> **TESTIMONY OF**
>
> **CHARLES D. NOTTINGHAM**
>
> **CHAIRMAN**
>
> **SURFACE TRANSPORTATION BOARD**
>
> 395 E STREET, SW
>
> WASHINGTON, DC 20423
>
> \(202\) 245-0200
>
> ![](media/image1.png)
>
> BEFORE THE
>
> **U.S. SENATE JUDICIARY COMMITTEE**
>
> **SUBCOMMITTEE ON ANTITRUST, COMPETITITION POLICY**
>
> **AND CONSUMER RIGHTS**
>
> AT A HEARING ENTITLED
>
> **"AN EXAMINATION OF S. 772, THE RAILROAD ANTITRUST ENFORCEMENT ACT"**
>
> **OCTOBER 3, 2007**
>
> **10:30 A.M.**

**Testimony of Charles D. Nottingham**

**Chairman of the Surface Transportation Board before the Senate
Judiciary Committee, Subcommittee on Antitrust, Competition Policy and
Consumer Rights**

**At a Hearing Entitled**

**"An Examination of S. 772, the Railroad Antitrust Enforcement Act"**

**October 3, 2007**

Good Morning Chairman Kohl, Ranking Member Hatch and Members of the
Subcommittee. My name is Charles Nottingham, and I am Chairman of the
Surface Transportation Board (Board or STB). I appreciate the
opportunity to appear before this Subcommittee today to provide the
Board's views on S. 772, the Railroad Antitrust Enforcement Act.

Before providing the Board's views on the proposed legislation, I will
first provide an overview of the Board, its responsibilities with
respect to competition, and the current limited immunities from the
antitrust laws that apply to rail carriers.

**Overview of the Surface Transportation Board**

The STB is charged by statute with resolving railroad rate and service
disputes and reviewing railroad restructuring transactions (including
mergers, line sales, line constructions and line abandonments). The Rail
Transportation Policy in the Board's governing statute addresses the
role of competition; it requires, among other things, that the Board
regulate in such a manner "to allow, to the maximum extent possible,
competition and the demand for services to establish reasonable rates
for transportation by rail," and, while "minimiz\[ing\] the need for
Federal regulatory control over the rail transportation system," acting
so as to "maintain reasonable rates where there is an absence of
effective competition." *See* 49 U.S.C. § 10101.

When Congress passed the Staggers Act in 1980, the Nation's rail system
was in desperate financial straits. It was burdened with unproductive
assets, forced to provide unprofitable services, and hampered by
excessive government regulation. The industry consisted of many
independent systems throughout the Nation, none of them particularly
healthy or efficient. Since that time, the Board and its predecessor,
the Interstate Commerce Commission (ICC), have approved mergers with
competition-protecting conditions -- almost always with the concurrence
of the U.S. Department of Justice (DOJ) -- that reduced the number of
large (or Class I) U.S. railroads to seven. But those seven systems are
far healthier and more efficient than the more numerous carriers that
existed in 1980. Indeed, the railroad industry's financial condition has
steadily improved and today the industry is considered by most
independent analysts to be relatively healthy. In addition, more that
500 smaller "shortline" railroads currently operate in the U.S. and
often enhance competition in the market for freight transportation.

Last month the Board initiated a \$1 million national study on the state
of competition in the rail industry. The study will also assess various
policy issues, including current and near-future capacity constraints in
the industry; how competition and regulation impact capacity investment;
how capacity constraints impact competition; and how competition,
capacity constraints, and other factors affect the quality of service
provided by railroads. The economic consulting firm Christensen
Associates, based in Madison, Wisconsin, has contracted to deliver this
study in the Fall of 2008.

What we already know is that in 2005 (the most recent year for which
adequate data are available), over 71% of the traffic that the railroads
carried moved at rates less than 180% of variable cost and is thus
deemed by statute to have been the result of a competitive market. Of
the remaining 29% of rail traffic that moved at revenue-to-variable cost
ratios above 180% that year, some was traffic that was exempted from
regulation pursuant to 49 U.S.C. § 10502, based on findings that the
particular commodities and services involved have competitive
transportation alternatives available, and some was traffic that moved
under contract and was therefore, by statute, outside of the Board's
jurisdiction. Thus, the rail industry is now governed by a hybrid system
of partial regulation when shippers have competitive options and
extensive economic regulation where such competition is not present.

When enforcing competition policy under the Interstate Commerce Act
(ICA), the Board is guided by, but not limited to, the traditional
antitrust principles in the Sherman and Clayton Acts. Congress has
delegated to the Board discretionary authority to enforce certain
provisions of the Clayton Antitrust Act, including Section 7, which
governs mergers. In practice, the Board reviews acquisitions under its
own statutory standard and merger guidelines, typically with comments
from DOJ in major cases. The main difference between the Board's review
of mergers and those of DOJ or the Federal Trade Commission (FTC) is
that the Board, under the broad public interest standard, is required to
consider other factors in addition to competition, including: the
adequacy of transportation to the public, the effects on other carriers,
rail labor issues, environmental issues, and whether the rail industry
can earn adequate revenues to support capital infrastructure investment.
Thus, the Board's oversight of competition and mergers in the freight
rail industry takes into account both traditional antitrust principles
and special characteristics of the rail industry.

Although the Board does not have the authority to directly enforce the
Sherman Act, many of the *per se* violations of Section 1 of that Act,
including horizontal price-fixing and bid-rigging, would likely also
violate provisions of the ICA, including section 10702's prohibition of
unreasonable practices. The Board has exclusive jurisdiction to enforce
those provision of the ICA, and upon the filing of a complaint has broad
investigative and remedial powers to enforce the provisions against the
railroads.

**Railroad Antitrust Exemptions**

There is a wide-spread misconception that the railroads are not subject
to the antitrust laws. That is not so. For example, in the 1980s, a
massive civil antitrust lawsuit was brought against numerous railroads
by a civil plaintiff.[^1] In that case, a jury returned a \$1 billion
verdict in treble damages against the only railroad that elected not to
settle that litigation, which I understand was, at the time, the largest
civil, antitrust jury verdict in U.S. history. The railroad subsequently
settled the case. Moreover, DOJ can investigate and prosecute the
railroads for civil or criminal sanctions if they violate the Sherman
Act (e.g., price-fixing, market allocation, bid-rigging). In 2005, the
New York Times reported that two large railroads were under
investigation by DOJ for possible violations of the antitrust laws.[^2]
And the railroads can be and have been sued by private parties in
federal district court for violating the Sherman Act.[^3]

Rail carriers do, however, enjoy several limited express statutory and
judicially-created immunities from the antitrust laws. In this regard,
the railroad industry is no different than numerous other industries
that have narrow immunities created by Congress designed to serve a
particular public purpose, such as air transportation (49 U.S.C. §§
41308-09), insurance (15 U.S.C. §§ 1011-15), natural gas (15 U.S.C. §
3364(e)), or labor (15 U.S.C. § 17, 29 U.S.C. §§ 52, 101-15, 151-69).
Recently, the Antitrust Modernization Commission identified more than 30
exemptions created by statutes or the courts.

In brief, relevant exemptions addressed in S. 772 are:

-   **Express immunity for certain transactions approved by the STB.** A
    rail carrier participating in a transaction approved by the STB
    under 49 U.S.C. § 11321 et seq. is exempt from the antitrust laws to
    the extent necessary to carry out the transaction. 49 U.S.C. §
    11321(a); 15 U.S.C. § 18. Such transactions include consolidations,
    mergers, acquisitions, leases, trackage rights, pooling arrangements
    and agreements to divide traffic. This immunity is part of a broader
    set of preemptions in the statute designed to protect the national,
    public interest in ensuring the free flow of interstate commerce by
    preventing parties that do not want to see an increased rail
    presence in their communities from blocking or delaying those
    transactions with hundreds of individual suits in every local
    jurisdiction affected by the transaction.

-   **Express immunity for certain rate-related agreements approved by
    the STB.** Under 49 U.S.C. § 10706, the STB has the authority to
    grant antitrust immunity for certain agreements related to rates or
    charges. For example, the STB has approved an agreement between the
    railroads that establishes rules governing the charges that
    railroads pay each other when using the equipment (typically rail
    cars) of another railroad. The authority is narrow and the Board
    cannot authorize rail carriers to discuss or participate in
    agreements related to single-line rates, or to interline rates of a
    particular movement unless the rail carrier can practicably
    participate in the movement.

-   **Express immunity from injunctive relief in private civil
    actions.** Only the federal government, not private parties, may
    bring suit for injunctive relief against any common carrier subject
    to STB jurisdiction. DOJ has broad powers to pursue injunctive
    relief against the railroads. The purpose of this prohibition is to
    ensure that the national, public interest in protecting the
    efficient operation of the national rail network is not stymied by a
    patchwork of narrow, parochial interests.

-   **Express immunity from the Federal Trade Commission Act.** The FTC
    Act creates no private right of action, and provides that the FTC
    has no jurisdiction over common carriers, including but not limited
    to rail carriers. Thus, the prohibition in Section 5 of the FTC Act
    against "unfair methods of competition" does not apply to the
    railroads. Other common carriers (a category that includes airlines,
    telecommunication firms, and pipelines) are also not regulated by
    the FTC. Some are also regulated by specialized federal agencies
    (such as the Federal Energy Regulatory Commission (FERC)), but most
    common carriers operate with much less federal regulatory oversight
    than the freight railroad industry.

-   **Judicially Created Immunity from Treble Damages.** Historically,
    the railroads have enjoyed immunity from rate-related antitrust
    civil damages suits under the *Keogh* doctrine. Created by the
    courts in 1922, the doctrine is premised on the idea that tariffs
    filed with the ICC should be immune from challenge, except before
    the agency. But because railroads no longer file tariffs, a leading
    antitrust treatise has questioned whether the *Keogh* doctrine still
    applies to the railroads.[^4]

The Board has already provided its initial views on two provisions of S.
772 at the request of the Senate Committee on Commerce, Science and
Transportation and the Subcommittee on Surface Transportation and
Merchant Marine Infrastructure, Safety and Security. I am glad to expand
on those comments below and to provide my views on other parts of the
proposed legislation. I have attached that September 13, 2007 letter to
my written testimony before this Subcommittee.

**Analysis of the Proposed Legislation**

The STB believes that railroads should be governed by and subject to our
Nation's antitrust laws. The core premise underlying antitrust policy --
"that the unrestrained interaction of competitive forces will yield the
best allocation of our economic resources, the lowest prices, the
highest quality and the greatest material progress"[^5]-- is certainly
applicable to the rail industry. The concerns I express today about
S.772 relate not to whether that maxim should apply in greater or
different force to rail carriers. Rather, there are practical problems
that can arise when the antitrust laws are layered atop a regulatory
regime. The ICA shares the same core purpose of promoting free market
competition whenever possible and protecting rail customers from market
power abuses. But we must also take into account the other public policy
issues set forth in the national rail transportation policy (49 U.S.C. §
10101) in providing a single, overarching public interest view in
regulating the complex national rail system.

The STB does not believe that immunities once granted under particular
economic and legal circumstances should remain in place regardless of
changes in the economic and legal environment that occur over time. I
agree with the suggestion by the Antitrust Modernization Commission in
its April 2007 report to Congress and the President that it is critical
to reassess existing antitrust immunities and consider whether the
original justifications for them continue to hold true and whether they
serve a public interest that cannot be furthered by the imposition of
the antitrust laws.

In May of this year, the Board did just that with regard to motor
carrier rate bureaus, using our discretion to terminate antitrust
immunities that had been routinely granted since 1948.[^6] The motor
carrier industry has long operated with collective ratemaking as its
backbone, in which regional rate bureaus develop collective rates and
suggest general rate increases to its members. The collectively set
rates are not the actual market prices charged by the motor carriers,
but served as a baseline for negotiations between individual shippers
and carriers.

In the Board's review proceeding, the motor carrier bureaus urged
continuation of their antitrust immunities based on a set of familiar
arguments: that there could be no harm to consumers because carriers
routinely discount from the collective rates, that the rate bureau
system "simplified" transactions, and that continued Board conditioning
and monitoring of rate bureau agreements was the best way to protect the
public interest. The Board rejected each of these arguments, finding
that the motor carrier industry had become so deregulated and so
competitive as to make the antitrust-immunized collective ratemaking
system obsolete and contrary to free-market principles. Thus, the
original justification for rate bureau immunity, which centered on a
pervasive regulatory environment, no longer made sense when that
regulatory environment disappeared. The Board also concluded, as did the
DOJ and Department of Transportation (DOT), that the bureau system
likely leads to higher rates than might otherwise be charged.

With this decision, the STB ended more than 70 years of antitrust
immunity for motor carrier rate bureaus, demonstrating its commitment to
and respect for the antitrust laws. As Congress now takes a new look at
rail regulation issues, it makes sense to reassess antitrust immunities
as well, including how these long-standing immunities fit in with
today's regulatory environment and whether the public interest would be
better served by repealing or adjusting certain immunities.

The Board's analysis of S. 772 is set forth in three parts. First, I
will go through the sections of the bill that I believe have either no
impact or a positive impact on the STB's regulatory efforts. Second, I
will discuss those parts of the bill that would make effective
integrated economic regulation of the rail industry more difficult and
complicated. Third, I will discuss those parts of the bill that raise
significant questions.

**I. Immunities That Can Be Repealed With A Positive Or Neutral Effect
On The Board's Statutory Responsibilities**

A. [The *Keogh* Doctrine's Limit on Treble Damages]{.underline}

Section 6 of the bill would repeal the *Keogh* doctrine, derived from
the Supreme Court's 1922 decision in *Keogh v. Chicago & N.W.
Railway*.[^7] *Keogh* held that a filed tariff was the only legal rate,
and that the rate could only be adjusted by the regulator. The Court
stated that even a rate that was the result of a conspiracy under the
antitrust laws was not illegal if it had been filed and approved by the
regulatory agency. The Court believed that permitting treble damages
would create "unjust" price discrimination and would give the antitrust
plaintiff (the rail customer) a trade advantage over its competitors.
*Keogh* has been interpreted as an absolute bar to antitrust treble
damages actions that involved rates or tariffs filed with a regulator.

However, since 1995, the railroads are no longer required to file rates
and tariffs with the Board. Moreover, rates are not subject to advance
approval by the Board, and even after-the-fact rate complaints are
limited to those circumstances where the railroad has market dominance
over the movement at issue. Indeed, as discussed above, approximately
90% of all rail traffic falls outside the rate review jurisdiction of
the agency. Simply put, the *Keogh* doctrine has been overtaken by the
partial de-regulation of the freight rail industry that has ended the
practice of filing rates.

There is, however, a concern with the current legislation as it relates
to the *Keogh* doctrine. If the legislation passes in its current form,
it would overrule the *Keogh* doctrine, but *only* as it applies to the
rail industry. The *Keogh* doctrine currently is applied in a wide range
of industries, including pipeline, energy, and water carriers. By
targeting only the rail industry, the federal courts could assume that
Congress has endorsed the continued application of this doctrine in all
other industries where the doctrine may apply. This would mean, for
example, that if water carriers subject to our jurisdiction (who still
file tariffs with the STB) were to collude and then file the agreed-upon
rates with the STB, the carriers would continue to be protected from
treble damages in a civil suit.

B. [49 U.S.C. § 10706 Approvals By The STB]{.underline}

The bill proposes to eliminate the antitrust immunities for agreements
approved by the STB under 49 U.S.C. § 10706. By its own terms, section
10706 is extremely limited and could not be used to approve a
traditional rate-bureau agreement of the sort that used to exist prior
to the Staggers Act. Moreover, the Board may only approve agreements
that will further the Rail Transportation Policy. The Board also has
broad conditioning power to ensure that any approved agreement, as
implemented, furthers national transportation goals. The FTC is required
to periodically assess any anticompetitive impacts of agreements
approved under section 10706. *See* 49 U.S.C. § 10706(e).

In practice, there are very few section 10706 agreements in place today.
In 1998, the Board approved certain rate-related aspects of the Rail
Industry Agreement (RIA) between Class I carriers and short lines
railroads.[^8] Another section 10706 agreement is the Association of
American Railroads Code of Car Hire. Under the Code, the railroads
collectively establish rules governing the charges that railroads pay
each other when using the equipment (typically rail cars) of another
railroad. [^9] The railroads do not, however, collectively establish the
rates for car hire under the Code or any other section 10706 agreement.
In 1996, the Board withdrew approval for carriers to collectively
establish demurrage and storages rates.[^10] The ICC also approved the
agreement of the National Railroad Freight Committee, which has in the
past published the Uniform Freight Classification for its members.

No parties have asked the Board to use its Section 10706 powers in
almost a decade. And the power should not, in any event, be used by
parties as a tool to shield anticompetitive agreements that would
otherwise violate the antitrust laws. Given that this authority is
almost never used, I do not believe that repealing section 10706
antitrust immunity would have a negative effect on the Board's ability
to regulate the industry.

**II. Provisions That Would Hamper the Board's Ability to Regulate the
Industry**

A. [Injunctive Relief in Private Antitrust Cases]{.underline}

The section of the bill that would have the greatest negative impact on
the Board's ability to effectively regulate this Nation's interconnected
rail network is Section 2, which would permit injunctive relief to be
ordered by any of the more than 90 district courts in private civil
actions. I believe that implementation of this section would undermine
the STB's ability to achieve the regulatory objectives set forth by
Congress. Shippers and rail carriers are best served by centralized
oversight and the harmonization of rail related injunctive relief.

As the Board stated in our September 13 letter, the purpose of the
injunction exemption traces back to the original Section 16 of the
Clayton Act of 1914. As explained by the Supreme Court, the "obvious
purpose" of the prohibition on district court injunctions in private
suits was to "preclude any interference" when a carrier was regulated by
the ICC, the STB's predecessor. *See Central Transfer Co. v. Terminal
R.R. Ass'n*, 288 U.S. 469, 475 (1933). Although regulation is now less
burdensome, the rail industry is still subject to substantial economic
regulation. Thus, my concern about section 2 of the bill is threefold:
(1) district courts do not have a broad policy oversight mandate; (2)
there is a great potential for conflicting decisions between courts and
between the STB and courts; and (3) the implementation of rail-related
competition remedies typically requires long-term oversight.

The Board has "broad authority over the operation of railways" and rail
transportation issues.[^11] With that authority comes the responsibility
to consider how regulatory actions affect the rail industry from both a
national, regional and local perspective and to ensure that remedies
resolving individual disputes comport with national rail policy
objectives. The Board's policies in adjudications are guided not just by
the facts presented in the individual matter, but also by rulemaking
records, comprehensive industry studies, public hearings, and a long
history of considering competitive behavior in the rail industry.

District courts simply do not have the same mandate. They are not
responsible for meeting the policy goals of the rail transportation
policy. When deciding an antitrust case, a district court ***must
reject*** the same kind of non-competition related public interest
factors and policy goals that the Board ***must consider*** under the
ICA. *See FTC v. Superior Court Trial Lawyers' Association*, 493 U.S.
411 (1990) (holding that proffered non-economic public interest
justifications were not relevant to the question of whether a restraint
of trade is unlawful under the antitrust laws). Nor do the district
courts possess the institutional expertise to consider how a decision
resolving one case will affect other carriers and shippers on that line,
or on other lines in different parts of the country. Unlike many other
industries, the national rail system -- while comprising hundreds of
individual railroads -- nevertheless operates as a single integrated,
complex, and interdependent network. Operational changes or issues
arising in one location can have significant operational ramifications
hundreds of miles away, including effects on other freight carriers as
well as on Amtrak and commuter lines. The docket of a district court is
necessarily varied and contains hundreds of cases from numerous
industries. Moreover, because the courts of appeals, and not the
district courts, review decisions of the STB pursuant to the Hobbs
Act,[^12] I expect that district courts have even less familiarity with
the rail industry than they otherwise would. District courts do not
conduct generalized studies or rulemaking proceedings that provide
critical information about how the industry is performing or how certain
regulatory policies have affected it.

Allowing district courts to order injunctive relief in individual
private antitrust actions would create a potential for conflicting
decisions from individual courts, as well as for creating a ripple
effect of unforeseeable operational and service problems outside of a
particular court's jurisdictional territory. Many national companies
already find it challenging to comply with the antitrust laws when there
is a "split" in the courts about the legality of certain behavior; but
conflicting decisions in a physically networked industry such as rail
could be devastating. A single rail line may extend hundreds of miles
through many federal judicial districts and circuits, creating a
possibility for different rules and injunctive relief governing
identical behavior on different parts of the line. It is also possible
that competing carriers could be subject to different rules for
identical behavior merely because one has been sued and is subject to a
district court injunction and the other has not. Add to this already
complicated picture the possibility that the Board may also have
existing rules and remedies to fix those same competitive issues and you
quickly have an unworkable system that leads to confusion and additional
expense for shippers and ultimately consumers as carriers pass on the
costs of complying with multiple regulatory and judicial standards.
Another layer of complexity arises from the fact that carriers may need
STB approval to carry out potential district court remedies. For
example, if a district court in a Sherman Act Section 2 essential
facilities case required Carrier A to allow Carrier B to operate over
its lines, such a trackage rights agreement could not be implemented
without Board approval. Likewise, divestitures of rail lines to another
operator would also require Board approval.

Finally, the Board knows from experience that some rail disputes do not
lend themselves to one-time remedies, but rather require continuing
supervision and oversight. The ability and willingness to retain
jurisdiction over a matter for a longer term is a hallmark of regulation
and the Board is well-suited to retain jurisdiction to resolve long-term
network issues as they arise. A case still pending at the Board is a
good example. In mid 2006, the Board authorized one carrier to operate
over the lines of another carrier due to certain service inadequacies.
The parties have been litigating over operating protocols, access,
switches, interchange, and other issues ever since. It is difficult to
see how a district court could monitor and resolve these disputes
without stepping into the role of regulator.

B. [Dual Merger Review]{.underline}

Section 3 of S. 772 would subject rail mergers and acquisitions to both
the approval process and criteria of the Interstate Commerce Act and to
Section 7 of the Clayton Act. Congress considered this question 12 years
ago in enacting the law sunsetting the ICC and establishing the Board.
At that time, Congress decided to retain the merger exemption, keeping
rail merger review with the same agency that regulates the economic
activity of the industry. However, Congress clarified and modified the
contours of that review to encompass features associated with merger
review under the antitrust laws: a broad, national outlook on the
relevant markets to be examined; use of divestiture as a remedial
condition; and the ability to discuss a proposal directly with
interested parties.[^13]

Before I discuss the problems that could arise from a dual review
scheme, I would like to discuss some of the current features of the STB
specialized rail merger review process. The STB's merger review process
is conducted on an open record, with opportunities for comment, evidence
and counter-proposals from all interested parties, including the DOJ,
DOT and other interested federal entities. Because the Board monitors
and supervises the industry full-time, its decisions are suffused with
knowledge about the industry; its customer segments; its past, present
and future competitive landscape; and the impact of the merger on the
Board's other regulatory policies and goals. When deciding whether to
approve, disapprove, or impose conditions on a proposed merger, the
Board's public interest analysis goes beyond competitive concerns and
considers operational/services issues as well as a host of other issues.
This understanding is key to devising remedies that will work in the
real world. And, as I discussed earlier, the Board actively monitors the
results of mergers and can impose post-merger conditions as needed to
address competitive, operational, and environmental issues. For example,
in the Southern Pacific/Union Pacific merger, which I will discuss in
more detail, the merged firm was required to submit quarterly and annual
reports for 5 years to allow the Board to analyze the impact of the
approved transaction.

I am also concerned that dual enforcement could result in some of the
same problems raised by the potential for district court injunctions,
including inconsistent Board conditioning and DOJ consent decree
provisions, differences in the statutory review deadlines and the public
availability of evidence and data. Moreover, proposed merger parties
would incur substantial additional costs to comply with both review
processes.

From a substantive standpoint, possibility for disagreements between the
antitrust regulatory agencies and the Board on merger competitive issues
is not a major concern. Under section 11324(d), the Board must accord
"substantial weight" to any recommendation of DOJ. The Board is also
guided in its competitive impact analysis by cases decided under Section
7 of the Clayton Act and Section 1 under the Sherman Act.

Critics of the current review scheme cite to the much-discussed but rare
cases where the Board declined to follow the DOJ's recommendation that
merger authority be either denied or conditioned on expansive
divestitures. When the Board approved the acquisition of Conrail by CSX
and Norfolk Southern and the division of Conrail's assets between the
two carriers, there was general agreement that the transaction was
largely pro-competitive. I understand that there were only modest
differences of opinion between the Board and DOJ on the number and type
of conditions that should be attached to the Board's approval.

The differences of opinion were more pronounced in the Board's review of
the Union Pacific/Southern Pacific merger, where the Board declined to
follow DOJ's recommendation that the merger either be denied or
conditioned on expansive divestitures. The Board concluded that, on
balance, the merger would be in the public interest, as it would permit
the financially weak Southern Pacific (SP) to become part of a large,
financially healthy rail system that would sustain efficient operations
and invest in the SP's deteriorating infrastructure. The Board also
concluded that a divestiture requirement would be problematic for
ensuring adequate service levels for many of SP's customers, and that a
trackage rights remedy, in combination with continuing Board oversight,
would be sufficient to preserve competition for those shippers that
would otherwise have lost a choice of carriers. Finally, the Board also
disagreed with DOJ about whether the significant efficiency benefits
claimed by the merging parties were likely and merger-specific.

Significant differences between the Board's and DOJ's competition
analysis are rare, however. And in such cases, the DOJ may challenge a
Board merger decision in the courts of appeals.

Finally, a dual merger scheme overlooks the impact of the Board's new
merger rules. These new rules were put into place following the Board's
merger moratorium that forestalled what was widely expected to be the
final round of mergers, which would have resulted in two (or three)
large transcontinental systems.[^14] Under traditional merger analysis
by DOJ or FTC, such vertical integration of two partners with
complementary systems (e.g. a western railroad merging with an eastern
railroad) would not be perceived to carry as significant a risk of
competitive harm as a horizontal merger of two direct competitors (e.g.
two western or two eastern railroads). However, under the new STB rules,
a Class I merger would be in the public interest "only when substantial
and demonstrable gains in important public benefits -- such as improved
service and safety, enhanced competition, and greater economic
efficiency -- outweigh any anticompetitive effects, potential service
disruptions, or other merger related harms."[^15] To offset any harms
that could not be mitigated, merging carriers would need to show how the
proposed merger would enhance competition.[^16]

Although a Class I merger has not been proposed since the Board adopted
the new rules, the Board has in place a comprehensive review scheme that
would address both competition and service issues and the interplay
between them. It is difficult to see how the imposition of Section 7
would enhance the collective ability of the federal government to
protect consumers from potentially anticompetitive and disruptive
transactions.

**III. Provisions That Raise Significant Questions**

A. [Limitation on Primary Jurisdiction]{.underline}

Section 4 of the bill would instruct district courts that they need not
defer to the primary jurisdiction of the STB in antitrust civil actions.
The doctrine of primary jurisdiction provides that a district court may
stay a civil action in order to refer a complex matter to a regulatory
agency for preliminary findings. Courts refer such matters "when the
protection of the integrity of the regulatory scheme dictates
preliminary resort to the agency that administers the scheme."[^17]
Although the factors under which a district court decides to refer a
case differ by circuit, when determining whether to make a referral
under the primary jurisdiction doctrine, courts generally consider
whether there is "(1) the need to resolve an issue that (2) has been
placed by Congress within the jurisdiction of an administrative body
having regulatory authority (3) pursuant to a statute that subjects an
industry or activity to a comprehensive regulatory scheme that (4)
requires expertise or uniformity in administration." *U.S. v. General
Dynamics*, 828 F.2d 1356, 1362-63 (9th Cir. 1987). Once district courts
have preliminary findings from the administrative agency, the findings
may be upheld or rejected.

It is not clear what the effect of section 4 would be on the primary
jurisdiction doctrine, nor do I understand the problem that exists with
the existing primary jurisdiction doctrine that this provision seeks to
remedy. My interpretation is that it would permit district courts to
decline to refer a matter to the Board even if all of the primary
jurisdiction factors were present. If the bill is intended to achieve
this outcome, then I question whether it is prudent to restrict the
judiciary from gathering information and expertise that the court
decided is necessary for the effective administration of justice, or
"when the protection of the integrity of the regulatory scheme" dictates
seeking the guidance of the Board.[^18]

B. [Duplicative Regulation By The FTC]{.underline}

Section 5 of the bill would permit broad regulation of the rail industry
by another regulatory body, the FTC. It would amend the Federal Trade
Commission Act (FTC Act) to permit the FTC to investigate and adjudicate
"unfair methods of competition" by rail carriers. This provision of the
FTC Act, however, is to our understanding largely duplicative of the
federal antitrust laws in the Sherman Act that are already enforced
against the railroads by DOJ.

Moreover, there is also considerable overlap between the FTC's unfair
competition authority under 15 U.S.C. 45 (were it to apply to railroads)
and the Board's unreasonable practices authority under 49 U.S.C. 10702.
Both statutory provisions could be used to assess behavior that reduces
competition, etc. However, the Board considers unreasonable practices
through its broader public interest lens while the FTC's review is
limited to competitive issues. As always, there is the possibility that
the different statutory mandates could lead to different and conflicting
results, particularly with regard to cases that consider the
responsibilities of a monopolist rail carrier.

Competition issues are already subject to regulation by the Board and
DOJ. While I appreciate that many industries are subject to overlapping
economic regulation under two or more regulatory regimes, I am concerned
that introducing a third regulator would make it more difficult to
administer any sort of uniform regulatory approach to the national rail
system.

**CONCLUSION**

The railroads have been subject to the federal antitrust laws since
those laws were first enacted by Congress in 1890. And for the most
part, those competition laws and the economic regulatory scheme that
governs the railroads have co-existed for decades without serious
conflict. Yet Congress has, over time, carefully created a few narrow
immunities or exemptions to the federal antitrust laws. I believe most
of those exemptions were designed to permit the STB to carry out its
statutory obligations to protect the public when competition does not
exist, while also promoting a safe and efficient rail system by adopting
policies that will permit the carrier to earn sufficient returns to make
the critical investment in their infrastructure.

Some of those exemptions may no longer be needed, and the judicially
created *Keogh* doctrine is a fine example of a judicially created
antitrust immunity that has no valid purpose in the current regulatory
environment. This bill is not, however, targeted to remove just those
exemptions that have grown outdated or are no longer useful, but rather
is a sweeping change that removes them all. I am concerned that doing so
will make it more difficult for the STB to perform its regulatory
oversight responsibilities required by Congress under the Interstate
Commerce Act. Moreover, there has not been a pattern of antitrust
complaints or anti-competitive conduct in the railroad industry. And the
bill seems premised on the inaccurate notion that the railroads
presently are broadly immune from antitrust liability, which is not the
case.

The Board understands, and is sensitive to, the concerns of rail
customers about rail rates and service. That is why we have taken, or
are taking, a number of initiatives related to those issues, including:
modifying our major merger rules to promote enhanced competition;
streamlining our major rate case procedures; revising our procedures for
small and medium-sized rate cases to make them more accessible and
affordable; examining our methodology for calculating the rail
industry's cost of capital; examining issues related to "paper
barriers;" and sponsoring a million-dollar, yearlong study of the state
of rail competition throughout the country.

It is doubtful, however, that rail customers would benefit from the
changes proposed in the present legislation; indeed, the legislation may
well make rate and service concerns worse rather than better. The bill
would make efficient, uniform regulation of the rail industry more
difficult by creating duplicative and overlapping regulatory schemes.
Subjecting the rail industry to a patchwork of judicial injunctions at
the behest of localities scattered across the country could cause a
ripple effect of operational problems for freight, Amtrak, and commuter
rail transportation. District courts are not equipped to anticipate,
monitor, or remedy such problems, and those problems could impede the
railroads' ability to provide efficient and timely freight and passenger
rail service and raise the cost of providing those services---costs that
likely would be passed on to rail customers in the form of higher rates.

I appreciate having the opportunity to discuss this legislation with the
Subcommittee today.

[^1]: *See* *In re Burlington N., Inc.*, 822 F.2d 518 (5th Cir. 1987).

[^2]: *See Two Railroads Under Antitrust Investigation for Rates*, [N.Y.
    Times]{.smallcaps}, Feb. 17, 2005.

[^3]: *See* *In re Lower Lake Erie Iron Ore Antitrust Litigation*, 998
    F.2d 1144 (3d Cir. 1993); *Laurel Sand & Gravel v. CSX Transp.*, 924
    F.2d 539 (4th Cir. 1991); *Transkentucky Transp. R.R. v. Louisville
    & Nashville R.R.*, 581 F. Supp. 759 (E.D. Ky. 1983). The Class I
    railroads are currently defendants in dozens of class actions
    alleging that the railroads colluded in establishing fuel surcharge
    programs. *See, e.g.*, *Dust Pro, Inc. et al. v. CSX Transp. et
    al.*, Civ. Action No. 07-2251 (D.N.J., complaint filed May 14,
    2007).

[^4]: *See* [ABA Section of Antitrust Law, Antitrust Law
    Developments]{.smallcaps} at 1402 n.1135 (5th ed. 2002) (questioning
    "future relevance" of *Keogh* after ICCTA).

[^5]: *Northern Pacific Ry. v. U.S*., 356 U.S. 1, 4 (1958).

[^6]: *Motor Carrier Bureaus -- Periodic Review Proceeding,* STB Ex
    Parte No. 656 *et al.* (STB served May 7, 2007) (the decision
    becomes effective January 1, 2008).

[^7]: 260 U.S. 156 (1922)

[^8]: *See Association of American Railroads and American Short Line and
    Regional Railroad Association -- Agreement -- Application Under 49
    U.S.C. 10706*, 3 S.T.B. 910 (1998). The rate-related provisions of
    the RIA are a series of bilateral agreements between a larger
    carrier and the short line with which it interchanges governing
    switch charges and interline rates between those carriers.

[^9]: *Railroad Car Hire Compensation Rulemaking*, 9 I.C.C.2d 80, 9
    I.C.C.2d 582 (1993), 19 I.C.C.2d 090 (1993), *appeal dismissed*
    *Southern Pacific Trans. v. I.C.C.*, 69 F.3d 583 (D.C. Cir. 1995).

[^10]: *Exemption of Demurrage from Regulation*, Ex Parte No. 462 (STB
    served Mar. 29, 1996).

[^11]: *See, e.g.*, *City of Lincoln v. STB*, 414 F.3d 858 (8th Cir.
    2005).

[^12]: 28 U.S.C. §§ 2321(a), 2342.

[^13]: H.R. Conf. Rep. No. 104-422, at 191 (1995).

[^14]: *See* *Western Coal Traffic League v. STB*, 216 F.3d 1168 (D.C.
    Cir. 2000).

[^15]: 49 CFR § 1180.1(c).

[^16]: 49 CFR § 1180.1(c)(2)(iv).

[^17]: *United States v. Philadelphia Nat'l Bank*, 374 U.S. 321, 353
    (1963).

[^18]: *United States v. Philadelphia Nat'l Bank*, 374 U.S. 321, 353
    (1963).