[Senate Hearing 106-1098]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1098
OVERSIGHT HEARING ON THE STB'S MORA-
TORIUM ON MAJOR RAIL MERGERS AND
15-MONTH RULEMAKING PROCEEDING ON
FUTURE MERGERS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SURFACE TRANSPORTATION AND MERCHANT MARINE
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MARCH 23, 2000
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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___________________________________________________________________________
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Republican Staff Director
Martha P. Allbright, Republican General Counsel
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
------
SUBCOMMITTEE ON SURFACE TRANSPORTATION
AND MERCHANT MARINE
KAY BAILEY HUTCHISON, Texas, Chairman
TED STEVENS, Alaska DANIEL K. INOUYE, Hawaii
CONRAD BURNS, Montana JOHN B. BREAUX, Louisiana
OLYMPIA J. SNOWE, Maine BYRON L. DORGAN, North Dakota
BILL FRIST, Tennessee RICHARD H. BRYAN, Nevada
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
JOHN ASHCROFT, Missouri MAX CLELAND, Georgia
SAM BROWNBACK, Kansas
C O N T E N T S
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Page
Hearing held on March 23, 2000................................... 1
Prepared statement of Senator Hollings........................... 7
Statement of Senator Hutchison................................... 1
Prepared statement of Senator Inouye............................. 7
Statement of Senator Lott........................................ 18
Prepared statement........................................... 19
Prepared statement of Senator McCain............................. 6
Statement of Senator Rockefeller................................. 2
Witnesses
Morgan, Hon. Linda J., Chairman, Surface Transportation Board.... 8
Prepared statement........................................... 8
Appendix
Beam, Bruce A., Chairman, Consumers United for Rail Equity,
Washington, DC, letter dated March 31, 2000, to Hon. Kay Bailey
Hutchison...................................................... 27
Davidson, Richard K., Chairman and CEO, Union Pacific
Corporation, prepared statement................................ 28
Duff, Diane C., Executive Director, Alliance for Rail
Competition, Washington, DC, letter dated March 30, 2000, to
Hon. Kay Bailey Hutchison...................................... 34
Goode, David R., Chairman, President & CEO, Norfolk Southern
Corporation, prepared statement................................ 42
Krebs, Robert D., Burlington Northern Santa Fe Corporation,
prepared statement............................................. 43
Snow, John W., Chairman and CEO, CSX Corporation and CSX
Transportation, Inc., prepared statement....................... 47
Tellier, Paul M., President and Chief Executive Officer, Canadian
National Railway Company, prepared statement................... 48
Response to written questions submitted by Hon. John F. Kerry to:
Linda J. Morgan.............................................. 27
OVERSIGHT HEARING ON THE STB'S MORATORIUM ON MAJOR RAIL MERGERS AND
15-MONTH RULEMAKING PROCEEDING ON FUTURE MERGERS
----------
THURSDAY, MARCH 23, 2000
U.S. Senate,
Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:30 a.m., in
room SR-253, Russell Senate Office Building, Hon. Kay Bailey
Hutchison, Chairman of the Subcommittee, presiding.
Staff members assigned to this hearing: Charlotte Casey and
Ann Begeman, Republican Professional Staff; Carl Bentzel,
Democratic Senior Counsel; and Debbie Hersman, Democratic
Professional Staff.
OPENING STATEMENT OF HON. KAY BAILEY HUTCHISON,
U.S. SENATOR FROM TEXAS
Senator Hutchison. Thank you for coming. I'm going to call
the hearing to order because we do have votes at 11 o'clock,
and unfortunately there will be two votes; so we'll get as far
as we can and then I hope we'll be able to come back, because
this is very important and very significant.
I called the hearing today because of the announcement made
by the STB that it would impose a 15 month moratorium on any
merger activity while it rewrites the rules that are applicable
to future mergers. This is clearly a major decision.
I have read the Board's notice in the case and I believe
the STB is rightly concerned about the factors to be considered
in a merger. I also believe that Burlington Northern and
Canadian National have been put in limbo, which could affect
their willingness to make infrastructure investments, and could
affect their business projects.
I convened the hearing because I believe very strongly that
Congress has a role to play here. In fact, I think part of the
reason that you are having to reassess the factors is because
Congress has not given sufficient guidance. Sitting on the
sidelines will not do. We are witnessing a rapid consolidation
in the rail industry, as you said in your statement, and the
number of Class I railroads has gone from sixty-three in 1976
to seven today.
The Board is looking at a situation that in a short time
would result in the number of major railroads being reduced to
perhaps two or three.
Service problems have erupted because of past mergers.
There is less competition because of these mergers. I know
firsthand the service meltdown that occurred in Houston
following the Union Pacific-Southern Pacific merger, and some
have estimated that this service disruption cost businesses
across America $1 billion.
In the face of this, I do not think a straight
reauthorization will pass muster with the majority in Congress.
Congress must tackle the competitive issues that have resulted
from consolidation when we reauthorize the STB.
There are many proposals on this. I have offered my own
proposal in Senate bill 747; first and foremost to make it the
policy of the STB to promote rail competition. My bill would
also ease the plight of captive shippers by addressing the so-
called bottleneck issue; simplify rate case complaints; and
codify the Board's elimination of product and geographic
competition in rate cases.
If Congress had adopted the standard to assure competition,
the Board may not have had to invoke its moratorium.
We may also have to be creative in our thinking to
determine if today's smaller railroads will be able to remain
viable competitors. We must be cognizant of the needs of the
major railroads to remain profitable. As you have pointed out,
Ms. Morgan, this is essentially because they carry a need to
invest nearly $1 billion in capital to keep their rail
infrastructure sound for the future.
This is a challenge to Congress and to the Board, to
develop a workable proposal to incorporate all of these
concerns and issues into legislation that can pass this year.
It's a tall order, but the STB's actions have sounded an alarm
and now is the time for Congress to get moving.
I welcome Ms. Morgan to today's hearing, and before I call
on you, I'd like to see if any of the other senators would wish
to make an opening statement.
Senator Lott. For now, Madam Chairman, I just want to thank
you for having this hearing. Obviously it's timely, and I know
we do have two votes at 11 o'clock. So I'd like to withhold any
comments at this time to hear the Chairman's statement, and
then when she completes that, I may have just a couple comments
I'd like to offer. Thank you.
Senator Hutchison. Thank you.
And I turned to you because you were first, but I
appreciate your showing the deference to the Major Leader.
Senator Rockefeller?
Senator Rockefeller. Thank you, Madam Chairman. I do not
want not to withhold my statement, and please forgive me for
that.
Senator Hutchison. I suspected that you wouldn't.
OPENING STATEMENT OF JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
Senator Rockefeller. It's been a remarkable couple of weeks
for Linda Morgan, for the STB and for the railroad industry.
It's very interesting that the result of the 150 witnesses that
Linda Morgan listened to, it was the first time that the STB
and the railroad industry both agreed that the railroad
industry was in severe crisis and that things are not working.
That was the testimony, and that is the underlying aspect of
the ruling.
I would like to make three points, and I will also have
more questioning. First, I want to commend Linda Morgan and the
STB Board for making a really bold decision on the 15 month
moratorium on railroad mergers. I commend you for that, and I
think it was excellent.
This was not an easy step to take; Burlington Northern and
Canadian National have gone to court, as everybody always does,
to seek a stay of the STB decision. The Board is likely to end
up in litigation over the question. I'm not a legal expert I
can tell you, but I certainly believe that you do have the
legal authority reflected in the statutes to mandate the
protection of the public interest and prevent irreparable harm,
as they say.
Chairman Morgan noted in her own written comments that this
was a tough decision, but she said, quote ``the current
problems facing the rail sector are so extraordinary that an
unprecedented response is necessary.'' Close quote. As Ms.
Morgan and many of my colleagues know, I've held that view now
for 15 years.
I want Ms. Morgan and the Board to know at the outset how
glad I am that we are together on this, and now I think we have
to get on with it.
Secondly, I want to not yet share publicly a letter which I
want to give to you, Madam Chairman, after I get a few more
signatures during the course of the next couple of votes; but
the gist of it will be that we have a choice here, we can say
``Oh, we've got a 15 month moratorium and then let's just let
the time go by and see what happens,'' or we can decide that
the railroads have spoken very clearly about what they believe
to be the condition of the railroad situation; the STB has
spoken very clearly; and that we need to go ahead and do our
work in Congress as the chairman herself suggests in her own
very strong opening statement.
We cannot dump our work in Congress as we have done for
years on the STB, when the STB is claiming it doesn't have the
authority to do what the Staggers Act in fact called for. We're
not talking about overhauling the Staggers Act, we're talking
about a modification, and that is all.
Finally, I would point out that the underlying current
debate seems to be based on an assumption that we are headed
into the next round of mergers, and that the industry must
inevitably settle into just two transcontinental railroads. I
believe that is the direction that we are headed, from 50 to 2
in the sixteen years I have been in the Senate.
I want to be very clear in my own remarks that I, for one,
am not prepared to accept that assumption, and will fight that
assumption with every ounce of strength I have.
Already, recent mergers have concentrated 90 percent, Madam
Chairman, of rail freight revenues into four hands: UP, CSX, NS
and BNSF, and consolidation doesn't seem to have brought any of
the promised consumer and financial benefits.
Based on recent stock prices, CSX and NS are worth less now
than what they paid for Conrail 3 years ago, so that was not a
very good business decision perhaps on their part. But merger
mania has its own internal chemistry.
Mergers are supposed to result in growth, yet rail mergers
have been accompanied by losses of more business to trucks. I
don't think that was the purpose of all of this. Customers,
employees and financial markets have lost faith in the
industry, have lost all faith in the industry, the railroad
industry, something I have not seen in any other industry in
the time that I have served on this committee which, as I
indicated, is now 16 years.
More than anything else, my experience with rail service in
West Virginia makes me extraordinarily leery of having only two
transcontinental railroads in this country. As recently as this
month, I have been trying to facilitate a new dialog between
chemical companies in West Virginia and the railroad to which
they are captive, that being illegal under the Staggers Act.
The railroad has said, literally said, Madam Chairman, to
these companies recently: ``The only way you'll ever get
competitive rail service and rates is through government
intervention.'' I repeat that: The railroads say ``Take a hike,
we're doing nothing for you, we don't care what your situation
is, we will only respond to congressional legislative action.''
So it is that action, now more than ever I think that has
to be called for. I think that is monopolistic behavior, I
think that is outrageous behavior, it infuriates me, it is
terrible for my state. There is an arrogance in the delivery of
the message which is something I've heard before but I've never
heard it so continuously, and it is something which as I say is
flat out monopolistic. With the enormous advantage that the
American Railroad Association has in keeping itself under the
radar screen while doing great damage to many shippers all
across this country, and passing out a lot of money.
Well, that is not the kind of dialog I had in mind, Madam
Chairman, and I'm sorry about the length of the statement, but
you can tell that I am not going to stop until I have finished
it.
All rail customer captivity may not be as big a problem,
for example in Texas, as it is in West Virginia. Some 90
percent of West Virginia chemical plants are captive shippers,
and in Texas it is 50 percent. And there is a big difference
between 50 percent and 90 percent, but then on reflection is
there really that big a difference?
Senator Hutchison. Well, I think captive shippers are a
real problem, and I don't think the percentages do make a
difference.
Senator Rockefeller. What you indicated in your opening
statement, I thought, was very, very strong.
So 50 percent is too many, and if there were two railroads
in this country you'd be at 90 percent in a very short time. So
all I try to do is make my point: I implore my colleagues to
join with some of us, an effort to try at last once and finally
to do some legislative remedy for this absolutely disgraceful,
under the radar screen, well-financed operation which is
devastating the economy of my state, which has just slipped to
number 50 in per capital income.
Senator Hutchison, Senator Byron Dorgan, Senator Burns,
others and myself have been asking for legislative action and
we have waited a long time, we really want it. We cannot simply
leave this up to the STB. That is what we do. And this 15 month
moratorium cannot be another excuse for us to do that.
I thank the Chairman for indulging me.
Senator Hutchison. I thank the Senator for his statement,
and I want to say that you and I disagree on the remedy but we
agree that something must be done to solve some of the captive
shipper problems and the bottleneck problems; and I think the
15 month moratorium means we need to get in and do our jobs in
providing Congressional guidance.
Senator Rockefeller. And Madam Chairman, if you and I and
others want to address the bottleneck problems, we are going to
do enormous service to competition in this country.
Senator Hutchison. Senator Kerry, did you have an opening
statement?
Senator Kerry. Just very, very brief if I may, Madam
Chairman.
Let me thank you first of all for this opportunity, and I
welcome Ms. Morgan here. I, like my colleague, just heard a
brief earlier comment before I was visiting briefly with the
Leader in support of your decision. I just want to express my
support also for the decision that you have made, which I think
is a very, very important one in order to get time to assess
and to properly make some, create some structure for how these
mergers may or may not occur in the future. I want to credit
you with this thoughtful decision, I think it's a good one that
you've taken.
We really need to update the standards. The profound
implications of the downstream effect of these mergers is much
more significant than people have allowed for. It has the
capacity for great disruption, as you know. You've heard from a
lot of people, 150 witnesses, and I think Massachusetts was one
of those who commented and supported the moratorium, so we're
grateful for that.
Let me just raise one other issue, if I may quickly. The
willingness of the STB to modify or even break collective
bargaining agreements in order to effectuate a rail merger
which is known in the industry as cram-down strikes me as being
inherently, fundamentally unfair.
Now I know the Supreme Court has affirmed the right to do
it, but having a right to do something doesn't necessarily make
it good policy. And it seems to me it is clear that while the
right exists, there's no mandate that you do this; there's no
requirement that this be the practice.
I would simply remind you that you are talking about our
fellow citizens here, you are talking about people. People who
are at a place in their lives, and in the economy where it is
not as easy to make a transition, particularly in a world where
we are having great difficulty providing some of the means to
facilitate that transition--ongoing educational opportunities,
transitional assistance and other kinds of things.
So what happens is, the cram-down practice has a profound
impact on workers; some of them lose their seniority, others
are forced to spend a lot more time away from home and family
in order to work under conditions that are particularly
disagreeable and complicated. But that is what they have to do
because the size of the work area gets significantly increased.
Others find wages significantly altered, and so they suffer
financially at a time when other pressures have already existed
on the economy in terms of wage appreciation measured against
other increases. The gap is really growing in our economy,
between people who are touching the new economy and people who
aren't.
I want to change the law that allows that. Now Senator
Crapo has a bill, and I'm cosponsor with him of the bill, that
would address the problem; but the STB can remedy the situation
by itself in the rulemaking. I simply want to call that to your
attention, that you can make mergers work without breaking
worker's contracts, or even by showing, I think greater
sensitivity to the existence of those contracts in the process.
The rulemaking process, as you focus on the merger, provides
you with a ready-made opportunity to do that and I hope that
you will consider in fact ending that practice in the course of
this, and we can continue a dialog on that.
I thank you for listening, and Madam Chairman, I thank you
for the time.
Senator Hutchison. Thank you.
[The prepared statement of Senator McCain follows:]
Prepared Statement of Hon. John McCain,
U.S. Senator from Arizona
Thank you. When I was approached on Monday about holding an
oversight hearing to consider the Surface Transportation Board's March
17th decision on rail mergers, I quickly consented. The Board's
decision is bold and unprecedented. As such, it deserves Congressional
oversight.
This morning's hearing was requested to discuss the STB's decision
concerning future mergers. I also recognize other issues beyond the
scope of the Board's merger moratorium may be raised.
But first, I want to commend Chairman Morgan and Commissioners
Burkes and Clyburn for holding their hearings earlier this month on
major rail mergers and the present and future structure of the rail
industry. I have always supported the Board's efforts over the years to
initiate these types of information-gathering proceedings and I'm
confident the multi-day hearings provided very useful information.
I hope that the hearings also provided yet another wake up call to
the railroad industry that many rail customers, quite simply, are not
satisfied with the service they are receiving. This message has been
delivered on other occasions and in other forums and as I have said
before, I urge both the industry and shippers to work on ways to
resolve these serious service gaps.
I also want to remind my colleagues on the Committee that I am not
opposing additional hearings. At no time have I denied any request by
Committee members to hold hearings on the Board or rail and shipper
issues. Just like I did when I was approached about today's hearing, I
will agree to members holding as many hearings as they deem necessary.
All the members need to do is to specifically request a hearing, as
Senator Hutchison did Monday.
Today, we will hear testimony from Chairman Morgan. But I caution
the members to understand that Chairman Morgan will be under certain
constraints in her ability to respond to certain questions. The Board's
decision is under appeal with the D.C. Circuit Court and as such, we
must understand her position.
According to the reports I have seen, the Board's decision to place
a 15-month moratorium on the consideration of any rail mergers was
based in large measure on the many comments expressed during its
hearings. During the 15-month merger freeze, a Federal rulemaking to
create new merger standards will be established that will guide how the
Board will review the merits of future merger applications.
Again, according to the reports I have seen, some groups are very
pleased with the Board's announcement while others are clearly not.
This morning's hearing should provide the Board with a welcomed
opportunity to further elaborate on the factors which led it to
initiate the moratorium and to discuss what types of revisions it feels
are needed in its merger application consideration procedures.
Let me conclude by reiterating my strong support for reauthorizing
the Board. In the Senate, bipartisan compromises are always necessary
to pass needed legislation and it is quite clear that none of the
pending bills as currently drafted have the support necessary for
passage. The bills have wide ranging provisions and policy goals and I
remain hopeful that all the interested parties will meet to iron out
their differences.
I look forward to hearing from Chairman Morgan and appreciate her
accommodating the Committee's scheduling this hearing on such short
notice.
[The prepared statement of Senator Hollings follows:]
Prepared Statement of Hon. Ernest F. Hollings,
U.S. Senator from South Carolina
As many of you know, Linda Morgan served as counsel for the Surface
Transportation Subcommittee for eight years and then as General Counsel
for the Full Committee for seven years. During that time, I found Linda
Morgan to be one of the most erudite and thorough professionals. She is
smart, she cares about the issues, and she knows how to respond to the
pressures of overseeing our surface transportation industries at the
Surface Transportation Board.
I would like to commend the Surface Transportation Board on its
recent decision to consider downstream effects on overall railroad
competition and service issues as part of future merger proceedings.
Recently, the Board took the time to listen to four complete days of
testimony on the state of the rail industry, and on the impact of
previous mergers. I think that no one out there can deny that the rail
industry has experienced significant change in the years after passage
of the Staggers Act. Given the problems with service on recent rail
mergers, and the poor financial status of the stock of railroad
companies, I think it is important to review the landscape from a
broader perspective.
While the Surface Transportation Board has plenary statutory
authority to approve or deny any merger application, I believe that it
is appropriate for the Board to consider cumulative impacts, crossover
and downstream effects. Considering the number of mergers that has
occurred in recent years and the ensuing service problems it is clear
the STB has many challenges before it.
In December, the Canadian National Railway Company (CN) and the
Burlington Northern Santa Fe Corporation (BNSF) announced their plans
to file a merger application with the Surface Transportation Board.
While we all may have different positions on the proposed merger, I
feel that it is prudent for the Board not only to address the current
state of the railroad industry, but the future landscape as well.
Linda Morgan has done a lot of heavy lifting during her tenure as
Chairman of the STB, and she has a lot of heavy lifting yet to do. I
want it to be known, however, that she has my full confidence and
support. I look forward to her testimony this morning.
[The prepared statement of Senator Inouye follows:]
Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
I would like to commend the Chairwoman for holding a hearing on the
Surface Transportation Board's decision to review existing merger rules
in light of the massive industry consolidations in the past twenty
years. In addition, I would like to thank Chairwoman Hutchison for her
leadership and her quick attention to this major development, which was
announced only last week.
I would like to applaud the Surface Transportation Board for its
recent efforts to address prospective rail consolidations and the
future of the railroad industry. Earlier this month, the Board held a
four day hearing on the state of the rail industry. During this hearing
the Board heard testimony from many parties on the impact of previous
mergers and the potential issues that could arise with future mergers.
The rail industry has experienced significant change in the years after
passage of the Staggers Act. Given the service problems following
recent rail mergers and the poor financial status of the stock of
railroad companies, I think it is important to review the landscape
from a broader perspective.
In December, the Canadian National Railway Company (CN) and the
Burlington Northern Santa Fe Corporation (BNSF) announced their plans
to file a merger application with the Surface Transportation Board.
While we all may have different positions on the proposed merger, I
feel that it is prudent for the Board not only to address the current
state of the railroad industry, but to look forward in an effort to
anticipate future problems or issues.
I support the Board's decision to consider downstream effects on
overall railroad competition and service issues as part of future
merger proceedings. Considering the number of mergers that has occurred
in recent years and the ensuing service problems, I believe that it is
appropriate for the Board to consider cumulative impacts and crossover
and/or downstream effects.
I am pleased to welcome Chairman Morgan back to the Commerce
Committee. As many of you know, Linda Morgan worked on the Committee
for fifteen years prior to her appointment as Chairman of the STB.
During the time that I worked with Linda Morgan, I observed her keen
intellect, attention to detail and her commitment to the issues. I have
great respect for her abilities and I am confident that she knows how
to respond to the pressures of overseeing our surface transportation
industries at the Surface Transportation Board. I look forward to her
testimony this morning.
Senator Hutchison. Chairman Morgan.
STATEMENT OF HON. LINDA J. MORGAN, CHAIRMAN,
SURFACE TRANSPORTATION BOARD
Ms. Morgan. Thank you very much.
I am appearing today at the request of this Subcommittee.
When I was notified on Monday that there would be a hearing and
that I would be the only witness, I was told that I would be
here to answer questions regarding the March 17th decision on
rail mergers. I have submitted a short, written statement
summarizing that decision, to which I have attached a copy of
the full decision.
I ask that all of that be submitted into the record in
full.
[The prepared statement of Ms. Morgan follows:]
Prepared Statement of Hon. Linda J. Morgan, Chairman,
Surface Transportation Board
My name is Linda J. Morgan, Chairman of the Surface Transportation
Board (Board). I am appearing at the request of the Subcommittee to
discuss the decision served by the Board on March 17, 2000, in STB Ex
Parte No. 582, Public Views on Major Rail Consolidations. For the
record, I am including a copy of the Board's decision with my written
statement.
Background
The Board's proceeding in STB Ex Parte No. 582 was triggered by the
filing of a notice on December 20, 1999, that the Burlington Northern
and Santa Fe Railway (BNSF) and Canadian National (CN) intended to file
an application, on or shortly after March 20, 2000, seeking Board
approval to bring their railroad systems under common control. Given
the aggressive consolidation and associated disruptions that had
occurred in the railroad industry during the past several years, and
the likelihood that the BNSF/CN proposal would set off yet another full
round of major rail consolidations, the Board issued an order on
December 28, 1999, waiving the so-called ``one case at a time'' rule
for the BNSF/CN proceeding and stating that, if the BNSF/CN proceeding
went forward, the Board would consider not only the direct impacts of
that combination, but also evidence of the cumulative impacts and
crossover effects that would likely occur as other railroads developed
strategic responses in reaction to the proposed combined new system. In
addition, given the prospect of significant further consolidation
within the railroad industry, and the Board's concern that the railroad
industry and the shipping public have not yet recovered from the
service disruptions associated with the previous round of mergers, the
Board issued an order on January 24, 2000, opening the STB Ex Parte No.
582 proceeding to obtain public views on the subject of major rail
consolidations and the present and future structure of the North
American rail industry.
The March 17 Decision
As part of the STB Ex Parte No. 582 proceeding, the Board took
written and oral testimony from all sectors associated with the rail
industry, including large and small rail carriers; large and small
shippers representing various commodity groups; intermodal and third
party transportation providers; rail employees; state and local
interests; financial analysts and economists; and Members of Congress
(including Members of this Committee) and other federal agencies. The
overwhelming weight of the testimony, particularly the testimony taken
over the 4 days of oral hearings, was that, at a minimum, the Board's
merger policy must be reexamined--and must be reexamined now--before
any new major mergers are processed. The Board agreed, concluding in
its March 17 decision that the rail community is not in a position to
now undertake what will likely be the final round of restructuring of
the North American railroad industry, and that current Board rules are
not appropriate for addressing the broad concerns associated with
reviewing transactions that may well produce two transcontinental
railroads.
In reaching the March 17 decision, the Board recognized that the
Government is not in the business of drawing railroad maps, and that
this agency is not attempting to do so in this proceeding. The Board
also recognized that the law it administers generally contemplates
private initiatives that are then subjected to regulatory scrutiny. But
the Board is required to take actions and to fashion regulations that
advance its mandate--under which it is to approve mergers only to the
extent consistent with the public interest, and under which it is to
promote a safe and sound rail system that runs smoothly and efficiently
to provide service for rail customers--in a manner that is consistent
with the overall rail transportation policy established by Congress.
The Board found that it would be impracticable to try to act on a final
round of mergers while in the process of developing new merger rules,
and that such an approach would also be disruptive to the rail system
and to rail service that remains well below acceptable levels in many
areas. The disruption would go far beyond the specific interests of
BNSF and CN and the carriers that compete with them; it could
irreparably damage the entire industry, to the detriment of the
interests of shippers, rail employees, and the national economy and
defense.
Thus, in the March 17 decision, the Board announced that, over the
next 15 months, it would initiate and complete a proceeding that will
provide new merger rules. To permit the development of the new rules,
and to ensure that the industry has had the opportunity to fully
recover from service problems associated with recent mergers without
the distractions associated with consideration of additional mergers,
the Board decided that it could best maintain the status quo by
ordering a suspension of all merger activity, categorized as major rail
transactions, until after the final merger rules are issued, or a total
period of 15 months.
Activity Stemming From the March 17 Decision
The Board is currently preparing an advance notice of proposed
rulemaking (ANPR) to institute the process of reexamining its merger
rules and policy. The Board expects to issue the ANPR to the public by
April 6, 2000 (within 20 days of the March 17 decision).
BNSF, CN and the Western Coal Traffic League have appealed the
Board's March 17 decision to the Court of Appeals for the District of
Columbia Circuit. Also, BNSF has filed with the Board a petition for an
administrative stay pending judicial review of the Board's decision.
This concludes my testimony. As I stated earlier, I am including a
copy of the Board's March 17 decision, which fully explains the action
taken by the Board. I will try to answer any questions that you may
have regarding the March 17 decision, given the constraints that the
pending agency and court proceedings impose on me at this time.
surface transportation board decision
STB Ex Parte No. 582
Public Views on Major Rail Consolidations
Decided: March 16, 2000
Overview
This proceeding was triggered by a notice filed on December 20,
1999, indicating that another major railroad merger application was
imminent.\1\ The railroad industry has consolidated aggressively in
recent years; now that Consolidated Rail Corporation (Conrail) has been
divided between CSX and NS, only six large railroads remain in the
United States and Canada.\2\ In an order issued on December 28,
1999,\3\ we stated that, if the BNSF/CN proceeding went forward, we
would consider not only the direct impacts of that combination, but
also evidence of the cumulative impacts and crossover effects that
would likely occur as other railroads developed strategic responses in
reaction to the proposed combined new system. Additionally, given the
prospect of significant further consolidation within the railroad
industry, and our concern that the railroad industry and the shipping
public have not yet recovered from the service disruptions associated
with the previous round of mergers, we opened this proceeding to obtain
public views on the subject of major rail consolidations and the
present and future structure of the North American rail industry.
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\1\ In particular, The Burlington Northern and Santa Fe Railway
Company and Canadian National Railway Company filed a notice of intent
to file, on approximately March 20, 2000, an application seeking Board
authorization under 49 U.S.C. 11323-25 and 49 CFR part 1180 for a major
transaction (referred to as the BNSF/CN transaction) under which the
two railroads would be brought under common control.
\2\ The six are: The Burlington Northern and Santa Fe Railway
Company (BNSF); Union Pacific Railroad Company (UP); CSX
Transportation, Inc. (CSX); Norfolk Southern Railway Company (NS);
Canadian National Railway Company (CN); and Canadian Pacific Railway
Company (CP). Two smaller U.S. Class I railroads (Grand Trunk Western
Railroad Incorporated and Illinois Central Railroad Company (IC)) are
affiliated with CN. A third smaller U.S. Class I railroad (Soo Line
Railroad Company) is affiliated with CP. A fourth smaller U.S. Class I
railroad (The Kansas City Southern Railway Company (KCS)) remains
independent but has entered into a comprehensive alliance with CN and
IC.
\3\ Canadian National Railway Company, Grand Trunk Western Railroad
Incorporated, Illinois Central Railroad Company, Burlington Northern
Santa Fe Corporation, and The Burlington Northern and Santa Fe Railway
Company--Common Control, STB Finance Docket No. 33842, Decision Nos. 1
& 1A (STB served Dec. 28, 1999) (published in the Federal Register on
Jan. 4, 2000, at 65 FR 318).
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As part of this proceeding, we took written and oral testimony from
all sectors associated with the rail industry: large and small rail
carriers; large and small shippers representing various commodity
groups; intermodal and third party transportation providers; rail
employees; state and local interests; financial analysts and
economists; and Members of Congress and other federal agencies. Certain
parties expressed support for a radical overhaul of the entire
regulatory scheme; some parties expressed support for a ``business-as-
usual'' approach to rail regulation in general and rail mergers in
particular; still others took the view that no more rail mergers should
be permitted under any circumstances. But the overwhelming weight of
the testimony, particularly the oral testimony, was that, at a minimum,
our merger policy must be reexamined--and must be reexamined now--
before any new major mergers are processed. Because we conclude that
the rail community is not in a position to now undertake what will
likely be the final round of restructuring of the North American
railroad industry, and because our current rules are simply not
appropriate for addressing the broad concerns associated with reviewing
business deals geared to produce two transcontinental railroads, we
agree.
We recognize that the Government is not in the business of drawing
railroad maps, and we are not attempting to do so in this proceeding.
We are also aware that the law that we administer generally
contemplates private initiatives that are then subjected to regulatory
scrutiny. But we are required to take actions and to fashion
regulations that advance our mandate--under which we are to approve
mergers only to the extent consistent with the public interest, and
under which we are to promote a safe and sound rail system that runs
smoothly and efficiently to provide service for rail customers--in a
manner that is consistent with the overall rail transportation policy
established by Congress.\4\ Not only would it be impracticable for us
to try to act on a final round of mergers while we are in the process
of developing new merger rules, it would also be disruptive to the rail
system and to rail service that remains well below acceptable levels in
many areas. The disruption would go far beyond the specific interests
of BNSF and CN and the carriers that compete with them; \5\ it could
irreparably damage the entire industry, to the detriment of the
interests of shippers, rail employees, and the national economy and
defense.
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\4\ The merger provisions of 49 U.S.C. 11324 direct the Board to
consider the public interest in general and, in particular, the
adequacy of transportation to the public; inclusion of other rail
carriers in particular mergers; and financial, employee, and
competitive issues. The rail transportation policy of 49 U.S.C. 10101,
which guides us in our regulatory activities, directs us, among other
things, to promote safety, efficiency, good working conditions, an
economically sound and competitive rail transportation system, and the
needs of the public and the national defense.
\5\ We fully understand that our mandate is to protect competition,
not particular competitors.
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Therefore, through this decision, we are announcing that, over the
next 15 months, we will initiate and complete a proceeding that will
provide new merger rules. To permit the development of the new rules,
and to ensure that the industry has had the opportunity to fully
recover from service problems associated with recent mergers without
the distractions associated with consideration of additional mergers,
we will maintain the status quo by ordering a suspension of all merger
activity, categorized as major transactions, until after the final
merger rules are issued, or a total period of 15 months.\6\
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\6\ In particular, within 20 days, we will issue an advance notice
of proposed rulemaking (ANPR) suggesting areas in which new merger
rules can be developed addressing the concerns that have been raised.
(We are not in a position to propose specific rules at this time
because, while several parties raised broad issues of concern, specific
rule changes were not the focus of our hearing.) We will provide a
total of approximately 60 days for comments and replies to the ANPR,
and then, within an additional 120 days, we will issue a notice of
proposed rulemaking (NPR). We will provide a total of 100 days for
comments, replies, and rebuttal with respect to the NPR, and then,
within an additional 150 days, we will issue final rules (a total of
approximately 15 months from now).
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Background
As indicated, our hearing was triggered by the announcement that
BNSF and CN seek to merge. This announcement came as the rail sector
and the shipping public have been struggling to recover from the
disruptions associated with the most recent round of mergers. Those
consolidations regrettably have been accompanied by a number of serious
service problems, and, while service levels have shown improvement in
certain areas, overall, service is clearly not where it should be.
Promised customer benefits have not yet been fully realized, and
carrier relationships with customers, rail employees, and local
communities have been strained. The performance of railroad stock
market equities has been trending downward since the service problems
developed in the East, taking a particularly sharp turn downward
immediately after the BNSF/CN merger proposal was announced. If it
continues, the downturn in the stock value, reflecting a loss of
investor confidence, could threaten the capital investment that is
needed by the rail industry to ensure that service improvements and
growth can be sustained.
BNSF and CN have argued that their consolidation proposal should be
examined on its own merits now, because it is a good one that will
produce benefits for the shipping public. But regardless of the merits
of the BNSF/CN proposal standing alone, many parties expressed concern
that, if the BNSF/CN proceeding goes forward, that proposal will not go
forward alone. Indeed, the Class I railroads have clearly stated that
they would find it necessary to respond in kind, and there is a
substantial possibility that, absent decisive action on our part, in
the very near future, we will likely be left with the prospect of only
two large railroads serving North America. We at the Board, like
members of the shipping public, are seriously concerned about the
competitive consequences of this level of industry restructuring, and,
in any event, about whether it would be in the public interest at this
time, while the industry is still recovering from service difficulties
and other disruptions associated with the last round of major rail
consolidations. And so we held a hearing to help us address the
important issues relating to major rail consolidations and the present
and future structure of the North American railroad industry.
At the hearing, several significant themes kept recurring. We heard
from Members of Congress, federal and state government agencies,
shippers, and employees about poor service; the threat that another
round of proposed mergers would further degrade service; and the need
to let some time pass so that railroads, their employees, and their
customers can catch their breath before the industry embarks upon what
will likely be the final round of mergers. We heard from shippers and
Members of Congress about the threat that another round of mergers
would pose to competition in the industry, and we heard from a
significant number of participants about the need for new rules to
govern future mergers. We heard from Department of Transportation
Secretary Rodney Slater that the BNSF/CN transaction should not be
reviewed under a ``business as usual'' approach. And we heard from
railroads and from members of the financial community about the
financial instability of the industry, which could be further
threatened by a new round of major mergers. We will discuss each of
those issues.
The Testimony
1. Service Instability. Rail mergers are pursued to increase
efficiency and to improve service. At least at the beginning, however,
service disruptions have accompanied the implementation of recent large
mergers, and many shippers have experienced substantial adverse impacts
in connection with the last round of mergers, beginning with the
combination of the BN and SF systems, proceeding with the UP
acquisition of the Southern Pacific (SP) system, and ending with the
acquisition and division of Conrail by CSX and NS.\7\ The overwhelming
testimony at our hearing indicated that the shipping public has still
not recovered from those disruptions. Shippers described the problems
that they faced, and that many continue to face, as a result of their
inability to obtain reliable service. Railroad chief executive officers
(CEOs) involved in the last round of mergers testified how difficult
merger implementation can be, even with the best planning and with the
experiences of prior mergers to guide them. Small railroads testified
that their ability to participate in the transportation business has
been threatened by poor service. A senior rail equity research analyst
whose firm is not representing any railroad in the newly initiated
round of rail merger negotiations reported on a survey that he had
conducted of large institutional investors that he advises. He
testified that poor service is partially responsible for the lack of
investor confidence in the railroad industry, and that many investors
do not want further mergers at this time, nor do they want the
legislative changes (which they view as reregulation) that they fear
further mergers will precipitate.\8\ And the regular service
performance reports provided by the railroad industry indicate that,
while service is improving on some fronts, overall, it is still below
where it needs to be.
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\7\ We have also recently approved CN's application to control IC,
but that transaction, which is largely end-to-end, has not yet been
fully implemented.
\8\ Representatives of investment firms that are advising the
applicants in the BNSF/CN proceeding (who also do not want what they
describe as reregulation) pointed out that there is no way to know
definitively what is driving rail stock prices downward, and that the
drop in rail stock prices could simply be related to many of the same
factors that are depressing the stocks of companies in other ``old
economy'' industries. We do not doubt that the drop in rail stock
prices is attributable to many sources, but it is clear that the
current service disruptions and the announcement of the proposed BNSF/
CN transaction have played a role. We believe that the potential for
further disruption that would accompany the initiation of a final round
of mergers at this time concern investors, who do not currently view
railroad mergers as a positive because, overall, these mergers have not
yet produced the good financial results that were promised.
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That is why many of the shippers testifying--both large and small--
asked us not to permit any further mergers at this time, and certainly
not without a change in the way in which we evaluate mergers. Similar
sentiments were expressed by Members of Congress, representatives of
small railroads, and representatives of railroad employees.\9\ Even the
CEOs of the large eastern railroads stated that initiation of a new
round of mergers would require them to focus on structural and
management changes necessary to protect their own positions in the
market, rather than on improving their below-par service. In short, in
light of the service issues attending prior mergers and looming over
future mergers, we heard widespread concern that any major
consolidations at this time would not be in the national interest.
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\9\ Clinton Miller, testifying on behalf of the United
Transportation Union (the largest railroad union), alluded to both
employee dislocations and service disruptions in support of his request
for a hold on further mergers. Mark Filipovic of the International
Association of Machinists expressed the view that recent mergers did
not produce what was promised for railroads, shippers, or employees.
Michael Wolly, representing three unions, requested a hold on further
mergers until the issues associated with employee dislocations are
resolved. And a number of the representatives of rail employees
expressed concern about the fact that, under the BNSF/CN proposal, a
major U.S. railroad would become foreign-controlled.
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2. Competitive Issues. For several years, parties involved with the
railroad industry have engaged in debate over competitive issues. Many
shippers are of the view that prior consolidations have left large
railroads with too much market power, and they seek various remedies to
``level the playing field.'' In our hearing, there were repeated
expressions--even from shippers with substantial market power, such as
United Parcel Service and General Motors--of the view that the rail
industry is becoming too concentrated.
Various remedies were suggested to address this concern about
concentration. Some shippers asked us to revisit the issues that we
studied in-depth 2 years ago in our proceeding in Review of Rail Access
and Competition Issues, STB Ex Parte No. 575. They would like us to
change the rules in a variety of ways so as to promote more rail-to-
rail competition throughout the industry. But short of a complete
overhaul of the existing regulatory system (which the financial
analysts and economists testifying at the hearing suggested could
introduce an additional level of uncertainty and risk into the
industry, thereby harming shippers by lowering aggregate rail
investment below those levels necessary for railroads to maintain and
improve service), a significant number of shippers stated that we need
to adopt new merger rules to ensure that competition will not be
curtailed further in the event that the industry seeks to merge itself
into a duopoly.
3. New Merger Rules. Thus, for a variety of reasons--some related
to service, some related to competition, and some, such as those
expressed by Transportation Secretary Slater and representatives of
rail employees, related to safety--there was substantial support at our
hearing for a broad review of and revision to the rules governing major
rail mergers. We agree.
Our existing merger policy guidelines were adopted by the
Interstate Commerce Commission soon after passage of the Staggers Act
of 1980. At that time, good government required a merger policy that,
while recognizing the importance of competition, would encourage
railroads to formulate proposals that would help rationalize excess
capacity in the industry.
The goals of that merger policy have largely been achieved. It does
not appear that there are significant public interest benefits to be
realized from further downsizing or rationalizing of rail route
systems, as there is little of that activity left to do. Looking
forward, the key problem faced by railroads--how to improve
profitability through enhancing the service provided to their
customers--is linked to adding to insufficient infrastructure, not to
eliminating excess capacity.
The testimony convinces us that our rules need to be reexamined.
Given the current transportation environment, and with the prospect of
a transportation system composed of as few as two transcontinental
railroads, we may wish to revisit our approach to competitive issues
such as the ``one-lump theory'' and the ``three-to-two'' question;
downstream effects; the important role of smaller railroads in the rail
network; service performance issues; how we should look at the types of
benefits to be considered in the balancing test, and how we monitor
benefits; how we should view alternatives to merger, such as alliances;
employee issues such as ``cramdown;'' and the international trade and
foreign control issues that would be raised by any CN or CP proposal to
combine with any large U.S. railroad. As Transportation Secretary
Slater pointed out, the sheer size of these potential new mergers poses
unique risks and leaves no margin for error: if these mergers were to
fail, or lead to service problems, the effects could be devastating for
both the rail industry and the shippers that depend on rail service. We
must be sure that our merger review process takes these risks into
account.
Discussion and Conclusions
Accordingly, we have concluded that we must revisit our merger
rules, and that in the meantime we must maintain the status quo by
directing large railroads to suspend merger activity pending the
development of new rules. We understand those parties that argue that
each case should be viewed on its own merits without regard to the
prospect of future consolidation, but we cannot close our eyes to the
fact that the mere consideration of any major merger now would likely
generate responsive proposals that, if approved, could result in a
North American duopoly.\10\ Before proceeding down that path, we must
make sure that we have the appropriate guidelines in place to assure
that we can properly assess and fully protect the public interest in
each individual case.
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\10\The CEOs for BNSF and CN have stated that there is no reason
why their merger should necessarily instigate any responsive action by
any other railroad. But recent history shows otherwise; indeed, the UP
takeover of the SP was a response to the BNSF merger. And CEOs of the
other major railroads have stated that they would look to future
mergers of their own as strategic responses to the BNSF/CN transaction.
Indeed, Richard Davidson, CEO of UP, stated that his company strongly
considered a merger with CP as a response to the recent CN takeover of
the IC, but ultimately concluded that it would be better off focusing
on issues other than mergers under the circumstances prevailing at that
time. Given the size of the BNSF/CN transaction, we have no reason to
doubt the assertions of the CEOs of the major railroads that if it goes
forward, they would have no choice but to seek their own merger
partners, and that in a short time, we could be faced with the prospect
of a North American duopoly.
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In their oral testimony, the CEOs of BNSF and CN recognized the
argument that certain new requirements may need to be imposed on future
merger proposals, but nevertheless urged us to proceed with
consideration of their merger proposal now, developing any new
requirements in the context of their application proceeding. We realize
that administrative agencies can choose to develop new rules either by
rulemaking or in individual adjudications, but in choosing which course
to take, we consider what makes sense. Here, it simply makes no sense
to attempt to develop new merger rules in the middle of what could
likely be the final round of major railroad mergers.\11\ New merger
rules will be a major undertaking, and we will not know what the rules
will look like until the process is over. Yet, under the BNSF/CN
approach, we could be reviewing merger proposals involving at least
four, and possibly all six, of the large North American railroads
before we have had an opportunity to reexamine and reformulate our
merger policy. The evidentiary filings in such cases are massive, and
yet none of the parties would know what they would be expected to show
until new rules are formulated. And then, at the end, once the rules
are known, it is not only possible, but quite likely, that the merger
process would have to start all over again. Thus, while BNSF and CN may
see some benefit to themselves from such a procedure, the process would
be inherently uncertain, could lead to substantial instability in the
industry, and thus does not represent good government.
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\11\ We should note that the representatives of the Departments of
Agriculture and Defense expressed the view that we should permit no
major mergers at this time. Moreover, Transportation Secretary Slater
urged us to make numerous and potentially complex changes to our merger
rules that, if they are to be applied evenly to all future mergers,
could not be practically effected in the middle of individual merger
proceedings.
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There are very serious risks associated with proceeding with
individual merger proposals at this time, before we have new rules in
place. The disruption that has beset the railroad industry in
connection with the last round of mergers could reach unprecedented
levels. Carriers whose management should be focused on fixing their
service problems would instead be fixated on finding merger partners,
defending their proposals, and responding in the regulatory arena to
other carriers' proposals. Investors, who have forsaken the railroad
industry in favor of businesses that they have come to believe may have
more favorable future prospects, could devalue the industry further.
And railroads could find it more difficult to finance the capital
improvements necessary to provide the better service that is key to
their financial revitalization. In short, the already fragile rail
industry could be further destabilized.
We understand BNSF/CN's view that holding up their merger
application proceeding would itself be viewed negatively by the
financial markets as creating uncertainty. We disagree, as we do not
see how anything could be more uncertain than moving forward without
appropriate rules in place at the beginning to govern the proceeding,
particularly at a time when uncertainty already surrounds the rail
sector. Furthermore, investors have come to view rail mergers in a less
than positive financial light, and we can see proceeding with the BNSF/
CN proposal at this time as only adding to that negative environment.
In this regard, we should note that there is clearly sentiment within
the financial community--from those analysts who closely followed our
hearing--that a delay in merger activity, while new rules are
developed, would tend to reduce uncertainty for rail investors, help to
stabilize rail financial markets, and provide an impetus for increasing
rail share prices.\12\
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\12\ For example, a Credit Suisse First Boston Corporation rail
stock analyst, in a March 6, 2000 note to investors, stated that our
hearing might ``provide some upside for the stocks if it appears that
the risk of industry consolidation will be pushed further into the
future by the Surface Transportation Board.'' Another analyst, from ING
Barings, in a March 14, 2000 note to investors, predicted that the
Board would impose a merger moratorium, and that, as a result, ``the
industry is full of many buying opportunities,'' including the shares
of BNSF. A March 13, 2000 report by a J.P. Morgan analyst expressed the
view that ``rail stocks would react positively to'' what the analyst
believed was a likely ``mid-term'' (up to 2 years) hold on further
mergers. A Donaldson, Lufkin, and Jenrette rail analyst, in a March 14,
2000 note to investors, explained that rampant pessimism has resulted
in rail securities that ``are selling at near recessionary levels. It
is a reversal of some of this pressure that is exactly what we'd expect
if we are allowed to gain some sense of the regulatory and structural
outlook for the industry as a result of last week's STB hearings.'' A
Morgan Stanley Dean Witter stock analyst, in a March 8, 2000 note to
investors, suggested that a decision by the Board to delay the merger
process would remove some near-term uncertainty and lead to near-term
strength in a number of railroad stock prices, including those of BNSF
and CN. Finally, the Chairman and CEO of Wasserstein, Parella & Co., in
a March 10, 2000 letter to Chairman Morgan, explained that his firm
``feels strongly that allowing the proposed merger to proceed would
place the entire industry in jeopardy,'' since ``the specter of another
round of rail mergers [at this time], which Wall Street is convinced
this transaction will precipitate, will accelerate the flight of
capital'' from the industry. He concludes that the prospect of moving
forward with the BN/CN transaction at this time ``is a serious threat
to the industry's financial health, well being and long-term
prospects.''
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Notwithstanding the serious potential public harms that could
result from going forward, BNSF and CN argue that they will suffer if
consideration of their merger proposal is delayed.\13\ Unless they
expect to escape the new rules that will apply to everyone else,
however, and to hold other mergers at bay until their own is completed,
we do not see how their transaction will not be adversely affected by
the disruption that it would produce throughout the industry. BNSF and
CN suggest that it is not fair to ``penalize'' them for the failures of
others.\14\ But our action here addresses industrywide concerns that
involve all railroads (including BNSF and CN), and in any event, should
not in any way be construed to be punitive.
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\13\ BNSF and CN also argue that delay will defer the public
benefits, such as new single-line service, associated with their
merger. But there are various alternatives to merger that can
approximate those benefits. Indeed, CN and its partner IC currently
participate in an alliance with KCS, a smaller Class I carrier, that
provides all parties many of the benefits of a merger. We note that
both General Motors and United Parcel Service (two of the largest
customers of CN and BNSF), which would presumably reap the largest
benefit from the new single-line service these railroads promise, have
testified in no uncertain terms that they do not want a merger to go
forward at this time, as has KCS, whose CEO stated that the carrier
would not survive as an independent carrier if the BNSF/CN proposal is
implemented.
\14\ We note that the BNSF merger, which was characterized by many,
when it was initially proposed, as a manageable ``end-to-end'' merger,
had its own share of integration problems, and there was some testimony
at the hearing concerning service issues on the CN/IC system, which has
not yet been fully integrated.
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Under 49 U.S.C. 11324, we must consider the public interest in
addressing rail mergers, taking into account, at a minimum, adequacy of
transportation to the public; including other rail carriers in the area
involved; competitive effects; financial impacts on the involved
carriers; and impacts on employees. In addition, the rail
transportation policy set out in 49 U.S.C. 10101 directs us, among
other things, to promote safety, efficiency, good working conditions,
an economically sound and competitive rail transportation system, and
the needs of the public and the national defense. For the reasons we
have discussed, we believe that we can best advance all of these
objectives by promptly initiating a rulemaking proceeding to adopt new
rules, as appropriate, and providing a short period for parties to
adjust to the new rules before proceeding with merger proposals. This
approach should provide a degree of stability for what is now a very
fragile industry and permit vital public interest issues to be
addressed on an evenhanded basis for all merger proposals. To go
forward with any individual merger proceeding in the meantime would be
unfair to customers, carriers, employees, and affected communities, and
would disrupt and distract the industry to the detriment of all of the
public interest concerns that we are charged with advancing.
We recognize that our action here is unprecedented. But these are
not ordinary circumstances, and we see no way of adequately protecting
the public interest short of the steps we have outlined here. Congress
has directed us to take such actions as are necessary to carry out our
statutory mandate, 49 U.S.C. 721(a), and has expressly authorized us to
take injunctive-type action to prevent irreparable harm, 49 U.S.C.
721(b)(4).\15\ After considering all of the circumstances, as
elucidated through our extensive hearings, we find that changes in our
merger regulations are necessary now and that no major rail merger
proposals should be filed, or will be considered, until new merger
rules have been established.\16\
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\15\ The legislative history accompanying section 721(b)(4)
explains that the provision ``explicitly authorizes the [Board] to
issue unilateral emergency injunctive orders to prevent irreparable
harm. This power has been asserted and used by the [Interstate Commerce
Commission] in the past, although not specifically granted by statute.
The Committee intends to confirm the scope of the former ICC power in
this regard. . . .'' H.R. Rep. No. 311, 104th Cong., 1st Sess. 124
(1995).
\16\ Accordingly, for the reasons expressed herein, we hereby
suspend the ``Notice of Intent to File'' filed in Canadian National
Railway Company, Grand Trunk Western Railroad Incorporated, Illinois
Central Railroad Company, Burlington Northern Santa Fe Corporation, and
The Burlington Northern and Santa Fe Railway Company--Common Control,
STB Finance Docket No. 33842, until such time as new merger rules have
been promulgated and the period set forth in this Decision has expired.
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This action will not significantly affect either the quality of the
human environment or the conservation of energy resources.
It is ordered:
1. Class I railroads are directed to suspend activity
relating to any railroad transaction that would be categorized
as a major transaction under 49 CFR 1180.2, pending development
of new rules by the Board, as outlined in this decision. No
filings relating to such a transaction will be accepted for 15
months.
2. This decision is effective on the date of service.
By the Board, Chairman Morgan, Vice Chairman Burkes, and
Commissioner
Clyburn. Chairman Morgan, Vice Chairman Burkes, and Commissioner
Clyburn commented with separate expressions.
Vernon A. Williams,
Secretary.
Chairman Morgan, commenting:
This decision has been one of the most difficult ones that I have
had to make since becoming a member of the Surface Transportation Board
and the Interstate Commerce Commission before it. The Board's action
here directing the suspension of all rail merger activity for a period
of time is particularly difficult for me because, as my record
demonstrates, I do not believe that the government should intervene
into free market processes without a very good reason for doing so. And
I also believe that parties should get fair and expeditious
consideration of matters brought to the Board. But the current problems
facing the rail sector are so extraordinary that an unprecedented
response is necessary. Given the financial and service instability that
exists in the rail sector as a result of the most recent round of major
railroad consolidations, I cannot in good conscience allow further
actions to occur that I believe would run the risk of creating more
disruption and instability to the clear permanent detriment of the
Nation's transportation system, rail employees, rail customers, and
communities across the country.
In this regard, once I decided that a time-out from mergers was
necessary, I proposed a 2-year waiting period before merger
applications could be filed. I firmly believe that a period of that
length is necessary to accomplish all of the goals set forth in the
Board's decision. A lesser time, in my opinion, will simply block the
BNSF/CN proposal without fully achieving the immediate and lasting
stability for which I am striving by taking this unprecedented action.
Nevertheless, although a 2-year period would do more to allow a
thorough reexamination of our merger rules and would permit the rail
sector to adapt to those rules and achieve a firm level of stability
before processing any more major rail consolidation proposals, overall
our action here is clearly on the right track.
While certain interests have favored moving forward with the
proposed BNSF/CN transaction when filed, many others have been opposed
to moving forward with any further consolidation at this time, and
certainly not until our merger rules are revisited. In balancing all of
these concerns in determining what action would be in the greater
public interest here, I have focused on the long-term, as well as
short-term, effects of our actions, and on my concern about what would
be for the greater good of all railroads, rail customers, rail
employees and communities across the country. In view of the
instability in the rail sector, the great risk of further harm from
continued instability and disruption, and the need to promote the
greater public good, it is my strong belief that processing mergers at
this time and for a significant period thereafter would not be in the
public interest.
Vice Chairman Burkes, commenting:
This decision sets in motion a 15-month rulemaking proceeding to
reevaluate the Board's merger guidelines and imposes a suspension on
all major merger activity during this period. This upcoming proceeding
will be extremely important. Much has changed in the railroad industry
in the nearly twenty years since the majority of our current rules were
established. I believe that it is long past time to step back and
revisit those standards.
The BNSF/CN merger announcement may have triggered this proceeding,
but it is long since overdue. However, it is unfortunate that it was
not held prior to their announcement. Consequently, in addition to
substantive merger rules issues, the application and timing of a
rulemaking proceeding have also become issues.
In this proceeding, we have established a 15-month period to
develop new merger rules. Although this is almost double the period of
time associated with the Board's last two major rulemaking proceedings
(Ex Parte Nos. 627 and 628), the issues here are significant and
complex and will require additional time. Although this proceeding
could be completed in a much shorter time period, 15 months should be
more than adequate for a thorough review of our merger rules.
Several parties have argued for a longer suspension period or
moratorium, i.e., two or more years. I believe this would be much too
long of a period of time. After we have issued our final merger rules,
there would be a minimum of an additional year before any additional
major railroad mergers could be approved. Moreover, the evidence
indicates that railroad service has started to improve after the
disruptions resulting from the past mergers and it is clear that those
problems started long before the BNSF/CN announcement. In addition, a
longer period could add to uncertainty for shippers who are considering
building or relocating facilities or planning to enter into long term
contracts.
In terms of application, I believe that the new railroad merger
guidelines should apply to the proposed BNSF/CN merger and all future
major railroad mergers. I also believe that, in fairness to BNSF and
CN, and to all parties, it is important to resolve these issues in a
timely manner.
Commissioner Clyburn, commenting:
I stated in my opening remarks to Ex Parte 582 that this proceeding
could be a defining moment concerning rail consolidation issues. Four
full days of listening intently to comments from all sectors of the
rail industry has only strengthened this belief. We have heard
testimony from large railroads, small railroads, large and small
shippers of all types of commodities, rail labor, economists,
government agencies and Members of Congress. While diverse ideas
regarding how the Board should address future consolidations emerged
from the testimony, it was abundantly clear, however, that the time has
come for a thorough review of the Board's current merger rules. Some
did suggest that we proceed with future consolidation utilizing the
same regulatory framework that currently exists, while some others have
suggested that we ``take a breath'' and impose a moratorium on filing
merger applications for two years, three years, or an indefinite period
of time.
It is clear to me that the rail industry has changed dramatically
within the past twenty years since the passage of the Staggers Rail Act
of 1980. Rail consolidations have created a new paradigm in which we
must now operate. Therefore, I support the Board's decision to
institute the 15 month rulemaking process to revise our merger rules
and suspend major merger transactions during this time. Others have
called for longer periods of time to attempt to address uncertainties--
real, perceived, or otherwise. However, my support of the 15 month
suspension is based solely on what I believe to be an appropriate time
frame in which the Board Members and staff can address, appropriately,
the plethora of complex issues the industry currently faces without
unnecessarily suspending merger applications. I believe our approach is
a reasonable one.
Ms. Morgan. I will now make a few brief comments about the
March 17th decision before I take questions.
That decision follows 4 days of hearings beginning on March
7th, with over 150 witnesses from all segments of the rail
sector and from various branches of government. It focused on
the issue of major rail consolidations.
The decision found that the rail industry is poised to move
toward the final phase of consolidation. We concluded that the
current merger rules are not appropriate, given the level of
concentration that is likely to result if the next round of
mergers is carried out.
For that reason, and because a new round of mergers at this
time will aggravate the difficulties that the industry is
already having in connection with the last round of mergers,
the decision suspends for 15 months the filing of major rail
consolidation proposals pending a reexamination of our rail
merger rules.
The Board has pending before it two petitions to stay this
decision, and the decision has been appealed by three parties
to the U.S. Court of Appeals, D.C. Circuit. The Board is
working on an advance notice of proposed rulemaking regarding
changes to our rail merger rules, which will be issued by April
6th.
The decision itself is quite clear and speaks for itself,
and I am proud of that decision. It would not be appropriate
for me to engage in extensive dialog about it, given the suits
in court and the fact that there are matters in deliberation at
the Board pertaining to the decision. However, there are a few
comments I wish to make about the decision.
First, there are those who argue that what we did by
suspending merger activity was extreme and unnecessary. The
Board's action was unprecedented, but bold action was necessary
given the extraordinary circumstances presented to the Board
and the decision lays that out in detail.
Secondly, there are those who question the Board's
authority to have done what it did by suspending merger filings
while the merger rules are being examined. In response, what I
would say is that the Board believes very strongly that it has
the authority to do what it did, and the decision is clear on
that point.
Thirdly, there are those who argue that we should have
handled the BNSF/CN merger while we reexamined our merger
rules. The Board believes that it made no sense to consider new
merger rules while considering what could be the final round of
major rail consolidation. The Board also believes that the risk
of creating more instability in an already unstable rail sector
was too great. The decision lays all this out in detail.
Fourth, there are those who have argued that the decision
was issued to protect railroads from competition. Our decision
was clearly made to protect the broader public interest. The
decision lays that out clearly.
As the decision clearly points out, the totality of the
record compiled focused on clear concerns about the state of
rail service and competition today, and about the negative
impact of further consolidation on service and competition. The
Board's March 17th decision responds to those concerns in a
responsible, forceful, and appropriate manner.
The Board strongly believes that the greater public
interest is served by a suspension of merger filings for 15
months pending reexamination of our rules.
In closing, let me say that I did not want to have to make
this decision, and my commenting opinion clearly reflects the
difficulty in making it. But in my 6 years at the Board and the
ICC, we have been faced again and again with new challenges and
we have always stepped up to the plate and done what was
necessary.
I am proud to say that we met the challenge here and acted
responsibly here. I am not sure how much I will be able to say
today, but I am happy to answer any questions that you might
have.
Senator Hutchison. Thank you, Chairman Morgan.
Before I start, the Majority Leader would like to make a
statement or ask a question.
STATEMENT OF HON. TRENT LOTT,
U.S. SENATOR FROM MISSISSIPPI
Senator Lott. Thank you, Madam Chairman. I wanted to give
our friend and a person that's very familiar with this room an
opportunity to make her statement first, and to hear from other
Senators briefly. But I want to thank you again for having this
hearing and I want to thank the members of the Board for being
here today and for the important work that you do.
I certainly believe that deregulation of the railroad
industry in 1980 turned the industry around. It went from a
patchwork of undercapitalized, inefficient small railroads to a
strong network of robust railroads in the space of a dozen
years or so. More recently, though, I have become concerned
that as the railroads become larger, the mergers become more
complex and difficult.
In the short term, it appears to me that the mergers have
drained the financial resources of the railroads and, as others
have already noted, they have eroded service gains and
efficiencies at various points in the railroads' service
system.
I am concerned that the industry as a whole needs to be
cautious in proceeding to the next round of mergers, certainly
in the near term. The railroads have lost traffic during this
post-merger service period due to breakdowns, and remaining
customers have borne the brunt of some of the problems that
have come from this.
Now, I think the situation is going to sort itself out as
the railroads digest the previous mergers over the past 5
years. I certainly don't believe that we need to permanently
end mergers; I have always felt that on a general basis, if
mergers make good business sense, generally speaking, the
government should be cautious about intervening.
But I do think we have to look at it broadly. I take
railroad issues very seriously from both a national perspective
as well as a Mississippi perspective, and the railroad industry
is very important in my state.
So as the Board considers the narrow benefits to the
requesting parties of the next proposed merger, I think that
they certainly must also consider the probable response of the
rest of the industry and its overall impact on the industry
and, very importantly, on its customers.
That is why I joined several members of this committee in
commending the Board for its December decision to take a
broader perspective on the effects of the railroad mergers when
reviewing future mergers; and that's why I support the Board's
recent decision on the moratorium. I believe the unanimous
decision by all the members was the correct one, and I
compliment you for your thoughtful approach to a difficult
issue.
On the overall STB reorganization issue, I have cosponsored
Senator McCain's bill. I think we need to be careful about
rushing to a legislative solution to what can probably be
handled by the industry itself and by the efforts of the Board.
But I know the chairman of this Subcommittee is very interested
in this area and has some proposals she would like for us to
consider. I have the utmost respect for her, and quite often
problems in her state are similar to the problems in my own
state. I look forward to working with the Board in the future
and with this committee to encourage the health of this
industry and ensure that we maintain strong commercial railroad
and Amtrak service in this country.
Thank you, Madam Chairman, for allowing me to enter these
remarks in the record. I do have a very brief statement I'd
like to be included in the record in its entirety at this
point.
Senator Hutchison. Without objection.
[The prepared statement of Senator Lott follows:]
Prepared Statement of Hon. Trent Lott, U.S. Senator from Mississippi
Good morning. I'd like to thank Chairman Hutchison for chairing
this hearing and Chairman Morgan for appearing before the Committee to
discuss the Surface Transportation Board's recent decision.
I believe the deregulation of the railroad industry in 1980 turned
that industry around. It went from a patchwork of undercapitalized,
inefficient, small railroads to a strong network of robust railroads in
the space of a dozen years or so.
More recently though, I've become concerned that, as the railroads
became larger, the mergers became more complex and difficult to
execute. In the short term, this has drained the financial resources of
the railroads and eroded the service gains and efficiencies they built
up through previous mergers. I am concerned that the industry as a
whole is not healthy enough to undertake another round of mergers in
the near term. The railroads lost traffic and their remaining customers
were stressed by rail service breakdowns as a result of the past
several mergers.
Now, I believe this situation will sort itself out as the railroads
digest their mergers of the past five years. I certainly don't believe
we need to permanently end further railroad mergers. I don't take
Government intervention in the marketplace lightly, but I take railroad
issues very seriously from both a national perspective and a
Mississippi perspective. I believe the industry has now reached the
stage where, as the Board considers the narrow benefits to the
requesting parties of future proposed mergers, it also must consider
the probable response by the rest of the industry, and the overall
impact on the industry and its customers.
That is why I joined several of my Commerce Committee colleagues in
commending the Board for its December decision to take a broader
perspective on the effects of railroad mergers when reviewing future
mergers. That is why I support the Board's recent decision to impose a
15-month moratorium. I believe the unanimous decision by the Board was
the correct one. I complement the Board for its thoughtful approach to
a difficult issue.
I cosponsored Chairman McCain's straightforward STB reauthorization
bill because I saw the rush to legislate specific service improvements
as short-sighted. The railroad industry should be given time to fix its
service problems. I believe the Board's moratorium will help in this
regard. Legislating prescriptive service requirements would only reduce
the industry's ability to fix its service problems on its own and
impose inefficiencies and unnecessary costs throughout the railroad
system.
I thank Chairman Hutchison, again, for her interest in this
Nation's rail service concerns. I look forward to working with her to
address these concerns. Also, I thank Chairman Morgan for her continued
good stewardship of the Surface Transportation Board and willingness to
discuss this issue with us today.
Senator Hutchison. I want to thank the Leader for the
statement and say that I think that the important thing here is
balance. We wall want to have healthy railroads, because having
heavy railroads creates competition in transportation.
I also think we need to protect competition in the
railroads to make sure that the shippers are not gouged in the
future. So I think a balance is what is needed, and I hope that
the Leader will work with us to make sure that Congress has set
the guidelines to keep competition as a factor in any future
mergers.
Senator Lott. That's why I added that last ``but I look
forward to working with the Subcommittee chairman,'' because I
know her views and I share a lot of her concerns and desires to
make sure that the service to the customers is also considered
in this whole process.
Senator Hutchison. Thank you. Thank you for attending.
I would like to start the questioning, Ms. Morgan.
Senator Dorgan. Madam Chairman, I wonder if I might make
just a very brief statement.
Senator Hutchison. Yes, I'd be happy for you to make a
statement, and then we will go to the Senators in the order in
which they arrived.
Senator Dorgan. Thank you, and I'll be mercifully brief.
Senator Hutchison. That would be merciful.
Senator Dorgan. That was my intention. Thank you.
Let me say that I think the action by the Board was bold
and it was action that I supported; and as you heard from the
Majority Leader, there seems to be wide support for the action;
and perhaps for different reasons, but nonetheless wide
support. We have had our differences, I have had my differences
with the Surface Transportation Board but this is an action
that is supportable; and I think incidentally it's my
impression and it's not of great note that I think you have the
authority to do this, and I have every expectation you will
prevail in court.
The period of time during which this moratorium will be in
place, however, should not be viewed by anyone as a period in
time in which some of us will go away; we fully intend to
continue to push on these other issues.
It is true that we all want a healthy rail industry in this
country. This country needs a healthy rail industry. It is also
true that we need fairness for shippers. And frankly, I would
say to the Majority Leader, there is not a lot of room left for
mergers, you know; we are about merged out in this industry.
I don't know how many additional mergers could be
accommodated in any event, without obliterating virtually every
semblance of competition that exists; and our market system
works only when there are competitive elements and of course
monopolies produce monopoly pricing which injures shippers.
This is a long, steady circle that all of us continue to
move in; but I did just want to say that I want to work with
the Subcommittee chairman, with the chairman of the full
committee, and the Majority Leader and others, and I want to
work with my friends who have joined in cosponsoring the Rail
Shipper Protection Act. We have people on both sides of the
aisle here in this committee, and it's our intention even
during this moratorium, to continue to push that legislation.
We hope very much we get a hearing on it and be able to have a
vote and move that legislation, even during this moratorium.
The moratorium itself, of course, deals with the question
of conditions under which future mergers might be evaluated.
But again, let me finish by saying I don't--there's not much
room for additional mergers in this industry; this industry has
gone from forty-some Class I railroads to about seven or eight,
and there's not much room left for additional mergers.
Thank you, Madam Chairman, for your courtesy.
Senator Hutchison. Thank you, Senator.
Chairman Morgan, I want to start with the basic decision to
impose the moratorium. What was your legal authority for
imposing the moratorium and how will you make sure that there
is a fairness to all sides in the handling of this merger? What
are the potential factors that will be considered for future
mergers.
I ask that because I am well aware of the problems with the
most recent merger. Clearly this hurt all of our states, and I
think the caution is certainly justified. On the other hand,
now we have all of the other railroads coming in and asking for
the moratorium, and I want to make sure that we are playing
fair with everyone.
Ms. Morgan. First of all, let me say that all of the
questions that you are asking will be extensively litigated,
and so I will try to present my case in such a way that I will
be able to win this case on appeal as we go forward.
First of all, let me say with respect to our authority, on
page 10 of the decision we discussed that; we believe we have
authority under a section of the statute that allows us to
provide injunctive-type relief, where there is irreparable
harm. The decision goes into great detail as to what we
consider in this case to be irreparable harm; and we felt very
strongly that given our authority to promote the public
interest as it relates to rail mergers and the rail sector in
general, that we did have the authority to institute a
suspension of merger filings for 15 months.
Now with respect to fairness, clearly that is always an
element in any decision that the Board makes, and we were
presented with a situation in which we had a hearing record
that clearly raised many concerns about future consolidation
and the impact that it would have on service and competition.
We were presented with a record in which people very clearly
wanted new merger rules before we move forward, as we move
forward. At the same time we had notification that there could
be a filing regarding another merger proposal.
The question I think you are asking is why did we suspend
merger activity in order to do our reexamination of merger
rules? And the Board felt very strongly that it would not make
sense to proceed ahead with what could be the final found of
rail consolidation before you had rules in place. And that
furthermore, processing what could be the final round of
consolidation while you were working on new rail merger
standards also did not make sense; and furthermore, the
instability that could be created by processing rules and
processing what could be the final round of rail mergers was
not a risk that we wanted to undertake, given the instability
that already existed in the rail sector.
Senator Hutchison. Let me just followup quickly and ask,
why 15 months? Is that absolutely necessary before you take up
the pending merger? Do you need to have that long a time to set
the standards?
Ms. Morgan. Again, I can assure you that the time period of
15 months will be litigated quite heavily. I myself was in
favor of a 2-year moratorium as opposed to a 15 months'
suspension. The consensus on the Board, however, was 15 months,
which was the time that all three of us agreed would allow us
to do merger rules. We also agreed that a suspension of merger
activity, as I indicated previously, would be appropriate while
we were processing our examination of new merger rules.
Senator Hutchison. Last question on this round. What
guidance do you think you need from Congress, or do you think
you have enough authority to set a different standard?
Ms. Morgan. What I would say to that is that I believe we
have the authority to do what we have done here, very clearly.
I believe we have the authority to proceed ahead with a
reexamination of our merger rules. Whatever we ultimately
decide in that proceeding, we will feel confident that we have
the authority to decide. That will be taken to court, and if a
court decides that we didn't have the authority to do what we
did, then we'll have a different situation.
But at this point we are proceeding along, using the
authority that we have, and feel very strongly that we have
that authority, and we will continue to use the authority we
have as we move ahead.
Senator Hutchison. But do you think you have the authority
to factor in competition, for instance, without congressional
action?
Ms. Morgan. Well, that clearly will be part of the
examination of our merger rules. When we put out our advance
notice of proposed rulemaking by April 6th, in that will be
discussions about various issues that were presented to us
during our 4 days of hearings, and we will put that out for
comment and I'm sure that issue will be one of those issues
discussed, and we will take the comments and see where we go
from there.
Senator Hutchison. Senator Lott?
Senator Lott. I will pass.
Senator Hutchison. Senator Rockefeller.
Senator Rockefeller. Chairman Morgan, as you know when
Senator Dorgan and I testified before, at the marathon 4 day
procedure you had to go through, I pulled out a thick book with
my usual massive orange-yellow-green-red-pink-purple
underlinings that I had done for exactly this same subject in
1987, and none of the issues had changed. I could have used
that briefing book for any current discussions.
I read partly to you a letter that I wrote then to Chairman
Heather Gradison of the ICC, and two of the specific requests
in that letter were for the ICC at that time to quote, ``assure
that captive shipper rate reasonables process is not so
complex, costly and time-consuming in that it fails to provide
protection intended by Congress and assure the commission is
discharging its responsibility to preserve and provide
competitive railroad transportation alternatives.''
I am just curious, and I want to phrase this in a way that
you can answer it: Not based upon your future judgment, but
based upon what you heard at these 4 days of hearing from 150
people.
How would you characterize the current level of competition
among Class I railroads? As being sufficient, too little, too
much? No. 1. Did you hear from witnesses what they think is the
appropriate number of Class I railroads for North America to
ensure competition, financial health, and/or efficient railroad
transportation?
Ms. Morgan. Well, let me try to answer that. I have here
the transcripts of the 4-days of hearings, and I brought them
with me because I wanted people to understand that this was a
lot of testimony that you are asking about. I will try to
answer your question, but there's a lot in there, and we spent
a lot of time looking at each and every piece of testimony that
was submitted.
The second point I want to make before answering your
question is that these hearings were on major rail
consolidations. So in terms of broader issues outside of the
issue of rail consolidations, there is testimony in there, but
that was certainly not the focus of the hearing.
With respect to the testimony we received, I think a couple
of things came out of it which we reflect in our decision here;
and that is a concern about service and about competition, and
particularly as we move forward, grave concerns about service
and competition. That is why this decision was issued, to
reflect the concerns that had been raised and the care and the
caution that was advised as we move forward.
Senator Rockefeller. Was that based upon the fact of
mergers in and of themselves? What they do to competition, to
bottlenecks, to whatever; or were some of those comments coming
from people who were simply complaining about the state of the
situation, as I am.
Ms. Morgan. Well again, I think the focus of the hearing
was on mergers, and where we are as far as mergers. So the
comments focused on how people felt about mergers to date and
how people felt about mergers going forward.
Now we did get some testimony that reflected the broader
interests----
Senator Rockefeller. That is what I am asking about.
Ms. Morgan. --and those are obviously some of the
individuals that you are reflecting; but that was focused in
the context of the discussion of mergers.
Senator Rockefeller. When you say that bottlenecks and that
massive, massive problem which is so devastating across America
will be a part of your proposed rulemaking considerations I
hear that, and of course in the hearing of it it sounds to be
good. The question is, how important do you think that is, and
to what depth will you take that as a consideration, while you
consider mergers and other things?
Ms. Morgan. Well, again, these issues are under
deliberation at the board. We are working on an advance notice
of proposed rulemaking that will address the issues that were
raised at the hearing.
One of the issues raised at the hearing of course was
bottlenecks and how that would be addressed in the context of
the review of future mergers. I do not want to avoid your
question. It is in deliberation; it will be an issue, it was an
issue raised in the hearings. I'm sure that it will be an issue
raised as we move along.
How it will be ultimately resolved I cannot tell you
because obviously the resolution of these matters will be based
on the record that we accumulate as we go from the advance
notice of proposed rulemaking to the proposed rulemaking, to
the final rules.
Senator Rockefeller. When you hear that, what I said in my
opening testimony, that a railroad executive told some chemical
companies in West Virginia quite recently that there would be
no increase in competition, no change in competition, no move
away from captive shipping, no change in pricing absent Federal
legislation. Do you find that a surprising statement? Do you
find that a true statement? What is your reaction to that?
Ms. Morgan. Well, I can't speak to the truth of it because
I didn't hear it myself, but I presume it was said, so I
presume whoever reported it is being truthful. I certainly
don't like the tone of that, I'm surprised by it; but I can't
say any more than that.
Senator Rockefeller. Thank you, Madam Chairman.
Senator Hutchison. Senator Dorgan.
Senator Dorgan. Madam Chairman, I understand there's a vote
underway, I think to be followed immediately by a second vote.
So let me just ask a brief question in sort of the direction
that Senator Rockefeller asked.
Can you give me your subjective evaluation of the state of
competition in the railroad industry today in the United
States?
Ms. Morgan. My subjective. Well, we have approved several
mergers, as you know; you and I may not have agreed on those--
--
Senator Dorgan. Did not.
Ms. Morgan. I certainly did not approve mergers that I felt
were anticompetitive. There are those out there who may feel
that that's the case, but I as a decisionmaker did not feel
that that was the case. Having said that, I believe we are now
entering another round, a heightened round, a very serious
round that could raise different issues as it relates to
competition, and I think the Board has responded to those
concerns appropriately.
Senator Dorgan. Is it your feeling that competition is
diminished in the last dozen years or so in the railroad
industry? In other words, is competition still a healthy,
wholesome element in that
industry, or is the element of competition diminished in that
industry?
Ms. Morgan. Well, let me answer that two ways. First of
all, again with respect to the mergers for which I was
responsible, I believe that we did not diminish competition
with those mergers. Now you and I will likely disagree on that,
but that is what I
believe.
Now, having said that, there are shippers who are quote
``captive'' unquote. There have been captive shippers for a
while, and I think the effort that you all have undertaken is
to try to provide some sort of competition for captive
shippers.
I do not believe--and again we may disagree on this as
well--that the mergers that we approved in the past created
captivity. As a matter of fact, we wanted to make sure that
service to shippers did not go from two carriers to one
carrier. So I do not believe that we created captivity, nor do
I believe that those mergers diminished competition.
I think though where you're coming from is there are
captive shippers that have been there, that will be there, and
is there something we need to do to address that? And I think
that's what your legislation effects.
Senator Dorgan. Yes, and also the fact that while there are
captive shippers, and that's a fact of life, there is not an
effective remedy for them. It's one thing to be a captive
shipper; it's quite another thing to have an avenue with which
you can use to redress grievances.
But as you know we have not in recent years had a
circumstance where a captive shipper can adequately complain
and receive some satisfaction from the complaint. In fact, in
one of our hearings a year or two ago we talked about the
Montana case that took 16 years? Captive shippers are captive
with--there's no door out of that room.
That's enough; I don't want to ruin the day here. I came to
say that I thought the decision you made was a bold decision.
Ms. Morgan. That's all right.
Senator Dorgan. But I thought the decision you made was a
bold decision, I think it's appropriate. I think a study of
mergers and their impact on this country and the rules by which
we make judgments about mergers is very important at this
point. We have much more to do.
I just want to finally say again, some viewed your decision
with elation saying, ``Well, that'll stop those folks that want
to do a captive shippers bill.'' That's not the way we view the
decision. We still intend to push our legislation here in the
Congress even as you proceed with the moratorium. Thank you.
Ms. Morgan. May I just--and you and I have had dialogs on
this in the past, and I and the rest of this committee have had
this on three occasions prior to this.
I understand your concern about access to the process for
captive shippers, particularly as it relates to rate cases. And
I continue to process them, simplify the process as best I can.
I communicated to this committee in December 1998 that the
small rate cases perhaps could be handled differently, and I
would need some sort of authority to handle them differently;
and I don't want anyone in the room to think that this is not
something I'm sensitive to. I have worked on it as best I can.
Rate cases are complicated, but we have tried to streamline
them; shippers have won some rate cases. The 16 year old case
is one that I'm sorry had been there 16 years, but when I got
to the Commission I did resolve it. And I will continue to try
to expedite as best I can.
Senator Hutchison. Thank you. I'm going to try to end this
so that we can vote and not make you wait for 30 minutes.
I would just like to say first of all that in my STB
reauthorization bill, we do deal with the small shippers'
complaints and expedite the procedure, which I think would be
very helpful. I just hope that Congress will do its part in
giving you the legislative authority you need on the key issues
that have been raised this morning.
Secondly, I am going to call on the railroad industry and
the shipping industry to try to be helpful to Congress in
fashioning an STB reauthorization bill that does produce, if
not a win-win for both groups, at least a partial win for both
groups that would alleviate the necessity for the Board perhaps
to have the 15 month moratorium.
Having said that, I want to say to you that you have I
think been very deferential to Congress; you have tried in your
dealings not to overstep your authority. I think we need to do
our part to give clear guidelines, and I would just finish by
saying that in my view, what we need is balance. The key word
is balance. We need relief for captive shippers, we need
competition, and we need a healthy railroad industry.
So those are my goals. I feel like I am an honest broker;
in my state I have shippers, I have railroads. I want all of
them to thrive and prosper and create new jobs for our country.
So that's where I'm coming from, and I just hope that we can
get the parties together, hammer something out, and give the
necessary guidelines.
With that, I want to thank you for coming.
Senator Hutchison. There has been a statement submitted by
Rob Krebs, the CEO of Burlington Northern Santa Fe, which I'm
going to put in the record. [Refer to Appendix.]
I am also going to leave the record open for 5 days so that
anyone else who wants to put a statement in the record may do
that. I don't want to in any way have only one statement, and
the only reason that I asked you to be the only witness is
because I didn't feel that we needed to hear from the parties.
But Mr. Krebs has asked for this; I will give it to him, but I
will give everyone else the right as well to see his statement
and to submit statements.
So we will have--let's see, today is Thursday--5 days
including today should give people time to respond if they so
choose. [Refer to Appendix.]
With that, I will adjourn the hearing, and thank you very
much, Chairman Morgan.
(Whereupon, at 11:20 a.m., the hearing adjourned.)
A P P E N D I X
Response to Written Questions Submitted by Hon. John F. Kerry to
Linda J. Morgan
Question 1. Can we get assurances from you today that you will
address the cram-down issue as you consider the new merger rules?
Answer. The Surface Transportation Board (Board) issued an Advance
Notice of Proposed Rulemaking (ANPR) on March 31, 2000, instituting the
proceeding in STB Ex Parte No. 582 (Sub-No. 1) in which the Board
proposes to revisit its rules for major rail consolidations. In the
ANPR, the Board specifically requested comments on the concerns of rail
employees, including their suggestions that the Board require railroad
merger applicants to agree to forgo any effort to ``cram down'' post-
merger changes in collective bargaining agreements under the auspices
of 49 U.S.C. 11321(a) and/or 11326, and/or under the auspices of
Article I, Section 4 of the Board's standard New York Dock labor
protective conditions. Thus, the Board will consider the cram-down
issue as part of its merger rule review.
Question 2. Do you believe that the authority of the Surface
Transportation Board regarding cram-down can be properly addressed with
new merger rules?
Answer. Because the issue you raise is now subject to the STB Ex
Parte No. 582 (Sub-No. 1) rulemaking proceeding pending before the
Board, it would be inappropriate for me to comment on that issue at
this time. As I testified before the Subcommittee, however, I do
support a legislative solution to the problem of cram downs in railroad
merger proceedings.
Question 3. To your knowledge, is there any governmental agency
other than the STB that has the authority to undermine collective
bargaining agreements?
Answer. Congress passed a unique statutory scheme providing for the
implementation of major rail consolidations and protection for
adversely affected rail employees. In doing so, Congress recognized
that, when larger railroads consolidate, the individual collective
bargaining agreements (CBAs) and protective arrangements into which the
merging railroads entered earlier are not always compatible. The law
that the Board administers provides for the imposition of the so-called
New York Dock conditions upon such transactions. The New York Dock
conditions provide: 1) substantive benefits for adversely affected
employees (including moving and retraining allowances, and up to 6
years of wage protection for employees dismissed or displaced as a
result of the consolidation); and 2) procedures under which carriers
and employees are to bargain to effectuate changes to their CBAs if
necessary to carry out the transaction, with resort to arbitration and,
as a last resort, limited Board review, if bargaining is not
successful. Additionally, in 1991, the Supreme Court confirmed that the
law provides that agency approval of a consolidation automatically
overrides all other laws, including obligations under a CBA, to the
extent necessary to permit implementation of the approved transaction.
To the best of my knowledge, these statutory provisions are unique to
the rail industry, which is otherwise subject to the Railway Labor Act
with regard to collective bargaining.
______
Consumers United for Rail Equity,
Washington, DC, March 31, 2000.
Hon. Kay Bailey Hutchison,
Chairman, Subcommittee on Surface Transportation and Merchant Marine,
Committee on Commerce, Science and Transportation,
United States Senate,
Washington, DC.
Dear Chairman Hutchison:
On behalf of the members of Consumers United for Rail Equity
(C.U.R.E.), I would like to express our appreciation for the oversight
hearing that you held on March 23rd regarding the Surface
Transportation Board's (STB) recent decision to issue a 15 month
moratorium on rail mergers and the STB's proposed rulemaking proceeding
to address possible modifications to its regulations governing
proposals for major rail consolidations.
As you know there has been a significant amount of interest
expressed in this issue. The hearings that the STB held in early March
attracted close to 150 witnesses and the STB received statements from
twice that number of interested parties. Rail customers, like those
represented by C.U.R.E., are concerned about the consolidations
occurring in the rail industry and the impact that these consolidations
are having on competition in the industry.
We encourage the Committee to schedule a series of hearings on
these important issues to build upon the record established in the
March 23rd oversight hearing. Much of the testimony received by the STB
earlier this month focused on concerns that rail customers have with
rail service. For those entities that have no option but to ship by
rail, this is a very serious concern. We believe that increased
competition in the rail industry will help to address many of these
service problems. Additional hearings will help the members of the
Committee determine the best way to address the concerns of rail
customers while considering the best policy for our nation regarding
rail mergers and consolidations.
C.U.R.E. would welcome the opportunity to participate in further
hearings the Committee may schedule.
Sincerely,
Bruce A. Beam,
Chairman.
______
Prepared Statement of Richard K. Davidson, Chairman and CEO,
Union Pacific Corporation
Thank you for giving Union Pacific the opportunity to present our
views on the Surface Transportation Board's (STB) decision to suspend
Class I rail mergers for 15 months while it writes new merger rules.
My career in the railroad industry began 40 years ago. I started
out as a brakeman and worked my way through the ranks to the position I
hold today. I have been with this industry when it was on the brink of
bankruptcy as well as when it was in its renaissance period. In short,
I have seen its many ups and downs, but I'm not sure I have seen a
situation like we have today. This is a critical and dangerous time for
the railroad industry, and we are clearly at a major crossroads. Which
path we take will dictate not only our future, but also the future of
many of our customers and the regions we serve. That is why we support
the Board's decision to suspend mergers for 15 months as well as the
development of new rules that will govern all future consolidations.
I sat through all four days of the Board's hearings on the rail
industry, and sadly, I wasn't surprised by what I heard. Many of our
customers are frustrated with service--from all railroads--that they
consider to be inadequate. Moreover, to a person, our customers will
tell you that large railroad mergers have exacerbated these problems.
Service problems followed all of the big mergers of the 1990s. I am
sorry to say that perhaps the worst followed our merger with the
Southern Pacific. However, none of the mergers were immune to problems,
not even the BNSF merger or the CN/IC merger, as the STB's hearing
record indicated. Union Pacific's problems are well behind us now. We
turned the corner in the spring of 1998, and our performance levels are
equal to or better than pre-merger levels. Even so, our customers are
not ready for more mergers. They want better service. Customer after
customer testified to this at the Board's hearings. Companies like
General Motors, United Parcel Service, Huntsman Chemicals, Hampton
Lumber, Arizona Grain, Ball-Foster Glass Container Co., Superior
Lumber, Westvaco, and many, many more told the STB we need a time out
on rail mergers to give the industry a chance to stabilize and work on
service. (By way of example the GM and UPS testimony is attached.)
It is understandable that service problems have led to a call for
no more rail mergers. What is worse, and more alarming, is that this
last merger announcement has poured gasoline on the fires of those who
want to re-regulate the industry. Mergers have not created a single
``captive'' shipper, or reduced in any way rail-to-rail competition
where it existed prior to a merger. Still, there are groups who believe
mergers have reduced competition, and are using the service disruptions
as leverage to change our regulatory structure to their benefit. Re-
regulation, competitive access, open access, forced access--whatever
name you care to use--it is nothing more than a governmentally imposed
revenue shift from one industry to another. Yes, it will reduce rates,
but it will cripple our industry, and require us to shrink our
networks, cut service, and lay-off employees.\1\ There will be some
very large shippers that will initially benefit, but everyone will
ultimately suffer as we lack the ability to invest in our system.
---------------------------------------------------------------------------
\1\ Re-regulation would cost UP nearly three-quarters of a billion
dollars in annual operating revenues.
---------------------------------------------------------------------------
We heard about this too at the STB's hearings. Investment bankers
like Morgan Stanley Dean Whitter and Goldman Sachs, as well as world-
renowned economists such as Nobel Prize winning Kenneth Arrow all
testified about the perils of re-regulation. Their testimony was very
clear; the financial community does not favor re-regulation. The
Staggers Act created the appropriate balance providing protections for
shippers while allowing the railroads to price differentially. Their
message to the Board was, among other things, don't change the balance
of power between shippers and railroads. Doing so will drive the
capital markets away from the rail industry. Since the rail industry
reinvests on average 19% of its earnings, the lack of capital will make
it virtually impossible for the rail industry to ever earn its cost of
capital or provide the level of investment necessary to give the
quality service our customers' demand.
I know the BNSF and the CN will say we are afraid of competition or
that we want to delay their merger while we prepare one of our own, but
this is far from true. Under other circumstances, UP would not be very
concerned about the BNSF/CN merger. We do not expect this merger to
have a major effect on our ability to compete, and we know we can
compete effectively with a combined BNSF/CN. In fact, we considered the
possibility of a Canadian merger ourselves, but we decided that
proposing a big merger would be irresponsible because of the risk of
re-regulation and because our customers would not want a merger. We
think any big merger would be unwise and dangerous in today's
environment. Of course, if BNSF/CN were to be approved, that would have
a destabilizing effect and force us to take a fresh look at mergers.
Yes, today we are at a crossroads. The announcement of the BNSF/CN
merger has created tremendous instability in the rail industry. Our
customers are irate that we would even contemplate more mergers, the
threat of re-regulation has been increased, and this lack of stability
has caused all of our stock prices to sink dramatically.\2\ As a
result, we believe the Board's decision was appropriate and
responsible--not radical or ill conceived as the BNSF or CN would have
you to believe. The Board has a tremendous undertaking before it.
Trying to determine what is right for the rail industry and the
shipping community it serves will be a complex, time-consuming task.
Rushing to conclusions is not the order of the day, caution and
prudence are. I think Secretary Slater said it best when he said,
``There is no room for error.'' We also believe the Board has the
authority to take this type of action, and we will be full participants
as this case winds its way through the legal system.
---------------------------------------------------------------------------
\2\ At the time of the STB's hearings, railroad stocks had lost
approximately $15 billion in value, or 25%, since the BNSF/CN merger
announcement.
---------------------------------------------------------------------------
Does Congress have a role? Yes it does. When the STB is
reauthorized, Congress must also decide what path to take. Again, we
would urge caution, not a rush to judgment based on short-term service
problems. We would also urge Congress to take the path toward stability
and viability, and not the path toward access and the financial stress
and instability it would cause.
before the surface transportation board
Ex Parte No. 582
Public Views on Major Rail Consolidations
Summary of Statement on Behalf of United Parcel Service, Inc.
I. Introduction
United Parcel Service, Inc. (``UPS'') welcomes the opportunity to
participate in this important public hearing on major rail
consolidations. UPS commends the Board for convening this nationwide
forum.
UPS has a vital interest in the present operations, and future
direction, of the North American rail industry. UPS is the largest
corporate customer of intermodal rail services in the United States.
Since the 1960s, railroads have moved UPS packages over long distances
(more than 500 miles) as an alternative to highway movement by truck.
In 1999, we spent approximately $680 million on intermodal rail
services. UPS is also in the forefront of the rapid evolution of
logistics and global supply chain management. The role of railroads in
this evolution is critically important.
Due to our large intermodal presence, UPS experienced the
considerable difficulties, and shouldered the enormous costs, caused by
prior major rail consolidations. We also have learned a few lessons.
II. Any Benefits are Costly, Disruptive and Delayed
Rail carriers justify mergers on two bases: (i) lower rates; and
(ii) better service. Our experience has been: (i) no lower rates
result; and (ii) rail service is seriously problematic for an extended
two to three year post-merger period. Incompatible rail systems,
equipment shortages and confused personnel all contributed to the
congestion. Unfortunately, the congestion did not remain isolated among
the individual railroads merging, but spread across the entire rail
network. UPS has found that--only after this prolonged post-merger
period--service does return to, or slightly exceeds, pre-merger service
levels. For what is ultimately achieved, the cost to UPS of rail
consolidations is extremely high.
UPS's system relies on hundreds of trucks and trains arriving at a
sorting center as scheduled. Disruptions and delays caused by rail
consolidations required UPS to take every possible measure to ensure
its service commitments to its shippers. Due to rail mergers over the
past four years, UPS has diverted trailers from the rails to the roads.
During the summer of 1999, for example, after exhausting all
possibilities of having eligible union employees drive these
unanticipated truck loads, over 700 union employees were turned into
tractor trailer drivers. Additionally, UPS was forced into short term
use of subcontractors on an emergency basis. Such disruptions caused a
strain in labor relations. Absent such subcontracting, UPS would not
have met its service commitments during the merger consolidation
period.
Late trains also caused UPS to extend the duration of sorting
operations, to add Saturday sorts, and to pay substantial overtime. UPS
has tried to reschedule on a daily basis placement of trailers on
trains to ensure as much as possible early departures and the avoidance
of congestion. For all these reasons, the cost to UPS of providing
service during a rail merger soared dramatically.
Due to UPS's relationship with the railroads, they made significant
efforts to accommodate UPS's service needs. However, notwithstanding
these efforts, UPS still lost customers due to the substantial rail
service disruptions caused by the mergers.
III. Lessons Learned From the Past
1. The nationwide rail system undergoes severe and costly
disruptions when major rail consolidations occur.
2. Significant costs are imposed on shippers like UPS to address
these disruptions so that service commitments are not irrevocably
jeopardized.
3. Rail carriers need a minimum two-to-three year period to digest
a merger before service returns to the pre-merger level.
IV. Guidance for the Future
1. Consistent with the Board's notice, UPS takes no position on the
proposed BNSF/CN merger. However, UPS would like to acknowledge the
efforts BNSF has taken to improve its service levels.
2. UPS's fundamental concern is that if the proposed BNSF/CN merger
is consummated, it will trigger mega-rail mergers of an unprecedented
size and scope.
3. Disruptions across the entire rail system from any such mega-
mergers will be innumerably worse than anything yet experienced.
Digestion will take substantially longer, and at a much greater cost,
than previous mergers.
V. Recommendation
The integrated nationwide rail system is still digesting the June
1999 Norfolk Southern/CSX carve up of Conrail. UPS, for example, was
forced at times to divert up to 50% of the traffic, previously handled
on the rails by Conrail, to trucks due to the delays and disruptions
caused by the integration of Conrail into the Norfolk Southern/CSX
operations. Clearly, any additional consolidation of the industry
appears premature. Based on past experience, and without commenting on
the merits of any such merger, no further rail consolidation should be
contemplated until June 2002 at the earliest.
before the surface transportation board
STB Ex Parte No. 582
General Motors Corporation
Statement on Rail Consolidation
General Motors Corporation (``GM'') is one of the largest shippers
in North America. GM produces over five million cars and trucks a year
in North America and ships approximately 24,000 per day. In addition to
its engine and component plants, GM has 31 vehicle assembly plants at
29 locations throughout North America. GM spends over $4 billion
annually for transportation services, and $1.2 billion of that is for
rail-related service. GM is totally dependent on reliable, economical
transportation service, both for the delivery of an enormous volume of
parts and materials used in production and assembly, and for the
delivery of its finished vehicles and other products to market.
GM appreciates the opportunity to appear before the Board to offer
its perspective on the structure and performance of the North American
railroad industry. At the outset, GM states that it favors competition
over regulation and supports competition in all forms, including
service-oriented competition. In a market in which competition occurs
on the basis of service, better service will win a firm more business.
GM's view is that deregulation of the railroads has served the economy
well; however, as this statement illustrates, the railroads have not
sustained a level of service performance that meets the reasonable
requirements of customers like GM. Competition certainly provides the
railroads the incentive to attain this service level, but GM's
experience is that rail consolidation has recently been associated with
deterioration of the railroads' service performance. The Board should
challenge the railroads collectively to raise their standard of
performance for all shippers.
In recent years, the declining quality of rail service has forced
GM to switch to higher-cost alternative modes of transportation in
North America. In the last year, the amount of rail service GM
purchased was approximately $270 million less than it purchased in
1997; this was largely because merger-related problems made it
necessary for GM to switch from rail to costlier truck transportation.
In 1997, for example, 70% of GM's outbound vehicle shipments were by
rail. GM would have held to or increased that level of usage if we
could have relied on rail for our requirements. Unfortunately, over the
last two years the percentage of vehicle shipments that move by rail
has been reduced by 7 percentage points to 63% of the outbound total.
GM has had no choice but to substitute other modes at premium cost in
response to unreliable rail service.
As the largest manufacturer in North America, GM has designed
state-of-the-art systems for efficiently moving parts to the point of
assembly and for quickly moving finished vehicles to consumers. For
example, GM has invested extensively in the establishment and operation
of ``just-in-time'' (``JIT'') manufacturing methods, in which parts are
delivered to the right place on the production line at precisely the
right time, minimizing inventory and handling costs, among other
benefits. JIT is far more than a delivery system--it is an entire
production process of which shipping and receiving are only a part. Two
components are essential to this process: one component is parts
suppliers who consistently build to schedule. The other component is
consistent transit. JIT production is not possible without stability of
parts delivery, and stability of parts delivery is not possible without
reliable transportation service.
Another time-and-transportation sensitive system is GM's Fast-to-
Market initiative to deliver new cars and trucks to customers promptly.
Reliable transportation service is essential to the success of this
program, just as it is to ITT manufacturing. GM's requirement is for
fast, flexible and reliable service across the national network.
Obviously, no system such as JIT production or Fast-to-Market can
function properly if the rail delivery of parts is reliable only 70% of
the time, but 70% reliability has been GM's recent experience with rail
delivery of parts. This poor level of reliability results from a
variety of failures, including late deliveries, missed connections,
deliveries to incorrect locations, and unavailability of rail cars to
receive product when scheduled.
The facts clearly demonstrate that the railroads have failed to
live up to their customers' reasonable service expectations. Premerger
representations and expectations that the railroads could avoid
disruptions have not been met, and specified benefits of consolidations
have taken entirely too long to be realized; so-called ``short-term''
dislocations of transactions have become entirely too lengthy and
costly. In particular, GM has experienced significant disruptions and
overall service deterioration from the 1995 Burlington Northern/Santa
Fe consolidation, the merger of the Union Pacific and the Southern
Pacific systems in 1997, and the 1999 division of the Conrail system
between Norfolk Southern and CSX Transportation.
The BNSF consolidation was the least harmful to GM, in part because
it serves the fewest GM facilities; however, BNSF's own data shows that
customer service deteriorated or at best was unimproved in the first
three years following its consolidation. Although the BNSF
consolidation did not significantly disrupt the inbound flow of
material to GM's manufacturing and assembly facilities, bottlenecks and
delays did adversely impact the outbound shipment of vehicles.
The UP/SP transaction caused an unprecedented degree of disruption,
uncertainty and cost for GM, in both inbound and outbound
transportation. The total costs incurred by GM as the result of poor
railroad performance following that transaction exceeded $100 million.
Because the UP/SP failed to function effectively, GM lost production at
plants, was forced to purchase trucking and air charter services at a
premium, experienced delays of rail cars in transit for the
transloading of components, and was required to acquire additional
returnable shipping containers to correct the imbalance created in GM's
normal use of such containers.
These custom-designed containers and racks warrant a general
comment without reference to any specific rail consolidation. They have
been developed by GM for the safe and effective transportation of many
kinds and shapes of parts, from engines to body panels. The containers
not only protect the parts in transit, but also are moved directly to
the assembly line as an integral part of the JIT assembly process.
These containers are required for transporting the parts to the
assembly plants, but also must be returned efficiently and reliably to
the locations where they are needed for parts shipment; without the
containers available, GM must ship parts in less efficient, more costly
expendable packaging or not ship parts at all. A number of recent rail
consolidations have created disruptions and delays in the return of
these containers. And in the past year, scheduled container returns by
rail have failed to arrive on time as frequently as they have arrived
on time--in other words, across the board, this critical service is
reliable only 50% of the time!
As the result of the UP/SP consolidation, in August 1997 GM was
required to establish its own rail operations control center, operating
seven days a week in order to make up for the lack of information
available from the railroad about GM's shipments and vehicle locations.
Examples of problems handled by the operations control center include
the failure of rail cars to arrive at plants as scheduled and the
resultant buildup in inventory of outbound vehicles, the failure of
parts to arrive at the right plants, and the delay and ``loss'' of
vehicles in transit. Other extraordinary measures that needed to be
taken with respect to the outbound delivery of vehicles included the
creation of off-site storage areas, the holding of vehicles at origin
and intermediate points, the double handling of vehicles (which
exacerbated transit quality hazards), and the devotion of extensive
resources to the tracking of vehicles.
One noteworthy example of disruption of GM's shipment of finished
vehicles by the UP/SP merger involved Mexican assembly plants. Unable
to secure reliable rail transportation across the border following that
transaction, GM resorted for the first time in its history to the use
of ocean-going vessels to move vehicles assembled in Mexico to the
United States: between August 1997 and July 1999, sixty-two shiploads
were made to the east coast ports of Jacksonville, Florida and
Brunswick, Georgia; and forty-one shiploads were made to the west coast
ports of Port Hueneme and Benicia, California. And to reach the ships,
GM was required to truck vehicles 600 miles to the west coast of Mexico
and 500 miles to the east coast. This ocean transportation necessitated
by the UP/SP consolidation imposed a premium cost (that is, above
normal rail cost) of approximately $20 million on GM.
The adverse effects caused by the division of Conrail between
Norfolk Southern and CSX Transportation have also been significant. GM
has been required to operate its control center seven days a week to
deal with the problems created by failures in the railroads'
information systems. The cost of operating the control center alone in
connection with the Conrail division has already exceeded $1 million
and is continuing to mount. In addition, GM has been forced to arrange
extraordinary and costly substitute transportation whenever rail
performance failures have occurred. These substitutes have included 248
special trains, 30,000 truckloads of finished vehicles, and thousands
of additional air charters for parts to keep the assembly plants
operating. The additional truck transportation alone has cost over $15
million to date. Suppliers of materials like metal stampings, fascia
and plastic parts, which were already expensive to ship by rail, have
now switched away from rail to even more expensive truck delivery
service simply because of the inconsistency and unreliability of rail
transit times. Such increased trucking costs for parts are now becoming
imbedded in GMs' cost structure.
One example of this diversion occurred at GM's vehicle assembly
plant in St. Therese, Quebec, which obtains metal stampings--door and
rear-end panels--from two major suppliers in Indiana. Shortly after the
Conrail division, the plant could no longer depend on rail service for
parts delivery. Rail service has now deteriorated to the point that no
rail shipments of these parts, which are otherwise ideally suited to
rail transport, are being made; these Indiana suppliers are using
trucking exclusively in order to meet the St. Therese assembly plant's
needs. GM must pay a premium for this trucking, of course, which has
been about $1.4 million to date.
Another illustration of costs incurred as the result of the Conrail
transaction involves engines for GM's Lansing, Michigan assembly
complex, which produces some of GM's best-selling cars. The engines
come from a plant in Mexico. Within days of the June 1999 Conrail
division, rail service for the shipment of these engines from Mexico
became so unreliable that GM had to switch to trucking the engines,
including their specialized containers, from Mexico to Lansing. The
freight penalty incurred as a result was $1.3 million as of December.
It is, of course, better to incur the premium cost of trucking than to
incur the greater penalty of a plant shutdown, but reliable rail
service is the correct and most cost-efficient answer. GM continues to
run test loads on the railroad to see if a return to rail is warranted,
but so far it is simply too risky to the Lansing plant operations to
consider relying on rail delivery of these engines.
Outbound shipments have also been adversely affected by the Conrail
division. Particularly noteworthy is the added delay. GM has
experienced a 20% increase in the number of vehicles that are in
transit at any given time--in the transportation pipeline, so to speak.
Furthermore, over the last three years, the weighted average vehicle
transit time has increased to an all-time high, due mainly to
deteriorating rail service. The increase in vehicle transit time is
totally incompatible with GM's focus on faster delivery of finished
vehicles to customers, and it has an adverse effect on goodwill and
sales. During a time when overall productivity in our country is
increasing, this deterioration in the time it takes the railroads to
deliver a vehicle is unacceptable.
Rail inefficiencies have adversely affected GM's work force as
well. The truck docks at plants are more congested where the more
reliable truck service must be used instead of unreliable rail service,
which heightens safety risks to employees. Also, movement of parts from
trucks to the assembly lines results in the increased use of fork lifts
in the aisles of plants, which increases safety concerns. And, more
overtime has been required to deal with transportation disruptions.
These effects must be counted along with the societal burdens imposed
when truck transport is used to replace rail transport which has failed
to provide satisfactory service.
In advance of recent rail consolidations, the railroads have
offered general assurances of benefits; examples are that the
acquisition of particular lines or operations would reduce delivery
times, eliminate congestion, improve rail car turn-around, and improve
overall trip transit time and car utilization. Such benefits have not
been promptly forthcoming following most recent rail consolidations;
rather, post-consolidation dislocations have lasted for years.
An assurance was given to GM in connection with the UP/SP
consolidation that delays in and out of Mexico would be few and far
between because alternative routings would be available after the
transaction. As noted above, however, the disruption of service
following the UP/SP consolidation forced GM to resort to trucking and
ocean shipping in order to get vehicles from Mexico to the United
States. This example offers a striking illustration of both the failure
of consolidating railroads to deliver benefits of a transaction and the
kind of adverse impact that consolidation has had on GM. On the basis
of GM's experience, unless there are substantial advances in railroad
information technology, improvements in the allocation of human
resources, and detailed operational planning on the part of the
railroads, it is naive to believe that any future consolidation alone
will result in better rail service. The railroads' record of failure to
provide improved service makes GM wary of any future assurances.
Although long-term efficiency gains have been achieved in some rail
consolidations, a high price has been paid by GM and others as the
result of ``short-term'' dislocations and inefficiencies such as those
described. In GM's view, the length of such ``short-term'' post-merger
adjustment periods has grown entirely too long, and the effects have
grown too severe to be tolerated. In the UP/SP merger, for example, the
so-called ``short-term'' inefficiencies persisted for at least three
years. No shipper, including GM, should have to accept a substantial
risk of repetition of these post-merger scenarios. 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 in order to reap the promise of long-term benefits of rail
consolidations.
GM favors competition and disfavors any movement toward re-
regulation of the railroads. Our opinion is that the public interest
has generally been well served since rail deregulation. Nevertheless,
GM expects reliable service from its transportation service providers.
And GM would buy more service from the railroads if the railroads could
bring their level of reliability up to reasonable levels--on-time
service at least 90% of the time would satisfy our industry's
requirements. Not only would the improved service gain the railroads
more business from GM and others, but the increased business volume
would strengthen their financial viability.
The marketplace demands speed, quality and reliability from GM as
conditions of its own competitiveness. As a shipper, GM must also
demand speed and reliability from its transportation service providers.
Service competition among rail transportation providers is vital to GM,
and GM believes that the competitive market should motivate the
railroads to improve their level of service performance. What was
acceptable performance two years ago, by definition, will be
noncompetitive in today's and tomorrow's marketplace. GM submits that a
minimum standard of service should prevail throughout the railroad
industry. The Board should challenge the railroads to focus their
efforts to bring industry-wide performance up to levels which will meet
the reasonable needs and expectations of their customers and which will
support North American economic growth. Rail consolidations must not
detract from the achievement of this goal.
GM's view of the future of the rail industry is not one of mergers,
less competition, more regulation, and an industry focus diverted from
customer service. Rather, we would expect the industry, individually
and collectively, to focus their leadership energy and resources on
providing transportation service that meets and exceeds our expectation
for speed, flexibility and reliability. It is our view that this is a
collective challenge, one that requires the current rail providers to
work together in the interest of customer service. There is little
value in ``pockets of excellence'' when the customer view is of total
network performance.
______
Alliance for Rail Competition,
Washington, DC, March 30, 2000.
Hon. Kay Bailey Hutchison, Chairman,
Surface Transportation Subcommittee,
Committee on Commerce, Science and Transportation,
U.S. Senate,
Washington, DC
Dear Madam Chairman:
Pursuant to the Subcommittee's hearing on March 23, 2000 reviewing
the Surface Transportation Board's Ex Parte 582 decision to impose a
15-month moratorium on rail mergers, I would like to submit the
Alliance for Rail Competition's (ARC) testimony from that proceeding
and this letter for inclusion in this Subcommittee's official hearing
record.
Since 1980, national rail transportation policy has featured
competition as a prominent element of regulatory responsibilities, but
competitive issues have clearly taken a back seat to other
considerations. The very purpose of having economic regulation is to
control an industry in such a way that its behavior will resemble that
of a competitive industry. However, in the case of rail policy,
something is obviously amiss. The kinds of service problems documented
over the past five to ten years could never have prevailed in
competitive industries, nor would they likely have been tolerated in
other industries subject to economic regulation such as electric
utilities or telecommunications. Furthermore, in competitive
industries, individual companies do not price similar services so that
they make an infinitesimal margin on some business while pricing other
business at more than twice the level of costs.
The members of ARC have long believed that Congress must act to
address rail policies as a whole if we ever expect true market-based
competition among rail carriers to be reintroduced to the industry. The
issues that have been the subject of debate before Congress for the
last several years must be resolved to address the industry as it is
currently composed, regardless of whether and/or when additional rail
mergers may be considered. Then, should any further consolidation or
other structural changes occur in the rail industry at anytime in the
future, our national rail policy must be dynamic enough to evolve along
with the industry. That is the only way that we can ensure that
adequate levels of competition are available to all rail customers.
Adequate competition and, in the absence of such, effective
regulation, would go a long way toward resolving rail customers'
concerns. Unfortunately, this has never been the centerpiece of
regulatory interpretation for rail mergers or any other element of rail
policy, and as a result, we have a highly concentrated rail industry
where the handful of remaining carriers rarely competes against each
other. Although we applaud the Board for undertaking a merger policy
review, that review alone cannot and will not resolve concerns about
already poor rail service, monopoly pricing and discriminatory
practices. We do question why such a lengthy timeframe is necessary for
undertaking such a review when previous rulemakings have been completed
in as few as six months. Extending this process for the purpose of
providing rail customers with a ``breather'' is unlikely to have much
effect since rail customer confidence will never return to the rail
industry so long as rail carriers are allowed to freely exercise their
growing monopoly power.
It is for this reason that, as you so eloquently stated in your
remarks at the March 23rd hearing, the Board's actions on this front
should not--and must not--preclude the Congress from acting to redirect
rail policy interpretation toward developing more rail-to-rail
competition. While we will likely participate in the Board's efforts to
review and possibly modify merger policy, ARC remains committed to
working with you and the other members of the Commerce Committee to
review rail policy as a whole and to find the balanced solution for how
to best bring more competition to the rail industry through legislative
action.
If you have any questions about ARC's testimony, please feel free
to call me. Thank you for the opportunity to submit this information
into the official hearing record.
Sincerely,
Diane C. Duff,
Executive Director.
Attachment
Statement of the Alliance for Rail Competition
before the surface transportation board
STB Ex Parte No. 582
Public Views on Major Consolidations
March 7, 2000
The Alliance for Rail Competition (ARC) commends the Surface
Transportation Board (STB) for initiating this review of major railroad
consolidations and the present and future structure of the North
American railroad industry. For the past several years, ARC has
represented the diversity of the rail customer community before
Congress and the Board, pressing for significant pro-competitive
changes to rail policy in recognition of the dramatically different
appearance of today's rail industry compared to that which previously
existed. Our organization and its mission have been defined by rail
customers who have had growing concerns about deterioration in service
performance, increases in rail transportation costs, monopolistic
railroad behavior in both pricing and service, and the inability of
captive rail customers to get either competitive choices among major
rail carriers or adequate regulatory protection from monopolistic
behavior.
Without any further consolidation activity among the remaining rail
carriers, these issues would continue to be of tremendous concern to
rail customers. However, the December announcement that Burlington
Northern and Santa Fe Railway (BNSF) and Canadian National Railways
(CN) intend to merge has raised the stakes. The subsequent reactions
from other Class I railroads and from this Board make it very clear
that the next merger to be approved--regardless of the merger
partners--will inevitably cause a domino effect, the outcome, in all
likelihood, being a two-railroad system throughout North America, with
extension of each system's monopoly power over that which is exercised
today.
That is a frightening proposition considering that in today's
system of two major eastern and two major western railroads, there is
little true competition among carriers for a significant portion of
their business and that economic regulation has not been sufficiently
revised to compensate for what has become an exponentially increasing
competitive void.
So long as today's configuration remains in existence, the
opportunity to address these problems with changes in the
interpretation of existing rail policy is possible. However, should
today's Class I rail industry undergo any further consolidation--
regardless of who the merger partners might be--rail policy, and the
rail system itself, would require more far-reaching changes than those
considered by ARC to date. No major merger--whether it's the proposed
BNSF-CN merger or two other Class I carriers--should be considered
without system-wide changes to rail policy that would address what has
now become an extensive record of customer complaints and widespread
dissatisfaction. In other words, merger conditions that apply only to
the merging carriers will not address the breadth of concern, and would
most likely put one carrier at a significant disadvantage to the few
remaining carriers. We need no further imbalances.
If this Board refuses to recognize that policies set 20 years ago,
applied in an environment significantly different from the one we face
today, are inadequate, the legislative debate over policy will
undoubtedly move away from the problems with regulatory interpretation
we have been trying to address--such as whether a customer should be
allowed to get a rate over a segment of a movement, or whether a
customer could choose between two carriers in a terminal area where
both those carriers operate--and move toward a more comprehensive
public interest debate about how to best open the access to the
railroads' track structures and related plant so as to reintroduce
universal competition. At this moment, a debate over pervasive access
is not one that rail customers generally, or ARC specifically, relishes
entering. Nonetheless, the prospect of further consolidations among any
of the remaining major rail carriers without adoption of system-wide
policy changes would leave rail customers with little choice. These are
options that the Alliance for Rail Competition will continue to study
thoroughly so we are prepared to enter such a debate should the need
arise.
* * * * *
Status of the Rail Industry
The discussion of downstream impacts of mergers must be based upon
a brief review and assessment of the current composition and behavior
of the rail industry.
A. Four Mega-Railroads Overwhelmingly Dominate Railroad Traffic and
Offer Extremely Limited Transportation Choice To Customers
The first basic element of this foundation is the increasing
concentration of market power among Class I railroads. As shown in
Table No. 1, attached to the end of this statement, the number of
railroads has steadily declined throughout the 20th century, while at
the same time, the percentage of traffic handled by the four largest
railroads has steadily increased. Even since the Staggers Act--
legislation which was to encourage and rely on market competition--the
number of Class I railroads has declined by over 80% to just seven
today, with four of those railroads dominating the industry. In fact,
the four largest railroads handle 95% of Class I railroad ton-miles,
and undoubtedly control an even greater percent of the traffic. Thus,
many rail-dependent customers are faced with either no choice of
carriers, or a limited choice between two railroads. While, in the
short run, a two-carrier choice might provide some competitive
advantages to some, basic economic theory holds that in the long run,
oligopolists and/or dual monopolists decide that an activity such as
competitive (marginal) pricing is self defeating because it will be
matched by the other supplier. Thus, a conscious parallelism of action
results with customers, such as railroad shippers, having little or no
choice of prices and service levels.
Another concern in regard to the increased concentration of
railroad market power is that two railroads will comprise a majority in
votes over such centralized intra-industry matters as car-repair
billing rates, interline agreements, accounting rules, and policy
positions. For example, even though shippers now supply more than half
of all railroad cars, the railroad industry already requires private
car owners to agree to be bound by the AAR Interchange Rules as a
prerequisite to private car operation, and those rules are effectively
set by the remaining Class I railroads. Individualism can be lost in a
two-railroad collective that is adorned with significant assets, strong
financial means, and inordinate staying power. The result is an uneven
regulatory arena between railroads and their non-collective, rail-
dependent customers.
B. Cost Savings of Mergers Have Been Overstated
The second element of any objective assessment must acknowledge
that railroad cost savings attributed to mergers have been
significantly overstated. Such an acknowledgment will provide the
proper perspective to prospective claims of merger savings, and allow
regulatory determinations to be made on the basis of more credible
estimates of economic efficiencies versus the adverse impact of less
railroad competition.
Table No. 2 shows that the railroad industry has been in the throes
of a long-term, downsizing trend. Quite simply, the industry was
substantially over-built, and the miles of road owned and number of
employees would have been significantly reduced even without mergers.
Mergers were not responsible for crew reductions from four or more
personnel down to two on-train employees. Mergers were not responsible
for the elimination of cabooses. And mergers were not entirely
responsible for the abandonment of light-density lines and related
service. There is no dispute that railroad mergers have resulted in the
realization of certain economies of scale and, to an even greater
degree, density, but this is only one component of railroad unit-cost
reductions. At the same time, the shrinkage of railroad competition
associated with mergers has had an adverse impact on rail-dependent
customers in the form of higher rates, and especially, service
deficiencies.
C. Service Deficiencies and Price Distortions
The purpose of economic regulation is to control an industry in
such a way that its behavior will resemble that of a competitive
industry. Something is obviously amiss in regard to railroad regulation
because the kinds of service deficiencies which have been documented
over the past five years or so, following large mergers of Class I
railroads, could never have prevailed in competitive industries.
Furthermore, in competitive industries the individual companies do not
price similar services so that they make an infinitesimal margin on
some business while pricing other business at more than twice the level
of costs. This is not to say that differential pricing is not practiced
by virtually all businesses in the United States, but rather to suggest
that the span of profit margins in the railroad industry is much wider
than in industries in competitive markets.
What is of major concern to rail-dependent shippers is that the
railroad mergers were supposed to correct service deficiencies, rather
than exacerbate them. Yet, we hear from railroad executives that the
service problems are to be blamed on satiated yards and terminals. But,
(rhetorically speaking), isn't this a railroad management problem?
After all, consider the cost savings enjoyed by railroads as shown in
Table No. 3. Railroad unit costs have declined dramatically over the
past 60 years. Even since 1980, as Table No. 3 shows, ``real''
(constant-dollar) costs have declined by 63% from 5.32 cents per ton-
mile to 1.98 cents per ton-mile. At the same time, as Table No. 4
shows, railroad traffic, measured in ton-miles, increased--going from
919 billion ton-miles in 1980 to 1.4 trillion ton-miles in 1998. With
such enormous savings and constant traffic growths, why is there not
enough capacity at terminals to adequately handle the traffic? Whose
fault is this? Why do rail-dependent customers have to suffer? Adequate
competition and, in the absence of such, effective regulation, would
have gone a long way in ensuing adequate railroad service standards.
This is not a matter of inadequate railroad earnings. The railroad
industry has not been short of capital for many years.
D. Economic Regulation Has Not Compensated for the Growing Competitive
Void
Some of the regulatory problems resulting in railroad pricing and
service deficiencies are fairly obvious to rail-dependent customers.
Maximum rate proceedings tend to go on for many years and are
enormously costly and time consuming. The railroad revenue-adequacy
determination has little, if any, credibility as both debt and equity
capital is readily available to allegedly revenue-inadequate railroads.
And such measures as stand-alone costs, the Uniform Rail Costing
System, and the cost of capital are laden with complexities, judgments,
and questionable data. In short, there is no effective regulatory
backstop for most rail-dependent customers.
This portion of the assessment is clearly supported by the outcome
of the General Accounting Office analysis completed last February.
According to their extensive surveying of rail customers, more than 70%
noted that time, complexity and costs of filing complaints with the STB
were such a barrier to regulatory intervention that they generally
didn't even consider it to be an option. Similar findings were the
result of an analysis completed by the American Enterprise Institute
and Brookings Institute in December of 1999.
Experience with Mergers
In considering further consolidation in the rail industry, it is
impossible to ignore rail customers' recent experiences with other
recent mergers that were supposed to offer tremendous improvements in
service. In and of themselves, mergers are neither inherently good or
bad. Their desirability depends on their impact on their customers and
their benefits to society. In turn, the impact on customers depends on
the economic characteristics of the merger, the level of railroad
competitiveness in the marketplace, and the ensuing merger conditions
established by the STB.
The customer is the focus for most other federal regulators as they
evaluate a proposed merger. For example, consider the policy of the
Federal Energy Regulatory Commission:
``Rather than requiring estimates of somewhat amorphous net
merger benefits and addressing whether the applicant has
adequately substantiated those benefits, we will focus on
ratepayer protection. The merger applicant bears the burden of
proof to demonstrate that the customer will be protected. This
puts the risk that the benefits will not materialize where it
belongs--on the applicants.''\1\
---------------------------------------------------------------------------
\1\ Inquiry Concerning the Commission's Merger Policy Under the
Federal Power Act: Policy Statement, III FERC Stats. & Regs. Para.
30,044, at 30,123 (1996).
As another example, Federal Trade Commission Chairman Robert
Pitofsky recently announced a tightening of merger reviews. While this
tightening is not being characterized by the FTC as a ``dramatic
shift'' in policy, Pitofsky has noted that the FTC's actions are
intended to ``make transparent'' agency procedures as they apply to
divestiture proposals. These provisions include provisions that ``would
allow certain `crown jewel' assets of a company to be seized if the
company fails to make good on an FTC consent decree.'' \2\
---------------------------------------------------------------------------
\2\ ``FTC to Get Tough on Merger Reviews.'' By James V. Grimaldi,
Washington Post, page E1, February 17, 2000.
---------------------------------------------------------------------------
Unfortunately, no similar level of attentiveness to customer impact
has been demonstrated in railroad merger situations. In fact, history
shows us that, in the case of railroads, neither consumer protection
nor competitive interests have been the litmus test for federal
approval. Rather, the financial benefits to the railroads in question
appeared to be the determining factor. In addition, there has never
been an effort to assess a rail merger's impact on customer service
measures after the transaction has been complete. In the October 19,
1998 issue of Traffic World, former ICC general counsel Fritz Kahn
wrote:
``The proponents of railroad mergers and acquisitions can be
counted on to contend that their proposals will lead to
improved transportation--better service and reduced costs--and,
just as surely, the agency can be counted on to accept
uncritically the railroads' assurances. The question, however,
is whether the railroads' representations have been realized.
Have the railroad mergers and acquisitions yielded the better
service and reduced costs, and hence, lower rates which were
the premise of the ICC's or STB's approval of the transaction?
The STB doesn't know, just as the ICC didn't know. Neither one
of them ever has studied the effects of a railroad merger or
acquisition approved by it.''
Nonetheless, a cursory review of the last several mergers clearly
demonstrates that the projected benefits that supported proposed--and
approved--mergers, generally have not been realized.
In summary, the rail customer's experience has been that railroad
mergers have traditionally and consistently been proposed as being the
panacea for all ills. Projected benefits typically range from huge cost
savings to substantially improved service, and sometimes include the
enhancement of competition. It is not surprising that, given such
expectations, railroad customers often support such mergers, only to be
disappointed with the ensuing reality. But then, another proposed
merger comes along and the cycle is repeated. What occurs is that the
expectations of the ``next'' merger outweigh the disappointments of the
past merger. When a railroad virtually guarantees that the benefits
from a proposed merger will provide shippers with the type of service
they require, it is difficult to deny railroads the opportunity to
fulfill their stated intentions. Yet, as previous merger opportunities
have now come and gone, it has become clear that there is a significant
gap between expectations and results. This gap can be illustrated by
comparing the projected benefits of such mergers with the state of the
railroad industry that currently exists. The following three examples
demonstrate the point.
1. The merger of the Burlington Northern (BN) and Santa Fe (SF)
railroads in mid-1995 was based on projected annual savings of $450
million in operating and administrative expenses, and the realization
of another $110 million in operating income on new revenue to be
earned. After increasing its offer for the SF from $2.6 billion to just
over $4.0 billion, BN reiterated the advantages of the merger which
included: single-line service to all four major West Coast ports; the
merging of Santa Fe's market strength in intermodal with BN's coal,
grain and commodities traffic; and, administration efficiencies that
will, among other things, allow the elimination of some 2,750 jobs. At
the same time, BNSF was saddled with significant new debt that
ultimately would have to be passed on to customers.
2. The merger between the Union Pacific (UP) and Southern Pacific
(SP) railroads was consummated in September of 1996. UP claimed that
the merger would ``provide dramatic service improvements to shippers,
greatly strengthen western rail competition, and help position American
industry to be fully competitive domestically and internationally in
the 21st Century.'' The merger was somewhat of a defensive action, as
SP Chairman Anschutz acknowledged: ``A combination with UP was
inevitable for SP, after BN and Santa Fe agreed to merge.'' More
specifically, the expected benefits of the merger were identified in
the 1996 annual report of the Union Pacific Corporation (UPC), as
follows:
The benefits flowing from this consolidation are multifold:
routes will be shortened, often dramatically, congestion will
be eliminated; and traffic flows will become more efficient on
every major western corridor. The total annual operating income
benefit to Union Pacific could reach more than $820 million by
the year 2001.
UPC went on to tout the expectation of improved on-time performance for
shippers, much faster transit times, expanded single-line service,
significantly reduced operating costs, shorter routes, better equipment
and more reliable service, a significant reduction in congestion and
delays, faster and more dependable intermodal service, stronger rail
competition in the West, and specialized use of parallel routes to
improve traffic flow, transit times and reliability.
This Board does not need to be educated about the aftermath of this
merger, but during its implementation, even UP President Ron Burns
stated: ``many shippers are experiencing unprecedented problems with
service provided by our railroad.'' At one point, Dr. Bernard Weinstein
of the University of North Texas estimated the economic impact of that
service crisis exceeded more than $2 billion in the state of Texas
alone, and that was long before service in the West improved.
3. The acquisition of Conrail by the CSX and Norfolk Southern (NS)
railroads went into effect on June 1, 1999. While some cost savings
were expected to be realized from the joint acquisition in spite of a
$20 billion acquisition premium, there were two major favorable
expectations: (1) improved service to shippers due to increased direct-
line competition between two railroads, and (2) traffic diversion from
motor carriage. It's worth noting that as CSX and NS increased their
respective bid prices for Conrail, the anticipated benefits were
``recalculated,'' and magically, as the price of the acquisition
increased, so did the anticipated benefits. Instead, rail customers
have experienced system-wide service problems on both CSX and NS that,
despite promises to the contrary, continue to this day. In some
regions, such as Buffalo, service has been so bad that customers have
been forced to shift production to other regions. Reports of rail
customers being forced to divert rail traffic onto motor carriers would
support the notion that the carriers have not only failed to take truck
traffic off the road, but have more likely contributed to at least a
short-term increase in truck traffic.
Representatives of both CSX and NS have acknowledged their troubles
and, despite having two years to prepare, both carriers have chalked up
their problems to ``poor planning'' and the fact that they ``didn't
anticipate their customer's needs.'' Despite the system-wide service
problems, both CSX and NS are in the process of increasing their rates,
and cite shortages of track and equipment as providing the opportunity
for them to do so.
* * * * *
It is important to note that the recent CN merger with IC has been
identified as having ``gone off without a hitch.'' However, this
statement cannot be applied to operational changes required by the
merger, as those changes didn't begin until approximately two weeks
ago. In fact, a key computer switchover has been postponed. In some
previous mergers, service problems didn't begin to be evident for as
long as six months. Thus, no one can legitimately classify the
relatively small CN-IC merger as an indication that mergers in this
highly concentrated market can still be done without harming service or
competition.
Merger Policy Recommendations
In considering any merger from this time on, the Board would more
appropriately serve the public interest by responding to broader
fundamental questions: What does our national economy require of its
railroad system? How does the merger in question impact the ability of
the rail system as a whole to meet the national need? What policy
changes are necessary to ensure that the nation's rail system is best
positioned to live up to those requirements? Answering those kinds of
questions would more appropriately focus this Board on protecting and
forwarding the interests of the consumers of railroad services--who
provide the reason that railroads exist at all.
Thus, sound public policy toward future railroad mergers should be
based on the following principles:
1. A Viable Freight Railroad Industry is in the Public Interest
Freight railroads are a national asset which have the ability to
provide relatively low-cost, energy-efficient, and environmentally
benign transportation service. Further, these railroads have a duty to
serve all of their customers, without whom railroads would cease to
exist. The best means for ensuring the railroad industry's viability is
to encourage rail carriers to compete among themselves, as well as with
other modes of transportation. Competition is the engine that drives
the free enterprise system. It pressures suppliers (railroads) to be
efficient and can help railroads grow traffic.
2. The Net Impact on Customers Should be the Key Merger Criterion
Even where economies of density are expected to be realized,
railroad mergers should not be approved if the prospective cost
reductions are offset by adverse service and/or rate impacts on
railroad customers due to a diminishment of competition.
3. Competitive Access is the Preferred Protection for Customers
Railroad customers can be protected from the adverse effects of
mergers through additional competitive access to captive customers
served by the merged railroad, and/or by implementing effective
economic regulation. Competitive access is preferable to regulation
because it motivates carriers to be responsive to customer needs.
Competitive access would benefit railroads in that the incumbents: (1)
could charge adequate user fees, (2) would experience traffic growth,
and (3) would in turn realized newly-found economies of traffic
density.
4. Railroad Customers Need Safe Harbor Protection
In the absence of effective railroad competition, economic
regulation is necessary to insure that service is adequate and freight
rates are reasonable. Opening access and economic regulation is not an
either-or choice; they are parts of a whole.
5. Railroad Mergers Are Not the Only Way to Lower Operating Costs
Traffic growth is a key to economies of railroad track density.
Aside from traffic growth, railroads can reduce costs through a wide
variety of managerial and technological means. Railroads have
controlled their costs by eliminating inefficient service, reducing
crew sizes, changing operating and work rules, and employing new
technology.
6. Post-Merger Performance Must be Closely Monitored
The STB shall establish procedures to measure post-merger
performance and should issue an annual report of its findings for a
period of ten years.
7. Where Desirable Adjustment will be Made
When railroad mergers cause unanticipated adverse impacts on
customers, the situation can be rectified post-merger, by opening
competitive access and/or making economic regulation more effective.
* * * * *
ARC fully understands that the remedy for defective railroad
markets is to be partially found in legislative change. However, the
extent of that legislative remedy will be largely determined by the
actions--or lack thereof--of this Board in reviewing further
consolidations. ARC also believes that the present railroad market
distortions would not have occurred if an adequate public policy
regarding mergers would have been developed and followed. It is not too
late; the time to begin the change is now, and the STB has the power
and authority to start the process. Thus, it is ARC's firm belief that
the STB should undertake the following four steps before even
considering any further major rail consolidations, again, regardless of
the merger partners:
1. Adopt a merger policy similar to that advocated in this
statement.
2. In light of the market power held by today's rail system
configuration, re-examine the issues of so-called ``bottleneck'' rates
and decisions relating to access in terminal areas.
3. Change the revenue-adequacy criterion to a simple measure of
``allowable return-on-equity,'' similar to the public utility industry,
and
4. Work with rail customers and Congress to develop an appropriate
method for providing protections for small captive shippers that can be
passed into law.
ARC stands ready to work with the members of this Board in support
of such pro-competitive, consumer-oriented changes.
Table No. 1. Downsizing of the Railroad Industry
(Class I Railroads)
------------------------------------------------------------------------
Miles of No. of
Year Road Owned No. of Employees
(000) Railroads (000)
------------------------------------------------------------------------
1907 230
1916 254
1920 2,148
------------------------------------------------------------------------
1929 230 162 1,661
------------------------------------------------------------------------
1980 165 36 458
1985 146 23 302
1990 120 14 216
1995 108 11 188
1998 101 9 178
1999 7
------------------------------------------------------------------------
Source: Association of American Railroads, Railroad Facts (annual
publication) and Railroad Transportation, A Statistical Record, 1911-
1951. Interstate Commerce Commission, Statistics of Railways in the
United States, For The Year Ended 1929, 1930 and annual reports.
Table No. 2. Increasing Market Concentration Within the Railroad Industry
(Class I Railroads)
----------------------------------------------------------------------------------------------------------------
Number of % Ton-Miles Carried By
Year Railroads Four Largest Railroads
----------------------------------------------------------------------------------------------------------------
1929 162 23%
1940 134 27
1950 129 25
1960 109 25
1970 73 34
1980 36 43
1985 23 47
1990 14 66
1995 11 69
1998 9 87
1999 7 95
----------------------------------------------------------------------------------------------------------------
Source: Association of American Railroads, Analysis of Class I Railroads (annual publication). Interstate
Commerce Commission, Statistics of Railways in the United States, For The Year Ended 1929, 1930.
Table No. 3. Declining Railroad Operating Expenses
(Class I Railroads)
------------------------------------------------------------------------
Operating Railroad ``Real''
Year Expense Per Inflation Expense Per
Ton-Mile (1998 = 100) Ton-Mile
------------------------------------------------------------------------
1939 1.04 cents 3.2 32.5 cents
1980 2.75 51.7 5.32
1985 2.74 \1\ 67.9 4.04
1990 2.37 81.4 2.91
1995 1.99 \2\ 93.4 2.13
1998 1.98 \3\ 100.0 1.98
------------------------------------------------------------------------
\1\ 2.85 cents adjusted for $809 million of special charges taken as
operating expenses.
\2\ 2.12 cents adjusted for $1.7 billion of special charges taken as
operating expenses.
\3\ 2.02 cents adjusted for $520 million of special charges taken as
operating expenses.
Table No. 4. Increasing Railroad Traffic
(Class I Railroads)
------------------------------------------------------------------------
Revenue
Year Tons Originated Ton-Miles
(Millions) (Billions)
------------------------------------------------------------------------
1929 1,339 447
1955 1,396 624
1970 1,484 765
1980 1,492 919
1985 1,320 877
1990 1,425 1,034
1995 1,550 1,306
1998 1,649 1,377
------------------------------------------------------------------------
------
Prepared Statement of David R. Goode, Chairman, President & CEO,
Norfolk Southern Corporation
My name is David R. Goode and I am Chairman, President and Chief
Executive Officer of Norfolk Southern Corporation (``NS''). I welcome
this opportunity to comment in support of the critical and important
decision issued by the Surface Transportation Board (``STB'') on March
17, 2000 in Ex Parte No. 582, Public Views on Major Rail
Consolidations. In that decision, the STB announced the commencement of
a rulemaking proceeding to develop new standards and procedures for
railroad mergers and suspended the processing and consideration of
major rail consolidation proposals for 15 months in order to give the
STB and the rail industry a much-needed respite from further rail
merger activity while those new rules are being promulgated.
The STB deserves the thanks of all of us who are part of the rail
industry and who are concerned about the difficulties and challenges
facing our Nation's railroads, our customers, our employees, and the
many others whose lives are affected by and intertwined with our
industry. As this Committee knows full well, the past several years
have been difficult and challenging ones for the railroad industry, as
we have struggled to implement major mergers and consolidations of rail
systems both in the East and the West. We at Norfolk Southern have been
challenged in our assimilation of the substantial portion of Conrail we
began to operate last June. I am happy to report that we have made
great progress toward providing the fast, efficient and reliable
transportation service our customers need and deserve. Still, we have
much more to do to achieve fully the promised benefits of the Conrail
transaction and to deliver these benefits to our customers and our
stockholders. The STB decision provides valuable time to accomplish
that goal without the disruptions, uncertainty and necessary loss of
focus that another round of major rail consolidations would inevitably
bring.
The STB recognized what we and our customers, our employees, and
our partners need most: time--time to make our service the best that it
can be; time to develop with our interchange partners cooperative and
reliable interline services to obtain maximum advantage from the
existing North American rail network; and time to restore the
confidence of investors in the industry.
During the four days of hearings held by the STB earlier this
month, the Board received testimony from more than 150 witnesses,
including myself and the CEO's of the other major North American
railroads. The Board heard an overwhelming appeal from all sides--from
railroads, from government agencies, from ports and municipalities,
from large automobile manufacturers to small agrarian interests, and
from chemical shippers to one of the industry's largest intermodal
customers (UPS)--for a breather from further rail merger activity. The
Board obviously listened, and it courageously acted by finding that the
public interest required a respite from rail merger activity while it
modernized and revised its rail merger regulations. I am convinced this
is a valuable pause, which will enable us to concentrate our efforts on
improving service and improving the financial health of the industry.
We need that time and I will do my part to see we use it wisely.
In short, Norfolk Southern believes that the STB's actions were
entirely consistent with its broad public interest mandate and were
fully supported both by the record compiled in its Ex Parte No. 582
proceedings and by the Board's experience. We look forward to
participating in the Board's rulemaking to revise its merger
regulations and look forward to continuing our efforts to improve the
quality and reliability of our transportation services, develop
cooperative arrangements with our interline partners and enhance our
overall financial results.
______
Prepared Statement of Robert D. Krebs,
Burlington Northern Santa Fe Corporation
On behalf of Burlington Northern Santa Fe Corporation, I appreciate
the opportunity to present this testimony for the record of this
oversight hearing.
I offer these comments as you evaluate the manner in which the
Board is carrying out the mission entrusted to it by Congress,
particularly in the area of considering private sector proposals for
mergers and consolidations.
As the Surface Transportation Board has stated, its decision to
initiate its Ex Parte Proceeding on Public Views on Major Rail
Consolidations was spurred by the announcement that Burlington Northern
Santa Fe and Canadian National intend to file an application with the
Surface Transportation Board seeking approval of the common control of
The Burlington Northern and Santa Fe Railway Company and the railroad
companies controlled by the Canadian National Railway Company. In
announcing its intention to hold hearings on Major Rail Consolidations,
the Surface Transportation Board noted that it was aware that, in the
wake of the filing of the BNSF/CN notice of intent, there has been a
great deal of speculation that the strategic responses of the remaining
North American carriers . . . will lead to a new round of major
railroad consolidations. Much of the speculation referred to by the
Board was spurred by our railroad competitors, a number of which had
recently engaged in railroad mergers that resulted in serious service
problems that affected not only their customers, but users of adjacent
systems and other railroads, as well. These competitors even went so
far as to take out an advertisement in the Wall Street Journal, the
Washington Post, the Journal of Commerce, and Traffic World, which
consisted of an Open Letter to Railroad Customers from four railroad
CEOs. The gist of the letter was that they were not ready for another
railroad combination, because, unlike BNSF and CN, they had not yet put
their houses in order following their own mergers. Remarkably, despite
their professed lack of readiness to enter into merger transactions of
their own, they threatened to initiate their own mergers if our
combination were to go forward.
In the four days of hearings before the Board on Public Views of
Major Rail Transactions, numerous shippers and shipper organizations,
such as the National Industrial Transportation League, shortline
railroads and municipalities, leading economists and members of the
investment community, the Secretary of Transportation, and other
stakeholders testified that they thought a moratorium would be a bad
idea. In addition, much of the testimony presented in those hearings
focused on the service problems associated with other railroads mergers
(and not with the way BNSF or CN had managed our own mergers), and many
of the witnesses stated that they thought our merger would enhance
competition and service to shippers. Despite these facts, the Board
nonetheless accepted the anti-competitive, self-serving arguments of
our competitors, ordering an unprecedented 15-month moratorium on major
rail consolidation filings and activities, and suspending the BNSF/CN
proceeding. It is inexplicable that the Board would believe that it has
the extraordinary power to block the filing of our control application
and yet believe itself powerless to block the merger of applicants who
could not implement a merger effectively without creating a service
crisis.
The Board's decision is illegal and in clear violation of the
policies and terms of the ICC Termination Act.
We have filed a petition for judicial review of the Board's radical
decision in the United States Court of Appeals for the District of
Columbia Circuit. We also have petitioned the Board to stay its
decision pending judicial review.
The Board's moratorium decision is inconsistent with both the
policies and the plain terms of the ICC Termination Act and, for that
reason, cannot stand. The decision contravenes the Board's statutory
authority and duties. In the ICC Termination Act, Congress addressed
the long history of interminable ICC merger proceedings by imposing
strict deadlines on the acceptance and review of rail merger control
applications. These deadlines were intended to further the
Congressional policy favoring pro-competitive rail consolidations and
to reduce the delays in achieving merger benefits that had
characterized ICC practice.
In our view, the moratorium simply cannot be squared with the law-
governing merger and control proceedings. As Chairman Morgan herself
noted in her confirmation hearings before this Committee just a few
months ago, ``[w]hen market conditions motivate two class I railroads
to want to merge, our statute tells us to review the proposal presented
to us, applying certain statutory standards, and to approve the merger
if it is in the public interest.'' Testimony of Linda J. Morgan,
Hearing On Reappointment, Sen. Committee on Commerce, Science, and
Transportation, Sept. 28, 1999. Even if the moratorium could be squared
with applicable law, it could not survive judicial scrutiny because the
procedures used by the Board in deciding to issue it were grossly
improper and unfair.
We have a number of complaints about the Board's procedures in
imposing the moratorium, which we set forth in our stay petition. These
procedural flaws are serious matters, because the essence of our
complaint is that the Board's moratorium constitutes a pre-judgment on
the merits of our application and, as a Board member noted in the
closing comments at the end of the Ex Parte No. 582 hearing, ``not to
decide is, in fact, to decide.'' 3/10/00 Tr. at 225. Because the
economy and our competitors will not stand still during the pendency of
the moratorium, a fifteen month delay in the filing and processing of
our application would irreversibly deprive both our shippers and
stockholders of the benefits that our combination would have provided
if not so delayed, and could preclude us from going forward with the
combination at all.
The Board's decision, which vaguely directed railroads ``to suspend
activity relating to any railroad transaction,'' also is striking
because it could be interpreted as preventing a wide variety of
protected discussions, the pursuit of judicial review, and even this
testimony here today. If, interpreted so broadly by the Board, the
decision would clearly be an overbroad and flagrantly unconstitutional
prior restraint on the exercise of First Amendment rights.
Needless to say, we are extremely disappointed with the Board's
moratorium decision. By accepting the self-serving arguments and
threats of our competitors this decision pre-judges our application
before that application was even filed and subject to review. As I
recently stated, if the Board's decision were to survive judicial
review, it would penalize BNSF and CN--the two major railroads who are
taking care of their customers--because of the failures of other
railroads whose mergers have resulted in debilitating and costly
service failures for shippers.
If given the opportunity to go forward with our combination
application, we would prove that our combination will be in the public
interest and would offer our customers unparalleled service. Over the
past four years, BNSF has spent about
$9.5 billion to improve its network, locomotive and car fleet, and to
build and expand terminals and intermodal facilities. These
investments, which would not have been possible had the ICC not
approved the merger of Burlington Northern Railroad and The Atchison,
Topeka and Santa Fe Railway Company in 1995, have enabled BNSF to
provide customers with on-time service year-to-date in the 94% range--a
superb performance that is the best that I've seen in this industry. A
combination with CN would further enhance our service and provide our
owners with better financial performance.
Therefore, we are frankly puzzled about how the STB could so
radically and
unfairly change the rules and deny us the forum established by law, to
have our case heard in accordance with the deadlines established by
Congress in the ICC Termination Act. Based on the existing criteria for
approving rail mergers, our combination passes with flying colors. In
fact, we have indicated that we are prepared to raise the bar ourselves
to ensure that there would be no service disruption resulting from our
combination and that greater competition would be injected into the
industry.
The STB should not be permitted to stop a good merger in its tracks
because of concerns about bad mergers coming down the road. And our
competitors should stop frightening shippers with threats that, if our
combination is not halted, they will carry out their own ill-considered
mergers, once again saddling their customers (and ours) with service
crises and breakdowns.
In conclusion, we hope that the Board will take the reasonable
course, issue a stay of its moratorium, and permit our application to
be filed and reviewed pending judicial review. If not, we are confident
that the result of that judicial review will be the overturning of the
Board's radical moratorium decision. And we appreciate the opportunity
to offer for the record our views about the Board's precipitous and
ill-considered moratorium decision.
bnsf news release
BNSF's Krebs Says STB Moratorium Will Prevent BNSF and CN--Rail
Industry's Best Service Providers--From Giving Shippers Even Better
Service
FORT WORTH, Texas, March 17, 2000--Burlington Northern Santa Fe
Corporation (NYSE: BNI) (BNSF) Chairman and Chief Executive Officer
Robert D. Krebs said, in response to today's Surface Transportation
Board announcement, that, ``We are extremely disappointed with the
STB's decision to impose a 15-month moratorium on proposed rail
consolidations. We have reviewed the decision, and while Chairwoman
Linda Morgan's action may be well-intentioned, as it stands, it has the
effect of denying our proposed combination with Canadian National
Railway Company (CN) before receiving our application and giving it a
proper review.''
Krebs pointed out that, ``If the STB decision survives judicial
review, the result of the STB's decision is to penalize BNSF and CN,
the two major North American railroads who are taking care of their
customers, because of the failures of other railroads whose mergers
have resulted in debilitating and costly service failures for
shippers.''
During the four-day hearing held last week by the STB to consider
the future structure of the rail industry, Krebs said, ``There was no
clear consensus for imposing a moratorium. In fact, there was
significant support from the Secretary of Transportation, shipper
associations such as the National Industrial Transportation League,
numerous individual shippers, short line railroads and municipalities
for BNSF and CN to file their common control application without
delay.''
Krebs indicated that ``BNSF will thoroughly review today's decision
to determine what appropriate legal action we can take. If Chairwoman
Morgan's radical decision stands, the effect would be something unheard
of in any industry: For a period of 15 months, industry participants
will be denied the opportunity to realize service and efficiency
improvements that a carefully conceived and well executed combination
can provide shippers, shareholders, employees and the public.''
Krebs said that ``Over the past four years, BNSF has spent about
$9.5 billion to improve its network, locomotive and car fleet, and to
build and expand terminals and intermodal facilities. These investments
have enabled BNSF to provide customers with on-time service year-to-
date in the 94 percent range--the best rail transportation service I've
seen in my 34 years in the industry. We believe a combination with CN
is the next step to providing our customers with even better service
and our owners with better financial performance.''
``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. Based
on all existing criteria for approving rail mergers, our proposed
combination passes with flying colors. We have indicated that we are
prepared to raise the bar ourselves to ensure that there is no service
disruption and that greater competition is injected into the
industry,'' Krebs noted.
Through its subsidiary, The Burlington Northern and Santa Fe
Railway Company, headquartered in Fort Worth, Texas, BNSF operates one
of the largest rail networks in North America with 33,500 route miles
of track covering 28 states and two Canadian provinces.
North American Railways, Inc. and CN have filed a registration
statement on Form F-4/S-4 with the Securities and Exchange Commission
(SEC) in connection with the securities to be issued in the
combination. This filing also includes the proxy statement for the
shareholders' meetings to be held for approval of the combination.
Investors should read this document and other documents filed with the
SEC by CN, BNSF, and North American Railways, Inc. about the
combination because they contain important information. These documents
may be obtained for free at the SEC's Web site, www.sec.gov. Other
filings made by BNSF on Forms 10-K, 10-Q and 8-K may be obtained for
free from the BNSF Corporate Secretary's office. For information
concerning participants in BNSF's solicitation of proxies for approval
of the combination, see ``Certain Information Concerning Participants''
filed by BNSF on Schedule 14A under Rule 14a-12.
selected excerpts from witnesses who testified before the surface
transportation board and comments from the journal of commerce
Here we hasten to note, though, that we do not believe a moratorium is
the right response.
(The Honorable Rodney Slater, U.S. Secretary of Transportation--March
7, 2000)
We are disappointed that the Board ordered a 15-month suspension of all
merger activity, including a proposed consolidation of the Burlington
Northern Santa Fe/
Canadian National Railroads.
(The Honorable Rodney Slater, U.S. Secretary of Transportation--Press
Statement--March 17, 2000)
First, it would be a huge mistake if the Federal Government were to
take on a central economic planning role for railroads that would
dictate and regulate the timing of when corporate transactions in the
rail industry could even be considered. No other industry in the U.S.
has to receive the government's permission to propose a corporate
transaction. In addition, from a practical standpoint, undue delay or
the enactment of a ``moratorium'' on when transactions should even be
considered can be tantamount to a denial of a transaction, without the
benefit of an actual and fair hearing on the merits of a proposal.
(Robert Krebs, Chairman/CEO, BNSF--March 7, 2000)
A fair hearing delayed is a fair hearing denied. For that reason, our
railroad opponents hope that you will delay a fair hearing on our
combination, at least until they feel they are more ready to respond to
it. They would prefer not to tighten their operations with an eye
towards increasing efficiency; delay will free them from the need to
meet our new efficiencies with new efficiencies of their own. That is
protectionism on its face, and you ought to reject it as such.
(Paul Tellier, President/CEO, Canadian National Railway--March 7, 2000)
This is why I believe strongly that the proposed merger should not be
subject to any sort of moratorium. The public interest would be served
better by a complete airing of the issues surrounding a major
combination such as is being proposed. The League stands ready to fully
participate in the merger process. To cut short the legitimate merger
process would be a mistake, we believe.
(Ed Emmett, President, The National Industrial Transportation League--
Letter to STB Chair Morgan--March 14, 2000)
But's it's a little ironic that the railroads who have botched their
mergers the most, now don't want the two that did pretty well in theirs
to go forward. There is a certain irony in that.
(Ed Emmett, President, The National Industrial Transportation League)
The STB has an important role to play here. That role should not be to
frustrate a beneficial merger and deny benefits to its proponents and
their customers due to a fear of ``downstream effects'' from others.
Such a miscarriage of justice would deny basic economic freedom to the
proponents of the merger. BNSF and CN and customers supporting the
merger should not be penalized for the difficulties of others. This is
a basic issue of fairness and due process . . . The BNSF and CN merger
should not be held hostage to the ability of other railroads to
participate in mergers of their own at the same time.
(J. Reilly McCarren, President and CEO of Wisconsin Central--March 8,
2000)
A more restrictive approach to the analysis of consolidation,
considered in isolation of other factors, would likely diminish the
willingness of companies to engage in such combinations, even in
circumstances where such combinations would be in the interest of the
railroads, their customers and employees and the public.
(Robert S. Kaplan, Goldman Sachs--March 7, 2000)
The government should not delay making decisions on real-world
transactions. Such delays are more likely to harm consumers and
producers, and hinder innovation by deferring the benefits of ``good''
consolidations. . . . Regulators cannot, however, determine when
capital markets will find opportunities for efficiency gains--these
opportunities come and go . . . the Board should encourage competition;
it should not allow any competitor to delay the introduction of
increased efficiency and competition while that competitor resolves its
current problems.
(Robert W. Hahn, AEI-Brookings STB--March 9, 2000)
It is hard to see why the difficulties of some railroads in
implementing the improved connections that should have come with
consolidation should be used to prevent others from achieving these
gains. To allow this argument would have perverse incentives; service
failures would be rewarded by shelter from competition.
(Kenneth Arrow, Professor Stanford University--March 8, 2000)
STB policy follows one of the basic tenets of antitrust/competition
policy: protecting competition, not competitors. As long as competitive
alternatives are preserved, then the STB lets market forces determine
where in the system there are efficiencies to exploit, and lets
shareholders and business decision-makers suggest both the scope and
timing of such transactions . . . The STB should avoid letting rail
industry players dictate the pace of action of their competitors.
(Joseph Kalt, Amy Candell, Kennedy School of Government)
Capital-intensive, mature industries are undergoing consolidation.
Railroads, steel, aluminum, chemicals--you name it--are under pressure
to use their capital more efficiently. A merger that increases the
density of traffic on rail lines is one way of accomplishing that.
Neither the STB nor any other government agency can change that for
long.
(The Journal of Commerce--March 1, 2000)
I am in favor of allowing the BNSF/CN merger to go forward. This
combination will give numerous shippers and communities on the C&G and
throughout a significant portion of Mississippi more efficient access
to some of the longest, single line service in North America.
(Roger D. Bell, President and CEO, Columbus and Greenville Railway--
March 8, 2000)
Delaying the benefits of a good transaction is not in the interests of
anyone, other than competitors.
(Robert Grossman, Chairman and President, Emons Transportation Group,
Inc.--March 8, 2000)
______
Prepared Statement of John W. Snow, Chairman and CEO,
CSX Corporation and CSX Transportation, Inc.
Thank you for the opportunity to present this statement for the
record on behalf of CSX Corporation and CSX Transportation, Inc.
I wholeheartedly support the Surface Transportation Board's (the
``Board'') very important, bold and correct decision in Ex Parte No.
582, Public Views on Major Rail Consolidations, to suspend for 15
months any activity that would be characterized as a ``major
transaction'' by the nation's Class I railroads pending development of
new rules by the Board.
This decision is a strong recognition by the STB that a BNSF/CN
merger, or any other rail merger, is not in the public interest at this
time.
While a longer pause would have been preferable, the Board's action
clearly reflects the unstable nature of the industry and the
overwhelming concern expressed by rail customers, railroad employees,
the financial community and the public--all of whom are critically
dependent upon a financially strong and stable freight rail system.
By proceeding with a rulemaking at this time, the Board has
accomplished two very important things. It has recognized the need,
first, to assess and update the standards by which mergers are reviewed
by the STB given the current state of the nation's freight railroad
industry, and second, to apply those standards to any future rail
mergers in an orderly and rational way. To redefine merger standards
while at the same time considering merger applications would invite
chaos.
Many public officials, including members of this Committee, have
voiced strong support for the Board's decision noting the unstable
nature of the nation's freight rail system and the need for a period of
calm, free from the diversion of an ill-timed merger. I too share those
sentiments and firmly believe that the Board's decision gives the
industry the opportunity to focus on resolving merger-related service
issues, and effectively bringing recent rail mergers to a successful
conclusion for the benefit of our customers and the public.
It should be noted that the Board arrived at its decision after
having conducted an exhaustive review of the issue, which included
several hundred statements from shippers, rail labor, financial
analysts and public officials, as well as a four-day hearing during
which the Board heard from more than 160 witnesses. The overwhelming
majority acknowledged the industry's instability and the need for a
respite from merger activity. Large customers like United Parcel
Service and General Motors were clear in their positions. In fact, a
vice president with UPS suggested during the four-day hearing that no
new mergers be considered until at least 2002.
These companies, along with Wall Street, recognize that any merger
at this time would have very negative consequences. Much-publicized
rail congestion and delays resulting from recent rail mergers in the
eastern and western U.S. have shaken customer confidence. A merger at
this time would only add to the current instability and result in more
ill timed mergers. Railroad attention would be diverted from the main
task at hand--that of fixing the existing system. Finally, the industry
would be destabilized even further by an almost-certain return to
greater government regulation.
The net effect would be a stranglehold on our efforts to rebuild
the country's railroads by destroying our ability to raise the
necessary capital to maintain the health of the industry and restore
shipper and investor confidence.
We must put the country's railroads on a stronger financial footing
if we are going to be in a position to make the capital infusions
necessary to give shippers what they need most--reliable rail
transportation. I believe the Board's decision paves the way for
achieving that goal.
As I stated in my testimony before the Board during the March 7
hearing, ``Before we decide to take any giant steps, we should finish
what we have started, learn the lessons of our mistakes, and only then
proceed. . . . Collectively, we owe it to our customers, our employees,
our shareholders and the public to get this one right.''
It is because of this that CSX has filed in opposition to the two
stay requests filed with the Board and will seek to have the Board's
decision upheld in the Court of Appeals.
On behalf of CSX, I thank you for the opportunity to submit this
statement for the record.
______
Prepared Statement of Paul M. Tellier, President and Chief Executive
Officer, Canadian National Railway Company
Madam Chairman and Members of the Subcommittee:
On behalf of the Canadian National Railway Company (CN) and its
affiliates, I appreciate the opportunity to submit this testimony for
the record of the Subcommittee's March 23 hearing on the Surface
Transportation Board's (STB's) railroad merger moratorium policy.
The STB's policy with respect to mergers of the largest railroads,
the Class I carriers, is a matter of the utmost importance to CN, and
we commend the Subcommittee for its examination of this important
issue. Given recent events, CN is in a unique position to comment on
the STB's merger policy and the Board's recently-imposed 15-month
moratorium on new rail mergers. After providing a brief description of
our situation, CN would like to comment on two major aspects of the
Board's recent activities in this area.
General Background
On December 20, 1999, CN and The Burlington Northern Santa Fe
Railway Company (BNSF) filed at the STB a notice of intent to file, on
approximately March 20, 2000, an application seeking STB authorization
to bring our two railroads under common control. This combination will
afford competitive transportation advantages to our customers at lower
cost and enhance the safety and efficiency of our operations--without
service disruption, without additional corporate debt, without
interfering with the operations of our connections, without adverse
effects on the environment, and with minimal impact on employees. This
essentially end-to-end transaction is good for shippers, competition,
the economy, and the shareholders of CN and BNSF.
Shortly after we filed our notice of intent, the STB issued an
order on December 28, 1999, announcing that, in the course of our
control proceeding, the Board would break with its long-standing
precedent of reviewing each merger case on its own merits, and instead
would consider not only the direct impacts of our combination but also
evidence of ``the cumulative impacts and crossover effects that would
likely occur as other railroads developed strategic responses in
reaction to the proposed combined new system.'' Later, on January 24,
2000, the STB initiated its STB Ex Parte No. 582 proceeding, Public
Views on Major Rail Consolidations, to examine these consolidations and
the present and future structure of the North American railroad
industry. The STB's notice of this hearing said nothing about the
possibility of a moratorium, but it did say that the hearing would not
result in any prejudgment of the CN/BNSF transaction.
Earlier this month, the STB conducted four days of hearings in the
STB Ex Parte No. 582 proceeding. During the hearings, many witnesses
supported a reexamination of the STB's merger rules. However, there was
no clear consensus for imposing a moratorium on STB consideration of
rail merger applications. In fact, the only unanimity in support of a
moratorium came from the major competitors of CN and BNSF. If people
had known beforehand that the STB would seize upon a moratorium as a
result of this hearing, the STB may have heard a lot more opposition to
that concept. Even so, most witnesses filing statements or letters, or
testifying in person at the hearings, supported proceeding with
consideration of the merits of the CN/BNSF transaction without delay.
For example, Secretary of Transportation Rodney Slater stated that any
type of STB-imposed moratorium on consideration of our transaction
would be inappropriate. Shipper associations (such as the National
Industrial Transportation League), short line railroads,
municipalities, academics, and a majority of individual shippers, also
supported prompt consideration by the STB of the CN/BNSF application.
In addition, more than 200 shippers wrote to the STB in support of fair
and prompt consideration of our transaction.
Despite this support for moving forward, the STB issued a decision
on March 17 imposing a moratorium for 15 months on activity related to
mergers of Class I rail carriers and announcing the initiation of a
rulemaking proceeding to consider new rail merger rules. By taking this
action, the STB suspended its review of the proposed CN/BNSF
combination, without allowing us to file our formal application or make
our case on the merits.
CN wishes to raise concerns about two aspects of the Board's
activities.
Moratorium on Class I Railroad Mergers
When it initiated the STB Ex Parte No. 582 proceeding, the Board
declared, ``we intend no prejudgment of the yet-to-be filed BNSF/CN
application.'' Yet, without receiving our formal application, or giving
any consideration to the merits of our proposed transaction, the STB
last week precluded any consideration of our application by refusing to
accept Class I merger filings for 15 months and suspending the notice
of intent filed by CN and BNSF.
The STB's purported authority to take this action was 49 U.S.C.
Sec. 721(a) and Sec. 721(b)(4). The first allows only those regulations
for ``carrying out'' the STB's statutory duties, such as holding
proceedings to consider transactions. The second is intended to allow
the STB to issue injunction-like orders to prevent irreparable harm in
specific matters, such as a rate reasonableness hearing. It was never
intended to authorize general orders, like the moratorium order,
freezing the competitive structure of the rail industry. That is a
power that Congress did not give to the Board, explicitly or
implicitly. The STB, in issuing this order, has repudiated its
statutory duty under 49 U.S.C. Sec. 11323-5 to promptly review the CN/
BNSF consolidation proposal. In failing to attend to its duties, it has
committed a legal error. Under current law and STB regulations, we are
entitled to a decision on the merits of our proposal within 16 months
of the date we file our application, which the moratorium improperly
prevents us from doing.
The STB's decision is not only unauthorized by Congress, it is also
a de facto amendment or rescission of the STB's regulations, applied
retroactively to prevent the filing of the CN/BNSF application and a
subsequent decision on the merits by the STB. The decision's illegality
is compounded by its blatant unfairness.
We maintain, therefore, that the Board lacks the statutory
authority to impose this moratorium. On March 17, CN and BNSF filed
notices of appeal with the U.S. Court of Appeals for the District of
Columbia Circuit, and we have filed with the STB a petition for a
stay--pending judicial review and prior to seeking, if necessary, a
judicial stay pending that review--of the Board's decision. We intend
to vigorously pursue all avenues available to us under applicable law.
The STB repeatedly cites the service problems of the rail industry.
However, the mere pendency and hearing of the CN/BNSF application will
not threaten irreparable harm to railroad service or contribute to
further service problems. This will only happen if railroad executives
ignore their own problems, and if the Board then fails to make them
remedy such problems. Over the longer term, the Board could consider
future potential service problems during its consideration of the
downstream effects of the CN/BNSF combination, as it already announced
that it intended to do.
In any event, the STB has the power, by proper application of the
public interest standard, to prevent future mergers from happening
before the prospective merger partners are ready to implement them
without significant risk of service problems. It makes no sense to hold
up good mergers, like the CN/BNSF combination, out of a misconceived
notion that the STB is powerless to stop bad transactions.
Prolonged Proceeding on New Merger Rules
In its decision last week, the Board also announced that it would
institute an approximately 15-month proceeding to consider new merger
rules. Given the record that has been developed in the STB's recent STB
Ex-Parte No. 582 proceeding, as well as in the course of the STB's
consideration and oversight of recent rail mergers, it is unclear why
such a lengthy process is necessary.
The Board's schedule for a reevaluation of its merger rules is
considerably longer than the time periods allotted for other recent
major STB proceedings, including STB Ex Parte No. 627, Market Dominance
Determinations--Product and Geographic Competition, and STB Ex Parte
No. 628, Expedited Relief for Service Inadequacies, both of which
addressed significant rail policy issues.
Further, in its March l7 decision, the STB expressed its concern
about uncertainty and instability in the railroad industry as part of
the rationale for new merger rules. If such uncertainty and instability
do indeed exist, the Board should feel even more compelled to move
expeditiously to reexamine its merger rules, so that rail carriers,
their customers and employees, and the financial markets will know what
to expect in the future with respect to the structure of the rail
industry.
A prolonged rulemaking proceeding, combined with the 15-month
moratorium on consideration of Class I rail mergers, will do nothing to
strengthen the competitive viability of the railroad industry. Rather,
it will have the opposite effect. The U.S. economy is dynamic and the
transportation sector must continue to grow and redefine itself to meet
new market challenges. Rather than allowing railroads to become more
efficient and effective competitors--both intermodally and
intramodally--the Board's March 17 decision will reduce competitive
pressures and, hence, reduce incentives to improve service and keep
prices down. In protecting railroads that would have to face the
increased competition that would result from the CN/BNSF combination,
the STB is not doing the job that Congress intended.
In sum, CN strongly disagrees with the STB's March 17 decision,
which we believe exceeds the scope of the Board's statutory authority.
The STB's decision deprives CN and BNSF of our statutory right to a
prompt and fair hearing. It is also contrary to the public interest in
efficient rail transportation. In fact, if the STB's consideration of
our proposed transaction does not proceed, the public benefits of the
CN/BNSF transaction, which could be in excess of $500 million annually,
will be either delayed or lost forever.
Thank you again for the opportunity to submit this statement for
the record. We stand ready to assist the Subcommittee as it considers
this vital issue.