With Fewer Options, Railroads Rethink Mergers
JoC ONLINE
Lawrence H. KaufmanThere was little new, except for an announcement that major railroads and rail labor unions had reached an agreement to end the contentious "cramdown" issue, in which railroads have been able to use the STB to abrogate long-standing labor agreements on the grounds that to do so was necessary to achieve the efficiencies of mergers approved by the agency.
Shipper witnesses reiterated what they had said in several rounds of written presentations proposing new merger rules, commenting on the agency's draft rules and rebutting the filings of others. Carrier witnesses did the same.
So why have the hearing if there was nothing new? A cynic might say it was a classic STB move to build a record that will stand up in the Court of Appeals against the probable, if not inevitable, challenge to the final rules. Board Chairman Linda J. Morgan has proved herself very adept in the past at conducting colloquy with witnesses that somehow always ends up with the witnesses saying what she wants them to say.
Courts hearing challenges to STB decisions rarely deal with the substance of the issue, but with the procedural issues of whether or not the agency has provided due process to those involved. During the 1996 one-day hearing on the Union Pacific acquisition of Southern Pacific, a railroad lawyer observed that Morgan was "creating a bulletproof record."
A prominent shipper lawyer who cannot be identified for obvious reasons, commented: "I think it's not so much that she is setting up for a court challenge, though that may be part of it. I think it's for Congress, showing how hard she's working, giving (the parties) a forum, explaining why and how (Congress) needs her to do its dirty work, etc.
"On the court front, she's given the public five rounds of comments. Most of us couldn't think of much new to say. So, although she could get useful tidbits out of unsuspecting people like shippers, ports, etc., so long as she adopts 'feel good' policies about protecting competition, service, etc. - with the devil in the detail that few if any courts will comprehend or consider ripe for adjudication in the abstract - she has little fear from the courts on these rules, I rather suspect."
Although their written filings had made their positions clear, it was interesting to see how the so-called Gang of Four major railroads that caused the entire merger rule making process to begin has become the Gang of One.
Remember, this exercise began when Burlington Northern Santa Fe and Canadian National announced their intention in December 1999 to combine, forming North America's largest rail system. Union Pacific, Canadian Pacific, CSX and Norfolk Southern unleashed an offensive that resulted in the STB imposing a 15-month moratorium on all mergers involving Class 1 railroads while the agency developed the new merger rules it suddenly decided were necessary. The CN-BNSF deal collapsed last summer and it is highly unlikely to be resurrected whatever new rules are adopted
.Proving the adage that there are no permanent friends, there are no permanent enemies, only permanent interests, the four-railroad coalition has shifted.
UP continues to oppose more rail mergers. Its position is consistent and makes good
sense from its perspective. As the largest railroad in North America, it is unlikely that UP would be able to take the initiative and start the next merger round.For 20 years, UP has responded to other railroads' merger proposals and argued successfully before regulators that it only wants the right to compete against rivals that are using mergers to seize competitive advantage. The argument worked in the UP-Missouri Pacific- Western Pacific case; it worked in the Chicago & North Western acquisition, and it worked in the Southern Pacific case.
UP is in great shape. Its franchise is virtually impregnable, particularly the chemical traffic from the Texas Gulf Coast, and the status quo serves it just fine. If it were to seek a merger partner, it most likely would be with one of the two eastern systems, and it interchanges nearly equal amounts of traffic with each, making a strategic merger of little value to it.
For the other one-time allies, however, the situation is considerably different. Mergers may not look as dreadful to them today as the BNSF/CN proposal did a year ago.
Canadian Pacific is being spun off from its corporate parent Canadian Pacific Ltd. and may want to keep as many options open as possible.
Norfolk Southern and CSX continue to struggle financially with the aftermath of their joint $10 billion purchase of Conrail and the ensuing service problems resulting from the dismemberment and division of that railroad. A transcontinental merger with a financially stronger carrier might be the solution to otherwise intractable problems.
Railroads don't believe the STB should be forcing them to demonstrate that a merger proposal will enhance competition. They want the agency to retain its current merger standard that public benefits outweigh perceived costs, and that mergers continue to be judged on a case-by-case basis.
The STB hearing gave shippers an opportunity to reiterate their calls for rules that would force railroads to enhance, rather than merely preserve, existing competition. The draft rules say it will do that, so we had the unusual sight of shippers applauding the STB.
Shippers complain that past mergers were predicated only on making the companies stronger and more competitive with other modes and that perhaps that might provide some benefits to customers. They want merging railroads to demonstrate benefits to their customers, something not a single shipper must do when they engage in their own mergers and acquisitions.
Here, I am reminded once again of the aphorism: there are a lot of socialists out there wearing capitalist suits.