Shippers hope rail merger decision will spark future competition
By Brian Milligan -- Purchasing, 4/20/2000 2:00:00 AM
Chemical manufacturers who use rail service are pushing the Surface Transportation Board to adopt the tenants of a Senate bill as it considers the fate of two railroads.
While railroad officials say they have taken serious steps to make sure their proposed merger would promote competition, members of the Virginia-based Chemical Manufacturers Association say they have not seen anything of note.
"I have not seen that yet. I haven't seen it yet," says Randy Speight, managing director of distribution programs for the association.
The Surface Transportation Board halted for at least 15 months the proposed combination of Burlington Northern Santa Fe Corp. and Canadian National Railway Co. The combination would create the largest railroad system in North America, but the federal board has issued a moratorium on mergers of major railroads. The moratorium will hold until it adopts new rules governing merger proceedings. The board plans to issue new rules in 15 months.
Burlington Northern Santa Fe representatives have asked the board to stay its decision pending a judicial review. They argue that the shipping community will be hurt by the moratorium and not helped by it.
Extended systems
Robert Krebs, chief executive of Burlington Northern Santa Fe, says railroads need to extend their systems so that they can offer better competition to the trucking industry. Meanwhile Patrick Hiatte, a spokesman for Burlington Northern Santa Fe, says the combination of the two railroads would expand a rail line to prospective manufacturers who hope to take advantage of rail service. Hiatte says the railroad views the merger moratorium as "unconstitutional" and unfair. "It's not so much us that is being punished but the shipping community that is being punished," Hiatte says.
"Absolutely it is unconstitutional. We believe we are not being given due process," Hiatte continues. "This is a question the board will have to answer. This kind of blockage is unprecedented."
Dennis Watson, spokesman for the Surface Transportation Board, says the board would not comment on Hiatte's assertions. But the Chemical Manufacturers Association says the board can respond by living up to the stipulations of the Rockefeller bill.
"The devil is in the details," says Speight. "We need to say exactly what the rules are, and our message is that they would enhance competition if their rules were laid out like the Rockefeller bill."
'Unreasonable barriers'
The bill is S. 621, sponsored by Sen. Jay Rockefeller, D-W.Va. The bill is designed to require the board to eliminate "unreasonable barriers" to railroad competition, ensure reasonable rates and remove unnecessary regulatory barriers that impede the ability of rail shippers. Among other things, the bill would:
- Eliminate the requirement that evidence of anti-competitive conduct be produced when the Surface Transportation Board determines the outcome of requests to allow railroad access to rail customer facilities within an area served by the tracks of more than one railroad.
- Repeal the revenue adequacy test. The test is a determination by the board on financial fitness of the railroads, and it creates an obstacle for shippers seeking rate relief from the board.
- Require railroads to submit service performance reports to the Department of Transportation.
Chemical Manufacturers Association members say the Rockefeller bill has the right focus for the problem.
"The question is what can they do in 15 months, and our view is they should inject competition into the rail system," says Mike Heimowitz, spokesman for the association. "They've got to say, As we look at these mergers, how can we enhance competition?'"
"This is another way for the government to change the way the system is working or not working," he continues.
Costly problems
Fred Webber, president and CEO of the CMA, says the wave of rail mergers to date has led to costly service problems for chemical shippers. The chemical industry is particularly dependent on rail service. The industry uses railroads to transport 140 million tons of products, at a cost of $5 billion each year. About two-thirds of chemical plant sites rely on one railroad, making them "captive shippers" that are charged from 15% to 60% more than non-captive shippers.
The chemical industry isn't the only one that depends heavily on railroads. The plastics industry, by comparison, is the largest rail-dependent industry in the country. The industry ships 85% of its raw materials by rail. Up to 75% of its resident manufacturers are captive to one railroad at the point of origin and destination.
Webber says chemical shippers, like their counterparts in the plastics industry, need desperate improvements when it comes to rail transportation.
"Chemical shippers, because of the nature of their products, need consistent and reliable rail transportation that responds to customer needs," Webber says. "We believe deregulating the railroads and introducing competition will take care of the rail industry's infrastructure, capacity, service and other problems."
The moratorium has only angered the railroads, and they do not intend to go down without a fight.
Unfair blame
Hiatte says both Burlington Northern Santa Fe and Canadian National are being unfairly blamed for the troubled mergers of other railroads. Those troubles have been well documented.
Union Pacific suffered drastic problems when it merged with Southern Pacific. In 1997 companies lost millions of dollars a month as rail car shipments were either lost or delayed, customer demand could not be met, and small businesses were forced to close.
More recently, the breakup of Conrail Corp. and the subsequent mergers of its parts with CSX Corp. and Norfolk Southern Corp. have created additional problems. Today, both services suffer from sporadic slow rail speed times and lengthy terminal dwelling times.
But Hiatte says these problems have nothing to do with Burlington Northern Santa Fe and Canadian National.
"The last few rounds of mergers have led to substantial service problems and a lot of the customers who testified before the Surface Transportation Board sited this in their testimony," Hiatte says. "We offer a better service than we ever have before, but Burlington Northern Santa Fe and Canadian National are being punished by this moratorium for the service problems of other railroads."
"What we are seeing is that without having an opportunity to present our application, we are being pre-judged as part of this moratorium," Hiatte continues.
Hiatte says the two railroads feel that the Surface Transportation Board has let them down. He says Burlington Northern Santa Fe went out of its way to prove to the board that major problems would not come about because of the proposed merger.
"We offered service guarantees and to create a service integration plan that would describe in more detail how we proposed to prevent that service interruption," Hiatte says. "We also said we would address the competition issues that the shipper groups have."
And Hiatte says the planned merger would increase rail competition by expanding an existing rail line.
"This expands a single line of service that is available to customers," Hiatte says.
Promoting competition
Hiatte also argues that the merger would promote greater competition among existing railroads. He says other railroads would feel naturally intimidated when they come up against the largest railroad system in North America. Comparison sparks competition, he says.
"It would make the combined railroads more competitive because we would offer better service," Hiatte says. "We hear repeatedly from customers that service is the name of the game. A combination like this will improve that."
But Heimowitz says the Chemical Manufacturers Association has heard this all before. It heard the same arguments when Union Pacific proposed the merger with Southern Pacific and when Conrail Corp.'s parts were to be merged with CSX Corp. and Norfolk Southern.
"Every time these railroads merge they say all these great things are going to happen, and we will get great service," Heimowitz says. "But we are still experiencing today the fact that Norfolk Southern and CSX can't integrate properly. The promises they make they can't keep."
Heimowitz says chemical manufacturers who use the Norfolk Southern and CSX route are still suffering production slowdowns and lost rail cars.
"They [manufacturers] say they are seeing improvements, but they are still frustrated," Heimowitz says. "They just aren't getting the same level of service that they had under Conrail."
"We need better service," Heimowitz continues. "We need to be able to use the railroad for the chemical industry and have consistent transit times and good transit times. We are hoping for a lot better service through competition."
Heimowitz says chemical manufacturers feel so captive to rail service that they are afraid to speak out individually, fearing retaliation. The members depend on the association for protection and power, he says.
"Our members don't like to go on the record with the problems they are having with the railroads because of a fear of retaliation," Heimowitz says. "They are captive and fear speaking out against the railroads."
Hiatte says it's time that this fear was removed. He says Burlington Northern Santa Fe desperately wants the chance to meet with manufacturing groups to see what combinations of service and price they would like to see in a merged railroad. But the moratorium has thrown a bucket of cold water on these talks, he says.
"If this moratorium stands for 15 months, there certainly won't be any capacity to impose conditions on our proposed combination because we couldn't make the application," he says.
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