Recent Merger Attempt Illustrates Need for Railroad Antitrust Reform
Recent efforts by Canadian Pacific Railway Limited (CP) to acquire Norfolk Southern Corporation (NS), and previously CSX Corporation, illustrate the need to enhance Federal oversight of proposed railroad mergers and make the railroads subject to the antitrust laws generally.
“With history as our guide, further industry consolidation more than likely would lead to even less competition among railroads, resulting in increased costs and service glitches, which can reverberate throughout the entire system and the country,” says Ann Warner, Freight Rail Customer Alliance (FRCA) executive director.
The railroad industry has generally been exempt from the Federal antitrust laws for over ninety years. The Staggers Rail Act of 1980substantially deregulated the railroads, and led to great improvement in the health of the industry. However, increased competition among railroads was another goal of the Staggers Act, but has not materialized. In fact, the number U.S. railroads has declined from over forty in 1980 to only seven Class I railroads today.
Moreover, four of these Class I railroads are responsible for transporting 90% of our nation’s traffic where they have essentially divided the country into four regional monopolies. At best, in some regions, one could argue that there is at least a duopoly. [March Madness Bracket]
More than 78% of our nation’s rail stations are served by only one major railroad. Due in large part to geography, rail-dependent shippers have only a 22% chance of having access to just two major rail systems. Click here for FRCA’s National Captive Shipper Map.
On Capitol Hill
FRCA continues to support removing antitrust exemptions that shield freight railroads from the rules of fair competition that govern almost all other U.S. industries, including all other modes of transportation. Consistent with previous years, FRCA is backing the Railroad Antitrust Enforcement Act of 2015, S. 1634, sponsored by Senator Amy Klobuchar (D-MN).
This bill would amend Federal antitrust laws to provide expanded coverage to the railroads and eliminate exemptions from such laws for the industry that are contrary to the public interest. S. 1634 is cosponsored by Senators David Vitter (R-LA), Patrick Leahy (D-VT), and Al Franken (D-MN). It has been referred to the Senate Judiciary Committee. There is no companion bill in the House at this time.
On March 9th, CP’s bid for NS was discussed during a Senate Antitrust, Competition Policy and Consumer Rights Subcommittee hearing entitled “Oversight of the Enforcement of the Antitrust Laws.” In response to a question raised from Ranking Subcommittee Member Klobuchar, William Baer, head of the Department of Justice’s (DOJ) Antitrust Division, expressed concern about the proposed voting trust structure CP wanted to use to acquire NS. Baer said that the DOJ would submit comments to the Surface Transportation Board (STB). DOJ later submitted comments strongly opposing CP’s proposal.
Before the STB
Facing mounting opposition and concern from Members of Congress, Governors and other elected state and local officials, labor, competing railroads, shippers, DOJ, and other affected industry stakeholders, the STB issued a Decision on April 13th, granting CPs motion to withdraw its previously filed Petition for an Expedited Declaratory Order.
A key element of CP’s bid for NS was a proposed voting trust whereby CP would acquire NS’s stock and CP’s (not NS’s) stock would be placed in trust, and CP’s CEO would “resign” from CP and become CEO of NS, even before a merger application was filed. CP filed a Petition for Expedited Declaratory Order so the STB could confirm the viability of its voting trust structure (Finance Docket No. 36004). The petition was designed in major part to put pressure on NS.
On March 23rd, FRCA filed comments to this docket expressing concerns, notably that:
- Issuance of declaratory orders is a discretionary mechanism to terminate controversy or remove uncertainty. A decision by the Board granting this petition would have unlikely accomplished either. CP’s plan would be have been to submit an actual voting trust for approval at a later time.
- CP’s petition also requested expedited action, the need for which would have been avoided if the petitioner had acted more expeditiously itself. Review of the petition would have also diverted attention from other important matters that have been pending for years. In short, entertaining such a controversial petition would not have been the best use of the Board’s limited resources.
- The suggested voting trust structure was problematic because CP’s former CEO would be managing NS before a merger application was even filed, much less granted.
As a part of more stringent merger rules established in 2001, the STB will not approve a merger application involving Class 1 railroads unless the transaction is shown to be in the public interest. CP’s proposal did include some vague promises to increase competition by allowing competitive switching and open gateways. However, these concepts were never formally proposed. As such, FRCA did not have an opportunity to comment, because CP abandoned the merger pursuit after comments were filed opposing the voting trust. These two goals of competitive switching and open gateways have long been supported, and continue to be advocated, by FRCA to help provide reliable access and fair pricing.