New rules issued by the Surface Transportation Board last month will make it more difficult for proposed rail mergers to gain approval. Because so few Class I railroads (defined as those with at least $250 million in revenue) remain and because rail mergers are no longer needed to address excess capacity, the board said, "future merger applicants will be required to bear a heavier burden to show that a major rail combination is consistent with the public interest in the rail industry."

The new rules include a number of changes. For example, merger applicants will now be required to submit a "Service Assurance Plan" that details how they will deal with any potentially adverse service effects of a merger during implementation.

The STB also said it would favorably consider such "competitive enhancements" as reciprocal switching arrangements, trackage rights, and efforts to eliminate restrictions on interchanges by shortline railroads. It added that, in light of service problems that have resulted from recent rail mergers, it would look more skeptically at claims by merger applicants regarding potential service benefits of a proposed merger as well as at promises that transitional problems would be minimal.

In an important departure from past policy, the board said it would consider the effects any merger might have on the ultimate structure of the railroad industry. Merger applicants will be required to begin a "commentary" that would "give the board the information needed to rule on what would likely be the first step in an end-game situation in which only two or three competing transcontinental railroads would remain in North America." In essence, that means applicants would have to open up a public debate about the future of the railroad industry.

The STB decided to revise the rules governing railroad mergers more than a year ago, when the Canadian National Railway announced its intention to merge with the Burlington Northern Santa Fe, a move that would have created the largest railroad in North America. That proposal followed close on the heels of several other major consolidations. They included the acquisition and split of Conrail by CSX Transportation and Norfolk Southern, the acquisition of the Illinois Central by Canadian National, the acquisition of the Southern Pacific by Union Pacific, and the acquisition of the Santa Fe by Burlington Northern. More than 100 parties submitted comments to the board about the proposed merger rules.

The Surface Transportation Board says the new rules represent a significant shift in policy and will place greater emphasis on enhancing competition, "while ensuring a stable, balanced, and reliable rail transportation system in a way that accounts for smaller railroads, ports, and passenger and commuter services." The National Industrial Transportation League (NITL), however, says the new rules are not so much of a departure from past practice as the board makes them out to be. In an analysis of the new rules, NITL said that it was not clear that the STB would require "competitive enhancements" beyond what it required in some earlier mergers, including the UP/SP and Conrail/NS/CSX agreements. Many shippers believe the STB's decisions in those cases did not assure enough competitive options.

"[T]he agency has given itself very broad latitude to determine, in a particular case, how much and what kind of 'enhanced competition' is 'enough,'" the NITL analysis said. "Thus, to a very great extent, parties will not know what the 'enhancing competition' requirement means until the issuance of the next merger decision."

NITL also criticized the new rules for not going far enough. "[E]specially with respect to the 'enhancing competition' requirement," the report said, "there appears to have been a conscious decision to restrain the degree of change and water down the new requirements," compared with provisions in the board's original notice of proposed rulemaking.

The shippers group concedes that the new rules do impose tougher requirements regarding post-merger service failures but says they do not go as far as shippers would have liked. For example, the new rules encourage railroads to submit to arbitration for service failure claims but do not require their participation. NITL favored a rule that would have made such arbitration mandatory. In the end, the NITL analysis concluded, "There is more cause for hope by shippers that the procedures for merger-related service failures will be improved than there is for enhancing competition."

The railroads' reaction to the new rules was mixed.

In a prepared statement, CSX Corp., parent of CSX Transportation, criticized the tougher rules but welcomed the clarity it provided for potential participants in any future merger. "It is disappointing that potential mergers—and their accompanying benefits—will be judged on a decidedly harder and more complicated set of regulatory standards than those faced by other U.S. businesses," the release said. "That said, the STB's decision is likely to result in a more stable environment, which will allow railroads to pursue alliances with other railroads that could very well result in substantial economic and operational benefits."

Paul M. Tellier, president and chief executive officer of Canadian National, praised the new rules. In a statement issued following the STB decision, he said, "CN is pleased that the rules adopted by the STB today will raise the bar for the quality of customer service in future railroad mergers. CN is also pleased that the STB appears to have heard its concerns and plans to apply higher public interest standards for mergers equally to all applicants—both domestic U.S. companies and foreign-headquartered corporations."