BEFORE THE 

SURFACE TRANSPORTATION BOARD

__________________________________

STB EX PARTE NO. 582 (SUB-NO. 1)

MAJOR RAIL CONSOLIDATION PROCEDURES

_________________________________

COMMENTS OF THE

U.S. DEPARTMENT OF AGRICULTURE

_________________________________

Michael V. Dunn

Under Secretary

Marketing and Regulatory Programs

U.S. Department of Agriculture

Washington, D.C. 20250

Date: May 16, 2000
2

AUTHORITY AND INTEREST

The Secretary of Agriculture is charged with the responsibility under the Agricultural

Adjustment Act of 1938 and the Agricultural Marketing Act of 1946 to represent the interests of

agricultural producers and shippers in improving transportation services and facilities by, among

other things, initiating and participating in Board proceedings involving rates, charges, tariffs,

practices, and services.

In 1999, American farmers produced more than 16 billion bushels of grain and oilseeds. 

Agricultural shippers pay more than $3.5 billion annually in freight costs to U.S. railroads to

transport agricultural products. Nearly half of all grain produced in the U.S. moves to market by

rail. Nearly 80 percent of all interstate wheat shipments from Plains States are by rail, and rail

accounts for 90 percent of all export traffic from the region. Rail is the dominant mode of

transportation for interstate shipment of wheat, accounting for approximately 80 percent of such

shipments in the Upper Great Plains States. Also, rail transportation accounts for more than 60

percent of the intrastate shipments in the Lower Plains States. These figures demonstrate that an

adequate and efficient rail infrastructure is essential for the marketing of U.S. agricultural

products.

This is particularly true in large areas of the Midwest, where inland waterways are not

nearby and distances to market are great. Nine of the ten top wheat-producing states are more

than 150 miles from barge transportation on the Mississippi River which typically provides the

strongest intermodal competition to railroads on the long distance movement of grain for export. 
3

Among agricultural shippers in the United States, wheat shippers in the Upper and Lower Great

Plains have no cost-effective transportation alternatives to railroads. The wheat produced in these

areas moves long distances to domestic markets for processing and consumption or to coastal

ports for export. Shippers in these regions have little direct access to inland waterway

transportation and the distances involved make truck transportation uneconomical.

Grain farmers are dispersed over the entire country. Unlike many other industries, grain

producers are unable to move their operations to other locations – indeed, their operations are

tied to the land and often to a particular climate. Rail and barge are the only two cost-efficient

transportation modes for hauling bulk commodities long distances. To compete effectively in

increasingly competitive world markets, U.S. farmers must have access to efficient, reliable and

cost-competitive transportation. The rates agricultural shippers pay for rail transportation must

be at a level which promote, not penalize, American competitiveness in world agricultural

markets.

The present U.S. freight transportation system has evolved to move large quantities of

undifferentiated bulk grains and oilseeds over long distances. The efficiency and cost

effectiveness of this system rely upon the ability to standardize grains and oilseeds into just a few

grades or classes. However, the emergence of genetically modified crops – which offer the

potential to produce specialty grains and oilseeds having high-value traits designed for specific

end uses – is resulting in a demand to preserve their identity from the farm to the end user. 

Recent railroad mergers have resulted in railroads having the ability to dictate the terms of rail
4

service – even though those service terms do not meet the present and future needs of many

agricultural shippers. Class I railroads, for example, encourage unit-train movements of grain,

even though the emergence of genetically modified crops will require identity-preserved handling

in much smaller quantities. Another example of Class I railroads dictation of service terms

involves their obligation as common carriers. Despite the retention of the Common Carrier

Obligation in the Interstate Commerce Commission Termination Act of 1995 (ICCTA), many

shippers have lost reliable and timely carload service while others have been required to meet

railroad-determined volume requirements to receive rail service. Other changes have required

substantial investments by agricultural shippers, even though railroads are able to change the

requirements again shortly after those investments have been made. 

BACKGROUND

Subsequent to the public hearings on Public Views on Major Rail Consolidations (Ex

Parte 582), the Surface Transportation Board (Board) concluded that the rail community was not

in a position to undertake further major railroad mergers and that the Board’s current rules were

not adequate for addressing the broad concerns associated with merger proposals that would

likely lead to just two North American transcontinental railroads. Therefore, the Board imposed

a 15-month moratorium on Class I railroad mergers and, in an Advance Notice of Proposed

Rulemaking, sought public comment on modifications to regulations governing major rail

consolidations. The U. S. Department of Agriculture (USDA) supports the Board’s decision to

impose a rail merger moratorium to consider more fully any changes in the regulations governing

major rail mergers that may be needed to protect the public interest. 
5

Concerns that caused the Board to initiate this proceeding include: The possibility that

further major mergers would curtail competition, the possibility of major service disruptions

which could spread throughout the entire rail network, the possibility that rail safety would be

degraded, and the existence of transnational trade and operational issues arising due to the merger

of Canadian and U.S. railroads. 

The Board’s merger regulations should advance its mandate – which is to approve

mergers only to the extent they are consistent with the public interest and promote a safe and

sound rail system that runs smoothly and efficiently to provide the service needed by rail

customers. The Board adopted the current regulations governing major rail consolidations in

1982 and they reflect the circumstances of that time: Financial distress of railroads, deteriorating

railroad infrastructure, excess railroad capacity, deteriorating service levels faced by rail

customers, and the recognition that pervasive railroad regulation unduly limits the ability of

railroad management to adjust to changing circumstances. The present merger regulations

encourage railroad mergers as a means to rationalize excess rail capacity, so long as competition,

access to essential service, and other public interest goals are not compromised. 

In a proceeding which involves the merger or control of at least two Class I railroads, the

Board is currently required to consider: (1) The effect of the proposed transaction on the

adequacy of transportation to the public; (2) the effect on the public interest of including, or

failing to include, other rail carriers in the area involved in the proposed transaction; (3) the total

fixed charges that result from the proposed transaction; (4) the interest of rail carrier employees
1

 U.S.C. § 11324(b).

2

 U.S.C. § 11324(c).

3

 As enumerated in 49 U.S.C. 10101.

6

affected by the proposed transaction; and (5) whether the proposed transaction would have an

adverse effect on competition among rail carriers in the affected region or in the national rail

system.1 

Under current regulations, the Board is required to approve and authorize a transaction

when it finds that the transaction is consistent with the public interest. In approving a transaction,

the Board also may impose conditions governing the transaction, including the divestiture of

parallel tracks or requiring the granting of trackage rights and access to other facilities. Any

trackage rights and related conditions imposed to alleviate anti-competitive effects of the

transaction must provide for operating terms and compensation levels to ensure that such effects

are alleviated.2

The Board is also required to regulate the railroad industry in a manner that is consistent

with the overall rail transportation policy established by Congress.3 Among the fifteen policy

goals which the Board must consider are the need: To minimize Federal regulatory control over

the rail transportation system; to promote a safe and efficient rail transportation system by

allowing rail carriers to earn adequate revenues; to ensure the development and continuation of a

sound rail transportation system with effective competition among rail carriers and with other

modes to meet the needs of the public and the national defense; to foster sound economic
7

conditions in transportation and ensure effective competition and coordination between rail

carriers and other modes; and to prohibit predatory pricing and practices to avoid undue

concentrations of market power and to prohibit unlawful discrimination.

Since many of these rail transportation policy goals conflict with each other – particularly

those seeking adequacy of railroad revenues and those protecting the interest of shippers by

ensuring effective competition – the Board is required to seek a reasonable balance. Due to the

past financial and infrastructure problems of the rail industry, the Board, and the Interstate

Commerce Commission before it, has traditionally placed a greater emphasis upon those rail

transportation policy goals relating to the financial health of the railroad industry rather than on

those policy goals protecting shippers. Under the circumstances of the late 1970s through the

early 1990s, the ICC’s choice to emphasize railroad industry profitability was a reasonable choice. 

However, conditions in the railroad industry have changed greatly since 1980. Instead of

needing to rationalize excess capacity to attain profitability, railroads today are constrained in

many cases by insufficient capacity. Instead of improving profitability by increasing efficiency, the

task for railroads now is to improve profitability by enhancing the service provided to their

customers. Instead of customer service deteriorating because of the inability of railroads to

adequately maintain their physical infrastructure, many agricultural shippers complain that service

has deteriorated due to the lack of adequate inter-railroad (railroad-to-railroad) competition and

service disruptions resulting from railroad mergers. Instead of many Class I railroads facing
8

bankruptcy, Class I railroads today are financially viable and able to attract enough capital to pay

large market premiums for the acquisition of other railroad firms and to make large infrastructure

investments. Instead of effective inter-railroad competition (as well as competition from

competing transportation modes) protecting shippers from the market power of Class I railroads,

many shippers who rely on rail transportation have been left without effective inter-railroad

competition due to recent Class I railroad mergers. The increased geographic reach of the

remaining Class I railroads also has limited the effectiveness of product and geographic

competition in constraining railroad prices.

Since future major rail mergers will almost certainly be end-to-end rather than parallel in

nature, additional efficiencies obtained through the elimination of excess capacity or through

operating efficiencies will tend to be limited. Thus, the public benefits associated with further

major railroad mergers will be increasingly more difficult to achieve. However, the potential costs

of these mergers upon shippers, communities, and other railroads – as well as the probability of

those costs occurring – will become increasing large, particularly to rural communities. 

The effects of additional truck traffic upon highway maintenance costs due to inadequate

rail service is increased due to the fact that the roads in many rural agricultural production regions

were not designed for heavy truck traffic. The damage a loaded semi-truck does to a major rural

collector highway is approximately 13.5 times the damage the same truck causes to a rural

interstate. For a minor rural collector highway, the damage ratio increases to 21 times that done
4 Denver Tolliver, presentation at the Agricultural Transportation Summit, Kansas City, Missouri,

July 27-28, 1998. His calculations were based on data contained in the Highway Cost Allocation Study,

Federal Highway Administration, 1997.

5

 Major railroad consolidations are defined as a control or merger involving two or more Class I

railroads. USDA’s comments in this rulemaking are meant to apply only to the regulations governing

major transactions. 

9

to a rural interstate.4 Since rural regions typically have lower population densities, they are less

able to pay for increased highway maintenance costs or increased road capacities required by

increased truck traffic.

The substantial service disruptions associated with many of the recent railroad

consolidations suggest that the integration of two large railroad firms is a particularly complex

task. These service disruptions may also suggest that returns due to the size of the rail network

operated by a single firm may be decreasing in nature – at least in the integration phase of the

merger if not in the fully implemented merger. It is also possible that Class I railroads are

becoming too large to manage efficiently. 

USDA believes the Board has made a wise decision to consider modifying its regulations

governing major railroad consolidations. Since any modifications to these regulations may result

in major consequences to shippers, rural communities, and the railroad industry, any changes

should be made only after careful consideration of the comments made by all the participants in

this rulemaking. USDA appreciates this opportunity to propose changes to the regulations

governing major rail consolidations.5

 
10

In these comments, USDA addresses those issues most related to its mandate and

expertise, i.e.: downstream effects; safeguarding rail service; promoting and enhancing

competition; short line and regional railroads issues; merger-related public interest benefits; and

cross-border issues.

DOWNSTREAM EFFECTS

USDA supports the Board in its decision to review its “one case at a time” rule. Future

major railroad mergers may be larger than previously attempted, may result in greater railroad

industry concentration, and could have much greater consequences for both the railroad industry

and shippers. Since the railroad industry is a network industry, the Board should develop

regulations for major railroad mergers which place more importance upon the effects the merger

would have upon the entire railroad transportation system rather than upon the merged entity

itself. Although firms in the railroad industry compete with each other, they also rely upon each

other for cooperation and access to the rail network. 

The Burlington Northern-Santa Fe merger was soon followed by the Union PacificSouthern Pacific merger and the division of Conrail between CSX Transportation and Norfolk

Southern. Even prior to this last round of mergers, railroads responded to mergers involving

competing railroads. Since the railroad industry has shown a tendency toward responsive

mergers, further major rail mergers may lead to only two Class I railroads serving the North

American continent. A failure of one of those two railroads would then result in a single railroad

having a monopoly over large regions of the United States, while other regions would suffer the
11

interruption or loss of rail service. As the U.S. Department of Transportation (DOT) suggests,

every major rail consolidation should be examined for both long-term and short-term

consequences on the rail industry itself and on the rail industry’s role in the national transportation

systems of the 21st century. 

USDA proposes that the Board incorporate possible downstream and crossover effects of

all future major railroad mergers upon the railroad industry, other railroad firms, other

transportation modes, shippers, and communities into its revised merger guidelines. These

regulations should place more importance upon the effects the merger would have upon the

entire transportation system rather than upon the merged entity itself. 

SAFEGUARDING RAIL SERVICE

As major railroad consolidations have increased in both size and complexity, the potential

for widespread service problems has increased substantially, the costs to shippers and other

railroads due to the service problems engendered have increased markedly, and the service

problems that are incurred have lasted longer. Due to the huge costs borne by shippers and other

firms in the railroad network in the event of railroad service disruptions, USDA believes the bar

should be raised for all future major railroad consolidations and mergers. Rather than shippers

being required to disprove the benefits of a proposed merger, the railroad firms proposing

consolidation should be required to prove the public benefits of the consolidation and that those

benefits cannot be obtained by means short of merger.
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USDA suggests that the Board institute a rebuttable presumption against future major

railroad mergers unless the merging railroads come up with a plan that mitigates any adverse

consequences of the merger upon shippers and other railroad firms, prove the existence of

merger-related benefits, and demonstrate that those benefits cannot be achieved by other means

short of merger.

To minimize merger-related service disruptions, some have suggested that merging

railroads be required to submit more detailed service integration or implementation plans to the

Board. Although protections need to be built into future mergers to prevent service disruptions,

USDA suspects that increasing the present requirements of the implementation plan may not be

particularly useful. Norfolk Southern Railroad and CSX Transportation presented the Board with

detailed plans for their acquisition of Conrail – applying lessons learned by Union Pacific in its

acquisition of Southern Pacific – and still continue to have substantial merger-related service

disruptions. 

USDA believes the market place (merging railroads) would allocate more efficiently the

cost-effective level of resources used in implementation planning than more rigid government

regulations would – if railroads were required to reimburse shippers and other railroads for losses

incurred by shippers and other railroads due to merger-related service disruptions. This would

require consolidating railroads not only to identify and quantify those losses, but also to identify

an economical means for shippers and other railroads to obtain reimbursement. 
13

USDA suggests that the Board require that railroads involved in major railroad

consolidations indemnify shippers and other railroads (during the merger implementation

period) for costs incurred due to merger-related service interruptions and require binding

arbitration of all claims which the consolidated railroad disputes.

The consolidation of the railroad industry has resulted in the abandonment of rail lines. 

This, combined with increased railroad carloadings and tonnage since 1980, has resulted in the rail

industry operating at or near capacity on many of its main lines. Since many secondary routes

have been abandoned, railroads have much less ability to adjust to periodic operational difficulties

and spikes in demand. This results in a fragile rail system where disruptions in operations can

quickly spread beyond the area causing the problem. In addition, many rail yards are operating at

or beyond capacity and are badly in need of modernization. Newly merged railroads have had to

make significant investments to increase capacity in key corridors and rail yards, as well as

temporary investments in equipment and personnel. 

USDA suggests that the Board continue to consider the ability of the merged firm to

make the necessary infrastructure improvements before approving any major rail consolidation.

PROMOTING AND ENHANCING COMPETITION

Since the passage of the Staggers Rail Act of 1980, the concentration of market power

held by Class I railroads has increased markedly – probably far beyond what the authors of the

Staggers Rail Act anticipated. Large regions of the United States now are served by only one
14

Class I railroad and most other regions are served by only two Class I railroads. Further major

rail mergers could result in there being only two transcontinental North American railroads.

When four railroads compete, collusion (implicit or explicit) requires six two-party

agreements; when three railroads compete, collusion requires only three two-party agreements;

and when only two railroads compete, collusion requires only one two-party agreement. 

Although the United States currently has a Class I railroad duopoly in the East and a Class I

railroad duopoly in the West, consolidation into only two transcontinental railroads will result in

shippers losing the option to choose the connecting carrier. The Board should not ignore the

potential of the two remaining railroads interacting with just a “wink and a nod” to “manage” the

markets. Also, because of prohibitive entry barriers, the contestability of rail transportation

markets – which is key to providing the competition necessary for the success of railroad

deregulation – is extremely limited. 

Due to increased concentration in the Class I rail sector, as well as the greatly improved

financial condition of the railroad industry, the Board should rethink the criteria by which major

rail consolidations are judged so that the public interest will be protected and enhanced. The

Board, in formulating new regulations governing major rail consolidations, should place much

more weight on achieving competition. Rather than just preserving competition, the Board

should use enhancement of competition as a deciding factor. 
15

To USDA, effective competition “to meet the needs of the public” must include effective

inter-railroad competition – the kind that minimizes the number of captive shippers and the need

for regulatory control over rates and services. Effective competition promotes reasonable rates

and encourages honest and efficient management of railroads. Competition is also important

because it is the force which drives process and product innovation. Unfortunately for

agricultural shippers, effective inter-railroad competition has been allowed to disappear in the

Plains States, the very regions in which intermodal competition is not effective. As a result,

agricultural shippers in Montana and North Dakota pay the highest rail rates in the United States,

even though they also receive the worst rail service.

Efficiency benefits, in contrast to benefits which shippers derive from effective

competition, are speculative. Based upon the results of recent mergers, even stockholders may

never realize the promised efficiency benefits of a merger. Also, market power possessed by

railroads can prevent efficiency benefits from being passed through to shippers in the form of

lower prices. Conversely, should the merger result in a loss of efficiency, captive shippers will

bear the increased costs. As USDA has already suggested, the Board should institute a rebuttable

presumption against future major railroad mergers. 

Thus, USDA strongly urges that the Board, before approving any future major railroad

consolidations, require the railroads involved to offer specific proposals to enhance competition

and to mitigate any adverse competitive consequences of the consolidation upon shippers. In
16

addition, the Board should use its broad conditioning powers aggressively to impose any other

conditions necessary to preserve competition.

Due to the geographic configuration of current Class I railroads, and the low probability

of the Board approving any parallel merger that would create a near total rail monopoly over half

of the United States, future Class I railroad mergers will likely be end-to-end mergers. Even

though many economists consider end-to-end mergers to be relatively free of anti-competitive

impacts, they still allow the vertical foreclosure of markets through the denial of competitive

access by the elimination or cancellation of joint-line rates, through routes, reciprocal switching

agreements, as well as the closing of gateways. The possibility of vertical foreclosure, as well as

the impacts of that foreclosure, may increase as the number of Class I railroads decreases to only

two. 

Thus, USDA suggests that the Board, in approving further major railroad mergers,

require the merging railroads to keep all existing rail gateways open. Furthermore, USDA

suggests that the Board require the merging railroads to open those gateways previously closed,

should shippers so request, and to remedy any reductions in route or service options before

approving any merger.

SHORT LINE AND REGIONAL RAILROADS ISSUES 

By the end of 1998, short line and regional railroads operated 49,985 route miles, which is

more than 29 percent of the U.S. rail network, and accounted for nearly 9 percent of all railroad
6 Railroad Facts, 1999 Edition, Association of American Railroads, Washington, D.C.

7 The Importance of Short Line and Regional Railroads to Agricultural and Rural

America, United States Department of Agriculture, forthcoming publication.

17

freight revenues in the U.S.6 In many agricultural states, the importance of these smaller railroads

is even greater – by the end of 1998, they operated 58 percent of the rail network in Wisconsin,

52 percent in South Dakota, 49 percent in Michigan, 43 percent in Iowa, and 42 percent in

Kansas. In addition, short line and regional railroads in the U.S. are also estimated to participate

in the movement of 33 percent of the total carloads, 45 percent of the lumber carloads, 34 percent

of the farm product carloads, 23 percent of the food product carloads, and 19 percent of the

chemical carloads.7

The viability of smaller railroads is vital to the grain gathering process. Since increased

transportation costs are absorbed by the agricultural producer, the loss of these smaller railroads

impacts directly the net income of agricultural producers. Rail and barge are the only costefficient transportation modes for hauling bulky products long distances. Since agricultural

producers must absorb any increase in transportation costs, the preservation of rail transportation

becomes more important as the distance to water transportation increases. Preservation of costcompetitive rural rail service is also important since it affects the ability of U.S. agricultural

producers to compete in world markets.

Thus, USDA strongly urges the Board to carefully analyze the impacts of future major

railroad consolidations upon short line and regional railroads since significant quantities of
18

grain and food products originate or terminate on these smaller railroads and because of the

damages that diversion to truck transportation causes to the rural road infrastructure. 

MERGER-RELATED PUBLIC INTEREST BENEFITS

Because service disruptions and increased rail tariffs have followed recent railroad

mergers, many shippers suspect that these mergers benefit only the railroads at the expense of

shippers. In reality, it appears that some of these mergers may have been as disruptive to the

railroads involved, at least during the implementation stage and a substantial time thereafter, as

they have been for shippers. Thus, it appears that both shippers and shareholders of merging

railroads have lost in many of the recent mergers.

Large railroad mergers have become very complex undertakings because they now involve

the coordination of traffic across thousands of origin-destination pairs, integration of complex

information systems, and often major shifts in traffic patterns. Thus, many of the more recent

mergers have required as much as three years before the railroads and shippers involved began to

benefit from the merger. It is only in the last year or two that the Burlington Northern Santa Fe

has made major strides beyond pre-merger overall customer service levels, even though the

merger occurred in 1995. It was the second half of 1999 before Union Pacific, which absorbed

Southern Pacific in 1996, began to attain pre-merger service levels and profitability – and this only

after severe merger related losses. Moreover, the division of Conrail between Norfolk Southern

Railroad and CSX Transportation in 1997 is still plagued with service disruptions and the

profitability of both railroads has plummeted. The stock prices of both Norfolk Southern and
19

CSX Transportation also have plummeted – in fact the recent market capitalization value of these

firms is now less than what they paid for Conrail.

Since the railroads have an “incentive” to sell the proposed merger, they often tend to use

the most optimistic estimates of the benefits derived by the transaction and minimize those costs

borne by other railroads, communities, and shippers. In selling the proposed mergers to shippers,

railroads promise lower rates and faster service due to single-line service. However, since

railroads set their tariffs according to the value-of-service rather than according to the cost of the

service, the only shippers that ever benefit from lower prices are those that are now able to

convert to rail from other transportation modes. 

Thus, USDA recommends that the Board examine more closely merger applicants’

estimates of the synergies and other public interest benefits when balancing the benefits of

proposed major railroad mergers against societal costs.

CROSS-BORDER ISSUES

The Board should adopt guidelines which consider the effects of different commercial,

regulatory and trade environments on the international beneficiaries of any proposed transnational

railroad merger. For example, because a merger has been proposed which would integrate a U.S.

and a Canadian railroad, differences in the U.S. and Canadian grain merchandising and

transportation environments become directly relevant to U.S. agricultural producers who compete

with Canadian producers in international markets. Even though the Canadian government is
20

considering significant changes to its regulations governing the grain distribution system,

including rates and railcar allocation, the Board should carefully consider that national advantages

may be conferred by any transnational railroad merger. 

Although the U.S. grain merchandising system is relatively free of government

involvement, a hallmark of the Canadian grain merchandising system is the centralized,

government-sponsored state trading enterprise (the Canadian Wheat Board). The Canadian rail

regulatory regime is also dramatically different than in the United States, especially as it affects

export wheat movements. Canadian export wheat rates are much less than U.S. rail rates for

export grain movements over comparable distances, because the Canadian rail rates are capped at

a certain percentage above cost. U.S. shippers are charged commercial rates that are set at what

the market will bear. Therefore, U.S. grain cannot be shipped at those much lower Canadian rail

rates.

Overall, while the U.S. grain merchandising and transportation systems are relatively open

to Canadian grain, U.S. grain companies do not have the same access to Canada. Moreover, U.S.

grain sellers believe that this gives Canadian grain producers an advantage over U.S. grain

producers, even in the United States. Consequently, when considering the approval of proposed

transnational railroad mergers, USDA requests that the Board carefully review the differences in

the commercial, regulatory and trade environments which exist between countries and incorporate

conditions so that shippers in both countries are assured of equal access to rail transportation.
21

Because future North American rail mergers will likely involve the combination of U.S.

and Canadian firms, USDA urges the Board to consider the effects that different commercial

and regulatory regimes between the two countries can have upon cross-border trade and the

potential international beneficiaries of a proposed transnational rail merger. Thus, the Board

should condition any transnational railroad merger so that shippers in both countries are

assured of equal or the same access to rail transportation.

Since a transnational railroad merger could result in a newly formed railroad being

controlled by Canadian interests, USDA is concerned that railcar supply between the two

countries could be unfairly administered to the disadvantage U.S. producers and shippers. This is

particularly true since railcar allocation in Canada is controlled by the Canadian Wheat Board

rather than by the railroad. Also, USDA is concerned that the profits earned on U.S. rail lines

could be invested to improve Canadian rail lines rather than improving U.S. rail lines. 

Therefore, USDA urges the Board, when considering major transnational rail mergers or

combinations, to analyze the effect of a foreign government’s jurisdiction on the rail operations

of the resulting railroad and the influence of state trading enterprises [the Canadian Wheat

Board], particularly on the distribution of railcar capacity among U.S. and Canadian

agricultural shippers which could have impacts in world markets. The Board needs to condition

transnational mergers to ensure equal and fair treatment for shippers in both countries.
8 As required by both the regulations governing consolidation, U.S.C. § 11324 and the rail

transportation policy goals enumerated in 49 U.S.C. § 10101.

22

Conclusion

USDA believes that the current regulations governing major railroad consolidations are

inadequate to protect agricultural producers, shippers, rural communities, and the public interest

should any of the Class I railroads consolidate further. To preserve inter-railroad competition and

the adequacy of rail transportation to the public, as required by the Board’s mandate,8 the Board

should revise those regulations to reflect changes in the railroad industry that have occurred since

1982. In addition, the current regulations do not provide adequately for the possible merger of

U.S. and Canadian railroads. Therefore, current regulations need to be amended to reflect crossborder trade and service availability issues. For these reasons, USDA supports the Board in their

decision to review its regulations governing major rail consolidations. 

Recent major rail consolidations have resulted in significant service disruptions which have

created particular hardships on agricultural producers, shippers, and communities. These service

disruptions suggest that the complexity of railroad consolidation increases substantially with the

size of the firms involved. Not only is agriculture dependent upon cost-efficient rail service, but

agricultural shippers have received discriminatory service from Class I railroads. An example of

this occurred during the Western rail crisis, when over 100 million bushels of grain were stored on

the ground due to the railroads’ inability to provide service and due to service discrimination. 
23

The possible consolidation of Class I railroads into only two North American

transcontinental railroads would result in less inter-railroad competition and a reduction in routing

choices for shippers. Although the United States currently has a Class I railroad duopoly in the

East and a Class I railroad duopoly in the West, consolidation into only two transcontinental

railroads will result in shippers losing the option to choose the connecting carrier. Furthermore,

past railroad consolidations have often resulted in Class I railroads refusing to quote tariffs for

shorter hauls, denying service to carload shippers, closing gateways, denying competitive access,

and canceling joint-line rates. The net result of these Class I railroad policies has been increased

transportation costs to agricultural shippers which decrease their access to world markets. Thus,

when approving major railroad consolidations, the Board should act to enhance competition, not

just preserve it.

Due to the erosion of inter-railroad competition and deficiencies in present rail service,

USDA believes that large railroads should be required to improve competition and service to their

existing shippers before they are allowed to become larger. Due to the occurrence of service

disruptions during most of the more recent Class I railroad mergers and anti-competitive actions

of the Class I railroads, USDA requests that the Board require significant protections for shippers

and rural communities before approving future major railroad consolidations. 

USDA has made the following ten recommendations, which are designed to protect the

interests of agricultural producers, shippers, and rural communities: 
24

• The Board should incorporate possible downstream and crossover effects of all future

major railroad mergers into its revised merger guidelines, placing more importance upon

the effects the merger would have upon the entire transportation system rather than upon

the merged entity itself. 

• The Board should institute a rebuttable presumption against future major railroad mergers

unless the merging railroads come up with a plan that mitigates any adverse consequences

of the merger upon shippers and other railroad firms, prove the existence of mergerrelated benefits, and demonstrate that those benefits cannot be achieved by other means

short of merger.

• The Board should require that railroads involved in major railroad consolidations

indemnify shippers and other railroads (during the merger implementation period) for

costs incurred due to merger-related service interruptions and require binding arbitration

of all claims which the consolidated railroad disputes.

• The Board should continue to consider the ability of the merged firm to make the

necessary infrastructure improvements before approving any major rail consolidation.

• The Board should require the railroads involved to offer specific proposals to enhance

competition and to mitigate any adverse competitive consequences of the consolidation

upon shippers. In addition, the Board should use its broad conditioning powers

aggressively to impose any other conditions necessary to preserve competition.

• The Board should require the merging railroads to keep all existing rail gateways open, to

open those gateways previously closed, and to remedy any reductions in route or service

options.
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• The Board should carefully analyze the impacts of future major railroad consolidations

upon short line and regional railroads.

• The Board should examine more closely merger applicants’ estimates of the synergies and

other public interest benefits when balancing the benefits of proposed major railroad

mergers against societal costs.

• The Board should consider the effects that different commercial and regulatory regimes

can have upon cross-border trade and condition any transnational railroad merger so that

shippers in both countries are assured of equal or the same access to rail transportation.

• The Board should analyze the effect of a foreign government’s jurisdiction on the rail

operations of the resulting railroad and the influence of state trading enterprises [the

Canadian Wheat Board], particularly on the distribution of railcar capacity among U.S.

and Canadian agricultural shippers which could have impacts in world markets. The

Board needs to condition transnational mergers to ensure equal and fair treatment for

shippers in both countries.

USDA hopes that the Board will carefully consider these recommendations when

developing its new regulations governing major railroad consolidations. USDA applauds the

Board’s initiative in this extremely important rulemaking and appreciates this opportunity to

participate.
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Respectfully submitted,

________________________

Michael V. Dunn

Under Secretary

Marketing and Regulatory Programs

U.S. Department of Agriculture

Washington, D.C. 20250