13
in rates and as to the adequacy of service which shippers have experienced since the merger.

Second, the USDA also believes it is critical for U.S. agricultural exports to Mexico that
adequate overland rail competition to this market be maintained and we urge the STB to review
and reconsider the effectiveness of its conditions aimed at preserving competition among U.S.
railroads to Mexico for their effectiveness. From contacts among U.S. railroad companies, it
appears that the service provided to the Tex-Mex railway under the terms of its haulage
agreement with UPSP has declined dramatically since the merger.

Third, many shippers have raised concerns to the USDA about the future disposition of
the Central Corridor line from Salina, Kansas to Pueblo, Colorado. This corridor is particularly
important to the wheat growers in southeastern Colorado who annually produce 17 million
bushels of wheat, in addition to other crops. The USDA urges the STB to require the UPSP to
maintain the trackage in this Central Corridor in its entirety at status quo ante levels until its
disposition can be determined

Finally, the USDA has also identified other rail service issues not directly related to the
UPSP merger but which are of concern: to agricultural shippers. One issue the USDA
recommends the STB examine is discontinuance by railroads of their policy of allowing multi-
station loading of unit trains. The USDA also encourages the STB te consider requiring railroads
to provide the same multi-station loading on unit trains that they have in the past -- a policy’

which allowed several elevators ta combine shipments for a lower tariff rate.


Post-Merger Effects

Unfortunately, more than a year after approving the merger, BNSF does not appear to be
providing the kind of effective competition the STB required in these movements from Kansas,
Oklahoma and Texas to the Gulf and Mexico. The comments from our listening sessions and the
numerous contacts we have received by phone, fax, and mail indicate that BNF’s presence has
been illusory -- as one shipper put it, BNSF “hasn’t even shown up on the agricultural side.”
Agricultural shippers are generally frustrated by the apparent lack of vigorous competition among
the only two carriers left in this important corridor, and between the UPSP and the BNSF
generally in railroad originations to all destinations from the lower Plains. For instance, some
shippers participating at the hearings in Kansas reported that they had been told almost
simultaneously by BNSF and the UPSP representatives that both firms would be increasing rates
on all domestic and export movements from the lower Plains wheat locations by $200 a car on
September l, 1997, The appearance of such rate announcements by the two carriers suggests at
minimum a lack of vigorous competition between the two carriers and highlights the need for the
STB to reexamine the competitive conditions it imposed on movements from the lower Plains.

The STB made it clear that should the BNSF fail to conduct trackage rights operations in
movements from the lower Plains, those rights could be terminated and another carrier could be
substituted in its place. On the basis of comments received from shippers, the USDA urges the
STB to begin a careful and public examination of the competitive situation in rail movements
from the lower Plains to the Gulf and Mexico. The scope of BNSF’s use of its trackage rights,
the performance of the UPSP as the landlord, and any changes in rates and in the adequacy of

service which shippers have experienced since the merger should be carefully reviewed.


9

STB should require that the UPSP continue service to agricultural shippers on the UPSP’s
Central Corridor line in Kiowa County, Colorado until a short line or regional carrier can take
over the trackage.

The UPSP has opened up segments of the Central Corridor for bidding and some shippers
believe that segments which are not sold will eventually be abandoned. If any segments in the
Central Corridor are abandoned, no other carrier will ever be able provide effective through-route
competition on the Central Corridor to the UPSP. The recommendation of the USDA is that the
STB require the UPSP to maintain the trackage in this Central Corvidor in its entirety at status
quo ante levels until its disposition is determined.

Although many short line railroads provide excellent service to agricultural users, the
shippers in this area are also concerned that the line wiil be sold to a firm that is more interested
in collecting lease fees than in providing good rail service. Many Kansas shippers complained
about significantly-increased lease payments being imposed by the Class I and shortline railroads
serving Kansas for leases of railroad sidings and rights-of-way which used to be provided almost
free of charge and on which shippers have constructed leading and unloading facilities. Should
the STB approve sale of this line to a short line railroad, the USDA recommends that the STB
consider using its authority to ensure that the short line railroad purchasing the line maintains an
adequate level of service and does not astronomically increase the lease fees charged for the use
of rights of way and sidings. |

A more economically sound remedy for the STB might be to require the UPSP to divest
itself of this Central Corridor line in favor of establishing a third Class I carrier. This is a viable

alternative with willing applicants who applied to the STB to buy this line at market prices and


6

terms of its haulage agreement with UPSP has declined dramatically since the merger. This
haulage agreement, which requires the UPSP to provide connecting service between the Kansas
City Southem and the Tex-Mex between two Texas interchange points, must be reviewed
carefully for its effectiveness in allowing continued access by the Kansas City Southern to the
Mexican border through Laredo, Texas, and its new concession route into Mexico. The dectine
in service experienced by the Tex-Mex may be evidence that a stronger condition such as
trackage rights, rather than haulage rights, might be needed to preserve effective competition for

U.S. agricultural exporters to the Mexican market.

ABANDONMENT OF THE CENTRAL CORRIDOR LINE

A third major issue relating to the UPSP merger is the future disposition of the Central
Corridor line from Salina, Kansas to Pueblo, Colorado. This corridor is particularly important to
the wheat growers in southeastern Colorado who annually produce 17 million bushels of wheat,
in addition to other crops. Over 70 percent of this wheat is sold on the export market, making the
growers heavily dependent on railroad delivery to terminals which are distant from Colorado.
Although Colorado shippers are not the only shippers who will be damaged by the loss of this
line, their experiences and concerns are representative of the rest of the shippers on the line,

The Central Corridor line was formerly owned by the Missouri Pacific Railroad.

Shippers received adequate, reliable and prompt rail service until the Union Pacific purchased the
line. Immediately after acquisition of the line, shippers allege that the Union Pacific began to
deliberately deny service and downgrade the service provided. In its request to abandon a line

segment in the region, UP claimed that the line had carried only 142 carloads the previous year.


RAILROAD SERVICE TO MEXICO

Mexico is an important and growing market for U.S. grains and oilseeds. The volumes of
U.S. grain being exported to Mexico were at all-time record levels in 1996 largely because of the
trade liberalization which occurred from the North American Free Trade Agreement (NAFTA)
and the reduction in domestic producer subsidies for basic grains in Mexico which have
accompanied trade liberalization. To allow U.S. grain producers to continue to share in the
benefits of NAFTA by exporting U.S. grain to Mexico, overland railroad services from the U.S.
to Mexico must be competitive. Many small Mexican feed grain importers prefer the small unit
sizes of feed grains available by railcar, and cannot handle or afford the minimum ship-size lots
of feed grains available by maritime transportation. The USDA has a special interest in the
availability of low-cost, competitive overland railroad services to Mexico because it underwrites
the importation of almost all U.S. feed grains by Mexican importers through its GSM-102 credit
guarantee program. Decreases in the competitiveness of railroad transportation to the border
increase purchase prices of U.S. feed grains to Mexican importers and decrease the volume of
USS. feed grains the USDA can underwrite and the U.S. can export to Mexico. Yet, information
received by the LISDA is that some of the conditions imposed by the STB in the UPSP merger to
maintain competitive rail service to Mexico are not being effectively implemented.

USDA believes that it is important for U.S. agricultural exports to Mexico that adequate
competition be provided in this market, and we urge the STB to review the implementation of its
conditions aimed at preserving railroad competition to the border. Information obtained from

U.S. railroad companies indicates that the service provided to the Tex-Mex railway under the


8

will also be severe. Agriculturally-based local economies will be severely damaged, eroding the
local tax base necessary to support basic local services. With the loss of essential transportation
services, these rural communities will also be unable to attract alternative industries. Additional
trucking will also damage the roads in the region, greatly increasing the costs of road
maintenance.

_ Extensive testimony was received by the USDA at the Kansas listening sessions as to the
impacts of anticipated rail abandonments on several rural communities which is expected to
occur as a result of the UPSP merger. One of these rural communities is Kiowa County,
Colorado, where the | ,700 residents in this rural agricultural community are heavily dependent
on UPSP rail service. In 1994, over 5 million bushels of wheat was produced in Kiowa County.
The seven grain elevaters in the county are equipped to load a maximum of 17 cars each and
cannot take advantage of cheaper 100-car unit train rates offered by UPSP. Although the Union
Pacific lines through Kiowa County were approved for abandonment in 1996 with the UPSP
merger, efforts have been underway to find a buyer for the lines. Ifa successful bidder is not
found soon, the 100 miles of UPSP track in Kiowa county will soon be abandoned.

Representatives of Kiowa county at the Kansas listening sessions reported that Kiowa
County has already lost two million dollars in 1997 in assessed property valuation because of the
UPSP merger. Two elevators in the county had over 150,000 busheis of grain stored on the
ground this past summer because of inability to secure railroad services. Other potential impacts
on this rural community from loss of rail service include the loss of $726,000 in tax revenue,
which is 33 percent of the county’s budget for schools, hospitals and the municipalities of four

small towns. Representatives of Kiowa county at the Kansas listening session stated that the


Due:

BEFORE THE

SURFACE TRANSPORTATION BOARD

STB FINANCE DOCKET NO. 32760 (SUB-No. 21)

UNION PACIFIC CORPORATION, UNION PACIFIC RAILROAD
COMPANY, AND MISSOURI PACIFIC RAILROAD COMPANY
----CONTROL AND MERGER----

SOUTHERN PACIFIC RAIL CORPORATION, SOUTHERN
PACIFIC TRANSPORTATION COMPANY,

ST. LOUIS SOUTHWESTERN RAILWAY COMPANY,
SPCSL CORP., AND THE DENVER AND RIO GRANDE
WESTERN RAILROAD COMPANY [OVERSIGHT]

COMMENTS OF THE

UNITED STATES DEPARTMENT OF AGRICULTURE

Lon Hatamiya
Administrator

Agricultural Marketing Service

U.S. Department of Agriculture
Washington, D.C. 20250

August 15, 1997


1]

The alternative scenario is that many smaller shippers will be forced out of business,
leaving only those able to load unit trains. The extra cost of shipping by truck to an unit train
loading facility will come directly from the farmer producing the grain. In addition to the costs
born by the farmers, communities will lose needed tax bases, and states and counties will incur
increased road maintenance costs.

Forcing unit trains from each shipper has greater impact upon those shipping wheat and
other grains and upon those shipping from more arid regions of the country. It requires a larger
area to aggregate a unit train shipment of wheat than it does for one of corn. Unirrigated semi- .
arid regions of the country also generally have lower yields, and are more dependent on rail
service to reach terminal and export markets. The impact upon roads caused by trucking grain to
unit loading facilities in these regions will be much greater than in other regions of the United
States, creating an additional road maintenance burden upon governmental units in those regions.

Shippers on Class I railroads have also expressed much frustration with the centralized
ordering systems. They end up talking with six or eight railroad representatives before reaching
anyone who can help them order cars. The next time they call back, they talk with another
person they have never dealt with before. When trying to find out why promised cars have not
been delivered on time, no one seems to be able to tell them when they will receive the cars.
When asked to find out and call the elevator back, they refuse and tell the elevator to call again.
Thus, elevator managers have great difficulty in planning the work activities for each day. The
new UPSP voucher system for railcars has also been confusing to many shippers.

The result of these cat service and car availability problems has been excessive storage of

grain on the ground throughout the Midwest. Asa result, the elevator expends more labor


10

assume operation of the former Missouri Pacific line.

GENERAL POST-MERGER RAIL SERVICE ISSUES

There are other issues relating to rail service of great concern to our constituents, but
which are not directly related to the UPSP merger. Although many of these issues are long
standing, the decreased level of competition among railroads has greatly increased their severity.

For instance, many agricultural shippers have expressed great concern regarding the new
UPSP co-loading policy. Prior to this new policy, a firm operating at several locations could _
combine the riumber of cars shipped from each location to obtain a quantity tariff rate. The new
policy requires that each location ship the required quantity to obtain that price level. For
example, in order to get the 25 car tariff rate under the new co-loading policy, each elevator must
ship 25 carloads as a unit. Under the old policy, several elevators could combine their shipments
to obtain the 25 carload price.

Additionally, many shippers have reported a decline in the level of rail service since the
merger. In particular, many shippers of less-than-unit train lots report they have great difficulty
obtaining rail service from the UPSP, and if they do receive service, it is infrequent. The UPSP
emphasis on moving unit trains to the reported exclusion of smaller shipments, when combined
with the new co-loading policy, will force many elevators to make large investments in sidings
just to maintain rail service. It will take long periods of time for many elevators to aggregate the ,
L00 carloads required for a unit train, causing them to hold the grain purchased from farmers for
longer periods prior to shipping, significantly increasing their costs, and subsequently resulting in

lower prices to farmers.


7

A study by the Colorado Department of Transportation estimated a potential demand of 4000
carloads of originated traffic per year on that same line.

Considering the quality of the Union Pacific’s prior service and its perceived lack of
concer for shippers, many shippers on the Central Corridor line are concerned the UPSP will
abandon this line, especially since it now owns a parallel line to the north. Due to reduced
competition giving shippers no other viable shipping alternatives, the UPSP can reduce its costs
by abandoning this Central Corridor dine without losing much of the revenue from the haulage.

If this line is abandoned, wheat growers in the region would be burdened with the extra
cost of trucking their grain an additional 60 miles or more to another location on the UPSP rather
than hauling it to a local elevator on the nearby former Missouri Pacific line. This additional
cost, currently 10-12 cents per bushel, absorbs the price premium being paid by 100 car loadout
facilities located on the UPSP main line. The removal of sidings on this Central Corridor line
may well result in the certain failure of many independently-owned and cooperative elevators,
leaving growers with fewer competitive options and possibly leading to one monopsonistic buyer
in some areas. With competing elevators and nearby shipping alternatives removed, there will be
little incentive for elevators on thé main UPSP line to pay a premium to attract wheat to their
facility. In addition, with the removai of rail competition, the USDA anticipates that the price of
trucking will also increase. Due to distance, trucking the wheat to the Port of Catoosa,
Oklahoma, or Kansas City, Kansas, is not a viable option for these shippers. Thus, the end result
will be a decrease in prices received by agricultural producers while their costs continue to
escalate, resulting eventually in the erosion of their Jand values.

The effects upon communities and state governmental units of abandonment of this line


3

local and state officials, farmers and rural residents from several other grain-producing States.
Comments received at the listening sessions or submitted directly to the USDA as a result of the ©

listening sessions were incorporated into this statement.

RAIL COMPETITION IN THE LOWER PLAINS

Initial Concerns

The USDA expressed concern about the UPSP merger, in part, because of our belief that
a third major railroad operating in the Kansas City, Wichita and Fort Worth corridor to Gulf and
Mexican markets was necessary to preserve competition in the movement of lower Plains wheat
to the Gulf and to Mexico. The lower Plains states of Kansas, Oklahoma and Texas, combined
with Colorado, usually produce more than three-fourths of all U.S. hard red winter wheat. A
third Class I railroad operating in this corridor was considered necessary to satisfy service
concems and to provide a competitive balance for shippers in these States who would be
completely dependent on the Burlington Northern Santa Fe (BNSF) and the UPSP for rail
service.

While the STB eventually decided in favor of the merger, the USDA was heartened by
the STB’s determination to mitigate any potential competitive harm to agricultural and other
shippers caused by the merger. The STB imposed 35 specific conditions on the merger, the most
important of which was granting nearly 4,000 miles of trackage rights to BNSF to replace the
service formerly offered by SP. In granting these trackage rights, the STB made clear that it
expected BNSF to compete vigorously for the traffic opened up to it and imposed a common-

carrier obligation upon BNSF with respect to this traffic.


14

Respectfully submitted,

iS)
Lon Hatamiya
Administrator

Agricultural Marketing Service

U.S. Department of Agriculture
Washington, D.C. 20250


2

industry and the adverse effects on U.S. agriculture of this continuing consolidation and
concentration. Our concern was based on the decline in the number of major U.S. railroads from
33 in the early 1980's to just 7 more recently, and the greatly increased overall] levels of
concentration in the railroad industry which has resulted. Whereas the top 5 railroads handled 44
percent of all railroad freight in 1982, the top 5 railroads handled 87 percent of all rail freight in
1995. Although the top 5 railroads originated 57 percent of all rail grain traffic in 1982, the top 5

railroads originated over 90 percent of rail grain traffic in 1995.

USDA LISTENING SESSIONS ON [IMPACTS OF RAIL MERGERS

Ina letter dated July 16, 1997, USDA natified the STB of a planned series of listening
sessions to be held in major grain-producing states as part of our efforts to gather and evaluate
information on the general impact of recent railroad mergers on agricultural shippers and
communities and on the specific impact of the UPSP merger. Because the grain harvest in many
states had just been completed or was still underway, USDA requested and was granted a two-
week extension of time by the STB to evaluate the input presented at the sessions and to submit
comments in this proceeding, On August 6 and 7, listening sessions were held by the USDA in
Dodge City, Kansas and Wichita, Kansas, respectively. Listening sessions on the general impact
of rail mergers on agricultural shippers are planned for other grain-producing states.

USDA believes input from actual shippers who have been affected by the UPSP merger,
such as was obtained from these Kansas listening sessions, is vital to the STB oversight process.
A national announcement of the holding of the listening sessions resulted in substantial other

comment and input being provided to the USDA on effects of the UPSP merger from shippers,


These comments are filed on behalf of the United States Department of Agriculture
(USDA) and are in response to the Surface Transportation Board's (STB) decision served May. 7,
1997, initiating a proceeding to implement the oversight condition it imposed in approving the
Union Pacific and Southern Pacific Railroad (UPSP) merger of 1996. STB is seeking comments
from interested parties on the effects of the merger on competition and as to the implementation

of the conditions imposed by the STB to address actual or potential competitive harms.

AUTHORITY AND INTEREST

The Secretary of Agriculture is charged with the responsibility under the Agricultural
Adjustment Act of 1938 (7 U.S.C. 1291) and the Agricultural Marketing Act of 1946 (7 U.S.C.
1622 (j)}, as amended, to represent the interest of agricultural shippers and producers in
improving transportation services and facilities, by among other things, initiating and
participating in STB proceedings involving rates, charges, tariffs, practices, and services.

As an active participant in the UPSP merger proceeding, USDA submitted comments to
STB on March 29, April 29, and June 3, 1996. In those comments we pointed out that rail
service is critical to the economic well-being of this Nation’s agricultural and rural economies.
Many agricultural products are produced in areas located great distances from export and
domestic markets. Moreover, agricultural shippers generally have limited access to alternative
providers of transportation services because many are located beyond effective trucking distances
from these markets and far from available waterway transportation. We highlighted the
importance of competitive rail service for agricultural producers and shippers and the entire rural

economy and expressed concern over the significantly increasing concentration in the U.S. rail


12
handling the grain and considerable deterioration and quality problems occur if it rains on grain
stored in such a manner.

The railroads have a common carrier obligation to provide reasonable service to their
shippers. On the basis of information provided by shippers, the USDA is convinced that —
reasonable service has not been provided to smaller agricultural shippers, and recommends that
the STB exercise its powers to require Class I railroads improve the level of service to these
shippers and to the short line railroads to which they connect. The USDA also encourages the
STB to examine the new railroad policy of discontinuing multi-station loading of unit trains,

which the railroads have typically allowed in the past.

CONCLUSIONS

USDA appreciates the opportunity to submit comments on the effect of the UPSP merger
on agricultural and rura! shippers. From its listening sessions and extensive contacts among
agricultural interests over the past months, USDA has identified four general categories of
concerns related to the impact of the UPSP and other railroad mergers on agricultural shippers.

First, as the USDA has cited in previous comments on the UPSP merger, vigorous
competition in lower Plains movements of grain to the Gulf and Mexico is essential to
agricultural shippers in the states of Kansas, Oklahoma and Texas. In light of comments the
USDA has received about the lack of aggressive competition between the two remaining carriers,
USDA recommends that the STB begin a careful examination of the competitive situation in rail
movements from the lower Plains to the Gulf and Mexico. Key concerns include the scope of

the BNSF’s use of its trackage rights, the performance of the UPSP as the landlord, and changes


RTIFICATE OF SERVICE
I, Keith A. Klindworth, certify that on this 15th day of August, 1997, I caused a copy of
the foregoing document to be served by first-class mail, postage prepaid, on all parties of record

in STB Finance Docket No. 32760 (Sub-No. 21), including counsel for UPSP and counsel for

BNSF.

Marketing and Transportation Analysis
Agricultural Marketing Service