Shippers unimpressed by rail rules

By Staff -- Purchasing, 2/8/2001

The Surface Transportation Board says it may have the answer on how to inject a little much-needed competition into the rail freight industry. But some of the groups that represent the shippers who use this mode remain unimpressed today.

They say the STB's efforts, written into a proposed rulemaking, are vague and unclear. They say they will only lead to more problems in the future.

"Right now, it's just so many words," says Ed Emmett, president of the National Industrial Transportation League. The league represents manufacturers and other shippers who purchase transportation. "It's a broad sort of generalization that just talks about competition."

The members of the board, a judicial body that oversees surface transportation issues, stay by the rules. They say the are just what the industry needs to foster competition and clear up railroad-related problems.

"I think the rules do provide guidance," says Linda Morgan, chairman of the board.

"Obviously, these are a new set of rules," Morgan continues. "We are trying new things, and we can't anticipate every case that comes in the door. We can't make every word specific enough to handle every case."

Railroads play an increasingly important roll in the shipping of high-tech goods and supplies. Railroad connections pick up containerized shipments of high-tech supplies from ocean cargo carriers coming out of Asian countries. Railroads are attempting to gel intermodal shipping operations into 24 hour, seven days per week schedules, allowing for an increase in these shipments.

Many manufacturers who purchase railroad service say rail mergers have led to significant service problems. Since 1995 alone, Burlington Northern acquired Santa Fe, Union Pacific acquired Southern Pacific, Norfolk Southern and CSX each acquired a portion of Conrail, and Canadian National acquired Illinois Central. Mergers of complex railroad operations led to incompatible computer systems, bottlenecked railroads and lost freight cars.

"Every time railroads merge, there is horrible service for two years," says Mike Heimowitz, spokesman for the American Chemistry Council. Chemical manufacturers are heavily dependent on rail service.

"You end up with service disasters," Heimowitz says.

And those weren't the only problems. With each merger, shippers had fewer places to turn to for service, and many believe that fewer rail carriers means less-competitive rates and an overall decline in service. Every merger brought less competition and lower chances for better rates. Shippers say they suffered from "merger fatigue."

Things came to a head when Canadian National Railway Co. attempted to merge with Burlington-Northern Santa Fe Railway Co. in 2000. The combination would have created the largest railroad system in North America, but the federal board issued a moratorium on mergers of major railroads. The moratorium will hold until the board adopts new rules governing merger proceedings. Meanwhile, the two railroads called off their plans for the merger.

Now the board has issued a Notice of Proposed Rulemaking. The notice proposes new rules for major railroad mergers and consolidations that involve two or more Class I railroads. These are railroads that each have annual revenues of at least $250 million. The board took comments on the proposed rules through January and will vote on them by June 11, 2001.

Morgan says the new rules would make it significantly harder for railroads to demonstrate that their proposed merger is in the public interest. In particular, they would require the railroads to show that the merger would enhance competition. They would also require much more accountability with respect to claimed merger benefits and service.

While it proposed these rules, the board stated that it does not intend to prevent transactions that would genuinely be in the public interest. The board would likewise look favorably on private-sector initiatives.

Central to the board's proposal is a new policy statement. Together, with the proposed rules, the STB says this represents a major shift in basis from the pro-merger approach that has guided agency merger decisions for the past 20 years.

Morgan says the proposed rules require applicants to bear a heavier burden when they try to demonstrate that a railroad merger proposal is in the public interest.

"The focus is on enhanced competition," says Morgan. "The new rules focus on improved service as a benefit that we will be looking at."

As they stand now, the rules would:

• Require applicants to propose specific remedies to keep open major existing gateways, retain build-out and build-in options (extend railroads to or from manufacturers), and preserve the opportunity of shippers in the so-called bottleneck situation to obtain a contract rate for one segment of a movement in order to separately challenge a rate for the remainder of the movement,

• Force the board to carefully scrutinize future claims of merger benefits and associated timeframes to ensure that they are well documented and reasonable projections,

• Force the board to assess the likely outcome of any major proposal on the future structure of the industry through an examination of a proposed merger's downstream effects, and

• Require merger applicants to cooperate with the Federal Railroad Administration concerning safe implementation of transactions, and require them to show that any applications approved by the board are consistent with the North American Free Trade Agreement.

Morgan says the beauty of these rules is that they make it clear to railroads that they want contingency plans created ahead of time. These would thwart problems brought on by mergers, she says.

"We are asking for contingency plans in the event that problems do arise," Morgan says. "We want contingency plans right up front that address those problems."

Some railroads say all the post-merger fallout has encouraged them to take matters into their own hands by taking steps to ease shippers' complaints. Both Burlington Northern Santa Fe and Canadian National, for example, recently announced a service agreement that they say will create a seamless bimodal network linking Montreal, Toronto and the United States Pacific Southwest.

"In preparing to make that [merger], we came across things that we can do to improve customer service," explains Pat Hiatte, a spokesman for Burlington Northern Santa Fe. "Even though we are facing this moratorium, we felt we should go ahead and do these things in the interest of improving service to our customers."

But shippers are concerned that all of these steps are not enough.

This isn't to say that they are unhappy with the board's efforts. Representatives from some shipper organizations say they are glad that the board is at least focusing on this issue.

In joint reply comments to the STB, the American Chemistry Council and the American Plastics Council state that the rules' lack of specificity will leave the proposed rulemaking weak and ineffective. Both councils say the board needs to revise the rulemaking and give it more teeth.

"While the board's policy would favor mergers only if they both preserve and enhance competition, that policy can be implemented effectively only by promulgating in advance a set of consistent and predictable standards," says the joint statement.

Perhaps most telling, the joint council statement observes that the proposed rulemaking lacks any policy changes that could in effect solve bottleneck problems or increase terminal efficiency.

"Under the proposed rule, there would be no change to bottleneck policy, no change to the rules governing terminal or line access, and no material change regarding the imposition of conditions to preserve gateways," the statement reads. "Instead, there would be a weighing by the board of the pros and cons of a merger, including the competitive pros and cons, and a decision based upon that inevitably subjective weighing."

Both councils conclude in their joint statement that the jurisdiction for rail merger review should be shifted to the United States Department of Justice. The councils argue that the department has detailed standards for merger review and has extensive experience reviewing mergers in both regulated and unregulated industries.

"There is no reason that the rail industry should continue to be singled out for special treatment notwithstanding that it already resembles the classic heavily consolidated industries that provoked the enactment of the original antitrust laws-monolithic, unresponsive to the customer, and too often offering take-it-or-leave-it terms," the statement says.

Despite this feedback, Heimowitz says the council is pleased that the board is acknowledging that there is a need for enhanced competition in this industry. But it still remains "deeply concerned" about how the final rules will be implemented. Heimowitz says the industry must avoid the service disasters that shippers experienced in past rail mergers.

"We are pleased that they acknowledge there is a need for preserving competition," says Heimowitz. "We are pleased with that part."

But Heimowitz says the vagueness issue will continue to be a primary concern. There are too many ways to interpret them, he says.

"The question is, how are they going to implement it?" Heimowitz asks. "It's not clear in how the proposal is written."

Heimowitz says he does not understand how these proposed rules would foster competition. He says the board should rework them with a better explanation.

"They need to explain in the application how they will deal with competitive issues," he says. "It's not clear how they can implement that, make it workable. I think the way this is written, it is very open to interpretation."

And the ruling has some bristling all over again about the moratorium on rail mergers.

NIT League has taken a firm stance against the proposed rulemaking. In November 2000, it asked the board to reconsider its approach.

The league believes that the scope of the rulemaking, which is focused purely on merger policy, would create a serious disparity between the competitive conditions facing merging as compared to non-merging carriers, to the detriment of both merging carriers and the shipping public. The league further believes that the board must put into place procedures that would work to insure greater rail-to-rail competition for both merging and non-merging carriers, at a minimum as part of the next major merger proceeding, if not sooner. A change like this would create a level competitive playing field for both merging and non-merging carriers and the shippers served by them.

The league also believes that the board's proposed rules can be improved in a number of other important areas, including its proposals on the definition and treatment of major gateways; the content of service assurance plans; the treatment of the acquisition premium in rail mergers and its proposals for post-merger operational monitoring.

Emmett says he was disappointed by the moratorium decision, saying it cut the first real railroad competition in many years off at the knees. He notes how other class 1 railroads protested the proposed merger of Burlington Northern Santa Fe and Canadian National. They protested it, he says, because they did not want to see such impressive competition.

"We had two railroads for the first time talking about providing competition to other railroads," says Emmett. "It terrified the other railroads. That's why the others tried to put a stop to it."

Emmett says the board should return to the drawing board and revise the rules.

"They will never be able to write a regulation that says specifically how every merger will be treated," Emmett says.

But Morgan says the shippers are missing the point. She says it would be impossible for the board to make a set of rules that would specifically address every issue brought on by proposed railroad mergers.

"We are providing guidance, but not making the list exclusive or inclusive," says Morgan.

Morgan also stands by the board's decision to call a moratorium on railroad mergers. She says the board made its decision after sitting through four days of hearings and listening to manufacturers and railroads alike complain about the problems brought on by mergers, so-called "merger fatigue." Further mergers in the immediate future, she says, would have "created further instability in what is already a destabilized rail sector."

Heimowitz agrees with her assessment of the industry. But he says the proposed rules have got to be revised and made more specific. As they stand now, he says, they will do little to bring stability to the industry any time soon.

Emmett agrees. He says generally worded rules will not do shippers any good in the long run.

"Yeah, on the surface it looks good," Emmett continues. "But it is so broad and general that it really depends on what types of decisions they make. The whole thing doesn't come down to any specifics."