Proposed rail-merger rules draw criticism

Shippers charge that the Surface Transportation Board's proposal doesn't go far enough in enhancing rail competition.

By -- Logistics Management, 11/1/2000

Just as the Surface Transportation Board (STB) issues proposed new rules to govern future railroad mergers, some of the nation's largest shippers are asking Congress to force merged railroads to become more competitive. Concerns over what they say is a lack of rail competition prompted nearly 300 executives from companies such as DuPont, Eli Lilly, and Procter & Gamble to send a letter to Sen. John McCain (R-Ariz.) and Sen. Ernest Hollings (D-S.C.), chairman and ranking member of the Senate Commerce, Science and Transportation Committee, respectively. Officials from trade associations such as the American Public Power Association and American Forest & Paper Association have also signed the letter.

In that letter, shippers ask the Commerce Committee to support pending legislation that would remove impediments to rail competition. They also note that the rail industry has changed drastically since passage of the Staggers Rail Act of 1980, which replaced government regulation of railroads with a free-market model. Previous rail mergers have reduced the number of Class 1 railroads from 30 in 1976 to only seven today, leaving many customers with only one rail carrier and decreasing the quality and reliability of service, the shippers say. Signatories also claim that the current situation, which effectively forces many to deal with rail monopolies, impedes their ability to compete in the global marketplace (and in the case of the public power suppliers, prevents them from generating low-cost energy).

The group's letter is critical of the STB, saying the board's policies hamper rail competition. It urges support for legislative changes that would give rail carriers access to competitors' terminals, end "bottleneck pricing," and encourage the growth of short-line and regional railroads. The letter also notes that Congress has supported increased competition among airlines and asks for a similar, bipartisan approach to reform the rail industry. "The nation must avoid the service disasters experienced from past rail mergers," Susan Roth, spokeswoman for the American Chemistry Council, told Logistics Management. "Consumers deserve improvements in competitive access and service reliability."

Ed Emmett, president of the National Industrial Transportation League (NITL), applauds the letter as a major step forward for rail shippers. "This is a powerful statement of shippers' concerns," he says, "and [we hope] the senators will realize just how inconsistent they have been in calling for more competition in the airlines while ignoring the glaring realities in the railroad industry."

About-face for STB?

The shippers' complaints come at a critical time as the STB proposes significant changes in its policies regarding rail mergers. Citing the service disruptions that have accompanied previous rail consolidations, the STB proposes to shift its focus from a pro-merger approach to one requiring applicants to demonstrate that a proposed merger would be in the public interest. The board also wants future applicants to provide more information in their merger proposals, including:

• Provisions for enhancing competition;

• Additional measures that the STB could take if the expected benefits of a merger should fail to materialize;

• Assessment of the "downstream effects" that a merger of two Class 1 railroads could have on smaller railroads and other modes of transportation; and

• Service-assurance plans, including contingency plans.

An analysis conducted by the NITL of the STB's proposed rail-merger rules says the agency wants future rail mergers to "enhance" rather than "preserve" competition, which NITL considers to be a major change. Although the group supports that change, NITL is concerned that the STB's plan to change its rail-competition standards for future mergers but not for existing rail combinations, could prove to be unfair. "By focusing solely on merger policy to enhance competition, the [STB] would probably create an 'unlevel playing field' for the next two merging carriers, which would be forced to open their systems to competition but would not be able to gain greater access themselves," the league's analysts wrote.

The lack of specific goals in the STB's proposal also has come under fire. Industry observer Martin Bercovici, a Washington, D.C., attorney with expertise in railroad issues, criticizes the plan as being too vague. "The board wants [rail carriers to offer] a tradeoff for service interruptions, but it doesn't say what those tradeoffs are," he says. "What is the end game here? What is the result? There's no meat to [the board's] criteria."

Bercovici suggests that the STB's proposal does nothing to change the current situation. "They're basically saying, 'We're going to try to do good and avoid evil.' But the [proposed] new rules provide no assurance that they will preserve competition or even service quality."

Railroads, meanwhile, are being cautious in their comments regarding shippers' demands. Warren Erdman, vice president of corporate affairs at Kansas City Southern Railroad, says his company supports modest rail-merger changes that would preserve the competitive service options that are available to shippers prior to any merger. But his company has reservations about some aspects of the legislation that the letter's signatories support. "While KCS supports these changes," he says, "it does not support anything that would reregulate the rail industry or introduce new open access."

Representatives from rail carriers CSX, Burlington Northern Santa Fe, and Union Pacific all say their companies are limiting public comment on the STB proposal to written statements, which must be filed with the agency by Nov. 17. Replies are due Dec. 18 and rebuttals are due on Jan. 11, 2001. The STB has announced it will issue final rules on or before June 11, 2001, when its moratorium on rail-merger applications ends.

To view the full text of the STB's proposed changes, go to www.stb.dot.gov.