Board's cenditions on prior railroad merg

rs nave failed to preserve competition. Also, in its
statement above. AAR acknowledges that the statute “authorizes the Board to impose conditions
to remedy any adverse eifects of a merger” (emphasis added). USDA believes the AAR is in
error when it states that the proposed rules would fundamentelly charge the Board's role.

Indeed, USDA asserts chat the Board would be complying with what its statutory mandate, and
the proposed rules merely enhance the Board's interpretation of its statutory authority, and de net
fundamentally alter the Board’s role or overreach the Board's statutory authority.

As other experts have noted in their observations cf both the transpertation industries and
the government bodies charged w:th ensuring their competitive behavior, at stake are billions of
dollars in economic benctits as well as perhaps the very success of rail regulatory reform. The
implications are clear: rail intramodal competition must be encouraged in every relevant area. . .
Competition should be preserved and promoted now. as undoing misguided actions will not be
easy. Itis important te recognize that deregulation dues not authorize the government lo
abdicate its antitrust responsibility and to fail te take actions to preserve competition. Vo the
extent that mergers can cnable railroads to improve service and reduce costs without concomitant
anti-competitive effects, they should be encouraged. It is the [government's] responsibility to
scrutinize carefully pocential anti-competitive effects from beth parallel and end-to-end mergers. !

AAR also implies that the Beard should not use its merger review authority to restructure
railroad markets by mandating conditions that are unrelated to any harms caused by a proposed

merger (AAR, p.2). AAR states that imposing additional conditions on a transaction “that would

"Winston. . Corsi, C. Grimm and C. Evans, The Economic &ffects of Surface Freight
Deregniation, Brookings, Washington, D. 199¢: and Grimm, C.. “Promoting Competition in the
Railroad Indust-y: A public Policy Analysis,” Proceedings of the Transportation Research Forum, 1984

5


Due to the magnitude of economic harm furcher major railroad mergers potentially can
inflict on shippers, communities, and other affected parties, USDA strongly opposes any decrease
in the review period of proposed mergers. Shippers that have expericnced arbitrarily imposed
Class I railroad limitations upon routing and market access have only recently begun to realize
the anti-competitive effects of end-to-end mergers. Thus. rai: shippers need the current length of
time provided in tne merger review period to adequately assess the effect of the proposed mezger
upon their operations, particularly since the competitive effects of end-to-end mergers are mere
difficult to quantify than those effects due to parallel mergers.

A shorter review period would not allow the Board to adequately ana'yze the public
benefits and costs of a rail merger — particularly with the Board’s current Limited resources. In
addition, recent railroad mergers have shifted to the shippers many o? the costs of service
disruptions and market premiums that should be borne by the merging railroads. ‘I’nus, a shorter
review period could fail to adequately protect shippe:s’ interests.

BNSF also states that investors cannot tolerate uncertainty or delay. creating a downward
pressure cn railroad stocks. (JSDA contends that the market price of railroac stocks is being
driven down because investors lack confidence :n the value of the proposed merger -- if investors
perccive value in the merger. the market price of the stock would increase. More likely, past
service disruptions and the associated costs to the merging railroads. have left the investment

community skeptical of the profitability of future large railroad mergers.

10


mitiyate the loss of geographic competition. Additionally, DOT believes that conditions that
enhance competition, if applied judiciously, will help to ensure the national rail system's
sustainability” (DOT, p. 3}. DOT further states,"Offering greater competitive options to
shippers generally has merit, but there should be a recognition of the need to first attempt to

raatch awards of competitive options to the specific shippers on whor the transaction otherwise

would impose losses of such options” (DOT, p.4).

USDA agrces with DOT that mandated open access at terminals wil: help mitigate the
effects of the loss of gcovraphic competition and egain. restates our earlier recommendation that
merging railroads must be required te keep all existing rail gateways open. to open those
gateways previously closed, and to remedy any reductions in route or service options. Moreover.
shippers should not be denied remedies in the final merger rules if they are unable to identify in
advance and quantify the competitive harms due to vertical foreclosure by the railroad. In
addition, shippers should not be denied remedies in the final merger rules to replace the loss of
competitive options that shippers operating more than one plant lose. which result in the loss of
whates er bargaining leverage the shipper had (NITL. p.7).

As the NITL states, “in focusing only on tne competitive harm of parallel mergers at
specific geegraphic points, while ignoring the competitive effects as end-to-end routes are
combined, the Board has lost sight of the fact that rail mergers of the size and scope of these

recently approved. and af the size and scape that could take place in the future. result in

losses in competition that geographically-specific ameliorating conditions simply do not cureTM
(NITL. p.8). Net only have shippers lost competition provided by carriers over part of a rail

movement wher mergers involving the combination of end-to-end routes have been permitted


yield substantial net benefits (and no unremedied competitive harms) might not be undertaken
because the applicants would be required to sacrifice too large a share of private benefits through

compliance with the new competitive conditions. The revenues lost through contrived

restructuring of rail-to-rail competition could readily exceed a merger’s expected cost savings’
(AAR, p.4h.

USDA contends that the compelitive conditions proposed by ihe Board are indeed related
to the harms caused by a proposed merger. Tne fact that the Board took a very narrow view of
competitive harms in the past docs not change the fact that recent mergers have resulted in

substantial competitive harm to many shippers. [n an effort to keep traffic on ils own line anc

increase its share of a joint haul, the newly merged Class I railroad typical.y closes gateways— if
not physically, thea economically— theredy reducing the competitive options available to
shippers. USDA asserts that too many shippers have not realized the promised benefits of Class |
railroad mergers. [nstead of reduced in-transit times dve to single-line service. shippers have
complained thal in-transit times have increased. Instead of benefitting from reduced rail rates,

shippers olien have encountered higher rail rates to cover the costs of the premiums paid for the

stocx of the pure?

sed firm and operating inefficiencies of the newly merged firm. USDA, and
most of those in :he shipper community. contend that the shippers have been Aarmed more often
by major railroad mergers than helped.

USDA agrees with DOT’s statement that it “supports the Board’s proposal to require

applicants to submit proposed conditions to enhance competition (emphasis added),

particularly where there may be anti-competitive effects tha: are otherwise difficult to remedy...

DOT supports enhancing competition through mandated open access at terminals as a way to


Enhanced competition should app‘y to all railroads in a region affected by a rail merger.

If the Board decides that its final rules should enhance rai!-to-rail competition, the Board
must also decice the most appropriate ways of achieving this goal and whether these rules should
apply only to the merging railroads or to all railroads in the affected regions.

DOT supported enhancing competition through mandated open access at terminals as a
Way 10 mitigate the loss of geographic competition (DOT, p.4) and USDA concurs (see above).
In addition, NITL makes 2 strong argument for the Board to require that the competitive
conditions be applied to all railroads serving the affected regions.

As the NITL states, “the League believes that the scope of the Board’s rulemaking which
is focused purely on merger policy, would create a serious disparity between the competitive
conditions facing merging as compared to non-merging carriers, to the detriment of both merging
carriers and the shipping public” (NITL. p.3). Thus, USDA agrees with NITL’s recommendation
that the Board recuire all carriers serving the affected gateways to be covered under the order —

such a condit.on would preserve, and perhaps enhance, effective gateway competition.

Decreased review period for major rail mergers.

Burlington Northern Santa Fe (BNSF) has proposed a maximum review period of one

year from the dace cf the pre-filing notification. “... given the end-to-end nature of likely fulure
Class 1 transactions, there is no reason why the Board cannot process mergers within even shorter

periods, using simplified procedures as other agencies do in reviewing mergers of comparable

scope and si

BNSF, p.6).


BEFORE THE

SURFACE TRANSPORTATION BOARD

STB EX PARTE NO. £82 (SUB-NO. 1)

MAJOR RAIL CONSOLIDATION PROCEDURES

REPLY COMMENTS
SUBMITTED BY THE

(1.8, DEPARTMENT OF AGRICULTURE

Michael V. Dunn

Under Secretary

Marketing and Regulatory Programs
U.S. Department of Agriculture
Washington. D.C. 20250

Date: December 18, 2000


Respectfully submitted,

Michael V. Dunn

Under Secretary

Marketing and Regulatory Programs
U.S. Department of Agriculture
Washington, D.C. 20250


Inclusion of rail alliances in the rule.

The American Chemistry Council (ACC) and the American Plastics Council (APC) state

that che proposed rules “omit entirely any scrutiny of proposed marketing alliances” (ACC-APC,
prop ly ay y OF prop 2

p-2). They further state, ‘... antitrust enforcement experts plainly recognize that marketing

a.liances can have anti-competitive effects...:°(ACC-APC. p.11). In light of these concerns,

USDA urges the Board. in its proposed merger rules. to require Beard approval of railroad

marketing alliances and the remediation of any anti-ompet:tive effects.

CONCLUSION:

Ir. conclusion, USDA strengly supports the Board’s proposal that merging Class 1
railroads be required to enhance rail-to-rail competition as a condition for a proposed merger’s
approval. USDA is convinced tha: competition between rail carriers is essential Lo improve
customer service in the railroad industry, to preserve the eccnomic vitality of the railroad
industry and to protect shippers from the abuse of railroad market power. Due to the magnitude
ofeccnomic harm further major railroad mergers potentially can inflict on shippers.

commun:ties. and other affected parties, USDA strongly oppases any decrease in the review

period of proposed mergers. USDA also supports the inclusion of rail alliances in the merger

rules

11


withou: ameliorating conditions, tut also shippers have lost preduct and geographic competition
(NITL, p.5-6).

USDA also supports further consideration of the proposal made by Ed Kemmerer

(Attachment to the Comments of the Amerizan Chemistry Council and the American Pla
Council) to require the origin carrier to provide rates to the closer interchange points that are in
proportion (by distance) ta the rate that is offered to a longer point (adjusted for terminal costs
and loca: service at the origin end destination points). This may be an effective method of
ensuring that gateways will be kept open following mergers.

Both AAR end DOT state that che Board seems to assume. a priori. that there will be
competitive problems arising from a mezger that cannot be directly remedied and that itis
premature to conclude that it will occur in all cases (DOT, p.4; AAR, p.9). Although USDA
recognizes the possibility that rot all railroad mergers will result in competitive problems. USDA
believes that tke loss of competition resul:ing from past major railroad mergers requires that the

Board should place greater emphasis on actions to protect the shipper community from potential

ar.ti-competitive results o7 any mergers. Thus, USDA suggests that a redutiable presumption —
that there are competitive problems — be instituted in the new merger rules. which places the
burden of proof on the railroad — where it appropriately belongs.

‘This burden en applicants obligates them zo Gemonstrate that un-remediable competitive
problems do not exist or are not a major factor that should aftect the merger approval. This
obligation further meets the Board’s proposed rule that future merger app!ican:s must include
provisions for enhancing competition, to present effective plans to keep open major existing

gateways, and to provide detailed service assurance plans.


Despite overwhelming shipper comments detailing the abuses of railroad market power,
the Association of American Railroads (AAR) states that “enhanced competition should continue
to flow from voluntary, market-based initiatives, not from government mandates” (AAR. p.2). In
tais statement, the AAR ignores the reality that Class I railroads dic-ate the terms of these
“market-based initiatives” since they possess significantly more markei power than their shippers
and connecting raiiroads. Dees thz Board really believe that AAR would espouse this tine of
reasoning if the situation were reversed and they lack the market power? It is precisely the

government's role to prevert this

might makes right” rationale. When deregulation of an
industry conflicts with the public interes: and leads to market failures that harm the public
interest, this is precisely the argumen: that justifies government examination and. :f necessary
and as appropriate. the introduction of market-based incentives or regulations to preserve the
public interest and protect a level playing field in the market place.

AAR also states (hat the Board’s requirement of enhanced compctition in its new major
merger rules would be a stark departure from the existing requirement of statute and case law
that the Board address adverse “fects on competition (AAR. p.1). AAR further states. “The
govern ng statute requires that the Board consider whether a proposed transaction would have an
adverse elfect on competition and it authorizes the Board to impose conditions to zemedy any

adverse effects of a merger. The proposec rules would fundamentally change the Boar

‘s role,
giving it the power to restructure railroad markets as the price for merger approval in ways the
Board, not the market participants. deems appropriate” (AAR, p.3).

USDA delieves taat AAR is in error interpreting the legal! authority of the Board te

require cahanced competition as a condition of future major railroad mergers, especially since the


the new major merger rules. Class | railroads. however, strongly oppose the Board's propasal
that competition be enhanced as a requirement of merger approvel.

USDA agrees with the Nationa! Industria: Transportation League (NU1L) that “rather than
preserving competition. the application of the Board’s prior major rail merger policy has resulted
in che loss of rail-to-rail competition as mergers over the past decade have been approved”
(NITL, p.5). This is because the conditions that the Board has imposed in the past lo remedy
reductions in rail competition due to mergers have beer treated in a very narrow manner; tne
Board has not imposed conditions to rectify the loss in competition when the number of railroads
available to shippers has been reduced from three to two. nor has the Board adequately
condizioned end-to-erd mergers co prevent vertical foreclosure. “.. . the Board has lost sight of

the fact that rail mergers of the size and scope of these recently approved, and of the size and

scope that could take place in the future, resuit in systemic losses in competition .. .” (NITL.
p.8). Not only have shippers lost competition provided by carriers over part of a rail movement
when mergers involving the combination of end-to-end routes have been permitted witaout
ameliorating conditions, but shippers have also lest product and geographic competition (NITL.
p.5-6}

Many other comments submitted by shippers in beth 4x Parte 382 and Ex Parte 582
(Sub-No. 1) clearly indicate that past Cless I railroad merges have resulted in significant losses
of rail-to-rail competition and abuse of Class | railroad market power. Inceed, the problems
associated with recent Class | railroad mergers have led us to this very policy debate, bul the
Class | railroacs blame the Board for proposing tha: enhanced competition be required as a

condition of future najor railroad mergers.


AUTHORITY AND INTEREST

The Secretary of Agriculture is charged with the responsib.lity under the Agricultural

agricultural pzoducers and shippers in improving transportation sezvices anc facilities by, among

other things, initiating and participating in Surface Transportation Board (Board) proceedings

involving rates. charges, tari practices, and services.

The

5. Department of Agriculture (USDA) strongly supports the Board’s proposal that
Class | railroads which seek to merge be required tc enhance rail-to-rail competition as a
condition for a proposed merger’s approval. USDA is convinced that competition between tail
carriers is the essential ingrecient needed to encourage improved customer service in the railroac
industry, preserve the econemie vitality of the railroad industry and protect shippers from the
abuse of railroad market power. Due to the magnituce of economic harr further major railroad
mergers potentially can inflict on shippers, communities. and other affected parties, USDA
strongly opposes, at this time. any decrease in the review period of proposed mergers. USDA

also supports the inclusion of rail alliances in the merger rules.

USDA REPLY TO OTHER COMMEN

Enhance or preserve competition?

The fundamental decision the Board must make in its final major railroad merger rules is
whether the rew major merger rules should enhance rail-to-rail competition or just continue to
preserve competition. Shippers, shipper organizations, smaller railroads, U.S. Deparment of

Transportation (DOT), and USDA strongly support the enhancement of rail-to-rail competition in

bo


CERTIFICATE OF SERVICE

The «undersigned hereby certifies that on December 18, 2000, he caused a copy of the
Department of Agriculture’s reply comments Lo be served by first-class mail, postage paid, on all

parties of record in STB Ex Parte 582 (Sub-No.1).

mAlan

wif fp at a—
tS

Jamés A. Caron

Acting Associaie Deputy Administrator
Transportation and Marketing Programs
Agricultural Marketing Service