[Senate Hearing 107-1031]
[From the U.S. Government Publishing Office]
S. Hrg. 107-1031
THE SURFACE TRANSPORTATION BOARD'S
NEW MERGER RULES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON SURFACE TRANSPORTATION
AND MERCHANT MARINE
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JUNE 28, 2001
__________
Printed for the use of the Committee on Commerce, Science, and
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COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska
Virginia CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon SAM BROWNBACK, Kansas
MAX CLELAND, Georgia GORDON SMITH, Oregon
BARBARA BOXER, California PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri GEORGE ALLEN, Virginia
BILL NELSON, Florida
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
Mark Buse, Republican Staff Director
Ann Choiniere, Republican General Counsel
----------
Subcommittee on Surface Transportation and Merchant Marine
JOHN B. BREAUX, Louisiana, Chairman
DANIEL K. INOUYE, Hawaii GORDON SMITH, Oregon
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska
Virginia CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
RON WYDEN, Oregon OLYMPIA J. SNOWE, Maine
MAX CLELAND, Georgia SAM BROWNBACK, Kansas
BARBARA BOXER, California PETER G. FITZGERALD, Illinois
JEAN CARNAHAN, Missouri JOHN ENSIGN, Nevada
JOHN EDWARDS, North Carolina
C O N T E N T S
----------
Page
Hearing held on Thursday, June 28, 2001.......................... 1
Statement of Senator Breaux...................................... 1
Statement of Senator Smith....................................... 3
Statement of Senator Carnahan.................................... 4
Witnesses
Gebo, William L., Manager of Rail Services, Dow Chemical Company,
accompanied by George Marshall, Director of Supply Cycle,
Albemarle Corporation.......................................... 40
Prepared statement........................................... 41
Haverty, Michael R., Chairman, President, and CEO, Kansas City
Southern Railway Company....................................... 30
Prepared statement........................................... 31
Howells, Claudia L., Rail Division Manager, Oregon Department of
Transportation................................................. 44
Prepared statement........................................... 46
Morgan, Hon. Linda J., Chairman, Surface Transportation Board,
accompanied by Commissioners Wayne Burkes and William Clyburn.. 4
Prepared statement........................................... 6
Snow, John W., Chairman, President, and CEO, CSX Corporation..... 23
Prepared statement........................................... 24
Tellier, Paul M., President and CEO, Canadian National Railway
Company........................................................ 26
Prepared statement........................................... 28
Appendix
Lott, Hon. Trent, U.S. Senator from Mississippi, prepared
statement...................................................... 59
Hamberger, Edward R., President and Chief Executive Officer,
Association of American Railroads, prepared statement.......... 60
Marshall, George, Director of Supply Cycle, Albemarle
Corporation, prepared statement................................ 61
American Chemistry Council, prepared statement................... 43
American Forest Resource Council, prepared statement............. 63
Response to written questions submitted by Senator Dorgan to:
Linda Morgan................................................. 66
Response to written questions submitted by Senator McCain to:
Wayne O. Burkes.............................................. 77
William Clyburn, Jr.......................................... 74
William Gebo................................................. 88
Michael Haverty.............................................. 89
Claudia L. Howells........................................... 86
Linda Morgan................................................. 68
John W. Snow................................................. 80
Paul M. Tellier.............................................. 81
Response to written questions submitted by Senator Specter to:
Linda Morgan................................................. 70
Response to written questions submitted by Senator Smith to:
Linda Morgan................................................. 72
John W. Snow................................................. 81
Paul M. Tellier.............................................. 84
Response to written questions submitted by Senator Rockefeller
to:
Linda Morgan................................................. 73
THE SURFACE TRANSPORTATION BOARD'S
NEW MERGER RULES
----------
THURSDAY, JUNE 28, 2001
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 2:34 p.m., in
room SR-253, Russell Senate Office Building, Hon. John B.
Breaux,
Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. JOHN BREAUX,
U.S. SENATOR FROM LOUISIANA
Senator Breaux. The hearing will please come to order. Good
afternoon. Thank you all for being with us this afternoon.
I want to, first of all, say how pleased I am that we begin
this hearing with my good friend and colleague, Senator Gordon
Smith, who is now on this side of the middle. Last time you
were on this side of the middle. I am not sure why you are over
here this time, but we are delighted you are here and look
forward to a long and fruitful relationship as Ranking Member
and Chairman of this Subcommittee. I think we have an
opportunity to do a lot of things that are very, very important
for this country in the area of transportation and also
maritime affairs.
Let me just say that when we look at the issue that is the
subject of the hearing this afternoon, which deals with
railroad mergers and the work of the Surface Transportation
Board, I take the opinion that it seems to me that more and
more we have less and less. What I mean by that is it seems
that more and more in this country, we have less and less of
companies that are engaged in competition with each other,
because more and more, we have mergers and consolidations, and
the end result is that we have few competitors.
If you look at what has happened in the airline industry,
we have fewer airlines. If you look at what has happened in the
telecommunications industry, we have fewer telephone companies.
If you look at what has happened in the energy production area,
we have fewer oil companies. And we certainly have fewer
railroads than we used to.
For those of us who believe in competition as the way to
have a society that serves consumers and also allows businesses
to prosper, in this country it is fundamentally based on
competition and not by regulation of those industries. It is
apparent, however, to me and I think to most Americans, that
you cannot compete if you have no competitors. And if you do
not have sufficient competitors to allow the free market and
the competitive marketplace to work, then you end up with
additional regulation, a result that I am not in favor of.
If we end up with two railroads or two airlines or one oil
company or one phone company, then the Federal Government is
going to regulate everything they do. We will regulate where
they can go, who they can serve and how much they can charge.
That is not something I want. That is not something I would
expect anyone in this room would want. I would certainly think
that my colleague, Senator Smith, would agree with that
premise.
So, today the purpose of this hearing is to listen to the
Surface Transportation Chairwoman and the Board members about
their recent decisions to remove the previous hold that they
had on any mergers, the freeze, and to discuss with the Board
members and with some of our other witnesses the effect of
those rules, the intent of those rules as well.
I would commend the Board for the so-called timeout that
they took when they had a freeze on any future mergers. I think
that it was important to allow for a freeze to occur, to step
back and look at the big picture. I am a little concerned about
whether that may have been too late.
I think that this is obviously a very difficult issue to
come up with something that is fair for everyone. Every merger
in every industry has pros and every merger in every industry
has a lot of cons. There are good and bad in all of these
activities.
But I do think that we can all agree that we need a strong
and a vibrant railroad industry in America, and we are
committed to doing everything we can to work with our
Administration officials to see that that happens.
The new merger rules, as I understand them, will clearly
require that merger applicants demonstrate with greater
specificity even than what the old rules required before a
merger can be shown to benefit the public, and I think that is
good.
The new rules would require the Board and future Boards to
evaluate a wider range of merger related activity. I think that
is good.
I am particularly pleased to see that the merger applicants
now will have to file a plan on how they intend to provide
compliance with the promised levels of service as a result of
the merger. I am interested to know more about the effect of
that plan. Is it a guideline? Is it a contract? Is it a wish
list? Is it enforceable? And questions of that nature.
I know in Louisiana some of our shippers have been required
to suffer the consequences and pay the extra costs associated
with mergers that did not work as they were intended to work
certainly or as soon as they were intended to work.
The final note. I was somewhat surprised to read, in
reading this new rule by the Surface Transportation Board,
about the distinct treatment afforded one railroad, Kansas City
Southern, in particular. I look forward to hearing from the
Board as to why that decision was made, what was the
justification for it, and was that the only way to accomplish
what the Board said that they were attempting to do.
We have only seven independent Class I railroads left in
this country, and if you exempt one of them from the merger
rules and they engage in a merger with another Class I
railroad, then you are, in effect, exempting one-third of the
Class I railroads from the new rules. Is that good public
policy? Does that make sense? Those questions need to be not
only asked, they need to be answered. And that is the purpose
of this hearing.
With that, I would recognize my good friend, Senator Smith,
for any comments he might have.
STATEMENT OF HON. GORDON SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Thank you, Mr. Chairman. I am very pleased
to be here with you and with our witnesses today.
Before the recent fate of the Republican Party, I occupied
your chair and I know we are in very good hands in this
Subcommittee, but it was my purpose to begin a series of
hearings on a wide range of rail transportation issues. The
first we held in March was with Linda Morgan here, where we
focused on the Surface Transportation Board and its ongoing
efforts to carry out its statutory responsibilities and to
explore the Board's merger rulemaking procedure that was then
pending and is now the subject of this hearing today. I note
that the Board's rules include a few items which we did not
discuss at the hearing, including the exemption of those rules
for one specific Class I carrier, and I am interested in
exploring that exemption.
Also, we had a second hearing in May, Mr. Chairman, on the
state of the rail industry, including its current financial
condition, capacity constraints, and long-term capital
investment needs.
I know, Mr. Chairman, of your willingness to pick up on the
agenda that we had set to hold a hearing to consider rail
shipper concerns, including service, reliability rates, and
competition. I think this is a good place to air out these
issues. So, I know we are in very good hands, Mr. Chairman.
I want to especially welcome Ms. Claudia Howells from the
Oregon Department of Transportation Rail Division. I appreciate
that she would come back here to share her views and those of
our State on these merger rules and their application on Oregon
and the Nation's rail transportation system.
So, I welcome you, sir, and congratulate you and look
forward to working in every constructive way with you.
Senator Breaux. Thank you very much, Gordon. I did want to
also say and to recognize, under your leadership, that this is
an effort that was started previously. You had already started
looking at shipping interests and railroad interests. I know
you want to do some more hearings on the question of shipper
protection, and we are going to certainly be cooperative in
that regard and hopefully, come up with something that will
make sense because you started this and we just hope to
continue in a cooperative fashion with you.
For any comments that you might have, Senator Carnahan.
STATEMENT OF HON. JEAN CARNAHAN,
U.S. SENATOR FROM MISSOURI
Senator Carnahan. Thank you, Mr. Chairman.
Unfortunately, I will not be able to stay at this hearing
very long today but I did want to take the opportunity to
acknowledge one of the witnesses here today.
Michael Haverty is the President and Chief Executive
Officer of Kansas City Southern Railway and the Chairman of
Kansas City Southern Industries. He is a fourth generation
railroader who started out as a Missouri Pacific brakeman at
the age of 19. In 1970, he moved over to the Santa Fe Railroad
and ultimately became the President and Chief Operating Officer
of that company in 1989.
In 1995, he came to Kansas City and was appointed President
and Chief Executive Officer of Kansas City Southern Railway. In
large part, because of Kansas City Southern's successful
acquisition of Mexico's Northeast Railway, Railway Age magazine
named Mike Haverty Railroader of the Year. All of us in
Missouri are proud to have Kansas City Southern as an exemplary
corporate citizen in Kansas City, and I am pleased to welcome
Mr. Haverty to this Subcommittee today.
While I will not be able to stay here to hear the witness,
I am very interested in the subject matter at hand. The various
consolidations over the past decade have raised serious
concerns about the status of competition in the rail industry.
With these concerns in mind, the Surface Transportation
Board recently adopted new merger rules that placed additional
burdens on applicants to demonstrate that proposed mergers will
actually enhance competition instead of simply preserving it. I
look forward to examining these new rules and reviewing the
testimony of today's witnesses.
Thank you very much, Mr. Chairman.
Senator Breaux. Thank you, Senator Carnahan.
I would just say to all of our guests that it is a terribly
busy day on the floor. Everybody is looking toward the Fourth
of July recess, so we are trying to get everything done in one
day, and it has been very, very difficult. But this hearing is
also very important.
I would like to invite as our first witness who the Chair
of the Surface Transportation Board, the Honorable Linda
Morgan, but I also want to ask Commissioner Wayne Burkes and
Commissioner William Clyburn to please come and take their
seats at the witness table too. This Board does not operate in
a vacuum. It operates with all of its members and I want them
all there. We will have a statement and then we will proceed to
questions of our Chair, Linda Morgan. Welcome back.
STATEMENT OF HON. LINDA J. MORGAN, CHAIRMAN,
SURFACE TRANSPORTATION BOARD; ACCOMPANIED BY COMMISSIONERS
WAYNE BURKES AND WILLIAM CLYBURN
Ms. Morgan. Thank you. I am appearing here today at the
request of the Subcommittee to discuss the Board's new major
rail merger rules. I will make my oral remarks brief. I have
submitted written testimony and I ask unanimous consent that it
be included in the record in its entirety.
Senator Breaux. Without objection, it will be included.
Ms. Morgan. My written testimony reviews the Board's new
merger rules in some detail. My written testimony demonstrates
that the Board has acted affirmatively and appropriately by
significantly raising the bar for future merger approvals. By
raising the bar, our final rules address issues that have been
presented about railroad consolidation.
Concerns have been raised about the level of competition in
the rail industry. We expect that, because our new rules view
enhanced competition as a clear benefit that will tip the
scales in favor of the public interest, mergers approved in the
future will add competition.
There has been legitimate concern raised about the service
problems associated with prior mergers. We have made sure by
requiring, for the first time, the filing of a service
assurance plan with a merger application, that new merger
proposals demonstrate how service will be improved and how
service problems will be dealt with.
There also has been concern raised about benefits claimed
with past mergers that have not been realized. We have made
sure that merger applicants are held more accountable for
benefits claimed and that applicants address whether claimed
benefits can be achieved by means other than merger.
We have made sure that downstream effects and cross-border
issues associated with a final round of North American rail
mergers are fully aired and considered. Also, our rules focus
particular attention on the interests of smaller railroads,
ports, and passenger and commuter operations, and we have
addressed concerns raised about the impact of mergers on
employees.
Some have said that the new rules do not really change
anything, but the rules clearly reflect otherwise. For one
thing, our old rules provided for the approval of a merger
``unless,'' whereas our new rules provide for approval ``only
if.'' Our new rules clearly reflect a greater skepticism about
the benefits of future mergers and a greater concern about the
potential harm of further consolidation. And we have shifted
the focus, imposed new requirements, and codified and expanded
upon past practices in a number of areas. To me, all of that
represents quite a change.
Some say that we have not gone far enough with respect to
enhancing competition. We went as far as we could legally go in
our decision, and I did not see the benefit in issuing rules
that stood a very good chance of being thrown out in court. In
any event, we clearly went further in this regard than our old
rules provided for.
Without question, these rules have clearly changed the
landscape for the future, reflecting the lessons learned from
the past. And it is my hope that, in raising the bar, these
rules will remind the railroads to take care of business with
the systems they now have and to stop viewing mergers as the
only way to go.
In this regard, I dissented on the waiver for Kansas City
Southern from the new rules. These new rules are intended to
address the final round of major rail mergers. Exempting a
strategically important carrier in a transaction that could be
expected to begin the final round and putting KCS customers
under a different set of rules from other customers seems
inconsistent and inappropriate to me.
In closing, I know that regardless of how much we have done
in these rules and elsewhere and how much we do in the future,
there are those who will say that we have done nothing of
substance unless we somehow guarantee the opportunity for every
shipper to be served by at least two railroads. To me,
belittling the progress that has been made is just not
constructive.
I believe that the Board has acted responsively and
responsibly to address, in a manner consistent with the
statute, concerns that have been raised about the rail sector
and to drive change that has moved the industry in a positive
direction. These new major merger rules are no exception. Our
rules recognize that a final round of major rail mergers will
draw the map for the North American rail network of the future,
and that if we go down that path, we had better take great care
to get it right.
I will be happy to answer any questions that you might
have.
[The prepared statement of Ms. Morgan follows:]
Prepared Statement of Hon. Linda J. Morgan,
Chairman of the Surface Transportation Board
My name is Linda J. Morgan, and I am Chairman of the Surface
Transportation Board (Board). I am appearing today at the
Subcommittee's request to review the Board's new rules governing
mergers of large railroads adopted in Major Rail Consolidation
Procedures STB Ex Parte No. 582 (Sub-No. 1).
The Board's decision adopting new major rail merger policies and
rules, which was issued on schedule on June 11, 2001, after a 15-month
period of extensive notice and comment, significantly raises the bar
for approval of a major merger. Merger applicants must clearly show
that a merger is in the public interest by demonstrating that public
benefits, such as improved service and enhanced competition, outweigh
any negative effects, such as potential service disruptions and harm
that cannot be mitigated. In particular, the Board indicated that it
will be looking for merger proposals to add competition, and the new
rules suggest ways in which that objective could be met in the original
proposal filed with the Board or by way of conditions imposed by the
Board. The rules also require that any merger application must include
specific details about the service that would be provided, how service
will be improved, and how service problems will be addressed. And in
the decision, the Board stated that it will take a more skeptical view
of claims of merger benefits, that it will hold applicants more
accountable for those claims if a merger is approved, and that
applicants will be required to address whether claimed benefits can be
achieved by means other than a merger.
events leading to issuance of new rules
In recent years, the railroad industry in the United States has
consolidated substantially. With those mergers came severe service
disruptions and concerns about further concentration in the industry.
Thus, the announcement in late December 1999 that the Burlington
Northern Santa Fe (BNSF) rail system would seek to merge with the
Canadian National Railway Company (CN), one of the two large Canadian
railroads, drew strong expressions of concern from many quarters.
The Board, concerned that the BNSF/CN merger proposal would trigger
another (and quite likely final) round of merger proposals, began a
proceeding in January 2000 to elicit public comment on the future
structure of the rail industry in the United States and the role of
mergers today. The Board received well over 400 written comments. And
during 4 days of hearings in March, the Board heard oral testimony from
about 125 parties, including Senators and Congressmen, the Departments
of Agriculture, Defense and Transportation, several ports, large and
small railroads, numerous shipper associations, individual shippers of
all sizes from every major industry, and the financial community.
The overwhelming message at the hearing was that the Board's then-
existing merger policies and procedures--as reflected in its rules,
policies, and precedents--were inadequate to deal with any new merger
proposals, and that fundamental changes to that body of law were
required to address any further mergers. Most witnesses also expressed
the concern, which the Board shared based on its own experience with
rail mergers over the previous 5 years, that additional mergers at that
time would have disrupted the Nation's rail transportation network and
disserved the public interest.
After evaluating these extensive comments, the Board agreed that a
broad reexamination of the agency's merger policies was required, and
concluded that the existing rules and policies were not adequate to
address what could be the final round of consolidation in the rail
industry leading to two transcontinental railroads. Accordingly, on
March 17, 2000, the Board imposed a 15-month moratorium on the filing
of major merger applications so that it could reexamine and revise its
merger policies and procedures before considering any new merger
proposals, including the anticipated BNSF/CN proposal (for which an
application had not yet been filed). The Board's moratorium, about
which I testified before this Subcommittee last year, was upheld in
court.
the new rules
So that final rules could be in place by June 2001, in accordance
with the moratorium period, the Board promptly initiated a rulemaking
proceeding. In the proceeding, the Board issued an advance notice of
proposed rulemaking, a notice of proposed rulemaking with a proposed
set of rules, and a set of final rules. The final rules increase
significantly the burden on major merger applicants. The new rules
require applicants to demonstrate that, among other things, a proposed
transaction would enhance competition where necessary to offset
negative effects of the transaction, such as competitive harm, and to
address fully the impact of the transaction on service, including plans
for service reliability.
Overall Approach
The new rules reflect a significant change in the way the Board
will apply the statutory public interest test to any major rail merger
application. The Board stated that, because of the small number of
remaining large railroads, the fact that rail mergers are no longer
needed to address excess capacity in the rail industry, and the
transitional service problems that have accompanied recent rail
mergers, future merger applicants will be required to bear a heavier
burden to show that a major rail combination is consistent with the
public interest. This shift in policy, the Board noted, will place
greater emphasis in the public interest assessment on enhancing
competition, while ensuring a stable, balanced, and reliable rail
transportation system in a way that accounts for smaller railroads,
ports, and passenger and commuter services.
Enhancement of Competition
The new rules reflect the Board's intent to offset, through the
adoption of proposals made by merger applicants and as necessary
through adoption of conditions for competitive enhancements, merger-
related harms that cannot be directly or effectively mitigated. The
Board indicated that such competitive enhancements could include, but
would not be limited to, reciprocal switching arrangements, trackage
rights, and efforts to eliminate restrictions on interchanges by
shortline railroads. The Board also indicated that the quantity and
quality of competitive enhancements that would be required relative to
a particular transaction would depend upon a variety of factors, such
as merger-related competitive harms for which feasible and effective
remedies could not be devised, and the amount of public benefits that
could be expected to flow from a particular transaction.
Benefit Assessment
The new rules also reflect the Board's view that, because the
realization of benefits in recent mergers has been delayed or
frustrated by transitional service problems, future merger proposals
should be met with a more skeptical, ``show me'' attitude toward claims
of merger benefits and toward claims that transitional service problems
will not occur. The Board said that it will also consider the extent to
which various claimed merger benefits can be achieved, short of merger,
through cooperative agreements among railroads. The Board further
indicated that, given the size of the transactions that may be proposed
in the future, and, given the dangers involved should such transactions
fail, the benefits claimed by future merger applicants will be very
closely scrutinized.
Service Assurance Plans
The Board's new rules require merger applicants to submit a Service
Assurance Plan with their initial application and operating plan. The
Board stated that, given the importance of service to shippers and that
implementation of any merger plan necessarily has an element of
uncertainty, applicants' Service Assurance Plan for each major merger
proposal must provide certain essential information, such as plans to
deal with any potential adverse service effects during implementation
and plans to accommodate such less-than-optimum operations. The Board
indicated that, in particular, a Service Assurance Plan must include
information about proposed operational integration, training,
information technology systems, customer service, freight and passenger
operations coordination, yard and terminal operations management,
service disruption contingency plans, how traffic-level changes or
increases will be accommodated by the combined system, infrastructure
improvement, labor issues, service benchmarking, and timetables for the
completion of implementation activities, as appropriate. The Board
stated further that the Service Assurance Plan must provide for the
establishment of problem resolution teams and describe specific
procedures to be used toward problem resolution.
Downstream Effects
The new rules reflect the Board's determination to ``look down the
road'' to ascertain whether approving not just the immediate proposal
that may be before the Board, but also others that are expected to flow
from it, would ultimately result in a rail industry structure that
would continue to provide at least the existing level of competitive
options for shippers. The Board stated that merger applicants will not
be required to present alternative benefit calculations based on
specific alternative possible responses that could be filed by other
railroads; yet, merger applicants will be required to initiate a
commentary, to which other parties may respond, that would give the
Board the information needed to rule on what would likely be the first
step in an end-game situation in which only two transcontinental
railroads would remain in North America. The Board made clear that it
is also prepared to use its power to apply conditions to a transaction
to repair conditions previously imposed on rail mergers that might be
substantially impaired by a new major rail merger.
Employee Concerns
The Board indicated that it is extremely pleased with the privately
negotiated ``historic settlement agreement'' on the issue of collective
bargaining agreement (CBA) overrides recently signed by most of the
larger railroads and by unions representing most rail employees. The
Board stated that, to the extent there is still any live issue relative
to CBA overrides, the new rules, which reaffirm that the Board supports
negotiated agreements wherever possible, respects the sanctity of CBAs,
and looks with disfavor on overrides, properly implement the Board's
statutory mandate concerning overrides.
Transnational Issues
The Board stated that, because future major transnational mergers
are likely to raise novel jurisdictional, national interest, and public
interest issues, it will be necessary to gather information about
relevant facts, laws, and policies important to an accurate and
comprehensive understanding of such merger applications. The new rules
therefore provide that, in addition to full-system competitive analyses
and operating plans required of applicants with transnational
operations, all applicants will be required to address any ownership
restrictions (by law or corporate initiative) and any pertinent
governmental restrictions or preferences.
Oversight and Monitoring
The new rules codify the Board's recent practice of formal
oversight for a period of no fewer than 5 years following each merger.
With respect to operational monitoring, the Board noted that, because
its monitoring of previous transactions has proven vital to identifying
and correcting operating deficiencies during implementation, the new
rules also provide for expanded post-approval monitoring of the
implementation of mergers to help ensure that adequate service is
provided during the crucial transitional period, and beyond. The Board
further indicated that, if substantial service disruptions occur as the
result of a merger's implementation, the Board will consider
alternative service arrangements.
Kansas City Southern
Finally, a majority of the Board granted a waiver to KCS from the
application of the new major rail merger rules. The majority indicated
that parties could attempt to show in a particular case that this
waiver should not be allowed. I dissented to this aspect of the
decision. I do not believe that KCS adequately demonstrated why it
should have been given special treatment. Also, I am concerned that,
given KCS' strategic position, any merger involving KCS and another
large railroad will likely trigger the final round of consolidations
leading to only two systems of large North American railroads. It seems
incongruous to me to exempt a carrier transaction that could trigger
the final round from the very rules that have been promulgated to
address the final round and the interests of rail customers and other
parties affected by further consolidation.
summary
Overall, the Board's new rules for major rail mergers will make
merger approval more difficult, reflecting a greater skepticism about
the benefits of more consolidation and a greater concern about the
potential harm of more consolidation. The rules make clear in this
regard that in order for the scales to be clearly tipped in favor of a
merger proposal, that proposal will have to offer competitive
enhancements. And any proposal will have to have been subjected to
significant pre-filing analysis and planning as to the type of service
to be provided and the actions to be taken in the event of service
failures. Given the risks and finality associated with what could be a
final round of consolidation leading to two transcontinental railroads,
the final rules ensure that any further consolidation will be approved
only if it is truly in the public interest.
I would be pleased to answer any questions that you might have.
Senator Breaux. Thank you very much, Ms. Morgan, for your
presentation on behalf of the Board.
Let me talk in the beginning about a plan that you are
requiring, as I understand it, with the new rules, that a plan
be submitted. That is different from the old rules?
Ms. Morgan. Exactly, yes.
Senator Breaux. What is the purpose of the plan? What
should it constitute and what is the effect of it?
Ms. Morgan. Well, the service assurance plan is new, and
the purpose of that plan is to make sure that applicants focus
on service in advance of filing their application.
Senator Breaux. Why is that any different from what
previously was required, or how is it different?
Ms. Morgan. It is different because we did not previously
require a specific plan that focused on how the operating plan
will be implemented in the context of service to customers. So,
this plan will focus on what service levels will be provided
and how those levels will be provided. It envisions that the
applicants will get with customers in advance to discuss
service needs so that the plan that is filed with us will
obviously reflect the needs of the customer community. And then
throughout the process of reviewing the merger application,
that plan will be before us and a record will be developed on
the aspects of that plan. So, the benefit is that service is
being discussed up front in a way that it has never been
discussed before.
Senator Breaux. Is the purpose of the plan to be something
that is considered prior to the merger, or is it some document
that is supposed to have an effect after the merger is
completed?
Ms. Morgan. It will have an effect after the merger is
completed, but the plan is to be put together before the filing
so that, when the filing comes to us, it will include this
service assurance plan. So, whatever planning needs to be done
has to be done in advance of the filing.
Senator Breaux. Is there any legal effect that the plan
brings to the table? In other words, suppose you have a plan
which the Board agrees to and then a year after the merger
there are significant areas of the plan that have not been
considered or requirements met. Is the plan worth anything, or
is it just a guideline? Can you enforce the plan, or is it just
a good idea?
Ms. Morgan. Well, it is a good idea, but it also has, I
think, some important ramifications. As part of the plan, we
also ask of the applicants their plan for how they will address
service problems, how they will address service failures, how
they will address claims. So, as part of our review process, we
will be looking at the adequacy of this plan not only in the
context of the service levels, but also in the context of the
procedure for resolving disputes. We will look at the plan in
the context of whether it is a benefit that will go into our
benefit box in determining whether a particular merger proposal
is indeed in the public interest.
Senator Breaux. Is a plan a document that both of the
merger railroads would have to agree to?
Ms. Morgan. Yes, because that would be part of the filing
that would be made.
Senator Breaux. I am trying to find out the effect. The
plan you said is a good idea, but a good idea that is not
enforceable is not necessarily a good idea if it cannot be
enforced. I am trying to figure out what does the plan, which I
agree is a good idea, because it clearly spells out what you
are going to try to do in areas of service--but if it is not
enforceable, what good is it?
Ms. Morgan. Well, I think it is enforceable in the context
that it is a plan that is filed with us, which then we will
monitor after the merger is put into place. It is also a plan
that will involve dialog between customer and railroad in terms
of what the service needs will be. So, whatever legal
ramifications of that will be represented in the plan. In
addition, of course, the plan for resolving disputes will also
cover whatever problems arise as a result of not meeting the
plan. So, it has importance in that regard.
Senator Breaux. How do people who utilize railroad services
have input into the content of the plan, if at all?
Ms. Morgan. Well, if a railroad is going to file an
application and have with it a service assurance plan, we will
be looking for whether that represents discussions with
customers about their service needs, whether it will include
some sort of service guarantees. So, we will be looking for
what went into that plan. That will again be part of whether we
view that plan as a good plan, as a beneficial plan, and
whether it is good enough to go into the benefits box, if you
will, in determining whether a particular proposal is in the
public interest.
Senator Breaux. Who is responsible for writing the plan?
Ms. Morgan. Well, the applicants will be responsible for
filing it with us, so they obviously, in the first instance,
would have to be the ones reaching out to affected people in
the context of the plan.
Senator Breaux. I am not challenging that in particular,
but if the two railroads are responsible for writing the plan,
how do you guarantee that people who utilize railroad services,
i.e., shippers, have had their input in the designing of the
plan?
Ms. Morgan. Well, you would hope that the railroads would
get with the customers, because I do not know how you would
write a service assurance plan without doing that. But let us
assume they do not. Then it comes to us and then we begin to
accumulate a record on that plan. If customers have not been
involved in the discussion on that plan, then they will clearly
file their comments with us. So, we will know in that regard
whether they have been involved and what their concerns might
be with the plan.
The key here is, whereas before some of these issues would
come to us as the proceeding evolved or perhaps after the
merger has been approved, this plan forces these discussions in
advance of the filing. Then it gives the opportunity for a
record to be built on the plan so that by the time we get to
the end of the process, we have a much better understanding of
where everybody is and everybody has had the opportunity to
have input into it.
Senator Breaux. I understand that shippers, for instance,
obviously can comment on merger applications and get their
input before the Board makes a decision. But I take it there is
no requirement of the Board. You said ``hope to'' have input
from shippers, but there is no requirement that this plan is
one that is achieved only after getting comments from users of
the services.
Ms. Morgan. Well, again, if you read the rules themselves
and the text that goes with the rules on this particular
section, I think it is pretty clear that the service assurance
plan, which focuses on service levels and service needs, would
need to involve a discussion with customers. And in our
description of that particular rule, we emphasize the
importance of that, of getting with the customers, and so we
will be looking for that in the context of whether the plan has
validity or not.
Senator Breaux. So, you would recommend as chairperson of
the Board that this plan obviously indicates that it has made
contact with people other than just the two railroads.
Ms. Morgan. Absolutely.
Senator Breaux. Let me talk about previous consolidations
and mergers which this rule obviously does not affect. Can you
give the Subcommittee an update on some of the problems that we
have had? Can you tell me how some of these previous mergers
are doing now as opposed to in the past where we have had some
difficulties?
Ms. Morgan. Well, as you correctly stated, in the last
round of rail mergers, we experienced some pretty significant
service problems in the integration process, first in the West
and then in the East.
We have obviously moved a great distance from where we
were. Service is much better than it was during that period.
Obviously, the West has been functioning better for longer than
the East, but now the service in the East is much improved.
Obviously, we continue to focus on further service improvements
in both the West and the East.
Senator Breaux. Things are better?
Ms. Morgan. Yes.
Senator Breaux. What areas are they not better in?
Ms. Morgan. Well, in terms of service, I think we continue
to hear about specific issues with particular customers, and we
have a rail consumer assistance program that is specifically
designed to interface with individual customers and other users
of the rail network with respect to particular problems that
arise. So clearly, we deal with those. We do not have an
overwhelming number of problems coming in. We have a steady
stream of individual issues, but we have been able to deal with
them and move on. So, I would not suggest that there is any
particular area that continues to be a particular problem. I
think we have moved beyond that. Now what we are doing is
focusing on individual issues in particular areas of the
country.
Senator Breaux. Are conditions indicating adequate
competition in these areas where we have had these previous
mergers?
Ms. Morgan. Well, as I have said before, this question does
relate to how one would define adequate competition. There are
those who feel that if a shipper is not served by two rail
carriers, then there is not adequate competition. Obviously,
there are customers out there who are not served by two rail
carriers and have not been served by two rail carriers for a
long time.
As far as the state of competition today, in terms of post-
merger implementation, I think we are seeing vigorous
competition both in the West and the East. There are rate wars
going on between carriers, and that is an indication of
competition. So, I think post-merger there is competition.
Senator Breaux. I think that that will be something that
the Subcommittee and I am sure the Full Committee under Senator
Hollings' leadership will continue to look at as far as the
preexisting mergers and the continuation of adequate
competition. I think that is obviously very, very important.
Let us talk about the KCS exemption and the rule. In
looking at your dissent on the rule, you said that you disagree
with the special treatment being afforded to KCS and the
decision being issued today. You point out that, indeed, as the
self-styled NAFTA railway with a substantial ownership interest
in a Texas-Mexican railway company and the strategic
importance--and I am paraphrasing here--that any merger between
KCS and another Class I railroad could well trigger the next
round of major rail mergers, resulting in two transcontinental
railroad systems. Giving KCS the opportunity to pursue waiver
requests on a case-by-case basis at the time it proposed a
specific merger transaction would have seemed appropriate.
Do I understand the exemption correctly that if KCS, which
is a Class I railroad, and another Class I railroad entered
into a merger agreement, that they would not be required to
meet the standards of the new rules?
Ms. Morgan. Well, that would be the effect of the waiver in
the first instance. Now, the majority voted also as part of
that provision to allow parties to come in and dispute that.
So, if a record were developed that that particular waiver
would not be appropriate, then it might not apply. But it is a
blanket waiver in the first instance.
Senator Breaux. Where did this exemption come from? The
reason why I ask that is because it was not included in the
Board's proposed rulemaking.
Ms. Morgan. No, it was not.
Senator Breaux. And I want to ask Mr. Burkes and Mr.
Clyburn the same question.
Ms. Morgan. Well, KCS had a proposal originally that would
have put it in a category other than the major rail merger
category. That was proposed in response to the advance notice
of proposed rulemaking.
Senator Breaux. They did not ask for, at that time, an
exemption from the new rules.
Ms. Morgan. Not in so many words. Their proposal involved
setting a threshold below which a railroad would not be
considered to be part of the major rail merger pool, and it
would go into another pool.
Senator Breaux. It was my understanding that what they had
requested was that if it was a friendly takeover or a friendly
merger, they would be considered a significant merger as
opposed to a major merger.
Ms. Morgan. That is correct. If it was a hostile takeover,
then they would want it to be considered a major merger.
Senator Breaux. So, if that is what they proposed, how did
it come out of the Board being something entirely different?
Mr. Burkes, would you comment on that?
Mr. Burkes. Thank you, Mr. Chairman. I will be delighted to
comment on it.
First of all, as you know, there has been a long history
under the Interstate Commerce Commission and the Surface
Transportation Board of treating carriers differently based
upon their size. I reviewed those records.
Senator Breaux. I am sorry?
Mr. Burkes. I reviewed the records of those cases.
Senator Breaux. You reviewed them?
Mr. Burkes. Yes.
Senator Breaux. I just misunderstood what you said.
Mr. Burkes. Well, there is a long history of treating
carriers differently based on the size of the carrier, whether
it is under the Interstate Commerce Commission or the Surface
Transportation Board, the successor of the Interstate Commerce
Commission. As a result of that and based on the fact that
Kansas City Southern at most of the public hearings and in
their comments, their replies, and their rebuttals emphasized
that they were not anywhere near in the class of the other
Class I railroads.
Senator Breaux. They are a Class I railroad, are they not?
Mr. Burkes. Yes, they are a Class I railroad based on their
annual operating revenue exceeding $250 million. That puts them
one-fifth the size of the next Class I above them.
Senator Breaux. They are still a Class I railroad.
Mr. Burkes. I understand that, but we are dealing with the
new rules for mergers of Class I railroads. They are one-
twentieth the size of the largest carrier, and them being
treated as a Class I railroad as a major combination, whereas
the proposal that I made was that any carrier whose annual
operating revenue was $1 billion or less--it would be treated
as a significant transaction. Our general counsel's office
looked at that. One reason I made that proposal is because
Florida East Coast and Montana Rail Link will, after another
year, it appears, become Class I railroads, but very small
Class I railroads.
Senator Breaux. So, is it correct, as I asked Chairman
Morgan, that if they had another Class I railroad that merged
with a Kansas City, another Class I railroad, that you would
have both of them exempt from the rules? Is that not correct?
Mr. Burkes. Well, it depends. It depends on whether
somebody filed a request that the waiver not apply. Another
carrier has that----
Senator Breaux. No, but the new rules, is it not correct,
would allow two Class I railroads to merge without being
susceptible to the new rules on merger? Is that not correct?
Unless someone challenged it. They can always do that.
Mr. Burkes. Yes, that is correct so far as being treated as
a major merger under the new rules. Now, they will still be
treated as a major merger, but it will be under the current
rules rather than the new rules.
Senator Breaux. Well, my concern is obvious by my question.
I do not understand where this came from. Can you shed some
light? Because this was not requested by KCS when they did
their proposed oral arguments before the Board. Who came up
with the idea of just carving them out as a special exemption?
Mr. Burkes. No. They had requested through their public
appearance before the Board, as well as in their comments,
their replies, and their rebuttals that they not be treated
like the other big Class I railroads.
Senator Breaux. But they did not request an exemption, as I
understand it, and Chairman Morgan said that they had requested
that they be considered as a significant merger if it was a
friendly merger and a major merger only if it was a hostile
merger.
Mr. Burkes. Yes, they requested they be treated as a
significant transaction.
Senator Breaux. So, they did not request an exemption.
My question to you, sir, is where did the concept of just
carving them with an exemption come from?
Mr. Burkes. The concept came from our general counsel's
office that recommended it be treated as a waiver rather than
it----
Senator Breaux. It is not a waiver, Mr. Burkes. It is an
exemption. It is an exemption that has the effect of law. It is
not a waiver request. KCS does not have to ask for anything.
They got it.
Mr. Burkes. It is a waiver, and they would be exempt unless
somebody within that 10-day period requests that they not be
waived.
Senator Breaux. Is someone merely requesting that they not
be exempt sufficient to prevent the exemption?
Mr. Burkes. Well, the Board would make that decision at
that time, just the same as the Board would make the decision
if they were included in the new rules as to whether or not to
waive them under the new rules.
Senator Breaux. Mr. Clyburn, where did this concept come
from?
Mr. Clyburn. Throughout the testimony and the submissions
that came before the Board in the ANPR and the NPR, KCS was
asking to have, I guess, two bites of the apple. If it were a
friendly takeover, then it would be a significant transaction.
My concern is that approach would exempt them from
possibly, arguably, the rules under Section 11324 of Title 49
where we have the criteria, even under the old rules,
determining whether a proposed transaction is within the public
interest or not. I did not want to just give an outright
exemption, saying ``Well, because you are merging with KCS, you
do not have to go through the rules and the criteria as
Congress put forth for a major Class I transaction.''
True enough, KCS is a Class I railroad. One of the issues
that came out was that KCS is such a small Class I railroad, in
terms of their trackage and their revenues, compared with the
other railroads. KCS has approximately $575 million in
operating revenues as opposed to BNSF with $9.1 billion or
Norfolk Southern with $5.2 billion. So, the issue was raised.
There was a concern that KCS not be treated differently
than Wisconsin Central per se which, with operating revenues of
approximately $300 million, is closer in size to KCS. As you
already know, the Board has deemed the Wisconsin Central/
Canadian National merger proposal as neither major nor
significant, but minor.
I have not proclaimed to be a soothsayer or prognosticator
as to what will happen next year or 2 years from now. So I was
concerned when the original proposal came through to carve out
that outright exemption for KCS.
True enough, KCS is a very small Class I, and I would like
to go back into the history of why the Board even has the Class
I classification. The major policy purpose for the Class I
classification is that railroads having major transportation
significance must file certain financial reporting
requirements.
In 1990, there was a proposal to change the Class I
threshold from $50 million to $250 million. The rationale
behind that change was that the agency did not see the need to
have the smaller Class I's, at that time, submit certain
financial requirements.
Since KCS is hovering around that threshold, particularly
when compared with the larger Class I's, the issue was raised
whether KCS should be treated differently.
My major concern was that KCS not get an outright
exemption. The rebuttable presumption is relevant to whether
KCS is deemed to be similarly situated as Wisconsin Central. If
so, then let us not automatically say that KCS is not a major
transaction and merely a significant one. Let us say we can
deal with them within the old context of the rules for a major
transaction.
However, because of the rebuttable presumption, I thought
it was always important for the Board to stay in the game. We
do not want to be onerous with our rules or our regulations.
However, I have traveled all over the country and I have talked
to shipper groups who are not too enamored with the Board. They
feel that the Board's rules do not go far enough if we do not
overturn the bottleneck decision, if we do not loosen the
competitive access rules in Midtech I and II, or if we do not
impose final offer arbitration.
Senator Breaux. Let us get right to the point on this. You
are saying you did not like the exemption that they were
requesting for, but in essence, you voted for another exemption
which was a blanket exemption. They do not have to comply if
they are going to merge with another Class I railroad with the
new rules. That is a blanket exemption. That is a more
extensive exemption than what they were asking for before the
Board.
Mr. Clyburn. It actually may be more of a ``blanket
exemption'' having a KCS merger deemed a significant
transaction as opposed to deeming the transaction major under
the old rules. Arguably, if the Board deemed a merger with KCS
a major transaction, the applicants will have more requirements
to satisfy, more work to do with the application, than if the
transaction were deemed significant under any rules. The
rebuttable presumption still allows the Board to protect the
public interest.
Senator Breaux. This is my last question. You do not
disagree with Chairman Morgan that the effect of what the Board
did was to allow two Class I railroads to merge, whether it is
a friendly or a hostile merger, without meeting the
requirements of the new rules.
Mr. Clyburn. If the Board at that time deems that the
rebuttable presumption is not met. The Board is still in the
game, Senator.
Senator Breaux. Only if someone comes in and challenges it.
Mr. Clyburn. Often there are challenges. Even in the
Wisconsin Central/Canadian National merger proposal which the
Board deemed as minor, there were challenges.
Senator Breaux. Then they have got to come prove that the
exemption that you granted was incorrect in the first place.
Mr. Clyburn. If someone believes a merger with KCS might
trigger other mergers, even if a merger with KCS does not
create a transcontinental, that party has the opportunity to
file that concern with the Board after the prefiling notice is
submitted, which occurs 3 to 6 months before the application is
filed.
Senator Breaux. Did any other railroads support the
exemption?
Mr. Clyburn. Well, there was a question in regards to
whether other railroads actually supported it. There is a
record of one or two railroads not opposing the outright
exemption. But as I said before, I felt comfortable with the
rebuttable presumption; that the Board would always be in the
game.
Senator Breaux. Ms. Morgan, do you agree with the response
that any other railroads supported the exemption?
Ms. Morgan. My recollection was that this particular issue
was not expansively discussed in the record. There were a few
comments along the way, but it was not a clear discussion one
way or the other.
Senator Breaux. It was not presented in oral arguments.
Ms. Morgan. Not to my knowledge, no. Not to my
recollection.
Senator Breaux. Senator Dorgan.
Senator Dorgan. Mr. Chairman, thank you very much. I regret
that I was not here during the initial presentations. I have
read much of it.
Let me say, Mr. Chairman, that Senator Rockefeller and
Senator Burns and I and some others have introduced the Rail
Shipper Protection Act, and we look forward to working with you
to get a hearing on that piece of legislation. I chair the
Subcommittee dealing with consumer issues, and perhaps we can
work with you on a hearing.
We are very concerned. You all have heard us describe our
concerns--Senator Rockefeller and myself, Senator Burns--about
what has happened with mergers and concentration in the rail
industry.
I want to say first that I appreciate the courage it took
for the Board to do what it did in creating the position you
did where you stopped all of the potential merger activity and
said, we are going to take a fresh look at this and create some
rules and regulations. I think that took some courage and it
took some thinking outside the box. That moratorium was in the
public interest.
It is not clear to me. I am not an expert and I have not
spent enough time studying these new regulations to know
whether they do what I would like them to do. I certainly think
it is a step in the right direction.
I guess the first question I would ask about them is, Linda
Morgan, you said that these new rules went as far as the
statute would allow you to move to enhance competition and
increase the burdens on major mergers. What kind of additional
authority would you need to have moved further?
And do you think that it would be advisable to have
additional authority that would allow you to move further in
these circumstances?
Ms. Morgan. Well, I think, first of all, with respect to
your discussion of my oral testimony, the key is that we had to
be very careful that we did not imply in our rules somehow that
mergers were bad in the first instance and that every merger
would be treated exactly the same in the context of what would
come in and how we would deal with the particulars. That is
something that we have to be cognizant of in a lot of the
issues that are before us.
Having said that, what you are interested in is enhanced
competition. My view of these rules is that if anybody brings
an application to us and they want it approved, they had better
have some sort of enhanced intramodal competition. And that is
a message that I think is very clear throughout the rules. If
you want your transaction approved and you want to make sure
that you bring something that has a pretty good chance of
getting approved, then if I were advising an individual, I
would say you had best come in with some sort of enhanced
intramodal competition.
Senator Dorgan. I do not understand that. Intramodal
enhanced competition. It seems to me highly unlikely that
anyone, given what has happened in recent years with the
mergers, the mega-mergers, and ending up with really four
behemoth enterprises dividing up the country, can come in and
say, by the way, here is another merger application and we
think it will ``enhance competition.'' Are there circumstances
where you think that will be the case?
Ms. Morgan. Well, for example, just looking backwards, the
Conrail transaction involved shared asset areas where there was
added competition, where two carriers are now serving a
particular area. That was part of the application that came to
us. So, there are avenues for enhancing competition, whether it
be trackage rights or whatever, that could be offered in the
context of the application. I do not see that as a problem.
If they want to come in and they want to get some sort of
approval, then I think the rules are pretty clear that we are a
little more skeptical about benefits from further
consolidation, we are concerned about harm from further
consolidation. So, we will be looking very carefully at the
benefits from future consolidation, and if you want to show us
that the benefits box is fuller than the harm box, then
enhanced competition should be what is brought to the Board.
Senator Dorgan. I think the phrase ``benefits from further
consolidation'' is an oxymoron.
Ms. Morgan. When I said it, I figured that is where you
were.
Senator Dorgan. I cannot conceive of benefits from further
consolidation being something that is even in our language
here. When I speak of benefits, I think of the public interest.
The Chairman just observed, well, it is going to benefit some
people. That is quite clear.
[Laughter.]
Ms. Morgan. But what we do look at is public benefits. We
look at the public interest and we weigh the benefits against
the harm in determining whether a merger approval would be in
the public interest.
Senator Dorgan. Obviously, this Committee is interested in
the public interest. I will not inquire further except to say
this. We have introduced now for the third time----
Senator Rockefeller. 35th.
Senator Dorgan [continuing]. The 35th time----
[Laughter.]
Senator Dorgan [continuing]. The Rail Shipper Protection
Act. And they are being protected very slowly at this point.
But we are determined this time to get a hearing, to get a
markup, and move this legislation. So, the first step, of
course, is with the cooperation of our colleague, Senator
Breaux, to schedule it for a hearing. The second step is to
have you show up and fully and without reservation support all
provisions of it.
[Laughter.]
Senator Dorgan. And then we will mark it up, and it will
become law. And I will be a much happier Senator.
Ms. Morgan. And you will drug me before I come to that
particular hearing.
Senator Dorgan. No. I think it is going to work out fine
for you.
[Laughter.]
Senator Dorgan. But I want to say very seriously, Senator
Rockefeller and myself and others, Senator Burns, have been
very serious about this for a long while. It made almost no
progress. We have drafted good legislation. But I was told 20
years ago, ``you take on the railroad, you are not going to
win. You are just sort of spinning your wheels.'' We learn
these lessons the hard way I guess. But we think this is such
important legislation that we must continue and we are
determined to succeed.
So, again, let me just say that your moratorium took some
courage. I do not know whether these regulations do what I want
done, and I certainly cannot conceive of enhanced competition
coming from further mergers. But I do know that passing a Rail
Shipper Protection Act fits right in the glove of what we are
talking about today, and it is critically necessary for the
public interest.
Mr. Chairman, thank you for holding the hearing.
Senator Breaux. Senator Rockefeller.
Senator Rockefeller. Thank you, Mr. Chairman. We are going
to be meeting on an easy matter in a little while.
Senator Breaux. Yes.
Senator Rockefeller. I wanted to say, Mr. Chairman, just as
an opener that I do not know this to be a fact, but I have
heard that the railroads are going to Members of this
Subcommittee asking them to sign a letter which would, in a
sense, sort of discourage the introduction of the bill that
Byron Dorgan was talking about. I do not know if that is true,
but I would hope that that would not be true.
And I would hope that the processes of the Subcommittee
would work so that a bill which has, in fact, been introduced
for 15-16 years or whatever, and in the three names, there is
even an advance, and I think our time will come that this will
not happen.
I think it is terribly, terribly important that we do not
have railroad companies going to Subcommittee Members telling
them what letters they ought to write to our Chairman and
whatever else. I am certainly not going to write such a letter
and I hope that others do not either.
Ms. Morgan, I want to also commend you, as Byron Dorgan
did, on the courage--I guess I can include all of you, but I
know the best, so I am talking to you--on recognizing some
potential harm and deferring some things and making some good
decisions. And that was good. That really was. I do not say
that because I am about to get into tougher questioning, which
I am, but because I really mean it. If it was not a shift, it
was an evolution and it was strong and it was good and it was
meaningful and had a very good effect.
Now, I have not read your remarks because I have been
swamped in the other work that John Breaux are doing all day.
But that does not prevent me--I know there is evidence that
one requires for mergers. And pro-competitive evidence you have
referred to in another way for the public benefit and all that
kind of thing. But pro-competitive evidence is a technical term
which is used and I think which is in that category. Is that
the kind of thing that one would look for if there were future
merger opportunities?
Ms. Morgan. In line with my earlier discussion with Senator
Dorgan, our rules definitely shift the focus toward enhanced
competition in a way that the rules had not previously.
Senator Rockefeller. I got that very clearly because I
listened very clearly. But the pro-competitive evidence is just
a bit sharper.
Ms. Morgan. Well, we use the term ``enhanced competition.''
Pro-competitive initiatives, as far as I am concerned, mean the
same thing. I may be missing something, but we just use the
term ``enhanced competition.''
Senator Rockefeller. But find no disagreement in the way I
put it in particular.
Ms. Morgan. No.
Senator Rockefeller. It sort of seems like the same thing.
Ms. Morgan. Right.
Senator Rockefeller. I have been a Governor for 8 years and
I have been doing this for some time. Like when John and I
would have discussions on managed care, there is always what
happens in the first couple of years and then what happens in
the third, fourth, fifth, sixth, and seventh year. If you look
at managed competition in health care, you can always say that
it is going to save costs, but the major question is how long
will it save costs. In other words, is there a period of 2 or 3
years where they can save costs and after that point they have
pretty much saved the costs that they are going to be able to
and therefore, it sort of even outs and goes into what we would
refer to as more fee-for-service like Medicare?
Now, having thoroughly engaged your interest on that----
[Laughter.]
Ms. Morgan. I think I will switch to that issue.
Senator Rockefeller. There has to be a follow-up on all of
this was my point. The question is, how does the STB do a
follow-up on enhanced competition or pro-competitive evidence
or whatever the word is? One can say the conditions seem to be,
but then a couple of years pass, and things could change.
So, how does one follow up on that? And how does one do
that in the process of making a decision that you can only make
once?
Ms. Morgan. I presume we are discussing the merger process
because that is where we are today.
Senator Rockefeller. We are, right.
Ms. Morgan. As you know, in the past round of mergers, we
instituted an oversight and a monitoring process. That has
become more and more refined. In our new merger rules, we have
formalized our 5-year oversight process, and also we have
formalized our operational and service monitoring process. So,
we have built into the rules, from lessons of the past, a
formalized oversight process for the implementation of the
merger for conditions that are imposed and so forth. I believe
that is what you are talking about.
Senator Rockefeller. It is. Suppose you find it becomes
deficient. There is not much you can do about, is there?
Ms. Morgan. Well, in our new rules, we have a provision
which formalizes our oversight and indicates what our oversight
will be looking at. One of the things that our oversight will
be looking at is the conditions that we have imposed and
whether they are working as they were intended to work.
Senator Rockefeller. If they do not?
Ms. Morgan. Then we will step in and fix the problem.
Senator Rockefeller. How?
Ms. Morgan. Again, without having a particular proposal in
front of me----
Senator Rockefeller. I understand that.
Ms. Morgan. But it would be coming up with a condition,
another condition, that would serve the same purpose and effect
as the original condition that we imposed was intended to have.
Senator Rockefeller. What would be a way that you might--
not hypothetically, but just thinking back in your experience
when you say enhanced competition or I would say pro-
competitive evidence--and we have agreed it is sort of the
same. What would be an example of enhanced competition?
Ms. Morgan. Well, I have used an example in the Conrail
merger of the shared asset areas. That represents the creation
of competition, in other words, having two carriers serving
those shared asset areas, and that was part of the proposal
that came to us. Trackage rights is another form of enhanced
competition, which I discussed with Senator Dorgan earlier.
Senator Rockefeller. Trackage rights gets interestingly
close to bottleneck, does it not?
Ms. Morgan. Well, obviously bottleneck is, I am sure, an
issue that we are going to get to here in a minute.
[Laughter.]
Senator Rockefeller. No, but I was not thinking about it.
Ms. Morgan. I was waiting for you to lead right into that.
Senator Rockefeller. Does that not fit under the definition
of enhanced competition?
Ms. Morgan. Yes, it can.
Senator Rockefeller. You have heard me do this so much that
you can sort of sip some water while I am saying it because you
are so accustomed to it. Again, if I am taking a flight to
Fargo, which I have done--I have not been invited back, but I
did it once--and let us say I have to make a switch. I am told
that the flight to Minneapolis or Chicago or whatever is such-
and-such, but then the flight to Fargo is not listed, and I do
not know what the cost is. Now, obviously within the airline
industry, the public would rebel.
The FAA would step in. The President would declare a state
of--it would be totally untenable. And they do not have the
protection, of course, that railroads do.
Is that an example of the kind of thing that could be
looked at in terms of prices that are not quoted on clearly and
predictably to be used rail service lines?
Ms. Morgan. Yes. May I elaborate on that answer? And maybe
now you may hear some of the prior discussion that we have had.
As you know, the Board issued a decision on bottlenecks
that was affirmed. So, in the context of the future direction
of the Board, we could not undo that decision because obviously
that decision, we felt, was based on the statute, and it was
upheld.
Now, having said that, in the context of a merger, given
what I have said earlier, if applicants were interested in
seeing their application approved, they, as I said, should
think about bringing us enhanced competition. Some sort of
additional bottleneck relief other than what the Board has
provided clearly could be initiated by the parties in the first
instance.
Senator Rockefeller. I am trying to think if I understand
that.
Senator Dorgan. Her answer was yes.
[Laughter.]
Senator Rockefeller. That is what I thought. I think you
are going in that direction, but it was not clear to me.
Let me put it negatively. If in the questioning that you
did in a proposed, hypothetical future merger, one of the
commissioners--it might be yourself; it might be one of your
colleagues--posed that question and the answer came back, ``no,
we do not really intend to do that because we do not have to,
because we have protections that others do not.'' Would that
negatively affect the way you looked upon an enhanced
competition?
Ms. Morgan. Well, again, if we are outside the merger
context, then as you and I have discussed previously--and I
know you do not like the decision we issued on bottleneck--
obviously, there is only so much relief in a generic sense that
can be provided under our current decision as upheld in court
in accordance with the statute.
Now, in the merger context----
Senator Rockefeller. Now, is that a way of saying that
until we change the law, you are stuck?
Ms. Morgan. Well, we have had that conversation before.
Yes.
Senator Rockefeller. We certainly have.
Ms. Morgan. But in the merger context, again if someone
wants to get approval for their transaction, they must figure
out a way to bring us what we comfortably feel is enhanced
intramodal competition, which will help us to feel better about
the benefits of a particular transaction. So, in the merger
context, that is one avenue that could be pursued. There are
other avenues that could be pursued to enhance intramodal
competition as well.
Senator Rockefeller. Let me just end with this, Mr.
Chairman, I apologize and I thank you, as I always do, and
apologize to you as I often do.
Everything you are saying, your body language, the word
``intramodal'' which caused confusion for a moment--but
everything you seem to be saying is really affirming an answer
to a question that I gave to you. I do not think you want to
come out in a Committee hearing and create an insoluble problem
for yourself or create unnecessary ruckus. But I think you are
saying that, yes, that is something we would look at. Yes, that
has to do with enhanced competition, and yes, intramodal means
things of that sort, that defines things of that sort. So, I
would take it that you would look at that carefully.
Ms. Morgan. In the context of a merger review, yes.
Senator Rockefeller. In the context of the merger, yes. I
would not be wrong, right, in saying that?
Ms. Morgan. No.
Senator Rockefeller. Thank you, Mr. Chairman.
Senator Breaux. I want to thank the panel.
Mr. Burkes. Mr. Chairman, may I make one comment in
response to the question you asked about others supporting
KCS's position? Obviously, the U.S. Department of
Transportation supported it. Wisconsin Central supported it.
CSX did not use the exact language, but in several areas they
referred to it on January 20th. The fact is there are only six
major railroads left in North America. If the proponents of the
combination that did not involve two of the big six carriers
could demonstrate that there was no reason to apply the rules,
then presumably after comment, the Board could grant the
waiver. So, they supported a theory but not the exact language.
Now, Dr. John Snow is here. He will be testifying. He can
respond to that as well as Mr. Haverty.
Senator Breaux. Have any of the Class I railroads ever
requested not to be considered a Class I railroad before?
Ms. Morgan. Not to my knowledge, no.
Mr. Burkes. Not to my knowledge. Obviously, six of them
would not because they so far exceed the limits.
Senator Breaux. But KCS has never requested that they be
not considered because of their smaller size?
Mr. Burkes. No. They just requested in all the comments and
the public hearings that they not be held to the standards of--
--
Senator Breaux. But they never requested changing what was
a requirement to be considered a Class I railroad.
Mr. Burkes. No. They requested the threshold be raised.
Senator Breaux. I understand.
We want to stay in touch with the Board on this decision
and work with you on future things that you are going to
involved with and do so very closely. Thank you for being with
us.
We would like to welcome up our next panel, which will be a
panel consisting of Mr. John Snow, who is Chairman and
President and CEO of CSX Corporation; Mr. Paul Tellier, who is
President and CEO of the Canadian National Railway Company; Mr.
Mike Haverty, who is Chairman and President and CEO of the
Kansas City Southern Industries; Mr. William Gebo, who is
Manager of Rail Services for Dow Chemical, who will be
accompanied by Mr. George Marshall, who is Director of Supply
Cycle for Albemarle Corporation in Louisiana, a chemical
company; also Ms. Claudia Howells with the Oregon Department of
Transportation. We look forward to receiving their testimony.
Let us see. We have got three good railroad men there and
look forward to hearing their testimony.
John, we have you listed first. We welcome you to the
Subcommittee and are pleased to hear your testimony.
STATEMENT OF JOHN W. SNOW, CHAIRMAN, PRESIDENT,
AND CEO, CSX CORPORATION
Mr. Snow. Mr. Chairman, thank you very much. Senator
Rockefeller. I am delighted to be here today. I have submitted
a statement and I will make some brief comments now and look
forward to your questions.
CSX is in broad and basic support of the rules that have
been propounded by the agency with respect to future mergers.
We think they are timely. They meet the requirements of the
situation, which is really a product of recent history, because
recent history, as you all well know, of railroad mergers has
not been a completely happy story. In fact, it has, in many
ways, been quite an unhappy story. These rules are designed, I
think, to deal with the unique circumstances of the current
environment. I think they adopt the right approach. They raise
the bar. They make future mergers more difficult. They put
added requirements on railroads going forward, as you have
heard the Chairman of the STB testify.
At the same time, I think we are in a period where further
rail mergers are clearly inadvisable. This is a time when
railroads ought to be focusing on serving customers better, on
reducing their costs, on improving their balance sheets, on
improving earning power, on winning back the confidence of both
shippers and investors.
I must say the process of the last 4 or 5 years with the
mergers has shattered, in many respects, that confidence of
shippers and Wall Street. We are now in the process of
rebuilding that confidence. I think we need some more time to
complete that process and do it right. I am confident that we
will.
CSX is a fundamentally different and better railroad today
because of the opportunity we have had to focus on improving
our performance than we were a year ago. I think if we had been
caught up in a merger movement 18 months ago or so, it would
have been hard for us to have made the clear progress that we
have made in the East.
Finally, I would say that I do not see any need for mergers
at this time. I do not see any sentiment for mergers at this
time. If there are to be mergers in the future, they should
come at a time when the shipping public and the investing
public really express a need and a desire for them. So, for the
next 3, 5, 7--I do not know--some considerable number of years
going forward, I do not see mergers. I see railroads, rather,
focusing on the things I mentioned to improve their
performance.
One important path to improving their performance will be
these alliances and joint ventures that have been talked about.
So, I think we are in a new era in railroading, Mr.
Chairman. We are in an era where we will consolidate the
benefits of prior mergers rather than seek future
consolidations for now.
I thank you very much.
[The prepared statement of Mr. Snow follows:]
Prepared Statement of John W. Snow, Chairman, President
and CEO of CSX Corporation
Good afternoon, Chairman Breaux and Members of the Subcommittee. I
am John W. Snow, Chairman, President and Chief Executive Officer of CSX
Corporation (CSX). CSX operates the largest freight railroad in the
eastern half of the United States, serving 23 states, the District of
Columbia and the Provinces of Quebec and Ontario. I appreciate the
opportunity to appear before you today to present CSX's views on the
new merger rules issued by the Surface Transportation Board (STB).
All of us with a stake in the industry--rail customers, labor,
management, short lines and the financial markets--have followed
closely the lengthy proceeding that produced these rules, and have
anxiously awaited the Board's ruling on the many complex issues that
were raised. Many of us have different interests. I believe, however,
that a broad consensus of interested parties agrees that the Board's
process was timely, open, professional, and fair in every respect.
Indeed, this has been our experience with the STB since its formation.
While we have disagreed with certain decisions, we have found that
under Chairman Linda Morgan the STB has functioned thoughtfully,
carefully, productively and efficiently.
CSX and the other major carriers are all products of
consolidations. Over many decades, mergers have produced substantial
economies and efficiencies. Shippers have shared in these benefits,
enjoying an inflation-adjusted rate reduction of more than 50 percent
since 1980. Now, with only seven major carriers left, however, the
Board has recognized the need to pause to identify the key issues for
study in future mergers which would result in a smaller major carrier
universe.
When the STB inaugurated this process, rail customers and investors
in the industry were experiencing the impact of service difficulties
following recent mergers, including the absorption of Conrail lines by
CSX and Norfolk Southern. It was a rough time for all of us--a time
when the industry was single-mindedly focused on re-building service.
We were determined to win back the confidence we had earned in
preceding years.
Recognizing the paramount importance of industry recovery, the
Board believed that another merger could trigger a final industry
restructuring at the wrong time. We agreed. Such destabilization could
have wreaked havoc in the economy and produced long-term problems.
Clearly, the decision to institute the moratorium and rulemaking was
well-timed and sound policy.
Given 15 months of breathing room, I am pleased to tell you that
CSX today is running better than ever. The critical operating metrics
we use as performance indicators--freight car dwell time in yards,
velocity, and cars on line--are exceeding goals. Customers have noted
the improvement: Complaints have plummeted and we are recapturing
business. Daily, we are becoming more responsive to our customers'
needs in our expanded service territory. While we recognize the need
for continuous improvement, CSX today is well staffed, well equipped,
running smoothly, and beginning to reap the considerable benefits of
the single-line service provided through the Conrail acquisition. We
are moving traffic from the highways onto the rails. We are moving coal
to our nation's utilities and industries in record amounts. My sense is
that other roads are experiencing similar improvements and are back on
a solid operational footing. The Board was prescient in deciding to
institute a moratorium on mergers, thereby giving the industry a
critical opportunity to stabilize and earn back the confidence of its
various constituent interests.
But I believe this rulemaking also sends the rail industry a clear
signal. It tells me that future Class I rail mergers will be much
harder to accomplish, which is as it should be given the industry's
recent history and current circumstances. It tells me that customers
and other constituencies have convinced the Board that more time must
pass to complete and verify industry recovery. I see this as a prudent
approach--the right approach for these times--which will be followed to
keep the rail industry on the main line to full recovery.
The Board's new rules focus on two key issues. First, how a
proposed merger affects competition in the surface freight industry;
and second, the need to thoroughly plan and implement well all the many
steps involved with any new merger initiative. We agree with the Board
that the need for increased focus on safety, service plans and
communications with employees, customers and affected communities are
appropriate elements for consideration in future merger proceedings.
On competition, the Board's decision confirms sound agency policy
against using its jurisdiction in ways that would re-regulate the
industry and, in short order, return to the regrettable pre-Staggers
days of regulated rates and services that virtually crippled the
industry. I can assure you that re-regulation of our industry with its
extremely competitive marketplace would ultimately deprive our
customers of the significant benefits they secured under the Staggers
Act, and would severely limit our ability to fund the necessary,
substantial costs of our infrastructure. This is a very important
point. We are one of the most capital-intensive industries in America.
This year alone CSX will invest nearly $900 million in infrastructure
and equipment. Re-regulation would be a stranglehold, constraining our
ability to generate these funds internally or secure outside financing
to even maintain our railroad in sound condition.
I am concerned, however, about the interpretation of competitive
standards in the future. There was considerable debate during the
proceeding over the roles of intermodal and intramodal competition in
future consolidations. While I believe that the final rules reflect a
recognition of the role of single-system service and intermodal
competition in delivering benefits to the nation's shippers, I'm
concerned that the Board in interpreting the new rules may focus too
much attention on intramodal competition without enough credit being
accorded intermodal, geographic and product competition--all of which
are key drivers in the rail marketplace.
In terms of the general rules for mergers, the bar has been set
higher, and winning approval of future mergers will be more difficult.
That result makes good sense for now and for the foreseeable future, as
railroads need to focus on securing the benefits of past mergers and
not on initiating new mergers. But as industry efficiency improves
further and we regain customer confidence with steadily rising service
reliability, there may come a time in the future when shippers seek the
benefits of mergers and when our shareholders' interests are enhanced
by a restructuring. These opportunities should not be permanently
foreclosed. But let me emphasize that for now, and for perhaps even 5
years from now, the message and effect of these new rules are not only
sound and appropriate, they are an imperative.
As I have indicated, we are in a time when railroads must continue
to demonstrate the benefits of prior mergers. As I see it, there is
little or no sentiment for additional major mergers among the rails
themselves, from our customers, or from our investors. For our part at
CSX, we have absolutely no plan, intentions, or inclination to initiate
any restructuring and would be opposed to such action by anyone else as
well until our recent history has become a much more distant memory. In
fact, the very existence of these new, more stringent standards
encourages us not only to continue improving our railroad in
traditional ways, but also to look for innovative, creative
alternatives to mergers. With our operations substantially improved and
our railroad running smoothly, we at CSX have turned our attention to
using the technological and marketing tools available to develop
alliances with other railroads to improve service and capture more
business from the highways.
Here are some examples: Just last month, CSX Intermodal and
Canadian National introduced a range of new intermodal services
connecting major Canadian and U.S. markets. The CN-CSXI marketing
agreement offers shippers highly competitive service for coast-to-coast
intermodal traffic moving between Vancouver, B.C. and New York; between
Toronto and Florida; and Toronto and New York. We are working with
Norfolk Southern on many projects, including an arrangement to improve
service in the critical Cincinnati gateway. With Union Pacific, we have
introduced ``Express Lane'' service which is moving fruits and
vegetables and even wine from the West Coast to New York City and
Boston on a greatly accelerated schedule that is 94 percent on time. We
also are running a NAFTA express with UP to get vehicle parts from
Michigan to Mexico. We estimate that 45,000 loads have been taken off
the highway and put on the rails as a result of this service alone. And
we are developing what we call a ``watershed'' business opportunity
using simplified routings with Western roads to connect target markets
that are generally 200-250 miles on either side of the Mississippi. Our
goal is to capture business that currently is moving almost exclusively
over the highways between these relatively short distances.
Last week we announced a partnership between CSX Intermodal and
Burlington Northern Santa Fe to provide service for temperature-
controlled products from San Bernardino, California to Little Ferry,
New Jersey. The schedule meets midnight delivery times and is a
seamless service that is a highly competitive alternative to over-the-
road transportation. In addition to our activities with other major
railroads, we are, of course, working with our friends in the short
line industry. There are a variety of alliances and marketing
initiatives underway between other railroads, and I anticipate even
more emphasis on these types of approaches now and in the future. I
sense a real ``sea change'' in the railroads' willingness to cooperate
with each other.
In conclusion, the challenge ahead of us is not to quickly
formulate a merger to meet the new requirements. The challenge is to
develop and test ways to reap many of the benefits of consolidations
without precipitously plunging down the merger track.
I appreciate having had this opportunity today and will be pleased
to answer any questions you may have.
Senator Breaux. Thank you very much, John. We appreciate
it.
Monsieur Tellier. [French spoken.]
STATEMENT OF PAUL M. TELLIER, PRESIDENT AND CEO,
CANADIAN NATIONAL RAILWAY COMPANY
Mr. Tellier. Merci.
Mr. Chairman, Senator Rockefeller, I am delighted to have
this opportunity to talk about these new rules.
By way of background, just a couple of words about Canadian
National. We are the only transcontinental railroad in North
America from the East Coast, Halifax, to the West Coast,
Vancouver, and also, as you know very well, Mr. Chairman, to
the Gulf Coast to New Orleans.
We are very much a North American company. The reason I say
this is that 52 percent of our revenues are derived either from
carrying freight in the U.S. or in cross-border traffic. We are
also a North American company because 65 percent of my
shareholders are on this side of the border. We are a $3.5
billion company in terms of revenues, real dollars, U.S.
dollars.
[Laughter.]
Mr. Tellier. And 22,000 employees. We are the fifth largest
railroad, but we never describe ourselves in that fashion. We
prefer to describe ourselves as the largest of the small guys.
Mr. Chairman, if I may say so, we offer quite a unique
perspective for the simple reason that we are the most
efficient railroad in North America, bar none. Six or seven
years ago, we were the last in the class. And today we are at
the top of the class. Whichever way you look at it, in terms of
operating ratio, in terms of quality of service, in terms of
the way we run our trains on a scheduled basis, we are at the
top of the class.
We are committed to shipper service. I can relate very
well, Senator Rockefeller, to your concern. As a matter of
fact, I stood in front of a group of shippers some years ago
proposing a bill of rights for customers or shippers. So,
therefore, our perspective is quite unique.
As you are very much aware, Mr. Chairman, in 1998 we
acquired the Illinois Central, and we integrated these two
companies without any service disruption. It was a successful
merger.
Later on that same year, we did a marketing alliance with
KCS, and since then we have embarked on a number of alliances,
for instance, very recently with our friend here at CSX
providing the best intermodal service from the West Coast to
the East Coast.
So, from that perspective, let me make some very brief
comments on the rules.
First of all, Canadian National is very pleased that the
STB has raised the bar for these future mergers if they do take
place.
Second, we are very pleased that our arguments were heard
and that the STB has come out saying that in transnational
mergers involving a U.S. railroad and either a Canadian
railroad or a Mexican railroad, the same rules should apply. We
are very, very pleased about that.
Third, we had expressed some concerns about the Board's
proposal on identifying the downstream effects of a future
merger. But we think that the new rules have addressed our
concern and have addressed the issue of enhanced competition
and, therefore, we are very comfortable with that.
My last comment on the rules. We may not agree with every
aspect of these rules, but Canadian National is quite confident
that the industry can live with these rules and we can operate
effectively within that framework.
A word before closing, Mr. Chairman, about the future of
the industry. It is difficult to predict. It is possible that
we will end up with only two transcontinental railroads, but
this is not a certainty. Some will say it is not even a
probability. It is certain that the industry will continue to
evolve. For instance, NAFTA over 10 years since it was signed
between Canada and the U.S.--the two largest trading partners
in the world--and Mexico has influenced a lot the evolution of
the structure of the rail industry, and I am sure that is going
to continue to be the case.
In conclusion, Mr. Chairman, what I would say to you and to
your colleague, Senator Rockefeller, really matters for us, CN,
is the quality of service. The quality of service has to
continue to improve.
Second, we are going to continue to improve the quality of
service. We, the Class I's, have to work better with one
another. The number of us is shrinking and therefore we must
work better together. If we cannot provide single line service
as a result of a merger, we should be able to provide single
line-like service as a result of good alliances.
At this point in time, we do not plan to merge with any
carrier. You may be aware, Mr. Chairman, that we announced at
the beginning of this year the acquisition of Wisconsin
Central, a Class II railroad. This application is currently
before the Surface Transportation Board. We are hopeful that it
is going to be approved by early fall and we will be able to
put these two companies together without any traffic disruption
by the end of the year.
Therefore, my very last point, Mr. Chairman, CN is not a
defender of the status quo. We know that our industry must
evolve. The truckers have been eating our lunch every day of
the week. We have got to be more conscious than ever that the
customers, the shippers, are paying our salaries. Therefore, we
at CN have been trying to provide leadership in this. On the
basis of our scheduled service, which means that we have a trip
plan for every car, year to date our service has been 92
percent on time. So, we think that by working better together
with our colleagues, the other Class I's, we could meet your
objective, Senator Rockefeller, and continue to provide better
service.
Thank you.
[The prepared statement of Mr. Tellier follows:]
Prepared Statement of Paul M. Tellier, President and Chief Executive
Officer, Canadian National Railway Company
Mr. Chairman and Members of the Subcommittee: On behalf of Canadian
National Railway Company (CN) and its affiliates, I appreciate the
opportunity to present our views on the new rules governing railroad
mergers that were issued on June 11 by the Surface Transportation Board
(STB) in STB Ex Parte No. 582 (Sub-No. 1), Major Rail Consolidation
Procedures.
By way of background, CN spans Canada and mid-America, from the
Atlantic and Pacific Oceans, to the Gulf of Mexico. With extensive
operations in Canada, as well as our activities in the U.S. and our
reach into Mexico by virtue of our marketing alliance with the Kansas
City Southern (KCS), we have a North American focus. We operate 15,500
route miles of track and we are the fifth largest of the seven Class I
railroads operating in the United States, with annual operating
revenues of approximately US$3.5 billion.
CN appears before you today with a unique perspective on these
merger rules. We are the most efficient railroad, with the best
operating ratio of all Class I railroads. Our objective since CN was
privatized in 1995 has been to become the best railroad in North
America by delivering high-quality service to our customers. We are
committed to more efficient service and faster transit times for our
customers, and we are committed to moving more freight, more quickly,
with fewer assets. We are always seeking new ways to compete in the
very dynamic transportation market.
To this end, we have undertaken a number of important initiatives.
To capitalize on the rapidly expanding market for north-south trade
that has arisen as a result of the North American Free Trade Agreement
(NAFTA), we merged with the Illinois Central Railroad (IC) in 1999 with
no serious integration problems. We have undertaken alliances and
entered into marketing agreements with other rail carriers. And, CN
announced earlier this year our intent to merge with the Wisconsin
Central Transportation Corporation (WC). All of these efforts make CN a
stronger railroad and a more effective competitor, which in turn
benefits our customers.\1\
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\1\ One initiative on which we were not successful was our attempt
last year to combine the operations of CN with those of the Burlington
Northern Santa Fe (BNSF) in a new company, North American Railways,
Inc. We saw this essentially end-to-end transaction as good for
shippers, competition, the economy, and the shareholders of CN and
BNSF. However, the Board's review of our proposed combination was
suspended with the STB's imposition in March 2000 of a 15-month
moratorium on activity related to mergers of Class I rail carriers. CN
and BNSF appealed the Board's decision to the U.S. Court of Appeals for
the District of Columbia Circuit, but the Court denied our appeal. On
July 20, 2000, CN and BNSF announced that we were abandoning plans for
our combination. To this day, we have not revived those plans.
---------------------------------------------------------------------------
cn's position on the new merger rules
We are pleased that the rules adopted by the Board will raise the
bar for the quality of customer service in future railroad mergers. The
Board has said it will closely scrutinize claims of benefits made by
future merger applicants and has imposed requirements intended to
ensure that railroad customers receive the service envisioned by merger
applicants. CN had urged the Board to adopt such an approach last year.
We also are particularly gratified that the Board appears to have
heard the concerns raised by CN, Canadian Pacific, and the Government
of Canada regarding the Board's proposed requirements related to
transnational mergers. In the final rules, the Board now plans to apply
higher public interest standards for mergers equally to all
applicants--both domestic U.S. companies and foreign-headquartered
corporations. If the goal of treating U.S. and foreign-headquartered
railroads equally is met in the implementation of the rules, that will
help stimulate competition in our industry.
In our comments during the Board's proceeding, we had expressed
concerns about the Board's proposal that merger applicants identify
``downstream'' effects of a merger and the Board's proposed requirement
that future mergers enhance competition. The new rules have taken steps
to allay our concerns in these areas, but the implementation of these
rules will be of vital importance. These rules should be a mechanism to
promote efficiency and service, not a way to induce artificial,
economically unsustainable competition or to protect some carriers from
competition with others.
It is also important to note that the enhanced competition that the
Board seeks can also come through more efficient competition. One of
the best actions carriers can take for their customers is to reduce
costs and improve service. Mergers may still have an important role to
play in helping the industry achieve that goal.
While we may not agree with all aspects of the new merger rules, CN
believes that, if the rules are properly implemented, the rail industry
will be able to operate effectively and will have the opportunity to
bring good merger cases before the agency and receive a fair hearing.
future railroad industry structure
In its new merger rules, the Board appropriately emphasizes the
importance of a renewed emphasis on improved customer service, which is
essential if the railroad industry is to survive. How the industry will
respond to new service challenges--and the new merger rules--is the
subject of considerable speculation.
It is important to note that no particular industry structure is
inevitable. It is, of course, possible that two major North American
railroads will emerge, but that possibility is neither a certainty nor
even a probability. Nor is there any reason to believe that the
industry structure will ever become static. CN believes the railroad
industry will continue its long history of changing along with the
economy at large, which is the only way rail can remain a competitive
mode.
In recent years, we have seen the rail industry change dramatically
with the economy. For example, short lines have re-emerged as an
important rail sector. Similarly, NAFTA has increased the importance of
improved north-south routes, which was one of the factors behind the
Board's approval of the CN/IC merger in 1999. Other new forms of
competition will undoubtedly emerge to meet future market needs.
Similarly, new capabilities may emerge that will allow old structures
to become effective in ways that are not yet possible.
CN believes that railroad customers can be the beneficiaries of a
new railroad paradigm that emphasizes responsible growth and responsive
customer service. Our industry will stagnate and deteriorate if it does
not continue to grow by providing more and better services to our
customers so that rail will always be an attractive alternative in this
dynamic, multi-dimensional economy. For customers who rely entirely on
railroads, we have to provide service that keeps them competitive in
the global marketplace. For the vast majority of our customers, who
have a choice between railroads and other modes, we have to make rail a
better choice of transportation than the other modes. We also need to
capture a part of the share of other modes, which have the largest
share of the freight transportation market--if we are to stay in
business.
With respect to CN, we of course are always looking to the future
and seeking new ways to improve our performance and enhance our
customer service. However, we have no plans at this time to merge with
another rail carrier. We are currently focusing solely on our proposed
merger with Wisconsin Central and the ongoing regulatory review process
at the STB surrounding that transaction.
Mr. Chairman, thank you again for the opportunity to appear before
the Subcommittee on this important subject. I would be happy to answer
any questions you might have.
Senator Breaux. Merci, Monsieur Tellier. It is nice to hear
someone who does not have an accent testify.
[Laughter.]
Senator Breaux. Michael Haverty.
STATEMENT OF MICHAEL R. HAVERTY, CHAIRMAN,
PRESIDENT, AND CEO, KANSAS CITY SOUTHERN RAILWAY COMPANY
Mr. Haverty. Good afternoon, Mr. Chairman and Senator
Rockefeller. It is a pleasure to be here today.
A little brief history on the Kansas City Southern. It was
founded back in 1887, primarily a North-South railroad intended
to move goods from the Midwest down to the Gulf Coast. When I
showed up in 1995, it was a mid-sized regional railroad. The
very month that I showed up, in May 1995, the Union Pacific/
Chicago & North Western merger was approved. Three months
later, the Burlington Northern/Santa Fe merger was approved.
The next month, the Union Pacific/Southern Pacific merger was
announced.
So, that meant that Kansas City Southern was clearly at a
crossroads in its history. If the merger was approved between
Union Pacific and Southern Pacific, which ultimately it was, it
meant that 90 percent of all of the rail traffic west of the
Mississippi River would be controlled by two railroads.
Inasmuch as we were west of the Mississippi River, that did
not bode well for our future.
But we looked at what courses of action we had. Number one,
we said we can shrink the railroad, which meant if we did that,
we probably would not be here today. Or second, we could
aggressively try and capitalize on the NAFTA trade agreement
that had just been passed in 1994 and through a series of
acquisitions, investments, and marketing alliances try and
capitalize on that traffic. And that is exactly what we did,
and in three-and-a-half years, we put together a NAFTA rail
network.
But I would like to point out that we did it by only
purchasing 450 miles of track. The rest of it was through
marketing alliances or investments where we are not the
controlling shareholder. We went from 2,700 miles in the United
States to 3,150. We are by far the smallest carrier, 3,150
miles compared to Burlington Northern and Union Pacific that
are close to 33,000 miles. So, even though we have been able to
survive with this strategy, we are still the smallest and we
have limited market access.
A year ago when the moratorium was proposed, we supported
the moratorium. We said that you needed a breather from major
railroad mergers. When the advance notice of proposed
rulemaking took place simultaneously, we participated in that,
and in fact, we proposed seven rules, none of which were
accepted in totality. But we have publicly supported the rules
that have just come out by the Surface Transportation Board.
Let me just briefly address some of the concerns that you
have, Senator, about the so-called exemption that Kansas City
Southern got.
First of all, it has been no secret that for a period of 15
months we have said that we think that Kansas City Southern
needs to be treated differently. I understand the Class I
rules, but to say a Class I is a Class I is a Class I certainly
is not the case. When I go out to compete with a railroad that
is 10 times our size and has 17 times more revenue for the same
customer in your State of Louisiana that produces paper, there
is absolutely no way that the two of us are the same. It is
very, very difficult to compete. In fact, many of the major
railroads today have argued that they had to merge in response
to other mergers because they did not want to be smaller. Well,
here we are, much, much smaller than any other carrier.
I think that a lot of the concern about this new rule is
really too much concern. Again, as was pointed out, the
grandfathering of the Kansas City Southern under the previous
rules--and that is the way I look at it, not an exemption, but
grandfathering--is appropriate, and there is a rebuttable
presumption. So, if someone thinks that we should not be
exempted or we should not be grandfathered, then they certainly
have the right to file for that.
Also, grandfathering KCS does not mean an exemption from
merger rules. All we are saying is that we be guided by the
same rules that the other mega-mergers were guided by when they
put together their 30,000-miles-plus systems. Again, we are
one-tenth the size of them.
We were somewhat surprised by Chairman Morgan's dissent. A
couple of months ago, Mr. Tellier's railroad here was granted a
right to move forward with the Wisconsin Central purchase. It
was considered a minor transaction, which means it can be
completed in basically 6 months under very lenient rules.
Kansas City Southern is very much closer to being the size
of Wisconsin Central than it is of the other Class I carriers.
We are at around $565 million and Wisconsin Central, in the
United States, was a little less than $400 million. Kansas City
Southern owns 3,150 miles of track; Wisconsin Central was
2,750.
Also, we were a little bit surprised when the comments were
made that Kansas City Southern might trigger the eventual move
to two railroads. Here we are, again 3,150 miles, yet Canadian
National bought WC (Wisconsin Central), which is similar in
size, and yet there are no strategic implications of the kind
that have been suggested for KCS? A Canadian railroad [CN] and
a U.S. railroad [WC] that owns trackage in Canada? There really
has been no protest by any other railroads or by shippers about
the WC transaction. Therefore, I did not understand the claim
that if we were involved in a transaction, as a 3,150-mile
railroad, we would trigger a major merger.
True, we have investments in Mexico. We also have
investments in Panama. But we are either an equal investor or a
minority investor, and we do not control the railroad down in
Mexico.
Thank you very much.
[The prepared statement of Mr. Haverty follows:]
Prepared Statement of Michael R. Haverty, Chairman, President and CEO,
Kansas Southern Railway Co.
Good afternoon Mr. Chairman, members of the Committee. My name is
Michael R. Haverty. I am Chairman, President, and Chief Executive
Officer of The Kansas City Southern Railway Company. I am pleased to
appear before you today, and I thank you for the opportunity to discuss
KCS's thoughts on the recently released final rules for major rail
mergers and their impact on the country's railroad system.
I would like to begin my comments by explaining the role that KCS
plays in the national railroad system. KCS is the smallest of the Class
I railroads. See Exhibit A. Using 1999 annual operating revenues
available from AAR, KCS's revenues were approximately $564 million
dollars. In comparison, the next largest Class I carrier, Canadian
Pacific Railway (``CP'') (including its U.S. subsidiary, Soo Line
Railroad), had annual operating revenues of approximately $2.4 billion
dollars. The largest Class I carrier, Union Pacific Railroad (``UP''),
is over 17 times the size of KCS with annual operating revenues of
approximately $10 billion dollars. In comparison, KCS is much closer in
size to Wisconsin Central's U.S. rail operations, that include a Class
II railroad, and had combined annual operating revenues around $400
million dollars. A quick look at the miles of road operated by each
Class I carrier reveals the same story of disparate size differences.
KCS's miles of road operated (including Gateway Western Railway) in
1999 was 3,158; CP's miles (including the Soo Line) were 14,358; UP's
miles were 33,341 and WC's miles were 2,756. See Exhibit B. Notably, WC
would have become a Class I railroad under existing criteria on January
1, 2002 if the recently announced acquisition by the Canadian National
Railway had not occurred. Also, notably, the Surface Transportation
Board (STB or the Board) determined this transaction would be treated
as minor, the most lenient treatment available for proposed rail
mergers.
KCS was founded in the 1880s by a visionary that sought to connect
America's heartland to the Gulf of Mexico to move Midwest agricultural
products by rail to southern states and by ship to other countries.
KCS's main lines ran from Kansas City to Lake Charles, Louisiana and
Port Arthur, Texas. In the 1930s, a line between Dallas and New Orleans
via Shreveport, Louisiana was added to the KCS network. In 1993, KCS
purchased a strategic line from Shreveport to Meridian, Mississippi via
Vicksburg and Jackson. KCS's rail network remained in this
configuration as a regional railroad until 1995.
In 1995, the Union Pacific/Chicago & North Western and the
Burlington Northern/Santa Fe mergers were approved by the Interstate
Commerce Commission (ICC), completing another wave of major rail
mergers. See Exhibit C. That same year, the proposed Union Pacific/
Southern Pacific merger was announced, and it was subsequently approved
by the STB, the successor to the ICC. As a result, KCS found itself
facing the possibility of extinction as two major rail carriers were
created that would control 90 percent of the traffic west of the
Mississippi River.
In an entrepreneurial reaction, KCS, in a span of about three and
one-half years, became part of a ``NAFTA Railway'' network, spanning
from Canada to Mexico. This network was created through a series of
acquisitions, investments and strategic marketing alliances. The
interesting thing to note is that KCS added only about 450 miles of
rail ownership to the company that it controls. The rest of the network
was created through minority investments and strategic alliances. KCS
is one-tenth of the size of the two major railroads it competes against
in the west, Burlington Northern Santa Fe (BNSF) and Union Pacific
because Kansas City Southern does not actually own controlling interest
in trackage beyond its 3,158 miles compared, for example, to Union
Pacific's actual ownership of over 33,000 miles of trackage and BNSF
ownership of over 33,000 miles of trackage as well.
Subsequent to the two major rail mergers approved in the west, two
major rail carriers were also created in the east when the CSX and
Norfolk Southern purchase of Conrail was approved by the STB. As a
result of these major rail transactions, two giant rail carriers
dominated traffic in the west and two dominated traffic in the east.
Besides these four major rail carriers in the United States, there are
two major railroads in Canada and two in Mexico. (KCS owns a minority
position in one of the two Mexican systems.) Because previous STB
decisions have established that two carriers are adequate competition
in the United States and there are only two major rail carriers today
in Canada and Mexico, the likelihood of eventually seeing only two
major rail companies in all of North America is strong. However, the
premise that KCS would be the catalyst of triggering a move to the
final end game of mergers, with ownership control of only 3,158 miles
of track in a 100,000 plus mile major rail network in North America,
is, in my opinion, unrealistic.
The mergers and other changes that have taken place in the rail
industry over the past two decades have in part been the result of the
major merger regulations enforced by the ICC, and (since 1996) by the
STB. Shortly after the enactment of the Staggers Rail Act of 1980, the
ICC modified its merger regulations to place a premium on the reduction
of excess capacity which was deemed to be choking the large railroads.
Under these merger regulations, consolidation was encouraged as long as
it was not deemed to unacceptably reduce competition. Along with the
liberalization of abandonment rules and, perhaps most significantly,
the reduction in government regulation of ratemaking and other service
issues, the merger regulations implementing the Staggers Act helped to
return the railroad industry from the brink of financial ruin.
The railroad industry that we see today is largely the result of
the ICC's and STB's interpretation of the post-Staggers merger
standards. However, it has now been determined that the reduction of
excess capacity should not be the primary goal of future rail mergers.
KCS supports that concept and supported the STB's 15-month merger
moratorium imposed in March 2000, and we were pleased when the
moratorium withstood a challenge in court.
The purpose for imposing the moratorium, according to the Board,
was to allow the Board time to re-write the merger regulations, to
better address the competitive and service issues which would now arise
from a round of final combinations. KCS also supported the Board in its
pursuit of these goals. However, I would like to make it clear that KCS
has not been, and is not, part of the ``mega-carrier'' problem that the
STB sought to address in its new regulations.
KCS actively participated in the STB's review of its merger rules--
a process which spanned 15 months. At each step in the proceeding, KCS
filed comments proposing modest changes which we believed could put the
merger regulations more in tune with the modern rail industry. See
Exhibit D. KCS's written comments were contained in hundreds of pages
of text, all of which reflected views on improving the rail system as a
whole. We were also represented by our regulatory counsel at an oral
hearing conducted by the STB to facilitate a dialog on the Board's
revision of the merger rules.
At each step in the Board's review proceeding, KCS urged the Board
to consider seven specific proposals for improving its regulation of
major rail mergers. Those seven points were as follows: 1. Rail Service
Options Should Be Preserved In Merger Proceedings; 2. Service
Restrictions Contained In Marketing, Haulage And Trackage Rights
Agreements Imposed As Merger Conditions Should Be Disclosed And
Justified; 3. Benefits Claimed From Prior Mergers Should Be Preserved;
4. Applicants Should Be Required To Disclose And Discuss The Impact Of
Related Negotiated Agreements In Merger Proceedings; 5. Recent
Cancellations Of Reciprocal Switching Access Should be Disclosed and
Discussed; 6. The Definition of ``Major'' Merger Transactions Should Be
Limited To Mergers Involving Only The Largest Railroads; 7. Merger
Applicants Should Be Required To Disclose And Discuss Paper And Steel
Barriers Applicable To Their Shortline Interchange Connections.
KCS was pleased that our seven modest proposals generated a
significant amount of discussion in the merger rule proceeding.
Although none were adopted in totality, other railroads, government
agencies, and shippers all made comments directly or indirectly
supporting or opposing the suggestions made by KCS. KCS has supported
the STB's new rules.
Since I assumed the Presidency of KCS in 1995, we have been
actively involved in all of the major rail mergers, urging the STB and
the ICC before it to maintain as a guiding principle the preservation
of rail competition. Railroading involves enormous capital expenses.
Unlike the trucking industry, for example, where underserved markets
can be remedied with the purchase of some trucks, railroads must pay
for their own infrastructure, meaning that it is virtually impossible
for any new rail systems to be built. In short, the rail systems we see
today are likely all we will have to work with for many years to come.
For that reason, we have repeatedly asked the Board to make sure that
rail mergers do not reduce competitive options to shippers in major
transactions.
Over the last few weeks, some have questioned the majority of the
Board's approval of a regulation grandfathering any potential merger of
KCS and another Class I carrier under the Board's former regulations
governing major rail mergers. The final regulation is different than
the proposal put forth by KCS, which was that such a merger be reviewed
as a ``significant'' transaction, not a major one, under the new merger
regulations. The Board's rule is different from what we proposed but is
based on the same facts that spurred our original proposal 15 months
ago: KCS's limited market reach simply cannot support the types of
concern over service and competitive issues which will dominate future
mergers of the other Class I carriers. The ``grandfathering'' of KCS,
under the previous rule, which is fair and appropriate, is a rebuttable
presumption that could be challenged by a concerned party if they
desired to do so.
I would like to conclude my comments with a few observations on
KCS's independence. Many parties have been speculating that the recent
adoption of the STB's major merger regulations is nothing short of a
``For Sale'' sign on KCS. The people making that speculation have
simply not watched us over the past few years. KCS has worked
diligently to maintain its independence while entering alliance and
marketing agreements to extend its reach and better serve our
customers. We have worked hard to develop on-line business
opportunities, and to work with our connecting carriers to better serve
our shippers. We are currently involved in the construction of a new
headquarters building in downtown Kansas City, an action that we would
not be taking if we were looking to exit the market as an independent
carrier. It is true that we are a publicly traded company, and thus in
some sense our future rests in the hands of those who invest in our
stock. Additionally, we must protect the interest of not only our
shareholders but our customers and employees as well. But a railroad so
dwarfed by major carriers around it with limited geographic reach may
well prove to be in no one's best interest. But, in the meantime, we
will continue to focus our energies on keeping KCS a strong, reliable
carrier, one with a proud heritage and a challenging future.
Again, I want to thank the Subcommittee for giving me the
opportunity to testify today. I would be pleased to answer any
questions you might have.
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Exhibit D--Debate Timeline On KCS Proposal
------------------------------------------------------------------------
Date Event What Happened
------------------------------------------------------------------------
March 11, 2000.................. STB imposes 15 ..................
month moratorium
on major rail
mergers.
March 21, 2000.................. STB issues ..................
Advanced Notice
of Proposed
Rulemaking
(``ANPR''); seeks
public comments.
May 16, 2000.................... Comments on the Over 100 parties
ANPR due. filed Comments
KCS asks any
future KCS-Class
I merger to be
``significant,''
not ``major''
WCL supports the
same idea in
KCS's proposal
June 5, 2000.................... Reply Comments on Approximately 60
the ANPR due. parties filed
Reply Comments
KCS again urges
differences
between large and
small Class I
railroads
BNSF, UP, EEI and
SPI oppose KCS's
request
WCL and CSX
indicate support
for KCS's
proposal
October 3, 2000................. STB issues Notice 1No distinction to
of Proposed ``major'' merger
Rulemaking definition
(``NPR''). included
November 17, 2000............... Comments on NPR Over 100 parties
due. filed Comments
KCS urges
reconsideration
of its proposal
WCL supports KCS's
request and USDOT
agreed with the
same concept of
KCS's request
December 18, 2000............... Reply Comments on Approximately 50
NPR due. parties filed
Reply Comments
KCS continues to
seek distinction
in ``major''
merger regulation
IMPACT and UP
oppose KCS's
proposal
WCL and USDOT
indicate support
for KCS's request
January 11, 2001................ Rebuttal Comments Approximately 40
on NPR due. parties filed
Rebuttal Comments
KCS's final
written
justification for
amendment to
``major'' merger
classification
April 5, 2001................... STB conducts oral Approximately 40
argument. parties
participate in
oral argument
KCS appears before
STB to answer
questions about
proposal
June 11, 2001................... STB issues final Regulations
major merger include
regulations. rebuttable
presumption that
KCS-Class I
merger to be
reviewed under
existing
``major'' merger
standards
------------------------------------------------------------------------
Senator Breaux. Thank you, Mike.
Mr. Gebo.
STATEMENT OF WILLIAM L. GEBO, MANAGER OF RAIL
SERVICES, DOW CHEMICAL COMPANY; ACCOMPANIED BY GEORGE MARSHALL,
DIRECTOR OF SUPPLY CYCLE, ALBEMARLE CORPORATION
Mr. Gebo. Yes, Mr. Chairman, Senator Rockefeller. My name
is William Gebo, and I am the Manager of Rail Services
Purchasing for Dow Chemical Company. It is an honor to appear
here today on behalf of the American Chemistry Council.
Dow Chemical is one of the Council's largest shipping
members. We operate a fleet of 29,000 rail cars with a
replacement value of $2 billion. We initiate over 145,000 rail
shipments per year, and we spend in excess of $450 million a
year on rail freight in North America.
For several years, coinciding with the recent wave of rail
mergers, the Council and its member companies have been
increasingly concerned about the lack of direct head-to-head
competition among railroads. For the Council's membership as a
whole, two-thirds of all rail-served chemical plants are
restricted to service by a single railroad. These captive
plants have no opportunity to obtain competitive price
quotations or service options. This is not acceptable to us as
an industry.
Throughout the recent 15-month merger moratorium and
rulemaking process, the Council took part in every phase of the
STB policy review. Our industry took those STB proceedings very
seriously, but we were fairly disappointed with the outcome.
STB had the opportunity to establish clear rules for the next
round of rail mergers. Now that there are only two major Class
I's in the East and two major Class I's in the West, the next
round of mergers will be the last round.
The Council believes that within a few years there will
only be two North American railroads. With our members already
subject to monopoly conditions at almost two-thirds of their
rail-dependent facilities, we are worried that there will be
even more concentration and even fewer routing options for
captive customers.
In the rulemaking docket, the Council asked the STB to make
competition the centerpiece of its new merger guidelines. While
the STB did appear to change its emphasis regarding
competition, unfortunately it declined to lay out specific
guidelines to enhance rail-to-rail competition.
Therefore, the American Chemistry Council makes the
following recommendations to the Subcommittee.
One, elevate the involvement of the Department of Justice
in rail mergers.
Two, direct the STB to examine marketing alliances and
other cooperative arrangements between the railroads that have
the potential to further limit competition without the benefit
of meaningful Federal scrutiny.
Three, direct the STB to establish more precise merger
guidelines for enhancing rail-to-rail competition.
Under these merger rules, there is no requirement to
enhance rail-to-rail competition in the future consolidations,
and moreover, there is no attempt to restore competition that
was lost from previous mergers.
Merger rules aside, the overall implementation of rail
policy so limits the opportunity for competitive market forces
to work, it is clear that Congress must intervene. Therefore,
we urge this Subcommittee--and I guess as far as Senator
Rockefeller is concerned, I am preaching to the choir--to
consider legislation such as S. 1103 that would promote rail-
to-rail competition as originally envisioned by the Staggers
Rail Act.
Thank you very much.
[The prepared statement of Mr. Gebo follows:]
Prepared Statement of William L. Gebo, Manager of Rail Services, Dow
Chemical Company, on behalf of The American Chemistry Council
Good afternoon Mr. Chairman and members of the Subcommittee. My
name is William L. Gebo and I am Manager of Rail Services for the Dow
Chemical Company. I am appearing here today on behalf of the American
Chemistry Council.
The American Chemistry Council (``the Council'') represents the
leading companies engaged in the business of chemistry. Council members
apply the science of chemistry to make innovative products and services
that make people's lives better, healthier and safer. The Council is
committed to improved environmental, health and safety performance
through Responsible Care, common sense advocacy designed to address
major public policy issues, and health and environmental research and
product testing. The business of chemistry is a $460 billion enterprise
and a key element of the nation's economy. It is the nation's largest
exporter, accounting for ten cents out of every dollar in U.S. exports.
Chemistry companies invest more in research and development than any
other business sector.
Safe and efficient rail service is crucial for the member companies
of the American Chemistry Council. The business of chemistry is second
only to the nation's electric utilities in terms of its dependence on
railroads and the size of its freight bill. Chemicals and plastics
annually account for 150 million tons of rail traffic, which provides
our rail service providers with $5 billion in revenues.
On behalf of Dow and the Council, it is an honor to be here today
to address the subject of the new major rail merger rules that the
Surface Transportation Board (``STB'') adopted on June 11, 2001. These
rules [often referred to by docket number as ``Ex Parte No. 582 (Sub-
No. 1)'' or as STB's ``Major Rail Consolidation Procedures''] will have
a significant impact on the country's economy and should be carefully
reviewed by Congress.
Before commenting these rules, the Council wishes to note that
earlier this year, under the chairmanship of Senator Gordon Smith, this
Subcommittee undertook a series of three hearings on the condition of
the rail industry. Rail customers respectfully request that, after
holding this special hearing on STB's new merger rules, the
Subcommittee complete its original series of three hearings. Still to
be examined in that series, and not on addressed today, are the on-
going problems that rail customers face on a daily basis.
For several years--coinciding with the most recent wave of rail
mergers--the Council and its member companies have become increasingly
concerned about the lack of direct head-to-head competition between
railroads. For the Council's membership as a whole, 63 percent of all
rail-served chemical plants are restricted to service by a single
railroad. In other words, when it comes to rail transportation, nearly
two-thirds of our industry is ``captive'' and therefore has no
opportunity to obtain competitive price quotations or service options.
Member companies that have competition available at some of their
facilities report that their freight rates are much higher (ranging
from 15 percent to 60 percent more) where the railroad has a monopoly
over the shipper's traffic. Nor is it surprising that the Council's
members report that railroads are less responsive to customer service
concerns at locations without rail-to-rail competition.
This lack of competition is not acceptable for the business of
chemistry, which is obligated to supply customers in virtually every
sector of the U.S. economy--including motor vehicles, pharmaceuticals,
computers, packaging, agriculture, and water treatment. Moreover, as I
have noted, the business of chemistry is the nation's largest exporting
industry, with more than $80 billion in exports last year. So the
business of chemistry must also rely on railroads to reach customers in
Canada and Mexico and to move products efficiently to various ports.
Having underscored the importance of rail service to the business
of chemistry, I will now focus on the specific topic of today's
hearing--rail mergers. Throughout the recent 15-month moratorium, the
Council took part in every phase of STB's rail merger policy review.
Our industry took those STB proceedings very seriously. But we are
extremely disappointed with the outcome. STB had the opportunity to
establish clear rules for the next round of rail mergers. And make no
mistake, now that there are only two Class I railroads in the East and
two in the West, the next round of mergers will be the last round. The
Council believes that within a few years there will be only two major
railroads in North America. Obviously, with our members already subject
to monopoly conditions at almost two-thirds of their rail-dependent
facilities, we are worried that there will be even more concentration
and even fewer alternatives for captive shippers.
In the rulemaking docket, the Council asked STB to make competition
the centerpiece of its new merger guidelines. Unfortunately, however,
STB declined to enhance competition when railroads merge. To be sure,
STB invited--and perhaps, to some extent, may be said to have
encouraged--railroads to ``talk the talk'' about competition and
improved customer service when they file their next round of merger
applications. But STB clearly did not adopt any rules that would
require railroads to ``walk the walk'' by competing directly with each
other at all points on their merged systems.
The American Chemistry Council commends to the Subcommittee's
careful attention the following three points about the current status
of Federal rail merger policy:
1. Ideally, the final round of rail mergers should not be reviewed
by STB, which simply can't bring itself to address the needs of captive
rail customers. We therefore urge you to adopt legislation, like S. 526
(already introduced by Senators Dorgan and Rockefeller), which would
elevate the involvement of the U.S. Department of Justice in rail
mergers. Given the extreme concentration already existing in the rail
industry and the market power that railroads exert over individual
captive shippers, it would certainly be appropriate to give more
authority to an agency with a balanced view of competition.
2. Even if Congress chooses to leave rail merger authority with
STB, that authority must be explicitly clarified to require the
examination of so-called ``marketing alliances'' and other cooperative
agreements between railroads. STB has generally not interpreted its
authority to include such transactions. Because railroads, like Major
League Baseball teams, are not subject to normal antitrust review,
there is the risk that ``de facto'' rail mergers could occur without
any meaningful Federal scrutiny.
3. Finally, this special hearing may well be the Senate's only
chance to direct STB to reconsider its new rail merger guidelines
before it is too late. Instead of issuing precise rules, which all
interested parties would understand in advance of a merger, STB has
left everyone wondering. Captive shippers see clearly that merging
railroads will not be required to enhance competition in a future
consolidation under these rules. Although STB itself recognizes that
rail mergers can lead to serious service problems, the new rules do not
require carriers to compensate shippers, who have suffered tremendously
in the wake of four of the past five mergers. For that matter, how can
short lines and rail labor unions and potentially affected communities
know what will happen to them? In fact, even the Class I railroads may
not be sure how STB will judge the final round of mergers, until after
that round has been completed.
In conclusion, the American Chemistry Council thanks the
Subcommittee for the opportunity to participate in today's hearing.
Because our members depend so heavily on the railroads, we urge the
Senate to provide clear pro-competitive rules in place of vague merger
guidelines. We also urge you to pass legislation that would promote the
long-term health of the nation's railroads--as envisioned in the
Staggers Rail Act of 1980--by allowing free-market forces to operate in
a truly competitive manner.
Thank you.
______
Railroads Need to do More Than Talk, ACC Testifies
[American Chemistry Council News Release]
Arlington, VA--In a special hearing held today before the U.S.
Senate Surface Transportation and Merchant Marine Subcommittee, the
American Chemistry Council emphasized that time may be running out to
reconsider rail merger guidelines. On June 11, 2001, the Surface
Transportation Board (STB) released new major rail merger rules that
the business of chemistry believes missed the opportunity to make rail-
to-rail competition the centerpiece of the new merger guidelines.
``The new rail merger guidelines may have encouraged the railroads
to talk about competition and improved customer service when they file
their next round of merger applications,'' testified William L. Gebo,
Manager of Rail Services for The Dow Chemical Company of Midland,
Michigan, ``but the STB clearly did not adopt any rules that require
railroads to compete directly with each other at all points on their
merged systems.'' Gebo pointed out that captive shippers see clearly
that merging railroads will not be required to enhance competition in a
future consolidation under current rules. ``Make no mistake, the next
round of, mergers will be the last round. With almost two-thirds of our
members already subject to monopoly conditions, our industry is worried
that there will be even more concentration and even fewer alternatives
for captive customers,'' he stated.
The U.S, Congress should adopt legislation that would elevate the
involvement of the U.S. Department of Justice in rail mergers, Gebo
urged. Currently, rail mergers are subject to review by only the
Surface Transportation Board. ``It certainly would be appropriate to
give more authority to an agency with a balanced view of competition,''
he said.
Gebo also proposed that the STB's authority be explicitly clarified
to require examination of ``marketing alliances'' and other cooperative
agreements between railroads. The STB generally has not interpreted its
authority to include such transactions. ``There is a risk,'' Gebo
continued, ``that rail mergers could occur without any meaningful
Federal scrutiny.''
Safe and efficient rail service is crucial for the member companies
of the American Chemistry Council. The business of chemistry is second
only to the nation's electric utilities in terms of its dependence on
railroads and the size of its freight bill. Chemicals and plastics
annually account for 150 million tons of rail traffic, which provides
our rail service providers with $5 billion in revenues.
``We urge the U.S. Senate to provide clear pro-competitive rules in
place of vague merger guidelines,'' Gebo concluded. He noted that on
June 26, Senators John D. Rockefeller (D-WV), Bryon L. Dorgan (D-ND)
and Conrad Burns (R-MT) introduced S. 1103, the ``Railroad Competition
Act of 2001.'' The U.S. Congress, he emphasized, must ``pass
legislation such as S. 1103 that would promote the long-term health of
the nation's railroads by allowing free-market forces to operate in a
truly competitive manner.''
The American Chemistry Council represents the leading companies
engaged in the business of chemistry. Council members apply the science
of chemistry to make innovative products and services that make
people's lives better, healthier and safer. The Council is committed to
improved environmental, health and safety performance through
Responsible Care, common sense advocacy designed to address major
public policy issues, and health and environmental research and product
testing. The business of chemistry is a $462 billion a year enterprise
and a key element of the nation's economy. It is the nation's #1
exporting sector, accounting for 10 cents out of every dollar in U.S.
exports. Chemistry companies invest more in research and development
than any other industry.
Senator Breaux. Thank you, Mr. Gebo.
Mr. Marshall, you are from Louisiana. Do you have anything
to add to Mr. Gebo's testimony?
Mr. Marshall. I fully concur with his comments, sir.
Senator Breaux. OK.
You had some interesting comments in your remarks regarding
KCS. You may want to talk to Mike Haverty there before you all
leave and work it out.
[Laughter.]
Senator Breaux. It will save me a meeting.
[Laughter.]
Senator Breaux. Ms. Howells, we are glad to have you here
and are pleased to take your testimony.
STATEMENT OF CLAUDIA L. HOWELLS, RAIL DIVISION
MANAGER, OREGON DEPARTMENT OF TRANSPORTATION
Ms. Howells. Thank you, Chairman Breaux and Senator
Rockefeller. I am very honored to be here today.
My name is Claudia Howells and I manage the Oregon
Department of Transportation's Rail Division. And I am here to
talk to you today about the consolidation rules, as well as to
bring some other issues forward, if I may.
Because Oregon's economy continues to be based in great
part on agricultural and timber production and because we are
distant from major markets, rail transportation is essential to
keeping Oregon producers competitive. We are somewhat unusual
in the country in having over half of our rail miles in short
line management, with 60 percent of our rail-served industries
served by a short line. The Union Pacific is by far the
dominant Class I carrier since the recent mergers, with
Burlington Northern Santa Fe generating only a small percent of
the Class I railroad revenue in the State.
I will mention that the short lines and their production of
carloads equals the Port of Portland's, which is the other
primary shipper in Oregon.
All of Oregon's shippers have been significantly affected
by all of the recent railroad mergers, including the Eastern
ones, since most of our markets are in fact in the East and the
South. While most Oregon shippers consider rail service to be
good today--it is always a relative term in this business--only
one shipper, when we recently surveyed them, found any benefit
from the mergers in terms of service or rates. The best that
can be said at present is that service and rates are comparable
to what they were before the mergers.
We reviewed the merger rules and we commend the Surface
Transportation Board for taking a very balanced approach to
drafting those rules. The Board clearly recognizes that the
rail system today is profoundly different than when the
Staggers Act was put in place. But what we say is I think what
others have said, and that is these rules come too late.
Had they been in place even 7 to 10 years ago, I think we
would have a better and stronger rail system than we do now.
One of the problems that I have seen over the last 18
years, the last 50 years of public policy decisions on
railroads come only after a catastrophic event such as a
bankruptcy of a major rail system or these service disruptions
that have caused so much agony to so many shippers.
What I would like to bring forward today are some issues
that I see coming ahead, and I think some of them rather
quickly. One of them is actually the breakup of the major
carriers, not in a way that will necessarily make sense, but
driven primarily by the need to spin off those parts of the new
mega-railroads that are costly and that are also less
lucrative. This will be as disruptive to shippers as have been
the mega-mergers and I suggest will not necessarily enhance
competition.
Another issue we have been very concerned about, but that
tends to be treated as a minor transaction, is the ongoing
consolidation of the short line holding companies. While there
certainly are not competitive problems, we foresee that this
will result in a wave of abandonments that are not necessarily
the kinds of abandonments that we saw in the mid-1980s.
We also predict a bankruptcy of many of our independently
owned short lines, primarily because they are captive and
because they are unable to withstand the damage caused by the
new heavier rail cars. In Oregon we see several short lines
facing very serious financial difficulties even while the
traffic levels are, in fact, fairly good. We would like to see
the STB play a stronger role in protecting the interests of
these smaller railroads and helping States and shippers deal
with what I see are up and coming bankruptcies.
Finally, the issue of passenger use of freight lines. We in
Oregon are very much involved in redeveloping intercity,
interurban, and commuter rail, but we also recognize that the
needs of the freight railroads need to be protected, and we see
the STB has having a larger role in mediating the needs of
moving people and moving goods.
Finally--and I have said this for a long time--we need a
national rail policy. Without it, we believe that railroads
will continue to engage in risky financial moves, such as mega-
mergers, which we believe are primarily done to generate
capital. Railroads will continue to reduce system capacity
because Wall Street punishes railroads that make long-term
capital investments or retain marginal operations.
Railroads will continue to hang on to their franchise,
perhaps irrationally, because it is all they have left.
I have noted some things I think that can be done. Chief
among them is that the three Federal agencies involved in
railroads, the STB, the FRA, and the FTA, need to work together
in developing a policy that will make sure that we have a rail
system as we move forward into the 21st Century.
We have a tremendous asset that we need to protect and not
simply treat as some other private investment.
I appreciate again the opportunity to be here. Thank you.
[The prepared statement of Ms. Howells follows:]
Prepared Statement of Claudia L. Howells, Rail Division Manager,
Oregon Department of Transportation
My name is Claudia L. Howells, and I am the Manager of the Oregon
Department of Transportation (ODOT) Rail Division. Thank you for the
opportunity to testify today on behalf of the State of Oregon and
Oregon producers as the committee addresses new procedures on major
railroad consolidations adopted by the Surface Transportation Board.
role of odot rail division
Oregon State Law vests the Department of Transportation Rail
Division with the responsibility of representing the customers of
railroads before the Surface Transportation Board (STB) and other
Federal agencies. We also are responsible for maintaining a current
State Rail Plan, which is an element of the Oregon Transportation Plan.
The 2001 update of the Rail Plan, which includes both freight and
passenger rail, is in the final stages of the approval process.
significance of rail transportation to oregon's economy
Because Oregon's economy continues to be based in great part on
agricultural and timber production and because we are distant from
major markets, rail transportation is essential to keeping Oregon
producers competitive. We are somewhat unusual in having over half of
our rail miles under short line management, with sixty per cent of
rail-served industries served by those short lines. The Union Pacific
(UP) is by far the dominant Class I carrier, with the Burlington
Northern Santa Fe (BNSF) generating only a small percent of the Class I
railroad revenue in the state.
Oregon shippers have been significantly affected by all of the
recent railroad mergers. The 2001 Oregon Rail Plan includes a survey of
Oregon shippers on rail service and their perception of the effects of
the recent mergers. While most Oregon shippers consider current rail
service to be reasonably good, with the short lines getting most of the
credit, only one shipper surveyed has found any benefit from the
mergers in terms of service or rates. The best that can be said is that
at present, service and rates are comparable to what they were before
the mergers.
comments on stb merger rules
We commend the Surface Transportation Board for a taking a balanced
approach in drafting new procedures governing major rail
consolidations. The Board clearly recognizes that the railroad system
today is profoundly different than when the Staggers Act, and its
regulatory predecessors, were put in place. We will say though what I
am sure others will say. These are rules that come too late, and sadly,
they will have little affect on the ability of the railroads to
survive.
I would suggest that had these rules been in place prior to the
merger of the Union Pacific and the Chicago Northwestern, there might
have been a more rational, less destructive chain of mergers that began
with the merger of the Union Pacific and Chicago Northwestern. Had the
new merger rules been in place before the merger of the Southern
Pacific and Denver & Rio Grande Western, a stronger railroad might have
emerged and been capable of standing on its own. But the rules were not
in place because, in my opinion, the last fifty years of public policy
decisions on railroads have come only as a result of catastrophic
events--like the bankruptcies of the Penn Central, the Rock Island and
the Milwaukee Road, and now the service disruptions caused by poorly
planned and poorly implemented railroad consolidations.
the future of the railroad industry
I suggest that we must begin to anticipate the challenges facing
railroads rather than waiting for the next disaster. Based on what we
see in Oregon, I will make the following predictions:
1. Break Up of Major Carriers
I predict that we will see few, if any, major railroad
consolidations in the coming years, once the Kansas City Southern/
Canadian National merger is completed. Although it seemed for a time
that we were headed for a round of transcontinental mergers, the
resulting service disruptions, I suspect, have cooled the interest in
the financial community for any more major railroad mergers. I think we
will begin to see, soon, spin-offs from these new mega-railroads into
small Class I or Class II railroads as the big railroads attempt to
jettison the less lucrative, costlier parts of their systems. I also
predict that these break ups will prove just as disruptive to shippers,
and just as destructive to the overall national transportation system,
as the mega-mergers. Without some clear direction now to the STB, the
regulatory response will again come too late.
2. Short Line Consolidation
I also predict that we will see further consolidation of short line
holding companies that will result in a new wave of abandonments as
they, like the Class I railroads, attempt to keep stockholders and
financial analysts happy by dropping less profitable lines. Under
current regulatory constructs, short line consolidations are handled as
minor transactions, because clearly the competitive issues do not
exist, and there is little in the way of statutory direction to look
much beyond those issues. The STB needs to address this issue with the
same level of attention as it has the issue of Class I railroad
mergers.
3. Bankrupt Short Lines
I also predict that many of the smaller independent short lines
will head toward bankruptcy. Absent financial support from either the
public, or the connecting Class I, these smaller lines will not be able
to bear up under heavier cars. Many of these short lines, having
experienced financial losses because of merger related service
disruptions, may not ever recover. In Oregon, several short lines are
facing serious financial difficulties, for the most part not of their
making. The STB should play a greater role in protecting the interests
of the smaller railroads, and Federal law needs to allow a greater
level of participation by shippers and public interests in abandonment
proceedings.
4. Passenger Use of Freight Lines
We will see growing pressure to use the freight rail system for
passenger and commuter trains. The Oregon Department of Transportation
fully supports redeveloping intercity, interurban and commuter rail,
which is very much a mission of Oregon's rail program. However, we
cannot afford to reduce the capacity of the freight system or in any
way adversely affect the profitability of the freight railroads. I
believe the STB should take the lead role in balancing the interests of
current and future users, both passenger and freight so that the
overall system remains solid.
national rail policy
Most importantly we need a National Rail Policy that is integrated
into the overall transportation policy, and that better balances the
interests of all the commercial transportation industries. If we fail
in that, then I predict, railroads will continue to engage in risky
financial moves, such as mega-mergers, because that is the only way to
generate capital. Railroads will continue to reduce system capacity,
because Wall Street punishes railroads that make long-term capital
investments or retain marginal operations. Railroads will continue to
hang on to their ``franchise'', perhaps irrationally, because it is all
they have left. Shippers will be left with an increasingly unstable
railroad industry; something no one wants.
What can be done to avoid this? First, the railroads, large and
small, need a financial safety net. Second, railroads need to remain
under a regulatory agency that has a greater mission than simply
mitigating competitive damage. The STB should be given a greater
mission to protect railroads as a national resource, which may not
always be consistent with the desires of either railroad management or
railroad labor or even rail shippers. Third, railroad mergers,
acquisitions and abandonments should continue under the jurisdiction of
the STB and not be transferred to any other Federal agency. Fourth, the
missions of the STB and the Federal Railroad Administration need to be
complimentary, and these agencies need to work together. Fifth, the
STB, the Federal Railroad Administration and the Federal Transit
Administration need to establish compatible policies when it comes to
the management of the railroad system.
With a clearly stated National Rail Policy and with the STB given
an expanded role, we may be able to head off the next major railroad
crisis.
conclusion
Recently, a member of the Oregon Transportation Commission observed
something that I do not believe I have ever heard so clearly stated.
She began by remarking on the initial investment by the government in
building the nation's railroads. She then went on to say that
government has all but abandoned the railroads and in so doing has
demonstrated a lack of stewardship over a valuable public resource, and
over that initial public investment.
Railroads continue to be the best example of a public-private
partnership that this Nation has ever seen. It is clearly a partnership
that needs to be reestablished if indeed we place any value on our
nation's rail system. In truth, we as a Nation should be grateful every
day that the railroads maintain their own infrastructure, run their
trains every day and help keep industries all over the country in
business without costing the taxpayer a dime. We must remember that
rail is not an alternative mode. It is an essential part of our
transportation system, and if not in private hands, would by necessity
become the responsibility of the public. In short, railroads most
assuredly need to act in the public interest, but in return the public
interest needs to support the railroads.
While I may believe that the STB's rules came too late, I also
believe that the quality of the new rules indicate an agency that
understands the industry and also understands its responsibility to
shippers and the public.
Thank you again for the opportunity to testify before the
subcommittee today.
Senator Breaux. Thank you, Ms. Howells, and thank you for
coming from Oregon, and all of our guests from distances that
they have traveled to be with us. Thank you for being here.
Let me start.
John Snow and Monsieur Tellier, you both indicated that
there are no new merger plans out there. You want to
concentrate on what we have got and make it work. If that is
the state of the industry, no new mergers, would it not have
been just as good just to leave the moratorium on for no new
mergers?
Mr. Snow. I think this is a better approach, Mr. Chairman,
because it lays out sensible rules of the road for railroads to
follow. There may come a time--I do not know when it would be,
I certainly do not foresee it--when the benefits of alliances
will have been exhausted, when the shipping public will say we
desire more single line services, when the investing public
says mergers make sense--none of that is true today--and where
mergers would once again be viewed as an appropriate way to
advance the well-being of shippers, investors, and railroads.
So, this Ex Parte 582 rulemaking sets broad guidelines,
sensible guidelines for dealing with that possibility. I see it
as a remote one for many years frankly.
Senator Breaux. Thank you.
Mr. Tellier, the same question. It just seems to me that if
there are no mergers that are going to be occurring in the
foreseeable future, according to your and Mr. Snow's feelings
on this issue, why do we not just leave the moratorium in
place, and if that time ever gets here, then we can see at that
time what the appropriate rules are at that time rather than
try to set the rules today for something that may happen
sometime in the foreseeable future, we know not when?
Mr. Tellier. Well, Mr. Chairman, I think it is important to
keep an open mind about these possible mergers. I will give you
a very concrete example that you will be able to relate to.
I have here on my left a representative of Dow Chemical.
Dow Chemical is one of the biggest customers of Canadian
National. We serve them in two places. We serve them out of
Edmonton in northern Alberta, where they have access to good
feedstock, and we provide them a single line service, for
instance, to your State where there is also a very large
concentration of chemical production, Geismar. Why have we been
able to improve the quality of service to customers like Dow
Chemical? Because today Canadian National and Illinois Central
are the same company--common ownership, common leadership, a
single operating plan, and so on. So, therefore, although at
this point in time we are not planning a big mega-merger, like
John, I would say let us make sure that the rules are there and
we keep an open mind.
The analogy that I like to use--and Senator Rockefeller was
using this analogy a few minutes ago questioning another
witness--if you decide to fly anywhere in this country today,
you will do your best to get a direct flight without a
connection. And what mergers have achieved is that we can
provide a customer like Dow Chemical a single bill of lading, a
single invoice, a single tracking system----
Senator Breaux. Mr. Tellier, I do not want to interrupt
you, but I am going to do it anyway. I appreciate what you are
saying, but you are talking about past mergers. The point I am
making to you and Mr. Snow is you are saying there are not
going to be any more new mergers. So, my question really to you
is if there are not going to be any new mergers, why do we have
to change the moratorium on no mergers?
Mr. Tellier. Well, Mr. Chairman, if I may, respectfully.
What I am saying is we do not see any one planned at this
point in time, but it is very difficult to forecast the future.
Senator Breaux. But you may have one in mind.
Mr. Tellier. No, we do not. But I do not see why our
industry should be treated differently from the other
industries in the North American economy. So, the rules are
there. What we say is that under the leadership of Ms. Morgan,
we have a set of rules that make sense, and if at one point in
time economic conditions, to better serve the shippers, make
sense to have a merger, the rules would be out there. But I do
not foresee the use of these in the foreseeable future.
Mr. Snow. Mr. Chairman, if I could just comment. Based on
the current environment, I think we have a de facto moratorium.
I think to enact a moratorium or leave the moratorium in place
at the agency would probably have exceeded the agency's
regulatory authorities. So, I think there was a very good
reason to put good rules in place because if you do not have
good rules in place, you have the old rules. The new rules are
better than the old rules. My understanding of the Act is that
to leave the moratorium in place would have exceeded the
regulatory authority of the agency.
Senator Breaux. Thank you.
Let me ask the railroads to comment on this. What in the
new rules regarding mergers, from your perspective, is a
greater burden or a greater standard that you have to meet in
terms of accomplish a merger than existed in the old rules?
Mr. Tellier. Well, in many different ways this is the case.
For instance, the benefits. In some of the past mergers, you
know, as well as I do, that the benefits of these mergers were
overstated. Now the Board is telling us they are going to adopt
a ``show us'' attitude. That is one example.
Competition. The Board will not only be satisfied in the
future that there is no reduction in competition, but they want
to make sure that, to the extent it is desirable, competition
is enhanced.
So, I think the bar is being raised, and this is the right
way to go about it. As a matter of fact, if I may say so, Mr.
Chairman, when our aborted merger last year with BNSF took
place, we were ourselves proposing to the regulator, to the
STB, to raise the bar to make sure that the disastrous results
of some of the past mergers would not repeat themselves.
Senator Breaux. What in the new rules guarantee that we are
going to have the same result in a future merger, though?
That is what I am asking.
Mr. Tellier. Well, the service assurance plan that Ms.
Morgan has described is surely one. Any applicant would have to
reassure the Board that there will not be the kind of
disruption that has taken place in the last 5 years in the case
of some mergers.
Senator Breaux. Mr. Snow, do you agree with that?
Mr. Snow. Yes, very much so, Mr. Chairman. As a former
practicing lawyer, who practiced before the old Interstate
Commerce Commission and was involved in merger proceedings, I
think any lawyer who did not counsel his client that mergers
are much more difficult would be failing to fulfill his duties
to his client. It is the clear intent of the agency, as you
read those rules, clear state of mind of the agency that
anybody who comes before us with a merger proposal has got to
jump through some more hoops, has got to show the public
interest in more and compelling ways.
So, if I were a practicing lawyer and two railroads came to
me and said, I would like you to represent me, I would be very
careful in making sure, before we filed it--in fact, my first
advice to them would be right now, do not file any mergers. The
agency has spoken pretty clearly. They are very inhospitable to
mergers. That is the only way to read those rules, is that the
agency is inhospitable to mergers, and you have to make a
compelling case.
So, I think the attitude expressed by the agency in the
rules is in terrorem. It brings terror to any proposed
application. And I think the bar will bring that to the
attention of would-be railroad applicants.
Senator Breaux. Mr. Haverty, I have to phrase the question
to you differently because you are not part of the new rules.
[Laughter.]
Senator Breaux. So, what in the new rules was so onerous
that led KCS to say, we cannot be part of them and want an
exemption?
Mr. Haverty. Well, I do not think that they were that
onerous. All we were asking for was the right to be treated as
the other Class I's had been treated under the previous rules--
because Kansas City Southern has never been involved in a major
transaction ever in its history. The four big railroads in the
United States, Union Pacific, Burlington Northern Santa Fe,
CSX, and Norfolk Southern, have been in multiple mergers. All
we were saying is because we were so much smaller, let us be
judged under the same rules where they put their 30,000 mile
systems together. That is what we were asking for.
It was not that they were all this onerous. I agree that
some of the hurdles are clearly higher, and I agree that they
are mostly intended for transcontinental type mergers.
But again, I fail to see, at some point in time, if we do
something, that a 3,150-mile railroad in the United States is
going to trigger transcontinental mergers. I just do not see
that.
Senator Breaux. But you are the smallest of the Class I
railroads under the old rules and you never requested an
exemption from them based on your smaller size. Why not then?
Why now?
Mr. Haverty. Well, because we were not involved in any kind
of merger proceedings. We have, as I think everybody knows,
pursued a course of independence. It is no secret. As I think I
mentioned in my testimony, we are building a new corporate
headquarters. A couple of weeks ago, I was out trying to sell
equity in the company. I think if we thought that somebody was
going to gobble us up next week, we would not have been doing
that.
But we have to be realistic about this, Senator. If it
comes a point in time where our company cannot survive and for
me to stand there and wave the flag of independence while the
company goes under and the customers suffer and the employees
suffer and the shareholders suffer, that is not in anybody's
best interest.
Senator Breaux. I do not understand why a Class I railroad,
as you are, although the smallest of the Class I's, if you have
a suitor out there that is looking for an acquisition, just
hypothetically, you would feel, if that was to occur, you would
not be able to meet the new standards under the new rules? The
only thing that I see which is new is a plan that has to be
agreed to between the two merging railroads that say they are
going to somehow enhance service. What is wrong with meeting a
standard that says we are going to have enhanced service if we
have a merger?
Mr. Haverty. Well, first of all, we did not----
Senator Breaux. Regardless of the size.
Mr. Haverty. We did not write the rules here.
Again, I will say what I said earlier. There is a
rebuttable presumption here. So, if someone thinks that Kansas
City Southern is going to trigger the next round of mergers or
what we are doing is going to stymie competition, clearly they
have the right, I think as Vice Chairman Clyburn said, to come
to the Board and say we think that this should be done under
the new rules.
Senator Breaux. Yes, but the point is apparently, I take
it, that KCS did not want to be part of the new rules. Is that
not true?
Mr. Haverty. Well, that is no secret. As I said, you can go
back 15 months and we said that. And we said, as you very
correctly said earlier, if it was a friendly transaction, that
we felt it should be a significant transaction, which basically
would be completed in 12 months. If it was a hostile
transaction, we said basically that it should be considered as
a major. That was our position. That is not what was chosen,
but that is what our position was. But clearly, we have made no
secret for 15 months.
And also, Senator, we supported Wisconsin Central back in
November when they said that they wanted hearings held to talk
about changing the classifications for Class I's. They wanted
to raise the bar to $500 million. We said that we would like to
be part of those hearings. We did not say that the number ought
to be $500 million. I think we have been pretty clear that we
have said that we think any railroad with less than $1 billion
in revenue should be treated differently.
Senator Breaux. That is a whole other question I want to
ask.
My final point. You got your exemption. Suppose with your
exemption you are the subject of a hostile takeover. Are you
going to come back before the Board and argue against your own
exemption?
Mr. Haverty. I do not think there is much chance of doing
that.
Senator Breaux. I said hypothetically.
Mr. Haverty. It is hard for me to answer, Senator.
Senator Breaux. Do you see the predicament you are in? You
are arguing that if it is a hostile takeover, you ought to be
treated as a major merger, but if it was a friendly takeover,
you should be treated as a significant merger. And what you end
up with is a complete carve-out of the new rules. If they put
you under the old rules, whether it is a hostile or a friendly
takeover, you are subject to the same rules. Is that correct?
Mr. Haverty. First of all, what we proposed, the hostile
versus friendly, was not accepted. That was number one.
Senator Breaux. I understand that.
Mr. Haverty. Again, I respectfully disagree that it is a
carve-out because that would indicate that we are not subject
to any rules. Again, any party, whether it be a shipper or
whether it be a railroad or whoever, who wants to come back in
and say that Kansas City Southern merging with somebody else
should be considered under these rules.
Senator Breaux. That certainly changes the burden of proof,
though, does it not?
Mr. Haverty. Well, it does. But it certainly does not keep
that from happening. And the Board has every right to decide
that they want to do that.
So, that is why I think that this thing is--quite frankly,
Senator, not that big of a deal. Also, I have not heard a lot
of outcry from shippers or shipper organizations saying that
they think this is outrageous that we were grandfathered under
the old rules. In fact, many of them say that we understand
because you are so much smaller and much closer to the
Wisconsin Central that is being purchased, that we can
understand that. So, I have not seen an outcry from shippers
over this.
Senator Breaux. Senator Rockefeller.
Senator Rockefeller. Thank you, Mr. Chairman.
I am one of those who tends to think that mergers kind of
keep taking place until they cannot anymore. So, I make the
presumption that there will be a merger. I cannot afford not to
make that presumption. Therefore, I also cannot take the chance
not to explore the whole concept of enhanced competition and
what Chairman Morgan and I were sparring on in terms of
language.
Mr. Tellier, in Canada when you have service problems, your
customers have what form of redress?
Mr. Tellier. There are several types of redress that they
have. The simplest one is final offer arbitration, which is
binding arbitration. Another one is interswitching arrangements
where, within a radius of 18 miles, if a customer is off an
interchange point, if the customer is not satisfied with the
railroad that serves his or her plant, he can ask the other
railroad to come and provide him with the service. And that
interswitching arrangement is provided with the regulated rate.
The so-called bottleneck situation that exists in this
country----
Senator Rockefeller. You say with a related? You mean a
spoken rate?
Mr. Tellier. With a regulated rate. So, it is a fixed rate.
So, basically the rate is fixed by the regulator and it varies,
I think, from $160 to a couple of hundred dollars per car
depending on the distance.
Another remedy or shipper's protection that exists is what
is called competitive line rates, which is to address
situations that you describe on this side of the border--the
bottleneck situation.
So, these are the key provisions that do exist.
Senator Rockefeller. So, in effect, it is a fairly
streamlined and fairly varied approach that people have to try
and find the service which is a part of enhanced competition,
if they seek redress.
Mr. Tellier. This is correct.
Senator Rockefeller. There is a variety of ways to do it.
In Canada, railroads do not have an exemption from review by
your Ministry of Justice, do they?
Mr. Tellier. No, they do not.
Senator Rockefeller. I think it was you--or somebody--said
``I do not see why any industry should be treated
differently.''
Mr. Tellier. I said that.
Senator Rockefeller. Would a shipper suffering from a
bottleneck situation in Canada, in the sense of enhanced
competition, ever just have to sort of have a ``take it or
leave it'' rate put upon them because the government deferred
to the wishes of the railroad?
Mr. Tellier. Well, let us go back to one of the provisions,
which is the final offer arbitration. Let us suppose, to use my
example, our friends here from Dow Chemical are not satisfied
with the rate proposal that we put on the table. What could
happen is that if there is a breakdown in negotiations, the
customer would put forward a package saying this is our final
offer. This is what we are ready to pay Canadian National to
move that traffic. And Canadian National would put its best
offer on the table, saying this is the best rate that we can
provide Dow Chemical for moving their shipment. And a third
party basically decides in favor of package A or package B.
Does this happen often? No. But when we sit down and negotiate
with Dow Chemical, we know that this exists.
Senator Rockefeller. It is because you have behind that the
threat of the choice.
Mr. Tellier. Yes. Senator, I know where you are leading,
and let me just make that comment. The regulatory regime north
of the border is quite different, and I would suggest that one
has to be very cautious before we import south of the border
that regulatory regime. If you are asking me why, I would say a
somewhat different history, different economics, different
situations. There are only two railroads and not seven as south
of the border.
Senator Rockefeller. And I understand what you are saying,
but I also heard you, as you affirmed, say that no industry
should be treated differently than another. We have one
industry which has exemption under antitrust. You do not.
Industries are treated here differently from another. Whether
there are two in Canada and seven in North America is less
important to me than the fact that there is a principle
involved here of fair and equal treatment which I think is
transnational or ought to be.
Mr. Tellier. But the broad point I was making, Senator, is
that I have shareholders. We have succeeded in convincing some
people, some of the best money managers in this country, to buy
shares of my company. Therefore, I have to be able to tell
these money managers this is the regulatory regime within which
we operate. Therefore, it makes sense to do an alliance or to
do a merger. Yes, the regulatory regime will provide me the
opportunity to do this. Otherwise, it would be a form of
penalty toward our shareholders who have invested----
Senator Rockefeller. And I understand that. In spite of,
let us say, being nervous about where I am going----
Mr. Tellier. I just said I think you have to be cautious.
Senator Rockefeller. I know. But you affirm that you have
this system in place, regardless of whether there are going to
be mergers or not. It is here now. It not a question of new
rules/old rules. It is your situation right now.
I think that becomes very important because enhanced
competition is not only a function of price, but it is a
function of service. And that is exactly the point that you
have made.
Mr. Snow, first of all, I need to say I have another life
actually in which I work on aviation, and one of the very best
pieces of news in that life is that you are heading up a group
of five very brave souls who are taking on how do we do
aviation in the United States of America better, which is
rationalizing the whole system and all the rest of it. It is
going to be a difficult job, and we will work together on that.
But having said that--and I can hear your answer, but I
want to ask the question anyway. Why should shippers in the
United States in a sense be at a disadvantage to shippers in
Canada with regard to bottleneck prices, number one? Why is
that in your interest or potential interest or disinterest?
And second, what justification can CSX or other railroads
in the U.S. give for a pricing system that would be illegal in
any other industry in this country and, as it so happens, in
Canada?
Mr. Snow. Senator, I am not an authority on the----
Senator Rockefeller. Yes, you are, Mr. Snow.
Mr. Snow. No, not on the Canadian system. You and Chairman
Morgan lose me when you get into the intricacies of that
bottleneck debate. So, you are talking to a relative layman
here.
Senator Rockefeller. Mr. Snow, let the record show----
[Laughter.]
Mr. Snow. But I will do my best.
Senator Rockefeller. All right.
Mr. Snow. As I understand the Canadian system, it has this
provision for access under the conditions that were described
by Mr. Tellier for the binding arbitration. We have a different
system. I am not sure it does not give shippers just as good
and perhaps better alternatives.
Under our system, shippers are able to go to a regulatory
agency, if they think they are being mistreated with respect to
rates, and complain and say, our rates are too high. And they
have done that with relative rarity I think because----
Senator Rockefeller. Of high prices, cost.
Mr. Snow [continuing]. Because they recognize that, by and
large, the rates that railroads charge are not above some
reasonable maximum level. The best evidence of that is simply
the earning power of railroads.
I know there is concern about monopoly power, but people
who claim we have monopoly power often overlook, I must say,
that the alternative forms of competition we face from
different modes and from geographic competition and product
competition and so on. Those are all arguments you and the
Chairman have had.
The shippers in the United States, Mr. Gebo suggested,
should also have access to the antitrust laws. I think that is
part of your question to Mr. Tellier about why should shippers
be treated differently in one industry than in another. That
may be a good argument. That is an open debate. Maybe shippers
would feel they would do better under the antitrust laws than
they do under the STB. That is an open debate. I do not know
what the answer is.
But I do not think we should be subject to two regulatory
regimes, to two masters. One master is enough.
I really do not know whether shippers would do better--
maybe you have a response to that--under the antitrust laws
than they do under the STB. It seems to me it may be a good
subject for the Subcommittee to debate.
Senator Rockefeller. Well, I am going to call on Mr. Gebo,
with the indulgence of the Chairman, because he and I both
meant to be elsewhere.
Let me just simplify it to North America. Why is it that
you should be able to operate under exemptions and an antitrust
situation would be illegal in any other industry?
How does one describe that in 2001?
Mr. Snow. Oh, I think you describe it, Senator, because the
alternative was putting us under the antitrust laws and having
the antitrust regime prevail. I think it was recognized that
you do not want two regulatory regimes, and when the Staggers
Act was passed back in 1980, it was determined that a
regulatory regime that provided for maximum rates under an
expert agency would protect and balance the interests of both
shippers and railroads most effectively.
Senator Rockefeller. Well, let me just say two things.
One is that when you indicate that the redress for service
under enhanced competition in a merger situation is simply a
matter of going to the STB, the answer to that is you and I
perfectly well know, if you want to take extreme examples, the
McCarthy decision, but it is the cost of doing it. People know
they cannot afford to. They know that you cannot afford to,
that you will out-weigh them. That is not a criticism.
This is the way of the world. But that is the answer to
that.
As we have joked here before, I have in my lineage those
who did well under monopolies, and in fact, one of the reasons
that I think about that, it did not stop until the monopoly was
99 percent, which is what makes me think that a further merger
is still possible. And that was declared illegal by the United
States Supreme Court. That was declared illegal.
You can operate under rules that would be illegal for any
other industry in this country to do. And I do not understand
how you are comfortable with that. No, I understand how you are
comfortable with that, but I do not understand how you justify
that.
Mr. Snow. Senator, I really do not know, as much as I
respect you, whether that statement is accurate. I think under
the antitrust laws, our maximum rates, challenged under an
antitrust action under the Clayton Act or Section 1 of the
Sherman Act or under Section 2 or under the Federal Trade
Commission Act, would probably fare at least as well as they
fare under the STB. I really question the basic proposition
that railroad rates or conduct in any way, including mergers,
would be found invalid under the antitrust laws.
Senator Rockefeller. Mr. Gebo, your thoughts, sir.
Mr. Gebo. Yes, thank you. Our thought on the question of
DOJ involvement was more with having a chance for DOJ to review
the mergers, which they do not under the current system with
any kind of power. So, it did not have to do necessarily with
other aspects of antitrust per se.
When you talk about the issues in Canada versus the U.S.,
though, I think you will see some very significant differences
in terms of operating in both countries, which Dow does. We get
involved commercially doing that.
In actual fact, interswitching is fundamentally terminal
access, as it is described under your bill. It is a tool that
really does give, in almost all situations, shippers in Canada
access to a second railroad. It has been in place, from my
understanding, since 1908 because they have only had two
railroads for almost all of their history. It may be a picture
of what the U.S. will look like 10, 20, 30 years from now. But
it is a very effective access tool in the sense that we do get
a choice. It is not a choice that is available to shippers, for
the most part, in the U.S., at least in the chemical industry.
Senator Rockefeller. Getting the choice is important to
chemical companies, steel companies, coal companies, granaries,
et cetera.
Mr. Gebo. You seldom have to even invoke that, although it
is very simple to do. We do several hundred carloads a year out
Fort Saskatchewan through that interswitching rule.
But for the most part, our relationship with CN is very
good.
It is probably the best of all the railroads that we deal
with. Certainly part of that has to do with the management of
the CN, but I also feel very strongly part of it has to do with
the regulatory regime that is in place.
Senator Rockefeller. I understand. I thank you, Mr.
Chairman. I thank Mr. Snow, all of you, very much.
Senator Breaux. Thank you, Senator Rockefeller, for your
good questioning on this.
I think that there is not a board or an antitrust office
that is going to do more in providing good service to consumers
than competition will. If you do not have competition, you have
to have regulation, which is my main point. I do not want to
have the government boards and bureaucrats in Washington
determining that people get good service. I would rather the
free market do that. I would rather competition do that. But if
you do not have competition, you are going to have regulation,
which I think is probably the worst way of guaranteeing good
service.
Mr. Marshall, you have some plants that are served by only
one railroad in Louisiana, and you have other locations where
you have more than one railroad. What is the difference in the
type of service you get?
Mr. Marshall. Considerable difference, sir.
Senator Breaux. In what way?
Mr. Marshall. The facilities that we have in the United
States with one railroad, it is basically a ``take it or leave
it'' freight rate that is presented to you. There is no true
spirit of cooperation in negotiating a rate. It is apparent at
the two locations where we do have choices, there is an
opportunity to sit down to discuss what we have, the reason we
are trying to move various tonnages to various locations, and
there is a chance to negotiate a rate that is acceptable to
both the railroad and to Albemarle.
Senator Breaux. So, in the case where you have one service
and you do not feel like you are getting good treatment, in
comparison to what you get in markets where you have
competition, what is your relief?
Mr. Marshall. It has been pretty much we roll over and take
it. We have made attempts, where we can, to move tonnage to
barge facilities. We have also made attempts to move tonnage to
truck carriers. Part of the problem we are having there, as
well, are ongoing regulations, municipal, State, and Federal
regulations, that are limiting the amount of hazardous material
going down various lanes.
So, our options are few. The most damning option would be,
as we experienced with previous mergers, sending people home
and shutting down the plant.
Senator Breaux. If you find yourself in that situation
where you do not have a choice and you are getting what you
consider to be bad service, why do you not just go to the
Surface Transportation Board and tell them about it?
Mr. Marshall. That is a fair question. Talking to various
colleagues in the industry who have made those attempts, they
were most often failed attempts. And I opted not to go that
route.
Senator Breaux. Well, I want to thank all of you. We have
got three good railroad people. You are probably the best, Mr.
Haverty, Mr. Tellier, and John Snow. You all are outstanding
railroad men. I mean that very sincerely. You do a terrific job
running your companies in difficult circumstances.
The purpose of this hearing is to express my concern and I
think the Senator from West Virginia's concern. I am more and
more concerned that more and more we have less and less: fewer
airlines, fewer telephone companies, fewer oil companies, fewer
railroads, fewer of everything. If that continues, we are going
to have more regulation. When you have fewer competitors, you
cannot have competition, and if you do not have competition,
you have regulation. And I do not what the Government of the
United States and the Congress setting the rates and the rules
for everything. We have to have a competitive society.
This Subcommittee is going to be aggressive in making sure
that we try and create circumstances that lead to more
competition, not less, because none of you want to be the only
railroad alive and have Congress regulate everything you do.
That would be much worse. That would be an impossible
situation for you to have to deal with, and we want to make
sure that does not happen.
I think your testimony has been extremely helpful in
shedding some light on where we are and where we are headed,
and we thank you for being with us.
That will conclude the hearing.
[Whereupon, at 4:41 p.m., the hearing was adjourned.]
APPENDIX
Prepared Statement of Hon. Trent Lott,
U.S. Senator from Mississippi
I want to commend my good friend John Breaux for holding this
hearing today in his new capacity as Chairman of this Subcommittee.
Railroads are vitally important to both of our neighboring States.
Mississippi is served by five class railroads and several short lines.
With Mississippi's focus on increasing its manufacturing presence and
serving as a gateway for Latin American trade, I am keenly interested
in ensuring adequate railroad capacity and service. Generally, the
railroads that serve Mississippi have been good partners in meeting the
needs of my home State's manufacturers and ports. The State is working
with Canadian National and CSX to provide service to the new Nissan
manufacturing plant in Madison County, and with KCS to upgrade the
track connecting the Port of Gulfport to Hattiesburg.
The previous two hearings held this year on railroad issues made it
clear that most railroads are having a hard time meeting their capital
requirements to maintain their infrastructure and expand their
capacity. As international trade flows increase across the United
States, the railroad infrastructure will be under greater strain than
ever. As we consider the Surface Transportation Board's recently
adopted new merger rules, I urge this Committee to use caution before
considering calls by some to legislate additional requirements that
will make it even more difficult to maintain and expand the industry's
infrastructure.
Aging railroad infrastructure is a problem for other besides the
class I railroads. The regional and short line railroads, which feed
and connect the class I railroads, are having an even harder time
obtaining capital to maintain and upgrade their systems. Historic main
line routes through the centers of cities and towns are increasingly
encountering conflicts with local motor vehicle traffic and economic
development needs. The development of high-speed passenger rail service
to relieve increasing highway and airline congestion will require major
investments in railroad infrastructure.
The Columbus and Greenville Railroad in Mississippi is a good
example of a short line that is struggling to obtain private capital to
upgrade a portion of its network, but still has severe problems
maintaining other parts of its system. Similar situations exist in
almost every State. The House of Representatives may soon consider H.R.
1020, which would help fund the regional railroad and short line
infrastructure problem. It is my hope that the Commerce Committee will
take up this bill shortly after it comes over from the House.
Senator Kerry and I introduced S. 948, the Community Rail Line
Relocation Assistance Act of 2001, to address municipal concerns with
existing downtown railroad lines. Relocating those rail lines,
including the use of tunnels or bridges, would improve safety, ease
traffic congestion, and facilitate economic development. While the bill
was referred to the Environment and Public Works Committee, this
Committee may have a role in addressing that concern.
Several Senators, including me, cosponsored S. 250, the High-Speed
Rail Investment Act of 2001, which was referred to the Finance
Committee. While Amtrak's management is struggling with meeting the
requirements of the 1997 Amtrak reform legislation, the Nation needs to
make a decision to either invest in the future of passenger rail to see
if a nationwide system will work or get out of the business and let the
States organize and finance their own systems.
Addressing infrastructure requirements is complex and requires
making difficult tradeoffs. All too often, it is easier to respond to
the symptoms of inadequate infrastructure by imposing additional
performance requirements rather than solving the underlying problem.
Although energy, aviation, and railroad transportation are different
industries with different regulatory issues and capital funding
mechanisms, we are seeing similar effects of inadequate infrastructure
and similar calls to treat the symptoms, not the causes, for all three.
I urge my colleagues on this Committee to work together to
facilitate the upgrading of our nation's system of private railroad
infrastructure to handle the transportation needs of the 21st century.
Let us make rational decisions regarding the regulation of the railroad
industry. I look forward to listening to and working with today's
witnesses, those from our previous hearings, and my colleagues on this
Committee and in the Senate to address this nation's railroad needs.
__________
Prepared Statement of Edward R. Hamberger, President & Chief Executive
Officer, Association of American Railroads
My name is Edward R. Hamberger and I am President and Chief
Executive Officer of the Association of American Railroads (AAR). The
AAR is the primary trade association representing the interests of
major North American railroads. Our members account for the vast
majority of rail mileage, rail employees and rail revenue in Canada,
Mexico and the United States. The AAR includes among its members all of
the Class I railroads.
The AAR is pleased to have this opportunity to express its views,
in addition to those of its individual members, on the new rail merger
rules issued by the Surface Transportation Board on June 11, 2001.\1\
Our overall assessment is that the Board accomplished what it said it
was going to do in its October 2000 Notice of Proposed Rulemaking,
which is to ``raise the bar'' for approval of proposed rail mergers.
The bar appears to have been raised in at least two ways. First, the
Board has imposed stricter standards on merger applicants in terms of
the details and planning that must be included in future merger
applications. The newly required Service Assurance Plans are a primary
example of this. Second, and more significant, the Board has placed on
the applicants ``a heavier burden to show that a major rail combination
is consistent with the public interest.'' (Final Rules Decision at 9)
The applicants' burden will be to show that the public benefits flowing
from a major rail combination clearly outweigh any potential harms and
do so by a substantial margin.
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\1\ STB Ex Parte No. 582 (Sub-No. 1), Major Rail Consolidation
Procedures. Each of the AAR's Class I railroad members participated
separately as a party in the proceeding before the STB and expressed
its respective position on various aspects of the new merger rules. The
AAR is addressing in this statement those issues of common concern to
its members.
---------------------------------------------------------------------------
It is apparent that avoidance of future merger-related service
disruptions was a primary goal underlying the new rules. No one wants
such disruptions to occur in connection with any future rail merger,
and if the application process can be changed so that the likelihood of
such disruptions are minimized, it should be.
It is also apparent that the Board feels that any future rail
merger proceeding between Class I carriers will be viewed as a high
stakes proceeding.
While we understand the impetus for the new rules, AAR does not
agree with all the substantive changes adopted by the Board. We do
agree generally with the increased emphasis on service planning and
with the requirement that rail merger applicants submit detailed
Service Assurance Plans. More troubling to AAR are certain aspects of
the Board's treatment of competition issues in rail merger proceedings.
Specifically, we are troubled by the idea that the Board will expect
rail carriers to propose non-remedial enhancements to competition that
are not an outgrowth of market forces as part of their merger
applications. This concept is expressed in various places throughout
the new merger rules, for example in new section 1180(c) (``Public
interest considerations'': ``[T]o assure a balance in favor of the
public interest, merger applications should include provisions for
enhanced competition, and, where both carriers are financially sound,
the Board is prepared to use its conditioning authority as necessary .
. . to preserve and/or enhance competition.''
Non-remedial restructuring of rail markets is not consistent with
the public interest. The practice of the Federal agencies entrusted
with carrying out competition policy underscores the point that non-
remedial enhancements of competition through government mandate is not
consistent with the public interest. The Antitrust Division of the
Department of Justice and the Federal Trade Commission are in the
business of protecting competition and not of manufacturing it.
While we are opposed to involuntary, non-remedial restructuring of
rail markets, I want to make it very clear that AAR believes that the
Board should recognize the voluntary, pro-competitive initiatives of
merger applicants as public benefits.
The Board has recognized in many contexts that voluntary, private
sector initiatives prompted by market forces should be encouraged.
Private agreements between merging carriers and other interested
parties have been an important source of pro-competitive benefits in
past rail merger proceedings. Apart from such negotiated agreements,
there are powerful pro-competitive incentives that lead rail carriers
to propose mergers in the first instance. In fact the predominant
impulse driving rail mergers of the recent past has been the need that
the merging carriers have perceived to compete more effectively in
surface transportation markets.
Railroading is a network industry. Railroads make themselves more
effective competitors through mergers by strengthening their networks
and expanding the reach of those networks. Expanded networks make
railroads more effective competitors because they can provide their
customers a greater range of service opportunities. Expanded networks
and, in particular, extended single-line service enables railroads to
compete more effectively with trucks. If merging carriers can show the
Board that a proposed transaction will result in increased intermodal
competition, the prospect of such increased intermodal competition
should be recognized as a public benefit flowing from the merger. I
believe the new merger rules as written would permit the Board to
recognize increased competitiveness of merged railroads vis-a-vis
trucks as a competitive enhancement, and I would hope the Board would
interpret the new rules in this manner.
With regard to remedying competitive harms, the new rules indicate
that the Board will continue to be vigilant in remedying potential
reductions in competition.\2\ This is clearly appropriate. The
governing statute specifically instructs the Board to consider
``whether the proposed transaction would have an adverse effect on
competition among rail carriers in the affected region or in the
national rail system.'' The Board's practice of identifying adverse
effects on competition and remedying them through conditions that are
narrowly tailored to remedy the identified harm is sound and consistent
with the statute. The Board's standards for remedying competitive harm
are so well known and understood that merger applicants generally try
even before filing an application to identify areas where competitive
problems are likely to arise and to propose solutions to those
problems, typically through negotiated agreements with other interested
parties. These negotiations often lead to voluntary structural changes
beyond those needed to remedy specific harms.
---------------------------------------------------------------------------
\2\ ``Our primary focus in imposing conditions--including
competitive conditions--should and will continue to be remedial.''
Final Rules Decision at 31.
---------------------------------------------------------------------------
It is appropriate that the Board decided to retain this remedial
focus, and it is also appropriate that the Board rejected proposals of
some parties that the new merger rules become the vehicle for
widespread restructuring of rail markets that extended beyond the scope
of rail mergers. AAR was very concerned that some of the parties
participating in the merger rulemaking proceeding were promoting an
agenda that went well beyond merger proceedings. These parties seized
upon the Board's suggestion in its October 2000 Notice of Proposed
Rulemaking that it might require non-remedial market restructuring as
the point of departure for an array of proposals seeking imposition of
broad pro forma conditions on rail merger applicants and even on non-
merging carriers. Those proposals were unrelated to the effects of
particular mergers and lacked any foundation in the statutory public
interest standard. We are gratified that the Board rejected the
argument that the Board should use its conditioning power to force
successful merger applicants to grant broad competitive concessions and
to require such concessions of non-merging carriers.\3\ The Board was
correct in concluding that its focus should be ``on ensuring that any
mergers that are approved are in the public interest, not on imposing a
new scheme of regulation upon the railroad industry through the back
door of merger approval.\4\
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\3\ The Board explained that ``[c]ontrary to the arguments raised
by numerous shippers and shipper groups, conditions should not be
sought to fix competitive and other longstanding problems that have no
nexus to the merger at hand.'' Final Rules Decision at 31.
\4\ Final Rules Decision at 32.
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No one would expect that the Board's revised merger rules would be
entirely satisfactory to any particular party. I have already suggested
that we believe the emphasis on non-remedial enhancements of
competition is misplaced. We are also pleased however that the rules
retained a focus on markets within the scope of a rail merger
transaction rather than looking to a restructuring of the industry.
__________
Prepared Statement of George Marshall, Director of Supply Cycle,
Albemarle Corporation
Thank you, Mr. Chairman, for allowing me the opportunity to submit
this statement for the record as the Subcommittee examines the issue of
rail mergers and the STB ruling.
I am George Marshall, Director of Supply Cycle for Albemarle
Corporation. Albemarle is a global supplier of specialty and fine
chemicals that enhance consumer products. We serve markets for
polymers, surfactants and biocides, pharmaceuticals, agricultural
chemicals, photographic chemicals, water treatment and petroleum
products. Thanks to the work of 3,000 employees worldwide, Albemarle is
a leading worldwide supplier of chemical flame retardants for
computers, TVs and other household products as well as manufacturers of
bulk ibuprofen used as an analgesic. Our corporate operations group is
in Baton Rouge, Louisiana and we spend over $6 million a year on rail
freight.
My comments about our relationship with the U.S. rail industry are
many and varied. Today, your Committee is addressing one of the largest
issues of concern to all who ship product by rail--rail mergers.
In the past 20 years or so, we have seen the number of independent
railroads shrink from around 30 to a total of four Class One railroads
today. We can expect to have only two railroads in the near future as
further consolidations are anticipated. While Bill has addressed the
immediate issue of the STB merger rules just issued, I would like to
take a minute to talk about the impact such mergers have had on
Albemarle's business. I believe that the impact is similar to other
chemical companies in Louisiana and elsewhere. Our fear is that the
problems we have encountered with the mergers of the past will repeat
themselves if something isn't done about future mergers.
Albemarle has several facilities in the U.S. that are dependent on
raw materials coming into the plant and immediately being turned around
into product and shipped out to our customers around the country. We
often do not have facilities for storage nor are we in some cases able
to store product. This means rail cars are constantly coming in and
going out. When the cars don't come in, we can't manufacture product.
If we can't produce product, we have nothing for our employees to do so
we find ourselves shutting the plant down until we can get raw supplies
in to the facility. Needless to say, this is a costly venture.
Immediately following the UP merger with the SP, we found ourselves
week after week shutting our facility down in Magnolia, Arkansas, to
cite one situation. Because we had no product to ship, nor any cars to
ship in, we had late deliveries to customers and even lost business to
competitors. Ironically, our employees in Magnolia could watch car
after car go right by the plant without stopping heading for places
unknown to us. When we were able to ship, rail cars full of our
products were lost for weeks at a time.
Even today, long after the merger, we are still confronted with
problems with the UP ranging from their failure to deliver cars to the
right place to incorrectly charging us demurrage when they place cars
on Albemarle leased track. More frighteningly, again in our Magnolia
facility, the county raised concerns about all of the derailments and
the condition of the track. We inquired of the UP who responded that
there have been no derailments since 1998 even though we have letters
from the UP to the contrary. We continue to struggle with trying to get
cars through Shreveport and Monroe, Louisiana.
We met with the UP on the track condition at our plant in Magnolia
and we found them to be confrontational and defensive. The UP
representative was belligerent and had no interest in hearing our
concerns and certainly felt no need to relate to us as customers. UP
inspectors had found several rail ties to replace, but during this
meeting, the UP representative said his inspector had ``gotten carried
away with the paint can'' and he didn't think any ties needed to be
replaced. We do not feel that given the hazardous nature and volume of
rail traffic which Albemarle has to pass through that yard that any
standard of track condition which could lead to derailments is not
acceptable even though it is to the UP.
I bring these issues to your attention because these are problems
we have had to deal with ever since the UP merged with the SP. It
continues to be such a horrific situation, that the thought of any more
mergers is enough to give us real heartburn.
I'm particularly glad to see the representative from the KCS here
today because we continue to have a difficult time in Baton Rouge with
KCS service. Suffice it to say, we have had numerous problems with the
KCS in Baton Rouge. It takes over 30 minutes to get someone on the
phone in dispatch and often takes up to three requests to get a car
moved. Frequently, nobody shows up to move the car and we loss an
entire day in transit time. KCS in Baton Rouge is unaware of what KCS
is doing in Shreveport and we end up doing their work for them. While
this is not the topic of today's hearing, we look forward to future
opportunities to discuss the service issues.
We are not opposed to railroads merging with each other. But unless
certain conditions are met, such mergers (as the UP-SP proved) should
not be allowed. The only way we feel we will have quality service is if
the railroads compete with each other for our business. Today the
carriers give you freight rates and you take it or leave it, no longer
is there the spirit of cooperation. Our freight rates have increased 7-
46 percent over the past 2 years, and we are being informed by the
railroads to expect additional increases while at the same time their
customer service is deteriorating and services being offered are being
reduced or simply eliminated. The shippers have to spend much more time
shipping the same material today than we did 2 years ago due to
deteriorating service conditions--adding to our overall costs. Very
recently I was in a discussion with UP regarding freights rates, and
how the increases are making it very difficult to remain competitive.
The UP representative shared this point with me, he stated, ``UP
recently had an opportunity to bid on moving a commodity for another
chemical shipper, and UP elected to withdraw from the bid process
because it was no longer profitable to UP''. This gentleman then
pointed out the following, ``this example points out something we
should consider as well, if the margins are this close Albemarle should
consider not making the commodity anymore''. I then stated to this
gentleman, ``This is exactly why I support measures underway today to
stop any further rail mergers. Clearly, Union Pacific elected not to
bid this because you had an option and the other chemical company
thankfully in this case also had an option. But those shippers who are
captive to one carrier must now also be forced to accept whatever
ridiculous increases the railroad shoves to them, or we must stop
producing the commodity. This is a real example that clearly points out
that competition is the only thing that will improve service and thus
the financial condition of the entire rail industry. Competition means
our ability to have a railroad provide a shipper with a rate quote for
any two points on their system. Competition means allowing shippers to
seek competition at terminal facilities where railroads routinely
interchange cars. That would have been very useful to Albemarle when
the UP was not delivering cars into our Magnolia facility because they
were so confused after their merger with the SP. We would have been
able to have another carrier without the problems UP faced come in and
deliver our raw materials.
To conclude Albemarle has become a captive shipper for the most
part that relies on a single rail carrier satisfying our transportation
needs, and I truly fail to recognize whom other than the railroad
benefits from this.
One comment frequently made by many of us in the chemical industry
is we would never be able to merge with each other the way the
railroads have been doing and that is mainly due to the fact that we
are subject to FTC review and anti-trust laws. It still amazes us that
in the beginning of the new millennium, railroads are the only industry
not subject to antitrust laws, so now it may be time to consider this,
and then develop a ``Shipper's Bill of Rights'', when dealing with the
railroads going forward.
Each and everyone one of us who relies on the railroad to handle
their transportation needs could suffer, and this will eventually reach
each and every one of us as a consumer, resulting in higher costs of
goods and services. We know better than anyone that if the railroads
are not economically viable, we will not be economically viable. If
they fail, we fail. Albemarle's motto is ``Don't worry about what's
good for the company--worry about what's good for the customer''. We
would like that to be the motto for the rail industry as well.
__________
Prepared Statement of The American Forest Resource Council
The American Forest Resource Council (AFRC) respectfully submits
testimony to the committee on the important issue of railroad mergers
and consolidations. AFRC is a forest products trade organization
representing nearly ninety forest product manufacturers and landowners
in 12 states west of the Great Lakes. Our membership represents a cross
section of the industry from large multi-national corporations to small
family owned operations. AFRC and its two predecessor organizations,
the Independent Forest Products Association and the Northwest Forestry
Association were parties of record in the Surface Transportation
Board's (STB) recent rulemaking effort on this important matter (STB Ex
Parte No. 582 (Sub-No. 1)).
Most of our members rely on railroads to transport a portion of
their finished products to market. Some are located where they rely
solely on Class 1 railroads for their shipping needs. Others utilize
shortlines to connect with Class 1 railroads, while some truck their
products to a reload usually located on a Class 1 railroad. On average,
transportation costs are between 10 and 25 percent of sales value and
are the third highest cost of production. Like coal and grain, the
total tonnage of forest products relying on rail is large, however, our
industry has many more producers and even more customers receiving the
freight. This fact makes our situation somewhat unique and more
vulnerable to changes in the railroad structure.
Consequently, any changes in the existing railroad system would
have a direct impact on our members businesses and for that reason AFRC
has been actively engaged in making certain that our member's concerns
regarding the subject of major railroad consolidations and the present
and future structure of the North American railroad industry are
addressed.
AFRC is generally pleased with the STB's recent issuance of a new
merger and consolidations rule since it appears to reflect a major
shift from pro-merger regulations to pro-service and competition
regulations. We will continue to remain concerned though until the new
rule is put to the test in evaluating the next proposed Class 1
railroad merger.
From the beginning of the STB's rulemaking process we have had
three major areas of concern, which are: (1) The forest products
industry cannot afford any more service disruptions or difficulties
like those experienced in the last round of major railroad mergers; (2)
Any future changes in the North American railroad structure should
result in an increased level of competition among the railroads and not
further oligopolistic situations that could negatively affect service
levels and rates paid by shippers and; (3) Any changes in the North
American railroad structure should be both market and trade neutral.
service
Historically, our organization and its predecessors have focused
its efforts on forest policy and regulatory issues at the Federal
level, but in 1997 we became involved with railroad transportation
issues due to our member's difficulties resulting from the Union
Pacific/Southern Pacific merger. Forest product manufacturers from
across the west came to us with horror stories of Union Pacific's
failure to provide a reliable means of transporting their products to
the marketplace. In response, we worked with our Congressional
Delegation and Union Pacific to find a workable solution to this crisis
situation. As part of this effort, we responded to the STB's January
13, 1998, Service Order No. 1518, by conducting a survey of forest
products manufacturers in Oregon and Washington and reported our
findings to the STB.
Even though, the Burlington Northern/Santa Fe's service history is
somewhat better than Union Pacific's, our members continue to have
problems with consistent and timely door-to-door service. Terminal to
terminal transit times have been good and relatively reliable, but
getting shipments to and from the terminals continues to be a problem.
These types of service difficulties and disruptions have a direct
effect on our members' bottom line. An inability to have a reliable
means to transport their goods to the customer means higher costs and/
or lost opportunities. Unfortunately, some forest products companies
are still recovering from the impact of the last round of railroad
mergers. While market share that was lost may return, the financial
losses suffered can never be recovered.
Our ability to compete in the forest products marketplace should
not be held hostage by incompatible computer systems or labor union
conflicts resulting from mergers. Simply put, the forest products
industry cannot afford anymore railroad mergers until shippers are
receiving an acceptable level of service and are provided a guarantee
that includes a form of measurement and remedy to the shippers.
The STB's new rules require railroads that are proposing to merge
to address service concerns. The new policy of the STB emphasizes
service. Railroads are required to submit a Service Assurance Plan. We
applaud this step, but are concerned that when the STB reviews a merger
and then conducts oversight, that these plans be binding on the
railroads, not something discarded because of changed economics or some
oversight on the railroads' part in creating the Plan. We want to avoid
service problems resulting from mergers.
Critical elements of the Service Assurance Plan are the problem
resolution teams, loss and damage claims handling process, service
failure claims process, and alternative rail service options the STB is
requiring the railroads to address. The STB should give these items at
least as much weight as competitive concerns. Rail mergers should
benefit the railroads' customers in addition to their investors. As has
been said, poor service hurts present and future business, employees
and the investors in the railroads' customers. The STB is seeking to
avoid the poor planning and worse execution of the last several rail
mergers with these new rules, but it must be vigilant when implementing
the rules.
competition
Since the first crossties and rails were laid on North American
soil, people have voiced concerns regarding railroad monopolies and
competition. While mergers and consolidations in the business world
promote corporate efficiencies, railroads have large fixed capital
assets that prevent free market principles from operating ideally. This
is one of the main reasons why the Federal Government regulates
railroads and why there is a STB, but more important is that Congress
and this subcommittee retain oversight of this critical form of
commerce and transportation.
Simply put, AFRC's members are concerned that any additional
mergers would lead to less competition among the railroads and result
in increased shipping rates. Without competition, the benefits of
mergers, such as increased efficiencies, will not occur and in its
place will be stagnation, complacency and disrepair. There needs to be
a ``critical mass'' of service providers or there may be a need for
some kind of intervention that promotes competition.
We expressed concern during the rulemaking process that the
approval of another major Class 1 railroad merger would result in the
other major railroads attempting to forge their own deals and win STB
approval. This process would ultimately lead to a North American
railroad structure with only a couple of transcontinental lines.
Shippers would be at the mercy of these oligopolies and ultimately
sections of the nation's railroad system could collapse due to
competition from transportation alternatives such as trucks, barges and
container ships.
The evaluation of proposed mergers must be based on whether they
are in the public's interest and not whether they are in the interests
of the railroads and their investors. A case in point is the Union
Pacific/Southern Pacific merger approved by the STB in 1996. The
Southern Pacific was in financial trouble and disrepair. The merger
with Union Pacific and the influx of new capital saved the railroad.
Therefore this merger benefited the public's interest.
We feel that the STB's new rulemakes a strong effort to this end by
requiring the proponents to prove that the merger will result in a
financially sound railroad and that competition will not be sacrificed.
A much more detailed and critical look at the resulting financial
fitness of a merged railroad appears to be one goal of the STB's new
rules. But, the STB and its predecessor required substantial financial
information from the applicants under the old rules. However, over the
years, the Interstate Commerce Commission and STB got away from making
detailed financial analyses and started accepting the railroads'
proposals, unless challenged by a party, without a searching and
independent analysis. AFRC believes that the STB has an obligation to
the American people to conduct an independent analysis of the proposed
financial health of every railroad resulting from a merger, regardless
of what the hired banking houses from Wall Street have said.
trade & market neutrality
The wood and paper products industry is a highly competitive sector
of our nation's economy. Nation-wide there are several thousand
producers, with annual sales totaling approximately $200 billion.
Products are shipped around the continent and the world, competing with
products produced in the consumer's own local area. Therefore, since
the forest products industry is so competitive, we cannot afford market
externalities such as a railroad merger to affect individual producer's
access to markets.
As discussed above, a two transcontinental railroad system could
limit which markets producers could sell to. For example: West Coast
Company X has been a major supplier to East Coast Retailer A. Retailer
A's distribution center is located on Railroad 1, while Company X's
manufacturing site is located on Railroad 5. Today, rail shipments are
transferred at a point along the Mississippi River. Unfortunately, due
to several mergers, Railroads 1 and 5 are now parts of competing trans-
continental railroads and Company X looses its cost effective access to
Retailer A. Such a scenario would be totally unacceptable to AFRC's
members.
Like domestic markets, international trade is another area where
railroad mergers could have a significant effect on individual
companies' businesses. International trade is an important aspect of
our nation's economy. Unfortunately, trade relationships and agreements
are usually more political than based in economics and such is the case
with forest products. For this reason, the STB should be weary of any
decisions that may have international trade implications and that could
have negative consequences on domestic producers.
AFRC members feel that any proposed change in the North American
railroad structure should be market and trade neutral--that is not
benefiting one set of producers over another.
The STB's rules also give it the ability to take a much closer look
at the competitive impacts of a railroad merger. In addition to the
traditional issues of competing parallel lines and 2-1 shippers, the
rules give the STB the leeway to review geographic competition,
bottleneck issues, and to enhance competition. AFRC does not read the
rules to limit enhanced competition to proposals made by the merging
railroads. AFRC believes that the STB does, and must, have the power to
enhance competition where justified and necessary.
We applaud the new feature of the STB's rules that require
information about restrictions and preferences under foreign law. It
goes without saying that there have always been disputes between the
timber industries of the United States and Canada. AFRC believes that
by requiring and considering this new information the STB will be able
to prevent the acquisition of a US railroad to the detriment of its US
customers while benefiting their competitors in another country. The
STB must be vigilant in this area.
summary
In conclusion, given the concerns stated above, we believe that the
STB's new merger and consolidation rule goes a long way in making the
process for evaluating and approving shipper friendly, and thus in the
public's interest. While we perceive that the new rule addresses our
important concerns regarding service, competition and, market and trade
neutrality, we will not know for certain until they are put to a test
by the next merger proposal.
Thank you for this opportunity to submit written testimony. AFRC
would be glad to assist the Subcommittee in its oversight of this
important issue.
__________
Responses to Written Questions Submitted by Senator Dorgan
to Linda Morgan
Question 1. You indicated in your testimony that the rules for
small rail rate cases may still be too complex despite the Board's
adoption of simplified rules in 1996, and that you would be willing to
work with Congress to address these concerns. Particularly, you have
suggested that a single benchmark test or some other simplified
procedure for small rate cases might be the way to address those
concerns.
Please prepare a list of all of the options you believe Congress
could consider that might address these concerns, including specific
details regarding how you believe those options could be applied. For
example, what kind of test might work; who should qualify; how would a
shipper make use of that test; what kind of information would be
required; how long would it likely take to process such a case and what
kind of expenses might be associated with bringing that case. Also,
please give us your thoughts on the use of various forms of arbitration
as a means of resolving these concerns.
Answer. As I have testified before, I believe that the Board's
small rate case rules are as simple as they can be, given the mandates
of the statute. To further simplify our processes, we have excluded
product and geographic competition as considerations in market
dominance determinations. Yet, I know that certain shipper
representatives have said that shippers do not use the rules because of
the complexity and cost that they believe might be associated with
making a small rate case and defending or challenging the agency's
decision in court in such a case. Because I believe that smaller
businesses should be assured meaningful access to the regulatory
process, I have indicated that I would work with Congress in this
regard.
The following are some possible options for handling what some have
called ``small rate cases'' that Congress could consider if it were
inclined:
(1) A preset revenue/variable-cost (R/VC) percentage selected by
Congress,\1\ above which a small shipper rate would be deemed to be
unreasonable. This approach would involve system average costs
developed through computer programs. A concern about this approach is
finding a percentage level that would be satisfactory to shippers
without undercutting carrier revenues to a point that would be contrary
to the public interest.
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\1\ A bill introduced by Congressman Oberstar (H.R. 141, 107th
Cong., 1st Sess. Sec. 103 (2001)), as well as bills introduced last
term by Senator Rockefeller (S. 621, 106th Cong., 1st Sess. Sec. 6
(1999)) and Congressman Quinn (H.R. 2784, 106th Cong., 1st Sess. Sec. 6
(1999)), would have effectively capped at 180 percent of variable cost
the rates charged to grain shippers that originate or receive no more
than 4,000 carloads of grain annually.
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(2) A rate cap based on an R/VC percentage applied to similar
movements. This approach is intended to deal with disparities in the
treatment of different shippers having similar movements. It would
require substantial regulatory involvement to resolve issues of
comparability.
(3) A rate cap based on some sort of a formula that would attempt
to measure a shipper's pro-rata share of the cost to operate a
particular railroad and replace that carrier's rail assets. This
approach would attempt to ensure that the shipper is not making too
high a contribution to the carrier's revenue needs, but it could run
counter to the concept of differential pricing. It could be difficult
to find an inexpensive way of developing data under this approach.
(4) A provision permitting small agricultural shippers to ``match''
contract terms obtained by other (possibly comparable) shippers. Such
an approach would apply rates that carriers have themselves set, at
least for certain shippers, rather than using a rate cap. But it also
could discourage carriers from offering favorable terms to some
shippers out of concern that those terms would have to be applied to
all.
(5) ``Final offer'' (baseball-style) or other forms of binding
arbitration. The Board can encourage arbitration, but arbitration
cannot be mandatory without legislation. With respect to arbitration in
general, issues regarding the authority of the arbitrator, the
standards to be applied to an arbitration, and the applicability of an
arbitral award would need to be resolved.
All of these proposals would need to be more fully explored either
by the Board in a rulemaking proceeding, or by Congress through the
legislative process, before a full understanding of the pros and cons
could be had. And there may be other options that we have not thought
of. More details would need to be fleshed out before a firm conclusion
could be reached and a comparison made as to the expense and processing
time for each option. For any legislative small-rate case relief that
the Congress may choose, it would need to carefully identify those
small shippers or those types of cases that should qualify for special
rate relief. If a carload-per-year standard were chosen, for example,
Congress would need to select a reasonable dividing line. Congress
would need to examine supporting traffic data at various levels, the
amount and type of traffic that would be embraced by the various cutoff
figures that could be selected, and the degree of revenue contribution
(above variable costs) that this group of traffic now makes.
Question 2. You testified that you believe what shippers want is
open access, which you said assumes all shippers would have access to
at least two rail carriers which would be permitted to operate on each
other's tracks. You also have indicated in the past that the Board's
decision in the bottleneck case was driven by the fact that the law
does not allow for open access. However, the debate over the bottleneck
decision focuses only on whether a shipper should be allowed to get a
rate quoted for that portion of track--it does not provide for one
railroad operating over another railroad's tracks.
(1) Can you please explain why you believe that allowing rail
customers to get a rate quoted to them over a bottleneck portion of a
route is open access?
Answer. Open access, as the term is commonly used, can refer to any
regulatory regime whereby a railroad is required to share with its
competitors traffic that it can handle directly to ensure that a
customer has access to at least two carriers. Under existing law, as
confirmed by the courts, a railroad that can provide direct service
from an origin to a destination generally has the right to its long
haul. Requiring a railroad to quote separately chargeable rates for all
segments of its lines at which other carriers can interchange with it
would be a form of open access because it would also force the carrier
to turn over single-line traffic to its competitor at any given
junction point.
(2) Please explain why you believe the ICC's Midtec decision--which
requires shippers to prove anti-competitive abuse before they can
access the pro-competitive terminal area switching provisions allowed
for in the law--is still appropriate in today's environment.
Answer. As the courts have held in affirming the MidTec decision
and the Interstate Commerce Commission's competitive access rules, the
Staggers Rail Act of 1980 was not an open access law. I have testified
on many occasions that, if Congress wants to change the law, it of
course may do so. At the same time, I believe that the goals of the
Staggers Act--eliminating unnecessary regulation and permitting
railroads to take efficiency-enhancing actions that permit them to fund
needed capital improvements without subjecting captive shippers to
unreasonable rates--clearly remain relevant today. And I have expressed
concerns about whether it would be a good idea to legislate a system
whereby all shippers would be guaranteed that at least two railroads
would be able to compete for their business. Although such a system
might result in rate reductions for some shippers for the short term,
railroads would still need to earn enough to cover all of their costs
and to provide both monies and incentive for further investment, and so
that approach could end up simply replacing rate regulation with
regulation of carrier access fees and other terms (which, in turn,
would affect the rates that carriers would need to charge shippers).
Moreover, the Board has raised concerns in the past that small shippers
particularly in rural areas would not necessarily benefit, in the long
run, from such an access-on-demand system, because with less revenues
coming into the system from lower rates the result could well be a
smaller, more streamlined rail system serving only larger shippers in
heavier traffic lanes.
Question 3. Please describe what rationale the Board used in
prescribing trackage rights over approximately 4,000 miles of track in
the UP/SP merger, and how the UP and the BN are faring under this
system. What were your expectations and is this approach working?
Answer. The Board prescribed trackage rights, into which the Union
Pacific (UP) and Burlington Northern Santa Fe (BNSF) railroad systems
voluntarily entered, to mitigate the competitive harm that could have
resulted from the departure of the Southern Pacific (SP) rail system as
an active, independent competitor. The idea was that replacing a weak
(indeed, a nearly failing) competitor (SP) with a strong competitor
(BNSF) would protect shippers from any potential loss of competition.
The trackage rights have been successful, and indeed, in some areas,
BNSF has been competing with UP far more vigorously than SP ever could
have done.
Question 4. The proposed merger regulations would require
applicants to list points where the number of serving railroads would
drop from two to one and from three to two, respectively, as a result
of the proposed transaction.
(1) Does this mean that the Board will not place an enhanced
emphasis on the preservation of three independent rail options for
shippers who enjoy three options pre-merger?
Answer. In the decision adopting final rules, the Board addressed
the so-called ``3-to-2'' issue--which has to do with preserving, rather
than enhancing, competition--that the agency had discussed in several
prior merger proceedings. The Board indicated that it would continue
its practice of always preserving 2-railroad competition where
feasible, and that it would also continue to review 3-to-2 issues in on
a case-by-case basis, but that it would not adopt the suggestion of the
Kansas City Southern Railway Company that it should never permit any
reduction in the number of railroads serving a particular shipper,
regardless of the circumstances.
The proposed merger rules State that future merger applications
will have to demonstrate enhancement to competition in order to be
found consistent with the public interest.
(2) Given the fact that many markets, large and small are served by
only two major independent railroads, does this mean that the Board is
concerned that two railroads might not be enough to adequately serve
the public?
Answer. No. The Board has found that, where two railroads compete
(for example, in handling coal out of the Powder River Basin),
competition has been sufficient to spur railroads to continue to seek
productivity gains and to pass along the majority of those gains to
their customers.
__________
Responses to Written Questions Submitted by Senator McCain
to Linda Morgan
I commend the Board for initiating its rulemaking proceeding and
recognizing the need to reassess its merger guidelines given the
restructuring to date by the industry and the expectation that the next
merger proposal will likely result in a transcontinental railroad.
Question 1. According to your statement, the Board intends to now
``take a more skeptical view of claims of merger benefits''. I had been
under the impression the Board had always worked to carefully weigh
merger benefits as it considered its public interest standards.
(a) Does the Board feel that based on the actual implementation
problems associated with recent mergers that it may have been somewhat
remiss in its handling of prior merger decisions?
(b) Does the Board feel that carriers have made promises that
couldn't be kept just to receive the Board's approval?
Answer. (a) The more skeptical view that the Board will be taking
of claimed merger benefits is not based on a conclusion that the Board
was remiss in its handling of prior merger decisions. Prior mergers
were approved because the agency found that the proposals were in the
public interest, and the benefits that were projected--many of which
are in fact now being achieved, although in certain cases not as
quickly as anticipated--related largely to eliminating excess capacity.
The Board's current, more skeptical view of projected benefits reflects
our conclusion that much of the excess capacity has already been wrung
out of the rail system, and thus we will be requiring other types of
benefits such as competitive enhancements. The service problems
associated with recent mergers were largely the result of operational
integration problems that we hope can be avoided in the future through
the submission of service assurance plans and more contingency planning
as required under our new rules, as well as through our oversight
process, which has evolved during this last round of rail mergers and
has been formalized under our new rules.
(b) Although I cannot speak to the motivation of any particular
party, it is possible that expected benefits were oversold for a
variety of reasons, some of which could have been related to regulatory
approval. Our new rules reflect the need for parties to be more careful
in predicting benefits and in making sure that they take the necessary
steps and precautions to ensure that the expected benefits materialize.
Question 2. Please describe how the Board intends to interpret its
new merger guidelines--how will carriers be held more accountable to
their claims of merger benefits, as mentioned in your written
testimony?
Answer. The Board will require the carriers to submit service
assurance plans that address the service levels to be provided by the
merged entity and potential service integration problems, and the
agency has in place procedures to provide temporary access to other
carriers in cases of severe service problems. Furthermore, because the
risks of failure in an ``endgame'' situation would be high, the Board
will require merger applicants to identify specific measures that can
be taken in the event that anticipated public benefits should fail to
materialize in a timely manner. The Board stated in its decision that
if things do not work out (from either a service or a competitive
standpoint), carriers should ``be prepared to try different
approaches,'' and the Board ``would look with more favor on
applications that provide back-up or contingency plans when we weigh
projected benefits against harms.'' The new rules are designed to
discipline the applicants to project benefits honestly and
realistically.
Question 3. There has been much attention to the issue of
``enhanced competition.'' Do the new rules clearly require a merger
application to expand competition or can the Board envision that based
on particular circumstances that a merger could be approved without
increasing competition?
Answer. It is possible that the benefits of a particular merger
proposal could be so overwhelming--and the risks to competition and
rail service so minimal--that a showing of enhanced rail-to-rail
competition would not be required. But at this time, no such proposal
comes to mind, and so the practical effect of the new rules is that
applicants are fairly warned that they had better show enhanced rail-
to-rail competition if they want to have their applications approved,
or the Board will use its conditioning power to ensure such enhanced
competition.
Question 4. To what extent was the Board unable to address
proposals submitted throughout the rulemaking process? Are there
particular areas in which the Board did not have statutory authority to
include otherwise reasonable proposals?
Answer. The Board addressed all of the concerns raised in one way
or another, and it adopted appropriate proposals. It did not adopt all
of the proposals submitted--for example, it did not revisit the recent
``bottleneck'' decisions, and it did not provide for access to
additional railroads on demand--given existing law. Whether those
proposals that could not be adopted under current law are reasonable
depends on what Congress believes the appropriate rail transportation
policy to be.
Question 5. By law, merger decisions involving two or more Class I
railroads must be determined within 16 months from the date the
application is filed. Given the Board believes it has issued much more
difficult guidelines, do you foresee any necessity to lengthen the time
period under which the Board reviews mergers?
Answer. At this time, I do not foresee any necessity to lengthen
the time period under which the Board reviews mergers.
Question 6. Do you envision any future mergers occurring?
Answer. I cannot say. It depends on a variety of factors, such as
the economy, and on how carriers, customers, and the financial
community view the industry's structure and our new rules.
Question 7. Would any of the mergers approved by the Board in the
last 5 years have been precluded if these new rules had been applicable
at the time those mergers were submitted?
Answer. I cannot answer that question, as each case is decided on
the record made at the agency. The merger proposals that were before
the Board in the past 5 years were developed and evaluated on the basis
of the rules then in effect. If different rules had been in effect,
different presentations would have been made.
Question 8. How do you believe the new mergers rules will affect
rail shippers?
Answer. For considering new merger proposals, the new rules focus
on enhancing competition, protecting service, and providing
accountability for projected benefits. Additionally, I hope that the
new rules remind railroads that mergers do not have to be the first
choice or the only choice when they are considering ways to strengthen
and improve their networks, and that their main focus should be on
effectively and creatively running, day-to-day, the businesses that
they now have.
Question 9. When were the rail merger rules last revised? How many
consolidations were approved by the Board, and previously, the ICC,
under the former rules?
Answer. The last major revisions to the merger rules and policies
were issued in 1980 and 1982. The Board and its predecessor, the ICC,
approved, with conditions, nine major consolidations under those rules.
Those consolidations were: Norfolk & Western/Southern; Union Pacific
(UP)/Missouri Pacific/Western Pacific; UP/Missouri-Kansas-Texas; Rio
Grande/Southern Pacific (SP); UP/Chicago North Western; Burlington
Northern/Santa Fe (BN/SF); UP/SP; CSX/Norfolk Southern/Conrail; and
Canadian National/Illinois Central. A tenth, the Soo/Milwaukee, was
assessed by the ICC under those rules in an advisory capacity in
connection with a bankruptcy court proceeding. And another application
involving two large railroads, the SF/SP proposal, was denied.
Question 10. The Board's final rules provide a waiver for the
Kansas City Southern Railway Company (KCS) from the application of the
new major merger rules. I understand this waiver was not a unanimous
decision by the Board--you dissented.
(a) Please offer your perspective on this waiver. I am interested
in hearing both perspectives.
(b) I recognize the KCS is a smaller Class I carrier compared to
others, but it is nonetheless a Class I carrier. If the specific size
of the company is the issue, perhaps a more appropriate route would be
for the Board to initiate a proceeding to revisit its classification
guidelines. Has the Board considered taking such action and if not, why
not?
Answer. (a) I believe that it would have been more appropriate to
permit a carrier to seek a waiver from the rules on a case-by-case
basis, rather than to assume that one large railroad would not be
covered in the first instance. In my view, KCS is strategically
situated, and a merger involving KCS could well set off the final
round. Therefore, the KCS waiver is, as I see it, inconsistent with the
entire thrust of the new rules, which were formulated to address the
final round.
(b) In late 2000, the Board initiated a rulemaking proceeding
(which has not yet been concluded) to consider requiring consolidated
financial reporting by related railroad systems. If such a proposal
were adopted, it would potentially give Class I status to more
railroads, rather than fewer. I see no reason why the agency would want
to make KCS a Class II carrier, and in my view the carrier has
presented no such reason other than its desire to be exempted from the
merger rules that would apply to mergers that would trigger the final
round.
Question 11. Did DOJ or DOT comment on your rulemaking proposal and
if so, to what extent do the Board's new merger rules reflect the views
of those Departments?
Answer. The Department of Justice did not comment on the proposal.
The Department of Transportation filed written comments, but at the
oral argument its representative indicated that the agency wished to
assume an essentially neutral position at that time principally because
there had been a change in Administration.
Question 12. I understand that this week, Senators Rockefeller,
Dorgan, and Burns introduced a bill, S. 1103, intended to enhance rail
competition. I haven't had the opportunity to study their proposal, and
believe it will likely be discussed more at a future hearing. But, I
would like to ask you to offer your views on the proposal for the
Record.
Answer. Among other things, S. 1103 would overrule the Board's
bottleneck decisions to allow rate regulation by segment, and would
provide a system in which access through terminal trackage rights and
switching is the norm. The bill would eliminate or dramatically reduce
the opportunity for carriers to engage in differential pricing, and
could have substantial impacts on the extent of rail service and the
size of the rail system. In a letter to Senator Specter last year (copy
attached), I expressed my concern about the possible effects from
changes to the regulatory system such as those intended by S. 1103.
__________
Responses to Written Questions Submitted by Senator Specter
to Linda Morgan
As you requested, I have reviewed the transcript of the hearing
held before the Senate Appropriations Committee on September 12, 2000.
At the hearing, you asked me whether I support provisions of the bill
introduced by Senator Rockefeller. I answered that I could not say,
categorically and without reservation, that I support that bill, which
calls into question the fundamental tenets of the Staggers Rail Act of
1980 (Staggers Act). You then asked me to review the hearing
transcript, which I received last week, and further explain ``the pros
and cons, policywise,'' of requiring rail carriers to open up their
lines to their competitors. This letter will amplify the response that
I gave in my oral testimony.
The Board's Hearings
In 1998, at the request of Chairman McCain and Subcommittee
Chairman Hutchison of the Senate Committee on Commerce, Science, and
Transportation, the Surface Transportation Board (Board) held extensive
informational hearings on access and competition in the railroad
industry. Several parties testified about access, bottleneck relief,
and other issues related to competition in the railroad industry. After
reviewing the record on the issue, the Board concluded that changing
current law and the policy behind the law to ensure that at least two
railroads would be available to serve every shipper might, at least for
the short term, reduce the rates paid by some shippers; at the same
time, it could reduce carrier revenues and cause the carriers to
abandon their less profitable traffic over time, which could degrade or
cutoff service to smaller shippers and shippers in rural areas. If that
occurred, then although cumulative railroad revenues would decline, the
rates paid by those shippers that would continue to receive service
could actually increase, because the overall traffic base from which
costs would be recovered would be reduced. Ultimately, the Board found
that ``it is quite possible that open access would produce a smaller
rail system . . . that would serve fewer and a different mix of
customers than are served today . . . .''
Because the Board concluded that only Congress was in a position to
determine whether it wanted that type of system--a smaller, more
streamlined system that limited output and served a smaller customer
base composed mostly of larger shippers in heavier traffic lanes--we
did not make a specific recommendation on the open access issue at that
time. I followed up with a letter in December 1998 to Chairman McCain
and Subcommittee Chairman Hutchison explaining the Board's concerns and
position, a copy of which is appended to the written testimony that I
submitted for the September 12, 2000 hearing.
My Testimony
At the hearing on September 12, you directed me to answer, yes or
no, whether I personally supported opening up access (in particular, by
reversing the Board's judicially approved ``bottleneck'' decisions and
by eliminating the current judicially approved requirement that a party
seeking competitive access must first show that the existing carrier
engaged in some sort of anticompetitive behavior). My response--that I
could not answer ``yes''--is consistent with past testimony before the
Senate Commerce Committee and should be viewed in the context of the
Board's decision in the Access and Competition proceeding and the
available research on the issue. I am aware that a study commissioned
by one of the shipper lobbying groups has concluded that forcing more
competition in the railroad industry would actually increase carrier
profits and produce across-the-board benefits, but the conclusions of
that study are inconsistent with other recent studies of the industry.
Meanwhile, the railroad industry has testified to the adverse
consequences to the industry, its customers, and its employees
associated with the significant revenue loss that would result from an
open access scheme. Additionally, a recent study (``Efficient Access
Pricing For Rail Bottlenecks,'' June 1, 2000) commissioned by the
Federal Railroad Administration (FRA) has expressed concerns about the
longer-term consequences of some of the proposals to change the
approach to rail regulation, and has concluded that forcing down
bottleneck rates by, for example, overturning the Board's bottleneck
decisions, ``may not be taken as an unambiguous good. . . . Lower costs
would be effected by reducing quantity or quality of service, or
both.'' And many of those shippers that continued to receive service,
the FRA study concluded, would face ``upward pressure on the price of
rail service.'' In short, as of this time, a persuasive case has not
been made that Senator Rockefeller's bill would produce uniformly
positive results.
The General Accounting Office found in a 1999 report that rail
rates have declined substantially since passage of the Staggers Act.
Nevertheless, certain shippers, at least looking to the short term,
have apparently concluded that their rates would drop even further and
that service would improve if every shipper were guaranteed service by
more than one railroad. I could understand why they might not want to
worry about the longer term, and would instead be willing to cross that
bridge when they get to it. Notwithstanding any short-term effects,
however, I am concerned that over the long-term, adding rail
competitors throughout the system could have negative implications on
railroads, rail customers, and rail employees that must at least be
fully understood and fully embraced before such changes are made.
Basis For My Position
Of course I understand the benefits of competition as a general
matter, and indeed, the Board in revising its merger rules and policies
is looking at enhancing competition in the context of new merger
applications. And of course I recognize that a lack of competition can
bring higher prices to certain consumers, and throughout my tenure at
the Board, I have tried hard to assure fair treatment for all segments
of the rail transportation community, particularly those with less
leverage. But the Staggers Act concluded that, in order for the
railroad industry to maintain its infrastructure and remain viable in
the private sector, it must be able to recover its high fixed costs by
setting rates sufficiently above the incremental or marginal costs
associated with providing a particular service. Thus, under the
regulatory regime that Congress set up in 1980, some shippers with
fewer competitive alternatives must necessarily pay higher prices than
other shippers with a greater range of options. More recently, the FRA
study concluded that, if that approach to pricing (termed
``differential pricing'') were altered in order to simulate a
competitive market so that railroads could price and produce ``at the
socially optimal level,'' the ``first-best'' solution would be ``a
subsidy from government,'' to cover the costs of maintaining the
infrastructure, which presumably would then allow railroads to charge
rates at or near marginal cost and would thus produce some rates that
are lower than what we have today.
Therefore, unless Congress is willing to subsidize the railroad
industry in the future to cover a capital shortfall or to ensure the
retention of the type of system we have today, or until someone figures
out some other way to protect the shippers that could be abandoned
under an open access system, I am not prepared to say that I support
some of the major regulatory changes that are being discussed, in
particular those provisions in Senator Rockefeller's bill that you
discussed in the hearing. Of course, if Congress were to conclude that
it wanted major changes, the Board would carry out the law as Congress
passed it.
I hope that this clarifies my position in accordance with your
request.
__________
Written Response to Question Submitted by Senator Smith to Linda Morgan
Question. Some Oregon rail users, the railroads' customers, today
have the option of using more than one railroad to pick up a shipment
and deliver it to one of two railroads in the east. If there are two
mergers, leaving just two transcontinental railroads, what will happen
to the options available to Oregon rail users? What incentive would one
merged transcontinental railroad have to keep the gateways open with
the other transcontinental railroad? How would the Oregon rail user go
about getting a price to transport goods across the country? Would
there truly be price competition, or would the railroad that can
provide single-line service always quote the lower rate? How do the new
merger rules help an Oregon shipper in this situation?
Answer. The new rules require merger applicants to include measures
not only to preserve existing competitive options, but also, as part of
their showing of merger benefits, to demonstrate ways in which new
proposals will indeed enhance existing competitive options. Carriers
could meet this burden by, for example, maintaining existing gateways,
preserving opportunities to challenge ``segment'' rates in
``bottleneck'' situations, and by providing trackage rights or other
access to other rail carriers, or eliminating ``paper barriers'' to
interchange by shortline carriers. In the absence of a specific
application, it is impossible to know how a particular proposal would
affect particular shippers. Because a new merger proposal would not
likely be approved without competitive enhancements, however, any new
proposals that are submitted should provide substantial competitive
benefits for shippers overall.
The addition of new competitive options should translate into lower
rates, even if a shipper does not have direct access to two
transcontinental railroads. I could not know the specific rates that
particular carriers or combinations of carriers would quote. But in
general terms, single-line service from origin to destination should be
more efficient, and the savings should be passed on to the shipper
because the shipper can threaten to use, and can indeed use, the new
competitive options to which the merged carrier would agree in order to
secure merger approval.
Responses to Written Questions Submitted by Senator Rockefeller
to Linda Morgan
Question 1. As a very general matter, can you: (A) Explain to the
Subcommittee what you see as STB's primary role in terms of its
oversight of the freight railroad industry; and (B) Explain the
statutory authority for the Board's position?
Answer. In general terms, the Board's role in overseeing the
freight railroad industry is to balance the variety of policy
objectives identified in the Rail Transportation Policy of 49 U.S.C.
10101. Those policies, which the courts have described as sometimes
competing and conflicting, require the agency, among other things, to
look at competitive issues, service, rate levels, the health of the
industry, and employee issues, and to do that in a way that minimizes
regulation and Federal involvement in the operations of the private
sector.
Question 2. During your tenure as Chairman: (A) How do you believe
the Board has carried out this primary role; and (B) What decision or
decisions best demonstrate the Board's understanding of its oversight
responsibilities?
Answer. As reflected in its impressive record in court, the Board
has carried out this role in an appropriately balanced and effective
way. We have balanced the interests of all of the stakeholders in a way
that has given effect to each of the RTP objectives and that has
advanced the public interest by providing for a rail system able to
meet the needs of not just a particular group of shippers, but of the
shipping public overall. In the ``bottleneck'' cases, for example, the
two reviewing courts found that we had construed the statute properly
when we provided new opportunities for shippers to challenge bottleneck
rates while maintaining the ability of originating rail carriers to set
rates and routes in the first instance. In various rate cases, we have
protected captive shippers from paying unreasonable high rates, and we
have changed the ``market dominance'' rules so as to enhance access to
the regulatory system. In our merger decisions, we have allowed market
efficiencies but have ensured that no shipper that had two rail service
options before a merger has been left with just one option as a result
of the merger. And our new major rail merger rules reflect changed
circumstances in accordance with our statute.
The rail industry did, of course, experience severe service
problems in recent years as a result of merger operational integration
difficulties. But these problems were not products of the way in which
the Board carried out its statutory mission, and indeed, the Board's
responses to the service problems reflect the agency's understanding of
its oversight responsibilities. In addressing the service crisis in the
West, for example, the Board, recognizing the interdependence of the
rail network, knew that a regulatory edict from the Federal Government
would not make the trains run more smoothly or more quickly but rather
could have the opposite effect by interfering with the marketplace in
such a way as to cause further harm to shippers. During the crisis, the
Board acted to ensure that all shippers were treated fairly and that
one shipper group could not exploit the situation to the detriment of
others. And while the Board did not use a suggested ``open access''
solution that the agency believed might aggravate rather than fix the
problem, it did provide for cooperation among the involved carriers and
other affected parties, altered the service through the Houston area on
a temporary basis, directed on a permanent basis a clear route through
the Houston area, ordered the filing of a plan for improving the
infrastructure in Houston, and gave effect to the ``joint dispatching''
that helped relieve congestion in the Houston area and has since been
used successfully to address operational issues elsewhere in the rail
system.
Question 3. Recently, the STB issued a decision that suggested the
Board should streamline its own procedures, including filing
requirements, for stand-alone cost cases. Apparently, the Board
believes staffing constraints are making it difficult for the Board to
meet the demands of its current caseload. However, the President's
budget request for the Board is $18.457 million (essentially the same
as fiscal year 2001, adjusted for inflation and pay raises). How would
you comment on how the Board plans to carry out its responsibilities
under these tight budgetary constraints, including how the Board will
carry out any proposed regulatory changes that might result from the
current merger procedures rulemaking?
Answer. In various Congressional hearings over the past several
years, I have been asked whether the Board needs more resources, and
how I would use them if we had them. My answers have been consistent:
the workload is heavy, and if Congress were inclined to give the agency
more resources, I would have no trouble deploying them. In the
meantime, we will continue to work efficiently and productively with
the resources we have. Because we are always looking for ways to be
more efficient and productive, when we noticed a sharp increase in rate
filings over the past several months--a workload that is a challenge
regardless of agency staffing levels--we issued the recent order
modifying, in a focused way, some of the procedures in stand-alone cost
cases. We will continue to review our caseload and our processes and
make any adjustments that we believe will improve the decisional
process. At this time, I do not believe that the new merger rules
present any new or unique resource challenges that the Board has not
already faced in implementing its responsibilities.
Question 4. How might the Subcommittee expect STB procedures to
change if staffing levels were improved to more reasonably reflect the
Board's caseload?
Answer. As we are always looking to streamline and improve our
processes and to expedite our decisional response time, I do not
believe that increased staffing levels would produce a major change in
how we approach the handling of our work.
Question 5. Regarding the merger rulemaking, and the moratorium on
rail mergers that preceded it, I believe it gave all those of us
concerned with the current State of the freight rail industry a welcome
pause to consider what should be done to create a system that better
addresses the legitimate goals of financially viable railroads and a
truly competitive rail environment. In light of the Board's hesitance
to act in the past without explicit authorization of Congress, how
would the Board explain to the Subcommittee the authority by which it
acted on the moratorium?
Answer. The Board imposed the merger moratorium because it
concluded that the old merger rules were not appropriate for reviewing
the final round of mergers, and that a moratorium was necessary to
prevent the final round from beginning before the new rules were in
place. The Board believed that its moratorium had a good chance of
surviving judicial review because it did not contravene any substantive
statutory provision or any recent court decision. As the reviewing
court found in denying the petitions for review of the Board's action,
in light of its express authority to review rail mergers, the agency
has implied authority to put a temporary hold on further mergers when
warranted to realize the broader goals of the statute.
Question 6. Assuming for the sake of this inquiry that the STB's
authority to call the moratorium was properly exercised, do you believe
the Board is empowered also to review, and possibly reverse, its
earlier decisions?
Answer. As the reviewing court found, the Board did indeed act
properly in imposing the moratorium under the particular circumstances
prevailing at the time. The finding that an agency has implied
authority to take actions necessary to effectuate its express
authority, however, does not mean that there are no limits on how an
agency interprets its governing statute. An agency can, of course,
change its view, particularly on questions of policy. But where a
particular statute has been expressly construed in court in affirming a
prior agency decision--for example, where the D.C. Circuit specifically
found that the Interstate Commerce Act is not an ``open access''
statute--the agency would have a hard time supporting in court a
decision reversing that particular prior precedent. Or, where an
agency's very recent decisions interpreting a particular statute have
been found on judicial review to reflect the proper balancing of the
various competing statutory policy objectives (as in the case of the
bottleneck decisions), it would be difficult for the agency to sustain
a new decision finding that the statute should be interpreted
differently.
Question 7. If so, what if any decisions would the current Board
revisit, and on what grounds?
Answer. As the various examples I have cited indicate, the Board
revisits prior actions when it believes it is appropriate to do so. The
new merger rules are a recent example of a situation in which the
agency revisited prior precedent and made major changes in how the
statute is administered in a way that will likely be defensible in
court. The Board will continue to revisit prior actions where
appropriate.
__________
Responses to Written Questions Submitted by Senator McCain
to William Clyburn, Jr.
Question 1. Please describe how the Board intends to interpret its
new merger guidelines. How will carriers be held more accountable to
their claims of merger benefits?
Answer. The new rules were intended to be interpreted to provide
all transportation stakeholders, including rail carriers, rail
customers, consumers, and public entities with a more comprehensive
application process to help ensure that the benefits projected in a
future merger application are reconciled with the benefits actually
realized shortly after that merger is consummated.
The Board has consistently stated that these rules represent a
significant change in direction from our previous rules. When the
Staggers Rail Act of 1980 was passed, the railroads were experiencing
excess capacity and the merger rules helped promote rationalization.
Today, excess capacity is not the major issue--lack of competition and
transitional service problems resulting from prior mergers are the
foremost concerns facing transportation stakeholders. Accordingly, the
Board intends to view any future mergers with those issues in mind and
hold applicants to a heightened scrutiny in proving that an application
is beneficial to competition and that any potential service problems
are properly addressed.
Applicants will have additional issues to address and higher
expectations to meet. For example, the applicants should include
provisions for enhanced competition to help ensure protection of the
public interest. Applicants are required to make a good-faith effort to
accurately calculate the net public benefits of their proposed merger,
so the Board expects the application to include additional
recommendations if the projected net public benefits fail to
materialize in a timely fashion. The Board also will hold applicants
accountable if they fail to act reasonably to achieve promised benefits
when actual circumstances are different than those projected. 49 CFR
Sec. 180.1(c)(1). Applicants must propose remedies to mitigate and
offset competitive harms, including measures to preserve existing
gateways, build-outs and build-ins, and shippers' opportunity to
challenge bottleneck rates. 49 CFR Sec. 1180.1(c)(2)(i). The Board will
require applicants to provide a detailed service assurance plan (see 49
CFR Sec. 1180.1 (c)(2)(iii)) and are expected to explain how their
transaction and conditions they propose would enhance competition (49
CFR Sec. 1180.1(c)(2)(iv)). Applicants will be required to work with
the Federal Railroad Administration to formulate and then submit a
Safety Integration Plan to ensure that safe operations are maintained.
49 CFR Sec. 1180.1(f)(3). Applicants also must provide evidence to the
Board, for at least the first 5 years (on no less than an annual basis)
following approval, to show that the merger conditions imposed by the
Board are working as intended, that applicants are adhering to
representations made, that no unforeseen harms have arisen
necessitating the alteration or imposition of new conditions, and that
the merger benefits projections are being realized in a timely fashion.
49 CFR Sec. 1180.1(g). In addition, the rules encourage applicants and
rail labor to enter into early negotiated implementing agreements and
discourages management requests to override collective bargaining
agreements 49 CFR Sec. 1180.1(e).
Question 2. There has been much attention to the issue of
``enhanced competition.'' Do the new rules clearly require a merger
application to expand competition or can the Board envision that based
on particular circumstances that a merger could be approved without
increasing competition?
Answer. Without prejudging the facts and circumstances of a
specific merger proposal, theoretically a major merger proposal could
involve a fact pattern where the competitive harm is so minimal as to
not necessitate enhanced competitive access to ameliorate or offset
those harms. The rules were promulgated for the express purpose of
helping to ensure that if there is another major merger, the applicants
provide the Board with the requisite information to address the
increased concerns that transportation stakeholders have with
additional mergers in an already highly consolidated industry.
The Board, after obtaining testimony in hearings and oral arguments
and in several rounds of written filings, has determined that while
mergers can be beneficial, there may be competitive harms that result
that cannot be mitigated by conditions. In such circumstances, the new
rules require applicants to provide a plan for enhancing competition.
It is clear that a filing absent such a plan would be less likely to be
approved by the Board.
Question 3. To what extent was the Board unable to address
proposals submitted throughout the rulemaking process? Are there
particular areas in which the Board did not have statutory authority to
include otherwise reasonable proposals?
Answer. There were some proposals submitted that arguably exceeded
the parameters of our merger review. For example, there were
recommendations for forms of competitive access and open access;
imposition of conditions on non-applicants; removal of contractual
agreements; changes to the Board's procedures regarding resolution of
rate disputes which probably exceed the Board's statutory authority.
While many debate how far the Board can go in terms of rail-to-rail
competition or how feasible certain Board actions would be, the Board
attempted to balance the need for rail customers to have reliable
service at reasonable rates, and fair treatment of labor, with the need
for rail carriers to be financially viable.
Question 4. By law, merger decisions involving two or more Class I
railroads must be determined within 16 months from the date the
application is filed. Given the Board believes it has issued much more
difficult guidelines, do you foresee any necessity to lengthen the time
period under which the Board reviews mergers?
Answer. As long as the Board has the necessary resources in terms
of budget and skilled personnel, the Board should be able to maintain
its record with respect to consistently issuing decisions in a timely
manner.
Question 5. Do you envision any future mergers occurring?
Answer. I don't know whether additional major mergers will take
place in the near future. The import of these new merger rules is to
address the concern of the impact on our national transportation
network of an additional major merger in an industry that has gone from
30 independent Class I railroads in 1976 to arguably 7 independent
Class I railroads today.
Question 6. How do you believe the new merger rules will affect
rail shippers?
Answer. I believe the new merger rules will give shippers more
information during the application process with which to respond
regarding the benefits of a major merger proposal. The rules also
provide for additional safeguards such as enhanced competition
proposals, a service assurance plan, and higher accountability
requirements to address harms and contingency measures. With the higher
thresholds applicants must cross, railroads must think long and hard
whether there are possibilities short of a merger which can accomplish
their goals, and before an application is approved the heightened
concerns of today's transportation stakeholders must be addressed.
Question 7. When were the rail merger rules last revised? How many
consolidations were approved by the Board, and previously, the ICC,
under the former rules? What are the benefits of the new merger rules?
Answer. The merger rules were revised in Ex Parte No. 282 (Sub-No.
3), Railroad Consolidation Procedures, 363 I.C.C. 200 (1980) (decided
August 8, 1980 and published on September 23, 1980, at 45 FR 62991). In
addition, they were revised again to address the Board's exemption
procedures in a decision printed at 366 I.C.C. 75 (1982) (decided
February 19, 1982, and published on March 8, 1982 at 47 FR 9844. Nine
major consolidations were approved under the former rules: Norfolk &
Western/Southern; Union Pacific/Missouri Pacific/Western Pacific; Union
Pacific/Missouri-Kansas-Texas Railroad Company; Denver and Rio Grande/
Southern Pacific; Union Pacific/Chicago and Northwestern; Burlington
Northern/Santa Fe; Union Pacific/Southern Pacific; CSX/Norfolk
Southern/Conrail; and Canadian National/Illinois Central. Also, the ICC
assessed the Soo Line/Milwaukee Road in an advisory capacity in
connection with a bankruptcy proceeding and denied the Santa Fe/
Southern Pacific proposal. The benefits of the new rules are that they
address the needs of the public as they exist today, not 20 years ago.
Accordingly, increased competition and accountability are stressed.
Question 8. The Board's final rules provide a waiver for the Kansas
City Southern Railway Company (KCS) from the application of the new
major rail merger rules. I understand this waiver was not a unanimous
decision by the Board--Chairman Morgan dissented. (a) Would you please
offer your perspective on this waiver; (b) I recognize the KCS is a
smaller Class I carrier compared to others, but it is nonetheless a
Class I carrier. If the specific size of the company is the issue,
perhaps a more appropriate route would be for the Board to initiate a
proceeding to revisit its classification guidelines. Has the Board
considered taking such action and if not, why not?
Answer. The idea of treating KCS in a manner different from the
other Class I railroads was initially sought by KCS itself. KCS has
argued that any merger between itself and another Class I would not
affect the national transportation system in the same manner as would a
merger between two of the large Class I railroads. In considering this
request, the Board considered the original purpose of our review of the
old merger rules and recognized the unique status of KCS in the realm
of Class I carriers.
Following the December 20, 1999 notice of intent to file the
proposed merger between the Burlington Northern Santa Fe and the
Canadian National, the Board, in a decision served January 24, 2000,
instituted a proceeding in STB Ex Parte No. 582, Public Views on Major
Rail Consolidations, to conduct public hearings on the possible
repercussions of such a merger which many believed would lead to a
final round of mergers eventually leaving only two transcontinental
railroads. After those hearings, by decision in Ex Parte No. 582,
served March 17, 2000 (the decision whereby the Board initiated its 15-
month moratorium on major mergers), the Board recognized that only 6
large railroads remain in the United States and Canada--Burlington
Northern Santa Fe (BNSF), Union Pacific (UP), CSX Transportation, Inc.,
Norfolk Southern Railway Company, Canadian National Railway Company
(CN), and Canadian Pacific Railway Company (CP). KCS was not included.
It was recognized that two smaller Class I railroads, Grand Trunk
Western Railroad Incorporated and Illinois Central Railroad Company,
are affiliated with CN and that a third smaller Class I, Soo Line
Railroad Company, is affiliated with CP. Finally, the Board stated that
KCS was also a smaller Class I but was an independent entity. While
technically meeting the revenue requirements to be classified as a
Class I (annual operating revenues of over $250 million), KCS is much
smaller than the other large railroads in revenue and miles of road
operated. KCS had operating revenues of approximately $522 million in
2000 and operated over 2,756 miles of road. By comparison, in the same
year BNSF had operating revenues of approximately $9.2 billion and
operated over 33,262 miles of road and UP had operating revenues of
approximately $10.5 billion and operated over 33,341 miles of road. In
fact, KCS is closer to the size of Wisconsin Central Limited (WC)
(operating revenues of about $281 million in 1999) than the large
railroads. Additionally, WC's proposed merger with Canadian National
was deemed by the Board not to be a major transaction or a significant
transaction, but a minor transaction--the least rigorous category.
Accordingly, a majority of the Board was persuaded that KCS should be
treated in a manner similar to WC.
However, I was not fully persuaded by the KCS arguments. KCS sought
a revision of the proposed rules to have the Board consider a merger
involving a carrier with revenues of less than $1 billion to be
considered as a significant transaction (involving lesser evidentiary
requirements) rather than as a major transaction as mergers involving
Class I railroads usually are handled. I did not see the basis for the
presumably arbitrary $1 billion threshold. Also, by including such a
high threshold and considering that KCS' proposal was framed in terms
of Class I railroads, the Board would have to treat any major merger
involving CN or CP as only a significant transaction, since they are
Canadian carriers and technically not Class I railroads. (Our
jurisdiction over a merger proceeding involving those carriers is
dependent on our jurisdiction over their U.S. affiliates which are now
Class I railroads but would also fall below that threshold under KCS'
recommendation). In addition, the statute in 49 U.S.C. 11324(b)
requires the Board to consider certain factors when reviewing a merger
involving two Class I railroads. If such a transaction were considered
a significant transaction rather than a major transaction some of these
factors may not be considered, and therefore arguably run contrary to
the statute. For these reasons, the Board did not incorporate a
proceeding changing the classification threshold.
KCS is a Class I carrier but as stated in 49 CFR 1201 (the Board's
regulations defining the classes of carriers) those classifications are
made for purposes of accounting and reporting. Class I railroads are
required to file annual and quarterly financial report--s as well as
other operational reports to the Board. The idea of classifications is
to reduce the burden on smaller carriers. As a result of the Staggers
Rail Act of 1980, the Interstate Commerce Commission (ICC) eliminated
the reporting requirements for Class II and Class III carriers. Thus,
although KCS is classified as a Class I carrier for accounting and
reporting purposes, it is reasonable to consider the limited impact of
KCS on the national transportation network as compared to the large
railroads.
The procedure the Board has authorized is actually more stringent
than that proposed by KCS (to be deemed a significant transaction)
because any merger involving KCS and another Class I railroad will be
considered a major transaction under the old rules and the factors
listed in section 11324(b) will be considered. Finally, it must be
pointed out that this waiver is not an outright exemption but a
rebuttable presumption. If interested parties have concerns about a
merger application involving KCS and another Class I, they will have an
opportunity to file those concerns. If the Board determines that the
rebuttable presumption is met, it would evaluate the proposal under the
new rules, just like a merger with a large railroad. The Board will be
involved at every stage to help protect the public interest.
Question 9. Did DOT or DOJ comment on the STB's rulemaking proposal
and if so, to what extent do the Board's new merger rules reflect the
views of those Departments?
Answer. DOJ did not file any comments in this proceeding. While DOT
did participate in all phases of the proceeding, DOT's representative,
at the oral argument in this proceeding held on April 5, 2001,
testified that because of leadership changes, DOT, except for a few
specific issues, could neither support nor oppose the positions it had
taken in its previously filed written comments. DOT stated it agrees
with the Board's imposition of the 15-month moratorium. DOT also
supports the Board's development of new standards to evaluate Class I
mergers which take into consideration the impact of those standards on
all interested parties in the transportation community.
__________
Responses to Written Questions Submitted by Senator McCain
to Wayne O. Burkes
Question 1. Please describe how the Board intends to interpret its
new merger guidelines. How will carriers be held more accountable to
their claims of merger benefits?
Answer. The new merger rules impose many specific requirements on
future merger applicants, which should not be subject to much
interpretation by the Board. For example, the new rules establish
detailed procedures that must be followed and list specific information
requirements that must be submitted by future applicants.
The major area in the new rules that could be subject to Board
interpretation is in the area of preserving and enhancing competition.
The new rules do not specifically require the applicants to preserve
the existing level of rail to rail competition nor do they define what
the Board will consider when determining whether a particular
transaction enhances competition. There are many ways to enhance
competition and our new rules leave it to the applicants to propose
such enhancements. The decision (but not the new rules) states that
enhanced competition ``could be'' the enhancement of ``intramodal'' or
rail-to-rail competition, such as the establishment of shared access
areas, the granting of trackage rights, the removal of so-called
``paper barriers'' and other approaches. However, enhanced competition
also ``could be'' the enhancement of ``intermodal'' competition (e.g.
rail-truck or rail-barge competition) or some other type of competition
that may not even be related to transportation.
The decision leaves it to the Board's discretion as to what
constitutes enhanced competition. It is my hope that future railroad
merger applicants will not only preserve the existing level of rail-to-
rail competition, but also focus on enhancing rail-to-rail competition.
In terms of holding the railroads more accountable to their claims
of merger benefits, the new rules require the applicants to identify
additional measures or contingency plans that would be used in the
event anticipated public benefits should fail to materialize in a
timely manner. These additional measures were designed as a regulatory
mechanism that should encourage applicants to carefully consider and to
limit the exaggeration of potential benefits and, at the same time,
provide a possible solution to problems if and when they might arise.
Question 2. There has been much attention to the issue of
``enhanced competition.'' Do the new rules clearly require a merger
application to expand competition or can the Board envision that based
on particular circumstances that a merger could be approved without
increasing competition?
The changes to the Board's major railroad consolidation rules and
procedures set forth in our decision correctly shift the focus away
from a policy that encouraged mergers to one that raises the threshold
for approving a new merger, including considerations of
enhanced.competition. However, Class I railroads will not be
specifically ``required'' to include provisions to enhance competition.
Enhanced competition is an encouraged goal rather than a mandated
standard.
I am not in favor of a mandated enhanced competition standard,
absent a definition of that term in the rules. As previously stated,
the new rules do not define enhanced competition. If we are to impose
an enhanced competition standard, future merger applicants should know
what steps they need to take to meet that standard and shippers should
know what to expect.
Nonetheless, I do not believe that a future merger will be approved
unless it contains elements that increase competition. It is my hope
that the Board will closely scrutinize future applications and use its
conditioning power, if necessary, to preserve and enhance competition
in a way that promotes a competitive and healthy railroad system.
Question 3. To what extent was the Board unable to address
proposals submitted throughout the rulemaking process? Are there
particular areas in which the Board did not have statutory authority to
include otherwise reasonable proposals?
I believe that the Board carefully evaluated and addressed all
proposals submitted during the rulemaking process. A few parties
commented that the Board should condition every future major railroad
transaction in a way that would allow any shipper to request its
serving carrier, whether or not that particular carrier was involved in
the transaction, to allow a second carrier to use the incumbent
carrier's facilities in order to provide competitive rail service. I do
not think the Board would have statutory authority to enforce such an
open access proposal.
Question 4. By law, merger decisions involving two or more Class I
railroads must be determined within 16 months from the date the
application was filed. Given the Board believes it has issued much more
difficult guidelines, do you foresee any necessity to lengthen the time
period under which the Board reviews mergers?
Answer. I do not foresee any necessity to lengthen the time period
under which the Board reviews mergers.I should note the new rules
require a substantial amount of planning by future merger applicants,
e.g., the service assurance plan, which will require a substantial
amount of work by the future applicants prior to the submission of the
application and, therefore, should not adversely affect our timetable.
Question 5. Do you envision any future mergers occurring?
Answer. There are currently seven (7) Class I railroads. Therefore,
there remain twenty-one (21) possible merger combinations, some of
which are more likely than others. For example, it is very unlikely
that the two eastern (i.e., CSX and NS) or the two western carriers
(i.e., UP and BNSF) would attempt mergers. I do not envision any more
mergers in the near future, but would expect another merger in the next
two to 5 years.
Question 6. How do you believe the new merger rules will affect
rail shippers?
Answer. Shippers, of course, will not be directly affected by the
new merger rules until a merger is proposed and the rules are
implemented. However, I believe that rail shippers did benefit from the
Board's moratorium and rulemaking, which helped stabilize the railroad
industry.
The primary benefit, in my opinion, is that new rules encourage the
enhancement of competition, whereas the former old rules actually
encouraged railroad mergers. For example, the former rules encouraged
private transactions that lead to ``rationalization of the nation's
rail facilities and reduction of its excess capacity.'' Conversely, the
Board's new rules encourage the enhancement of competition. The new
rules substantially increase the burden on applicants to demonstrate
that a proposed transaction would be in the public interest, by
requiring them, among other things, to demonstrate that the transaction
would enhance competition where necessary to offset negative effects of
the merger, such as competitive harm or service disruptions.
I should note that rail shippers could benefit from future railroad
mergers, under the new or former rules. Single-line, transcontinental
rail service could substantially reduce transit and cycle times for
certain shippers, which would reduce equipment and inventory costs. For
example, I understand that it currently takes approximately 30 hours to
move railroad traffic through the congested Chicago area. Mergers could
substantially reduce this time and congestion, which would benefit
shippers.
However, the benefits from future mergers may be very limited and
competitive harms may be difficult to remedy. Consequently, mergers
could also harm some shippers. There is a substantial amount of overlap
between the remaining large Class I carriers. As a result, rail
shippers could lose the benefits of direct competition and indirect
competition. Hopefully, the Board, as it has in past mergers, will
continue to strive to remedy direct competitive harm and other
competitive harms would be offset by competitive enhancements.
Question 7. When were the rail merger rules last revised? How many
consolidations were approved by the Board, and previously, the ICC,
under the former rules? What are the benefits of the new merger rules?
Answer. The railroad merger rules were last revised by the
Interstate Commerce Commission (ICC) in 1980 and 1982 in Ex Parte No.
282 (Sub-No. 3), Railroad Consolidation Procedures. Major revisions to
the merger rules were issued in a decision in this proceeding decided
August 8, 1980, printed at 363 I.C.C. 200 (1980) and published on
September 23, 1980, at 45 FR 62991. Major revisions addressing the
exemption procedures were issued in a subsequent decision decided
February 19, 1982, printed at 366 I.C.C. 75 (1982) and published on
March 8, 1982 at 47 FR 9844.
A review by Board staff indicates that there were nine (9) Class I
railroad consolidations approved, with conditions, by the ICC/STB under
the former rules. There was only one (1) Class I railroad merger that
was denied by the ICC/STB during this period. It should be noted that
ICC assessed another Class I merger in an advisory capacity connected
with a bankruptcy proceeding.
It should also be noted that there were many other railroad
consolidations and transactions approved by the ICC/STB during this
period, however, these did not involve two (2) Class I railroads and,
therefore, were not classified as ``major'' transactions. These
consolidations or transactions were classified as either significant,
minor or exempt transactions. The rules regarding these transactions
were not specifically addressed or significantly changed by the Board's
most recent rulemaking, which focused on major transactions.
In terms of the benefits of the new rules, see my response to
Question No. 6.
Question 8. The Board's final rules provide a waiver for Kansas
City Southern Railway Company (KCS) from the application of the new
major rail merger rules. I understand this waiver was not a unanimous
decision by the Board--Chairman Morgan dissented. (a) Would you please
offer your perspective on this waiver? (b) I recognize the KCS is a
smaller Class I carrier compared to the others, but it is nonetheless a
Class I carrier. If the specific size of the company is the issue,
perhaps a more appropriate route would be for the Board to initiate a
proceeding to revisit its classification guidelines. Has the Board
considered taking such action and if not, why not?
Answer (a). Our rules establish four criteria for reviewing
railroad mergers: major, significant, minor, and exempt. The size of
the carrier and the type of transaction determines which category the
merger fits into and what burdens such railroad applicants must meet
for their merger to be approved. The standards for a ``significant''
transaction are less rigorous than the rules for a ``major''
transaction and the time period to review such ``significant''
transactions is almost half of that for ``major'' transactions. The new
rules focused on ``major'' transactions and changed what would be
required of merger applicants in such ``major'' transactions.
During the entirety of this proceeding, KCS requested that the
definition of ``major'' merger transaction be limited to include only
Class I railroads that had annual operating revenues in excess of $1
billion per year and that any merger involving a Class I railroad under
that threshold be treated as a ``significant'' transaction rather than
a ``major'' transaction. In addition, KCS asked that if it was involved
in a hostile transaction it would like to be treated under the
``major'' rules. KCS asked for this differential treatment throughout
the entire 15-month process and other parties provided comments both in
support and opposition of the proposed rule.
In merger proceedings, the ICC and the STB have a long history of
treating railroads differently based upon their size. In reviewing the
record in this proceeding, I determined to continue that tradition and
suggested we adopt the rule requested by KCS. The final rule adopted by
the majority of the Board, however, decided to treat a merger with KCS
as a ``major'' transaction, but applied the old rules for such
``major'' transactions involving KCS rather than the new rules. It
should be noted that, in adopting this rule, the Board actually imposed
a higher burden on KCS than that requested by KCS, although not as high
a burden as imposed on the other Class I carriers, which are
substantially larger than KCS. Future transactions involving other
Class I carriers must comply with the new rules for ``major''
transactions.
Answer (b). The current rules regarding the classification of
railroads are set forth in 49 Sec. 1201, General Instructions 1-1.
These rules were last revised by the ICC in 1992 in Ex Parte No. 492,
Montana Rail Link, Inc. and Wisconsin Central Ltd., Joint Petition For
Rulemaking with Respect to 49 C.F.R. Part 1201, served June 17, 1992.
In that rulemaking, the ICC raised the revenue threshold for Class I
carriers status from $50 million (1978 dollars) to $250 million (1991
dollars). Under the current standards and indexed to a current level,
carriers having annual operating revenue of $261.9 million or more are
considered Class I carriers. Class II carriers are those with revenues
from $31.4 million to $261.9 million in revenue. Class III carriers
have revenues less than $31.4 million.
It may be time to revisit the classification standards. On November
14, 2000, Wisconsin Central (WC) petitioned the STB to open a
proceeding to consider amending the rail carrier classification
regulations. WC suggested that the threshold for Class I carriers
should be adjusted upward to $500 million dollars. KCS filed in support
of the WC's request to open a proceeding and urged the Board to
reevaluate the threshold classifications between carriers. To date, the
Board has not acted on WC's request.
Question 9. Did DOT or DOJ comment on the STB's rulemaking proposal
and, if so, to what extent do the Board's new merger rules reflect the
views of those Departments?
Answer. The Department of Transportation (DOT) submitted comments
in our rulemaking, but the Department of Justice (DOJ) did not submit
comments. In addition to DOT, the Department of Agriculture (DOA) and
the Department of Defense (DOD) submitted comments.
In remarks at the oral argument held in the rulemaking proceeding
on April 5, 2001, DOT indicated that, because its leadership had
``changed significantly'' after the filing of DOT's written comments,
DOT could neither support or oppose positions it had taken in written
comments.
__________
Responses to Written Questions Submitted by Senator John McCain
to John W. Snow
Question 1. If the STB had not initiated a moratorium on mergers
and rewritten the rules on major rail mergers, do you believe the Board
would already be facing the final round of mergers?
Answer. Yes. The proposed merger that precipitated Ex Parte 582
would have significantly altered the competitive environment. Had the
STB not initiated the moratorium, the remaining major roads likely
would have put forward their own responsive merger proposals, leading
to the premature and final restructuring of the nation's rail network.
Question 2. Do you believe the new merger rules will lead to any
merger approvals in the next 5 years? When do you think we can expect
to see movement by any carriers in an attempt to consolidate?
Answer. I do not anticipate any major merger proposal being
submitted to the Surface Transportation Board (STB) in the next 5
years. I believe future merger proposals will emerge only when rail
customers support and have faith that the new carrier's expanded single
line system service will achieve the benefits anticipated from the
merger in an efficient, timely manner.
Question 3. Based on your experience, do you think it will be
possible to complete a major rail merger under the new rules?
Answer. The Board has appropriately raised the bar on future
mergers. While overall I believe the requirements under the new rules
are achievable and do not represent an insurmountable barrier to future
consolidations, there are more risks. For example, future Boards might
seek to impose conditions that appear pro-competitive but actually
limit the merged carrier's ability to foster single system service
enhancements that produce the economic efficiencies which are shared
with the shipper community. In addition, the new rules impose on
railroads seeking mergers additional costs, including more analysis and
planning on top of an already strenuous process.
__________
Response to Written Question Submitted by Senator Gordon Smith
to John W. Snow
Question 1. Some Oregon rail users, the railroads' customers, today
have the option of using more than one railroad to pick up a shipment
and deliver it to one of two railroads in the east. If there are two
mergers, leaving just two transcontinental railroads, what will happen
to the options available to Oregon rail users? What incentive would one
merged transcontinental railroad have to keep the gateways open with
the other transcontinental railroad? How would the Oregon rail user go
about getting a price to transport its goods across the country? Would
there truly be price competition, or would the railroad that can
provide single-line service always quote the lower rate? How do the new
merger rules help an Oregon shipper in this situation?
Answer. It is customary in the rail system for competing carriers
to maintain longstanding joint line routes. The STB in its new rules
requires merging carriers to explain how they will ensure that
customers will continue to have available for some time existing
routings through major gateways.
Some customers prefer to separately negotiate with each carrier
that may be involved in a joint line movement; other shippers prefer to
negotiate a through (or single) rate with their originating or
terminating carrier. I anticipate that those options will still be
available.
By and large, rail prices today are set by the marketplace with
truck competition a key factor in the development of rate and service
packages. In the past, expanded single system service has permitted
merging carriers to operate more efficiently and economically, to
reduce rates and to compete more effectively with the much larger
trucking industry.
The new merger rules require development of extensive service plans
designed to ensure that disruption experienced during implementation of
recent consolidations does not occur in future transactions. The rules
also impose a higher standard of proof of anticipated benefits. By
meeting these thresholds, shippers in Oregon and elsewhere will be able
to receive the benefits of single line service and pricing without
facing major disruptions in operations.
__________
Responses to Written Questions Submitted by Senator McCain
to Paul M. Tellier
Question 1. In your testimony, you point out that you are pleased
that the final rules provide equal treatment for both domestic and
internationally headquartered railroads and that you believe that, if
properly implemented, the rail industry can operate effectively.
However, you also stated that, ``we may not agree with all aspects of
the new merger rules.''
Question (a). Can you inform the Committee about the areas you
still have concern with and why?
Answer. Throughout the course of the deliberations of the Surface
Transportation Board (STB) on its new merger rules, our concerns
focused on four major issues First, we were very concerned about the
Board's proposed requirements related to transnational mergers, which
would have required foreign applicants to meet a greater evidentiary
burden than domestic carriers as part of the initial merger
application. In the final rules, however, the Board states that it will
apply higher public interest standards for mergers equally to all
applicants--both domestic U.S. companies and foreign-headquartered
corporations.
Second, CN has urged that efforts to enhance competition as part of
a rail merger not be used as a means to artificially introduce
competition where no competitive problems exist. In our view,
conditions related to competition should focus on remedying competitive
harms that may arise from a merger so that a transaction will be
consistent with the public interest. The Board's final rules have
allayed some of our concerns by clarifying that applicants would be
required to demonstrate that a proposed transaction would enhance
competition where necessary to offset merger-related harms that cannot
be directly or effectively mitigated. As the Board noted in its
decision, its focus in requiring competition-related concerns ``is on
ensuring that any mergers that are approved are in the public interest,
not on imposing a new scheme of regulation upon the railroad industry
through the back door of merger approval.'' Third, we have been
concerned about the Board's proposed analysis required with respect to
the ``downstream'' effects of a proposed transaction. As initially
proposed, this analysis would have been highly speculative and
impractical and would not have served to respond effectively to
shippers' concerns about the prospect of two transcontinental
railroads. In the final rules, the Board declined to require merger
applicants to present alternative merger benefit calculations based on
specific alternative possible responses of other carriers. Instead, the
Board will require applicants to generally discuss the likely impact of
future Class I mergers on the anticipated public benefits of their own
merger proposal. So long as these rules are not used as a means to
extend merger inquiries unreasonably or to over-manage the market for
railroad control in a search for the hypothetically ``perfect'' set of
railroad combinations, they should not diminish the Board's capacity to
efficiently review merger proposals.
Last, we have been concerned about the Board's new requirements
regarding voting trusts. Under the previous merger rules, the decision
as to whether to assume the regulatory risk of unauthorized control
during the pendency of a merger proceeding was left to the applicants,
who had the option of obtaining informal staff review of a proposed
voting trust agreement. The new rules, however, require applicants to
obtain formal Board approval of voting trusts at the outset, with the
Board applying a public interest standard in addition to the no-control
test. Depending on how the rule is applied, it could require the Board
to make a decision on elements of a merger's merits prior to receiving
evidence on all relevant aspects of the proposed transaction, rather
than at the conclusion of a merger proceeding.
Question (b). How would you change the new rules to alleviate these
concerns?
Answer. On three of our four major concerns--treatment of
transnational mergers, enhancement of competition, and analysis of
downstream effects--implementation by the Board of the requirements in
the final rules will be key to determining whether the provisions are
having their desired effect. It is essential to the future of the
railroad industry that the merger rules serve as a mechanism to promote
efficiency and service, not a way to induce artificial, economically
unsustainable competition or to protect some carriers from competition
with others.
With respect to voting trusts, we would prefer that the Board
revert to its prior practice. In the alternative, the Board should
limit its inquiry into whether the proposed trust, rather than the
transaction itself, is consistent with the public interest. The notion
that the use of a voting trust somehow limits the Board's authority
ultimately to protect the public interest is unsupported.\1\
Application of the Board's traditional tests for control in a review of
trust proposals initiated at the option of applicants would continue to
fulfill the proper function of aiding applicants seeking to avoid
unauthorized control. Even under the new rules, we would hope that the
Board would not seek to limit the workings of the capital markets with
respect to the absorption of risk by an acquiring carrier or to
handicap the market for control by giving the Board the right to pre-
judge the merits of a merger. Instead, the Board's focus should be on
whether a voting trust itself is likely to have any serious impact on
the public interest. CN supports a more rigorous examination by the
Board of a transaction's financial impacts on the ability of the
merging carriers to maintain and improve service. The examination of
financial terms, however, like the examination of any other element of
the public interest, should occur during and not prior to the merger
proceeding.
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\1\ As an example, the Interstate Commerce Commission denied an
application involving a voting trust in the proposed Santa Fe/Southern
Pacific merger.
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Question 2. Do you believe the BNSF/CN transaction that you
intended to submit to the Board for review last year would have been
approved under the new rules?
Answer. Our proposed combination with Burlington Northern Santa Fe
(BNSF) was a pro-competitive, largely end-to-end transaction. I am
convinced that the CN/BNSF combination would have been good for
shippers and the rail industry.
Our commitment to service was consistent with the goals of the
Board's new merger rules. As part of this transaction, CN and BNSF had
made a commitment to shippers to provide service to our customers at
least as good as, or better than, the service they were receiving prior
to the combination. Importantly, CN and BNSF also pledged to keep
gateways open for customers following the combination. Not only do the
Board's new rules strongly emphasize the importance of providing good
service to customers, but they also incorporate this concept of open
gateways.
While it is impossible to State with certainty what the fate of
this proposed transaction at the Board would have been under any
circumstances, the basic spirit of this proposed combination, the
overall rationale for the transaction, and our commitment to customer
service were consistent with the Board's goals and objectives stated in
the new merger rules. I am confident that we would have been able to
successfully address the Board's concerns related to continued
financial viability, competition, and fulfilling our customer
commitments, and believe the transaction would have merited the Board's
approval.
Question 3. You briefly discuss in your testimony the impact the
economy at large has had on shaping the railroad industry in the past
and assert that this will continue to be the case and as such, there is
no ``certainty'' to the future make-up of the rail industry. This would
seem to disagree with the STB's assertion that one more Class I to
Class I rail merger will likely kick-off the final round of mergers.
Question (a). With ever-increasing traffic volumes moving in and
out of North American ports and more traffic moving north and south,
what do you believe we should expect to see with regard to Class I
mergers in the next several years? What about smaller mergers?
Answer. It is clear that the rail industry has an important role to
play in the North American transportation system given high traffic
volumes moving throughout the continent, particularly north-south
trade. There is no clear answer, however, as to how individual carriers
will choose to meet this challenge.
As I noted in my testimony, CN believes that no particular industry
structure is inevitable. What is important is that the rail industry
must emphasize responsible growth and responsive customer service. We
need to help our customers increasingly find rail to be the best
transportation choice. The rail industry overall has found it difficult
to divert freight from other transportation modes; in fact, the
railroad industry's share of the freight transportation market has
declined relative to the trucking industry in every year since 1980.
Railroads must increase our market share if we are to remain a viable
sector over the long run.
In CN's case, we undertook our 1999 merger with Illinois Central
precisely for the purpose of capitalizing on the expanding market for
north-south trade that has arisen as a result of the North American
Free Trade Agreement. More recently, we announced earlier this year our
proposed merger with Wisconsin Central, which is currently under review
by the Surface Transportation Board. By acquiring WC, we seek to secure
and to increase to the maximum extent possible the efficiency of our
important NAFTA route connecting western Canada and the central U.S.
Outside of these merger activities, we also are continuing to seek new
ways to improve our performance and enhance our customer service.
It remains to be seen whether Class I railroads will propose
further mergers between them to enhance efficiency and whether such
proposals would warrant approval. The Board should welcome progress
toward more efficient railroads if it is possible.
Question b. How has your view on what might happen with regard to
mergers changed as a result of the STB's new rules?
Answer. The Board's new rules appropriately raise the bar for
future rail mergers by emphasizing the importance of customer service.
The Board also will be examining more rigorously the effects of a
proposed transaction on the financial ability of the merged carriers to
maintain and improve service. Any carrier wishing to pursue a merger
will have to be prepared not only to demonstrate the expected benefits
associated with the proposed transaction, but also to identify how
these benefits in fact will be realized and what actions will be taken
should the expected benefits not materialize.
An important change from past precedent is the Board's more
skeptical attitude toward claims of merger benefits as opposed to the
previous presumption that a merger is in the public interest. The Board
is placing greater emphasis on enhancing competition as well as on
obtaining information on ``downstream'' impacts of a transaction.
Mergers may still have an important role to play in helping the
industry reduce costs and improve service, thereby enhancing
competition. If the Board's new rules are properly applied, applicants
with a solid business case for their transaction, consistent with the
public interest, should be able to successfully pursue a merger at the
Board.
With respect to smaller mergers, these may well prove to be more
appealing to carriers, particularly in the short-run. Smaller mergers
are less likely to raise significant ``downstream'' concerns, and there
are likely to be fewer competitive implications surrounding such
transactions. However, each rail carrier will have to examine its own
strategic goals, market position, and other factors before determining
whether any merger--large or small--should be pursued.
Question 4. In your written testimony you commented that your
annual operating revenues in the U.S. are approximately $3.5 billion.
What are CN's ``total'' revenues and track mileage, including your
Canadian side of the operation?
Answer. The figures cited in my written testimony applied to CN's
operations in both the United States and Canada. CN's total operating
revenues for the year 2000 were C$5.428 billion, which equates to
approximately US$3.5 billion. Approximately US$1 billion of these
revenues are attributable to our operations in the United States. With
respect to track mileage, CN operates over a total of approximately
15,500 route miles, roughly 3,000 of which are in the United States.
Question 5. You indicated CN and other carriers are undertaking
initiatives to expand service, such as through alliances and marketing
agreements with other carriers. What can't be accomplished by these
approaches that only can be produced as the result of a merger?
Answer. CN has had excellent experiences with alliances with a
number of different rail carriers. Major examples include the
following:
(a) Our most extensive alliance to date is our 15-year Strategic
Marketing Alliance with Kansas City Southern, which we announced in
April 1998. Through this alliance, we are able to offer shippers
extended reach through a coordinated network linking points in Canada,
the Midwest and southern U.S. markets. Through KCS affiliates, the
Marketing Alliance provides customers access to Mexico's largest rail
system, effectively linking all three NAFTA nations.
(b) We have in place three co-production agreements with Canadian
Pacific Railroad (CP): (i) directional running of CN and CP trains over
a 155-mile stretch of track through the Fraser Canyon in western
Canada; (ii) an agreement under which CN has access to CP's
Northeastern U.S. network; and (iii) an agreement providing CP access
to CN's Toronto--Chicago main line.
(c) Most recently, we announced in May 2001 a new range of services
with CSX Intermodal connecting major Canadian and U.S. markets. These
services should be attractive to shippers of high-value consumer goods
in Canada and the U.S., as well as international shippers.
Alliances can be an important part of a carrier's effort to enhance
its service offering and to meet customers' needs. However, the full
congruence of interests that common control provides is not possible in
an alliance. While it is fully expected that each carrier will seek to
maximize its own performance, this behavior tends to prevent an
alliance from achieving the higher level of performance that is
possible with common control. An alliance member may find it necessary
to deploy resources in such a way that maximizes its own profits or
level of service, without regard to the combined profits or service
levels of other alliance members.
__________
Responses to Written Questions Submitted by Senator Smith
to Paul M. Tellier
Question 1. Some Oregon rail users, the railroads' customers, today
have the option of using more than one railroad to pick-up a shipment
and deliver it to one of two railroads in the east. If there are two
mergers, leaving just two transcontinental railroads, what will happen
to the options available to Oregon rail users? What incentive would one
merged transcontinental railroad have to keep the gateways open with
the other transcontinental railroad? How would the Oregon rail user go
about getting a price to transport its goods across the country? Would
there truly be price competition, or would the railroad that can
provide single-line service always quote the lower rate? How do the new
merger rules help an Oregon shipper in this situation?
Answer. At the present time, the U.S. rail industry is
characterized by two Class I carriers in each of the Western and
Eastern regions--Union Pacific (UP) and Burlington Northern Santa Fe
(BNSF) in the West and CSX and Norfolk Southern (NS) in the East, with
CN, Canadian Pacific (CP), and the Kansas City Southern (KCS) operating
in portions of these regions. The options available to Oregon rail
users if two transcontinental railroads emerge from any next round of
rail mergers--should that occur--would depend largely on the conditions
that the Surface Transportation Board (STB) would impose on future
mergers, as well as the extent to which competition exists from other
modes and, with respect to some traffic, short-line rail carriers. The
Board has stated clearly in the new rules that it views not only the
preservation of competition, but also the enhancement of competition,
as essential in future mergers. Future merger applicants will be
required to demonstrate not only that the proposed transaction will
improve economic efficiency and lead to improved service, but also that
competition will be enhanced as a result.
With respect to gateways, the Board's rules require merger
applicants to present an effective plan to keep open major existing
gateways. The Board has stated that it will impose conditions on any
approved mergers to ensure that the gateways indeed remain open. The
Board's decision also notes that parties may identify gateways that
require specific protection other than those initially identified by
the merger applicants and the Board will determine whether conditions
are necessary to protect any such gateway from closure.
As to the processes available to a shipper to determine the price
of rail services, there should be no change from current practices.
Shippers can go to rail carriers, either to sales representatives or to
a variety of on-line options, to obtain price and service information.
Unless Congress chooses to make a substantive change to the Interstate
Commerce Act, the common carrier obligation still would remain in
force, requiring a rail carrier to quote a rate for its services. In
addition, as at present, shippers would have the option of seeking to
enter into contractual relationships with carriers to meet their rail
service needs.
With respect to price competition, merger rules that preclude any
reduction of competition and require its enhancement should, at a
minimum, assure no diminution of price competition between rail
carriers and between modes.
Last, as to the impact of the new merger rules on Oregon shippers
with respect to pricing, in addition to the pricing constraints imposed
by the marketplace, I believe the major impact is that the Board's new
rules emphasize the importance of customer service resulting from rail
mergers. The Board has made it clear that it will hold carriers to the
promises they make in their merger application and throughout the
review process; if these promises are not fulfilled, the Board will
take appropriate action. In addition, the traditional rate complaint
procedures will continue to be available to shippers at the STB.
Question 2. One of the problems we have in Oregon is congestion on
I-5. One way to reduce that congestion would be to divert some truck
traffic to the railroads. The last two mergers in the west have created
single-line routes along the entire I-5 corridor, but there has not
been a substantial diversion of truck traffic to the railroads. Part of
this must be based on the service problems that everybody involved with
the rail industry has suffered through. As I understand, it takes a
tremendous commitment from management and a huge effort to divert any
truck traffic to the railroads. Doesn't it make sense to concentrate on
the traffic that is available to the railroads, such as the I-5
corridor in the west, and, I understand, the I-81 corridor in the east,
and get that right before diverting the attention and limited resources
of railroad and management to putting together another merger and
resolving the problems and addressing the opportunities of that merger?
Shouldn't the problems of past mergers have been solved and the
promises of past mergers kept before the railroad industry embarks on
another, and apparently final round of mergers? How will we know when
that time has come?
Answer. A key goal of railroads is to enhance the industry's
competitiveness vis-a-vis other transportation modes. While important
opportunities for generating rail traffic clearly exist in areas such
as the I-5 and I-81 corridors, railroads throughout the country seek
opportunities to make rail their customers' first choice as a
transportation service provider. Despite service and productivity
improvements over the years, however, the industry has found it
difficult to divert freight from other transportation modes. For our
part, CN is aggressive in seeking new service opportunities and finding
ways to enhance our service offerings to customers.
With respect to past mergers, it is clearly important that problems
from past mergers be solved and promises kept. However, it is not
necessary--nor is it fair--to preclude rail carriers that have not
suffered merger-related difficulties from pursuing future merger
opportunities, should there be a strong business case and good public
interest rationale for so doing.
As an example, in 1999, the STB approved the CN/IC merger. We have
been successful in integrating our two railroads in an essentially
flawless fashion, with no disruptions to our customers. If the Board
approves our proposed merger with Wisconsin Central, which currently is
under regulatory review at the agency, we have every expectation of
implementing that transaction in a similarly successful fashion. Let me
hasten to add that CN has no plans at this time to merge with another
rail carrier beyond our ongoing transaction with WC. If an appropriate
opportunity should present itself, however, we should be free to pursue
it, subject to the rules established by the Board.
As to when we will know when the time has come for more mergers, I
do not believe it is a certainty that any particular industry
structure--such as two major North American railroads--is inevitable.
Nor is it likely that there will be one defining moment when it will be
clear that future mergers are inevitable. As in the past, each rail
carrier will need to assess opportunities that may present themselves
in the context of the carrier's current financial and operational
condition and competitive status, along with the public interest and
general competitive implications of a potential transaction, before
deciding whether to pursue a merger.
__________
Responses to Written Questions Submitted by Senator McCain
to Claudia L. Howells
1a. National Rail Policy should first establish a framework for
public actions related to or affecting the railroad industry. Others
may have their own thoughts about what should be included, but I offer
the following as a starting point.
1. Railroads are an essential part of the National Transportation
System and should be considered a valued national resource.
2. It is in the public interest to retain private ownership of
railroads and rail property, because it reduces the burden on the
public sector. Public policy should encourage private ownership.
3. Effort should be made to reduce competitive disadvantages
created by direct or indirect subsidizes to other private, competing
commercial modes of transportation.
U.S. DOT's National Freight Policy should be viewed as a document
that addresses all modes and not just those that use the highway
system. Much of what is in that policy statement can be mirrored in a
statement governing rail policy, with the understanding that railroads
can and should move people.
Currently the Federal Government collects 4.3 cents diesel tax. I
am well aware of that the Class I railroads want the tax eliminated,
but it is reasonable to use that revenue to protect the overall
integrity of the rail system. I can understand the railroads being
uneasy about the precedent of creating a Railroad Trust Fund, but it is
entirely unreasonable to suggest that Highway Trust Funds or general
revenues should be used to create a Railroad Fund.
There are some small changes that can be made that would help
create a ``safety net.'' As an example, FEMA funds cannot be used on
privately owned railroads (though they can on publicly owned railroads)
for disaster relief. Particularly for short lines, a flood can destroy
a line and isolate businesses and communities. Making railroads
eligible for FEMA grants would be a small step toward creating a safety
net.
Highway funds should contribute to the maintenance of crossing
signals and surfaces. Again, a small contribution that would relieve
the railroads of a financial burden created by highway users.
1b. First, we need to acknowledge that railroads continue to be
regulated more than any other transportation industry for both service
and safety. This is not necessarily bad. I would not suggest that we
return to the pre-Staggers days of regulation, but because the
railroads are so profoundly essential to the nation's economy they
deserve protection from others, and sometimes protection from each
other and themselves. A good regulator, and I believe that can exist,
should function as referee. Government doesn't need to be coach or
player but things can get very chaotic without a mediating or even
adjudicating body. A specific role I see the STB playing is to
arbitrate disputes between freight railroads and the growing commuter
rail interests. In my opinion, that is no different than arbitrating
disputes between the railroads, which is one reason the ICC was created
in the first place. I also believe that both railroads and shippers
continue to need a referee on rail line abandonments, mergers and
general service issues, to protect both the interests of the customers
and the public.
In my testimony, I don't believe I suggested additional regulation
as much as I did the need for the STB and the FRA to better anticipate
problems rather than react to a crisis, often after the damage has been
done. As Commissioner Morgan has pointed out, the statutes that govern
the STB were developed for a very different railroad industry than the
one we have today. It is a good time to think about a future of the
rail industry and how best to structure regulations to encourage
redevelopment railroads.
1c. On the issue of multiple agencies involved in railroad
business, there needs to be a study of how best to define how each
agency works with the railroads and how the agencies work together.
The various Federal statutes need to be evaluated to determine
where statutory conflicts exist. Presumably, all should have the same
``prime directive,'' something that does not exist now. Suggesting the
restructuring agencies always sends people into panic mode, so I am
reluctant to jump to that as a solution. What I can say is that after
many years working with all three agencies, I am convinced that the
cultures and direction of each agency are profoundly different. STB
needs to be independent and separate, and the FRA and Department of
Justice, both need to participate in STB proceedings. That kind of
public debate is important and constructive.
The FRA needs a clarity of mission, particularly in the policy
area. Where I think we need to take a hard look is which agency, the
FRA or FTA, is more appropriate to oversee and fund commuter rail (not
to be confused with Light Rail.) There is little difference now between
commuter rail and regional intercity passenger rail, yet funding is
with FTA for commuter rail, FRA for ``high speed rail,'' and Amtrak for
everything else. FRA is the safety enforcement agency for all railroad
operations, including freight, passenger and commuter, but excluding
Light Rail systems, which further muddles jurisdictions and missions.
There are other agencies involved as well. As an example, FHWA
funds highway-railroad grade crossing improvement projects. As the FRA
increasingly becomes involved in grade crossing regulations, there is a
disconnect between the only funding source, FHWA, and FRA's regulatory
initiatives. FRA's quiet zone initiative is one example.
All of these agencies are within U.S. DOT, and I hope that the
Secretary will provide encouragement for all of the agencies to work
together and to forge a common understand of how government relates to
the railroad industry.
2a. I agree that the predictions I made are contrary to what the
STB said prior to issuing the moratorium. The moratorium allowed cooler
heads to prevail. I have no doubt that without the moratorium the
mergers would have continued. I think many railroads believe that the
moratorium was illegal, but were relieved when the STB called halt. The
moratorium had exactly the affect intended, and the process in
developing the rules was healthy for the industry and the public.
As to how I arrived at my conclusions, I can only say that I pay
close attention to the railroad industry and to rail shippers. Every
indication I have is that proposals for any more major mergers would
create a firestorm within the shipping community. With perhaps one
exception, the railroads seem to realize that additional mergers will
not make the industry financially better off, and if anything, will
distract from the business of railroading.
2b. The issues I listed as being the next wave facing the railroad
industry included spin-offs of the weaker parts of the mega-Class I's,
consolidation of short line companies and the abandonment of short line
segments.
1. Creating economically weak Class I's could be as catastrophic as
creating huge semi-monopolistic Class I railroads. The STB needs to
hold such transactions to not only a competitive test, but also a test
to insure the financial viability of both systems. I am not saying that
these split-ups will occur, but the financial pressures on the industry
will make it tempting to concentrate resources on the strongest parts
of the system.
2. Consolidation of short line railroads has very little impact on
competition, but these transactions have the potential for being
financially risky and also could put at risk service to our most
economically challenged parts of the state. Like the big railroads,
publicly traded short line holding companies may need to jettison less
productive properties to keep Wall Street happy.
3. Many of the short lines desperately need money for capital
investment. Despite having respectable traffic levels, the heavier cars
are escalating damage to the infrastructure. The first line of defense
is to provide financial assistance to these lines. The STB also needs
the authority to place a higher public interest standard on these
abandonments. Typically, these are handled as Exempt proceedings making
it almost impossible for shippers, communities or states to effectively
protest. Put another way, the current process clearly favors line
abandonments, notwithstanding the public interest.
4. A long time transportation manager once told me that you don't
tell railroads how to run their business, just tell them what you want.
I don't think it's my business or the STB's to tell the railroads how
to deliver service. I do think that we (government) can, as
representatives of shippers and the public, tell the railroads what we
expect in terms of safety and service. As I mentioned earlier, the most
important role the STB can serve is as referee. The STB also needs to
insure a financially stable industry. If we assume that railroads are a
vital national resource then we need to protect that resource.
Furthermore, service problems are almost always an indicator of
safety problems, and vice versa. Unsafe railroads can have a tremendous
impact on communities, as the recent tunnel fire in Baltimore
demonstrates.
The STB has been very clear in saying that it does not want to run
the railroad industry. In fact, if the railroads were providing good
quality service the STB would have very little to do, because the STB
and the ICC before it, have been remarkably restrained in directing the
industry.
5. Policy makers, at all levels of government, seem to have no
problem at all partnering with the airline industry, the trucking
industry and the maritime industries, all of which benefit from
publicly funded infrastructure. On the other hand, investment in the
rail industry, even in Amtrak, seems to send shudders through public
policymakers.
If we can all agree that the railroads are still an essential part
of the transportation system, rather than a ``transportation has-
been'', we can begin to reestablish the public/private partnership that
built the railroads a century ago. As the railroads like to say, they
need to level the playing field. We need to look at how we tax
railroads, how we contribute to them, and how we create competitive
disadvantages relative to other commercial modes. We need to recognize
that moving freight by rail is as important as moving people. As an
example, the contribution of public funds for commuter rail is enormous
compared to public funds for moving freight by rail. Why?
__________
Responses to Written Questions Submitted by Senator McCain
to William Gebo
Question 1. What factors do you and other members of the American
Chemistry Council consider when choosing to locate new facilities? To
what extent does location to a rail line play in such a decision? Does
the proximity to two railroads weigh heavily in such decisions?
Answer. Chemical facilities are located on a number of factors.
These include availability of labor, energy, raw materials, access to
customers, and transportation. Many chemical plants were located in
areas with more than one railroad, but mergers over the past 20 years
have limited the current rail-to-rail competition. The Houston, Texas
area is a good example of this situation.
When looking to build or expand a chemical facility in North
America today rail-to-rail competition is certainly a factor that is
considered.
Question 2. Can you tell us if any of your members have seen
competition cease as a result of a merger--has any facility experienced
a loss of a carrier option where prior to a merger, two carriers
provided service but after a merger, only one carrier provided service?
Have any of your members decided to relocate due to a loss in service?
Answer. Rail mergers definitely diminish competition between
railroads. That problem is masked by the Surface Transportation Board's
overly narrow focus on ``two-to-one'' points. A two-to-one point is a
particular location that is served only two railroads, which happen to
be the two carriers seeking merger approval.
To focus on two-to-one situations, is to overlook many types of
other merger-related reductions in competition that shippers have
experienced. Merged railroads close ``gateways'' to prevent shippers
from choosing alternative routings that may offer favorable rate-and-
service packages. Relatively short ``bottlenecks''--where one of the
merging railroads controlled the traffic between a captive shipper
facility and the nearest interchange with a different railroad--become
longer bottlenecks, leaving shippers with fewer competitive options.
Mergers eliminate independent railroads, which provide shippers with
such benefits as ``geographic competition,'' which in some instances
may mitigate the market power of other railroads. Because STB generally
does not address three-to-two situations, over time many customers lost
competitive carrier options. Post-merger service problems are
exacerbated if only one railroad controls the infrastructure in a
region, because there is no longer head-to-head competition to serve
new industrial facilities.
As stated in my written testimony: ``For several years--coinciding
with the most recent wave of rail mergers--the Council and its member
companies have become increasingly concerned about the lack of direct
head-to-head competition between railroads. For the Council's
membership as a whole, 63 percent of all rail-served chemical plants
are restricted to service by a single railroad. In other words, when it
comes to rail transportation, nearly two-thirds of our industry is
``captive'' and therefore has no opportunity to obtain competitive
price quotations or service options. Member companies that have
competition available at some of their facilities report that their
freight rates are much higher (ranging from 15 percent to 60 percent
more) where the railroad has a monopoly over the shipper's traffic. Nor
is it surprising that the Council's members report that railroads are
less responsive to customer service concerns at locations without rail-
to-rail competition.''
Question 3. What is your view on the new rules? Do you believe the
Board has gone far enough in its merger rule revisions?
Answer. The Council's views on the new rail rules are stated in my
written testimony. We ``asked STB to make competition the centerpiece
of its new merger guidelines. Unfortunately, however, STB declined to
enhance competition when railroads merge. To be sure, STB invited--and
perhaps, to some extent, may be said to have encouraged--railroads to
`talk the talk' about competition and improved customer service when
they file their next round of merger applications. But STB clearly did
not adopt any rules that would require railroads to `walk the walk' by
competing directly with each other at all points on their merged
systems.''
Question 4. What is your view regarding the Board's blanket
exemption for the KCS?
Answer. The Council has no view on STB's decision in Ex Parte No.
582 (Sub No. 1) regarding the Kansas City Southern Railway Company.
__________
Responses to Written Questions Submitted by Senator McCain
to Michael Haverty
Question 1. Why should KCS receive preferential treatment under the
STB's rules? Would you support an exemption of the new rules for any
other Class I carrier?
Answer. Different treatment of rail carriers based upon the size of
the company has been a main stay under the STB's, and the former ICC's,
rules and regulations for over fifty years. Grandfathering KCS under
the ``major'' transaction review of the old rules, as was done by the
Board, is simply a continuation of that policy and recognizes that a
merger with KCS does not involve the same geographic scope and market
power as mergers involving the other Class I carriers.
KCS is the smallest of the Class I railroads with approximately
$564 million dollars of operating revenue in 1999. In comparison to
KCS, the next largest Class I carrier, Canadian Pacific Railway
(``CP'') (including its U.S. subsidiary, Soo Line Railroad), had annual
operating revenues of approximately $2.4 billion dollars. The largest
Class I carrier, the Union Pacific Railroad (``UP''), had operating
revenues of $10 billion dollars in 1999. As a result, the other Class I
carriers are between nearly 18 times and 4 times the size of the KCS.
Indeed, KCS more closely resembles the Wisconsin Central System
(``WC''), which had combined operating revenues around $400 million
dollars in 2000. Earlier this year, the STB agreed to treat a
transaction involving the WC as a ``minor'' transaction, a level of
review far below that of a ``major'' transaction review that KCS would
have to meet if it were merging with another Class I under the proposed
rule. Given KCS's closeness in size to the WC, as compared to the other
much larger Class I railroads, it is hard for us to see why we would be
treated so differently than the WC.
KCS's north-south market reach makes it impossible for any merger
of KCS and another Class I carrier to result in an east-west
transcontinental merger that is the type of merger that the STB was
addressing in the new merger rules. Nor, I believe, would a merger with
KCS and another Class I carrier trigger the final round of
consolidations that could result in only two large carriers serving the
entire United States. Grandfathering KCS under the previous rules,
given the huge size disparity between KCS and the other Class Is, and
given its lack of market power as compared to the much larger Class I
railroads, is entirely consistent with Board precedent.
Throughout the STB's rulemaking, KCS asked that the definition of a
``major'' merger transaction under the new rules be changed so as not
to include carriers with operating revenues under $1 billion dollars.
KCS drafted its proposed rule in such a manner to include other Class I
carriers that were significantly smaller than the big Class I carriers.
For example, WC would have become a Class I carrier on January 1, 2002
if the recently announced acquisition by the Canadian National Railway
had not occurred. KCS's proposal would have included WC in this
proposed treatment. KCS would support different treatment in mergers
for any Class I carrier similar in size to KCS or WC.
Question 2. Am I correct that you wish to retain the waiver
exemption granted to KCS by the Board so that any merger that your
company is involved in would be easier to receive Board approval?
Answer. KCS does agree that it should be grandfathered under the
previous merger rules as imposed in the STB's recent new merger rules.
As stated in response to question one, the differential treatment of
rail mergers based upon the size of the rail carrier is an established
precedent of the STB and the former ICC. KCS does not view the
treatment it has received as necessarily making any KCS merger easier
to receive Board approval.
Under the grandfathering provision, a merger involving KCS will be
thoroughly reviewed and commented on by any interested party under the
same timeframes and standards that were applied to all mergers
involving Class I carriers since 1980, including the most recent
mergers of Burlington Northern/Santa Fe, Union Pacific/Southern
Pacific, Canadian National/Illinois Central and the CSX/Norfolk
Southern/Conrail transaction. In fact, because the Board's rule
requires a KCS merger to be treated as a ``major'' merger, the Board
has actually imposed a higher burden on KCS than what KCS asked for in
the rulemaking. KCS requested consideration as a ``significant''
transaction rather than a ``major'' transaction. Besides, the rule as
written, is a rebuttable presumption and gives other parties the right
to challenge it if KCS were to become involved in a merger with another
Class I carrier.
Question 3. What do you believe is the appropriate revenue
threshold for classification as a Class I? Does the KCS want to be
classified as a Class II and if so, why, and if not, why not?
Answer. On November 14, 2000, WC petitioned the STB to open a
proceeding to consider amending the rail carrier classification
regulations. WC suggested that the threshold for Class I carriers
should be adjusted upward to $500 million dollars. KCS filed in support
of the WC's request to open a proceeding and urged the Board to
reevaluate the threshold classifications between carriers. At that
time, KCS did not comment on the appropriateness of the threshold
suggested by WC. KCS believes that the appropriateness of the threshold
can and should be determined in the context of a proceeding to examine
all of the issues. KCS has suggested a $1 billion revenue threshold for
``major'' transactions in its comments on the proposed new rules. That
may also prove to be an appropriate threshold for classification as a
Class I.
Most important in this process is that KCS is committed to
protecting the interests of its employees, shareholders, and the
service it provides to its shipper. Nevertheless, it is undeniable that
the mega-Class I railroads play a far different role in the national
rail transportation scene than do regional railroads such as KCS, WC,
Montana Rail Link (``MRL''), and Florida East Coast Railway Company
(``FEC''), who all serve a vital but more limited role as regional
carriers.