaints and widespread dissatisfaction."

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