STB moves to revise railroad merger rules

Citing major alterations in the rail industry's competitive environment, the Surface Transportation Board suspends all merger activity while it reviews its regulations.

By -- Logistics Management, 5/1/2000

Two weeks after it imposed a 15-month moratorium on railroad mergers, the Surface Transportation Board (STB) began the formal process of reviewing the rules that govern such mergers. A week later, the board denied requests that it stay its decision to rewrite those rules.

The board's decision to revise the merger rules followed four days of hearings held by the STB in March. During those hearings, railroads, shippers, government officials, consultants, financial analysts, and others presented their views on what the North American railroad industry should look like in the future. The catalyst for those hearings was a proposal for what would have been the biggest merger yet-the planned combination of the Burlington Northern Santa Fe (BNSF) and the Canadian National (CN) railroads. The two railroads combined currently operate about 50,000 route miles of track and have revenues of about $12.5 billion.

As soon as the board had announced its moratorium, BNSF and Canadian National officials said they would appeal that decision. First, BNSF asked the federal Court of Appeals for the District of Columbia Circuit for a stay of the moratorium order-a move supported by the National Industrial Transportation League (NITL), the nation's largest shippers group. Canadian National filed a similar motion with the appeals court a short time later. As of press time, the court had not yet acted on those requests.

In the meantime, the STB has issued an advance notice of proposed rulemaking, the first step in the process of writing or revising federal regulations. The focus of the STB's efforts will be on consolidations of Class 1 railroads, defined as U.S. railroads with annual operating revenues of at least $250 million.

New Competitive Climate

In announcing the proposed rulemaking, the STB repeated its rationale for suspending consideration of any new merger applications. That is, the industry is far more consolidated today than it was at the time the current rules were written, and another mega-merger would almost certainly lead to additional merger proposals by other Class 1 railroads. Many observers believe that if the BNSF/CN merger were to proceed, Union Pacific, BNSF's most direct competitor in the Western United States, would most likely seek an alliance with either the Norfolk Southern or CSX Transportation, the major railroads in the East.

The board said that the prospect of what it called a potential "transcontinental rail duopoly" drove its decision to impose the moratorium and rewrite the rules. The board also cited shippers' complaints about service problems that followed recent mergers. Many shippers, including some of the nation's major users of rail service, have argued that both railroads and shippers needed more time to get their operations in order before railroads moved on to other mergers.

In its advance notice of proposed rulemaking, the board said it would examine competitive issues, including the likely responses by other railroads to any merger; service performance; the role of smaller railroads in the rail network; how employees would be affected by a merger; and potential foreign control issues. In addition, the STB said it would consider adopting rules that would enhance competition among the railroads, in contrast with its current rules, which call for preserving competition.

The competitive issues may prove to be among the most contentious topics of discussion over the next several months. Suggestions offered by some shippers include requiring merging railroads to:

• Maintain open gateways for major routings;

• Provide terminal switching services;

• Offer contracts for the competitive portions of so-called bottleneck routes;

• Provide through routes at a "reasonable" interchange for any shippers that have contracts for the competitive segment of a bottleneck routing; and

• Provide captive shippers with access to an additional carrier when the sole serving railroad is merging with one of several connecting rail carriers.

• The first round of comments on the advance notice of proposed rulemaking is due this month and replies are due early next month. Following the comment period, the board will prepare a notice of proposed rulemaking, which it plans to issue by Oct. 3. It will then allow 100 days from that date for comments, replies, and rebuttals. The STB aims to issue final rules by June 11, 2001.