Proposed § 1180.1(h): Service assurance and operational monitoring. This proposed rule

requires merger applicants to file a service assurance plan, establish contingency plans, and
establish problem resolution teams, as well as specific procedures for problem resolution. The
Board will conduct extensive post-approval operational monitoring to help ensure that service

levels after a merger are reasonable and adequate.

USDA agrees with the Board’s emphasis upon contingency plans and post-approval
monitoring to help ensure that service levels after a merger are reasonable and adequate. Also,
USDA approves of the requirement that the applicants establish problem resolution teams and
the establishment of a Service Council. USDA cautions that it may be better for the Board to
prevent service disruptions by not approving a questionable merger than to try to monitor service

disruptions afterward.

The explanation for this section of the proposed rules indicates that the Board expects
applicants to engage in good faith negotiations with shippers and connecting carriers and that the
Board would consider the extent to which applicants are successful in such negotiations when
determining the need for mitigation. However, this intent is not stated anywhere in this section

of the proposed rules, and indeed, probably should be stated in paragraph §1180.1(c)(2)Gi).

Although the Board prefers to rely on mutual negotiations between parties, the
application of this policy ignores the huge differences in market power that exist between Class I
railroads on the one hand, and shippers and smaller railroads on the other. USDA does not have

20


"competitive" here could be interpreted as cost-efficient, rather than requiring the presence of

sufficient transportation competition.

When the Board is balancing the public interest, USDA agrees with its proposal to
increase the importance of competition, possible transitional service harms, and the role of
railroads in the broader transportation infrastructure. USDA also agrees with the Board’s

decision to decrease the importance it gives to improved carrier efficiency.

USDA, as well as many shipper groups, would prefer that the weights given each
component be specified in the final rules. In addition, USDA does not believe that assigning an
increased weight to the probability of transitional service disruptions adequately protects the

public interest (discussed further below).

USDA recommends that the last sentence of the proposed rule be changed to read,
"The Board must ensure that any approved transaction will promote competition, as well as

an efficient and reliable national rail system."

Proposed § 1180.1(c): Public interest considerations. The proposed rule requires that "merger

applications must include provisions for enhanced competition." USDA applauds the Board for

placing much more emphasis upon enhancing competition.

14


Respectfully submitted,

Dusbafel bh

Michael V. Dunn

Under Secretary

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

24


Recent railroad mergers have given the resulting Class I railroads the market power to
dictate the terms of rail service-even though those service terms do not meet the present and
future needs of many agricultural shippers. The two western Class I railroads have recently
increased demurrage charges by 50 percent and sharply decreased the loading times allowed,
even though the market for delivery of railcars has been soft. Although these railroads claim
these actions will improve equipment utilization, this goal will not be achieved until they
enhance their own accountability for timely notice and delivery of equipment, as well as

movement of loaded railcars.®

In addition, recent railroads mergers have increased the ability of Class I railroads to
restrict competition from smaller railroads. An example of this is Burlington Northern Santa
Fe’s (BNSF) demand that Montana Rail Link not renew a contract with a newly constructed
grain transfer facility at Big Timber, Montana, that provided competition to grain shippers
located on BNSF.’ Another example is the refusal of several Class I railroads, especially after
construction of shuttle-train loading facilities on their own lines, to allow the coloading of grain

and multiple switching by short line and regional railroads.* Other examples of restricted

° National Grain and Feed Association Newsletter, October 19, 2000.

7 Duff, Diane. Testimony submitted to the Transportation Subcommittee on Appropriations by
the Alliance for Rail Competition, September 12, 2000, pg. 19.

® Verified Comments of Farmrail System, Inc. STB Ex Parte No. 582 (Sub-No. 1), Major Rail
Consolidation Procedures, pg. 24, 25.


as much faith as the Board apparently has in the effectiveness of good faith negotiations due to
the large differences in market power between the respective parties and the tendency for the
needs of smaller shippers to be ignored. Continuing this policy will further disadvantage smaller

shippers and railroads.

USDA recommends that a paragraph be added to §1180.1(c)(2)(ii) to require the Board
monitor negotiations between applicants, on the one hand, and shippers and connecting
railroads, on the other , to prevent unfair discrimination against smaller shippers and

railroads.

Proposed § 1180.1(i): Cumulative impacts and crossover effects. This proposed rule requires
the Board to consider the cumulative impacts and crossover effects likely to occur as rival
carriers react to the proposed combination, rather than considering the proposed merger
transaction in isolation. USDA agrees with the Board’s proposal to consider cumulative impacts

and crossover effects.

Proposed § 1180.1(k): Transnational issues. The proposed rule requires applicant railroads to

submit "full system" competitive analyses and operating plans. When an application would
result in foreign control of a Class I railroad, applicants must assess the likelihood that
commercial decisions made by foreign railroads could be based on national or provincial rather

than broader economic considerations and address how any ownership restrictions imposed by

21


Proposed § 1180.11: Additional information needs for transnational mergers. The proposed rule
requires applicants in transnational mergers to assess the likelihood that commercial decisions
made by foreign railroads could be based on national or provincial rather than broader economic
considerations and discuss any ownership restrictions imposed on them by foreign governments.
USDA is pleased that the Board has included paragraph (b) in this section, which protects the

interest of U.S. shippers in the event of a transnational merger.

CONCLUSION

USDA and its agricultural constituents believe that, although the Board has attempted to
address the concerns expressed by shippers, the proposed changes fall far short of protecting the
public interest in the event of future major railroad consolidations. USDA believes this is due to
a lack of specificity in the rules, as well as the Board’s reliance upon voluntary offers,
negotiations, and applicant proposed penalties. Thus, USDA petitions the Board to consider

USDA’s comments and implement our suggestions regarding the proposed regulations.


USDA recommends changing the second sentence (which defines .. ."an existing
service as being essential if there is sufficient public need for the service and adequate
alternative transportation is not available .") to require ". .. adequate cost-effective alternative

transportation ...".

Proposed § 1180.1(c)(2): Potential harm. (iii) Transitional service problems. This proposed

tule states that the Board, in its determination of the public interest, will weigh the likelihood of

transitional service problems and require applicants to provide a detailed service assurance plan.

USDA does not believe that this proposed rule is sufficient to protect the public interest.
This rule, by placing only an increased weight upon the likelihood of transitional service
problems, allows the consolidating carriers to transfer the costs of service disruptions to shippers,
affected communities, and other railroads. The Conrail transaction has demonstrated that
extensive and detailed merger pre-planning is not sufficient to prevent service disruptions
~especially as the size and complexity of the transaction increases. If a merger truly makes
economic sense, the consolidating railroads should be able to reimburse those harmed by

transitional service disruptions.
This proposed rule also places nearly all of the adverse risks associated with rail merger
transactions upon shippers and other railroads, rather than with the applicants. When the adverse

risks of a transaction are transferred to other parties, it encourages firms to take risks that

18


agricultural producers located in those regions, competition, including rail-to-rail competition,

must be preserved and promoted for there to be effective competition.

Increased potential of antitrust violations. A hallmark of our economic system has been the

concept that the most efficient allocator of resources is individuals acting in their own self-
interest. However, late in the 19" century, the United States realized that these self-interests

must be constrained by effective and fair competition and enacted antitrust laws.

As the market power of Class I railroads has increased relative to that of shippers and
connecting short line railroads, the potential for the violation of antitrust laws also has increased.
Unlike most other businesses operating in the United States, railroads have partial antitrust
immunity. This immunity appears to be limited to: Mergers as approved by the STB; actions
necessary to implement these mergers; the authority to engage in car pools; joint ownership of
track and dispatching facilities; discussion of tariff rates for joint hauls; and actions to allow rate
discrimination for movements on a railroad’s own line.'* USDA believes the Class I railroads
have gone beyond this limited immunity. Although part of the increased potential for violation
of antitrust statutes may be due to reduced emphasis on the application of antitrust statutes and
principles to previous Class | railroad mergers, the larger part may be due to differing opinions
regarding the extent of the railroad industry’s antitrust immunity, as well as the reduced

consciousness and application of antitrust statutes and principles by railroad and shipper

'4 ICCTA Termination Act of 1995; §10501(b);§10706;§ 11321.

10


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."

Nationwide, short line and regional railroads in the United States now participate in the
movement of an estimated 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. Short line and regional railroads are also an important part of the grain

gathering network, originating nearly 20 percent of all U.S. railcar loadings of grain in 1996.”

This increased concentration of Class I railroads, and the corresponding increase in their
market power relative to connecting short line and regional railroads, threatens the viability of

smaller railroads serving rural regions.

Effects of increased transportation costs on agricultural producer income. Agricultural products

transported by rail typically approach a purely competitive market structure. Due to a
competitive market structure, agricultural producers, unlike people in other industries, must
accept the prices offered for their goods rather than being able to set their price. Thus, increased
costs due to inadequate and noncompetitive transportation services are not borne by the final

consumer, but come directly from producer incomes. Not only are producer incomes decreased,

" Prater, Marvin E., John Bitzan, Douglas Benson, Nick Schauer, and Kim Vachal. The
Importance of Short Line and Regional Railroads to Agriculture and Rural America, U.S. Department of
Agriculture, Agricultural Marketing Service, forthcoming.

® Ibid.


competition include pricing and railcar allocation policies that discriminate against smaller

railroads, as well as paper and steel barriers which restrict access to the rail network.”

The manner in which Class | railroads have abused their increased market power-which
has adversely affected agricultural producers, shippers, and communities, as well as the ability of
short line and regional railroads to compete-concerns USDA. Thus, USDA requests that the
Board modify its proposed rules governing major railroad consolidations-to more fully protect
the public interests-for the following reasons: (1) The possible harm to short line and regional
railroads, which are important to the grain gathering process, (2) the effects of increased
transportation costs on the net income of agricultural producers, (3) the loss of rural rail lines will
result in greatly increased road maintenance costs for rural areas, (4) the Staggers Act relies upon
the effectiveness of competition, rather than regulation, to discipline the marketplace, and (5) the
increased potential of antitrust violations to the detriment of agricultural producers and rural

communities.

The possible harm to short line and regional railroads. At the end of 1998, short line and

regional railroads operated 49,985 route miles in the United States-more than 29 percent of the
rail network-and accounted for nearly 9 percent of all railroad freight revenues.'° In many

agricultural States, the importance of these smaller railroads has become even greater; by the end

° Turner, Frank K. American Short Line and Regional Railroad Association Statement, STB Ex
Parte 582, Public Views on Major Rail Consolidations, February 29, 2000. Also, Verified Comments of
Farmrail System, Inc. STB Ex Parte No. 582 (Sub-No. 1), May 15, 2000, pg. 18 - 20, 27.

'° Association of American Railroads. Railroad Facts, 1999.

6


otherwise would not be taken. Thus, the proposed merger rules will encourage, rather than

discourage, merger transactions that are not in the public interest.

USDA strongly urges the Board to require consolidating railroads to reimburse -
shippers and other railroads fully for any damages caused by service degradation, rather than
placing a heavier weight on those transitional service harms when balancing the public
interest. This reimbursement should be required until the rail service provided each shipper

and railroad is equal to that received prior to the consolidation.

Proposed § 1180.1(d): Conditions. This proposed rule reflects the willingness of the Board to

use its conditioning power to mitigate or offset all types of threatened merger harms to the public

interest.

USDA appreciates the difficulty of conditioning mergers to offset the harm to the public
interest, while not undermining or defeating beneficial transactions. However, the potential
magnitude and probability of public harm caused by future Class | railroad consolidations may

be so great as to justify extraordinary caution.

USDA suggests that the final merger rules should be phrased so that in the application
of conditions, the Board err on the side of protecting the public interest. Also, the final rule
should be phrased to make clear that the Board is not limited to conditions suggested by the
consolidating railroads.

19


increases to 21 times that done to a rural interstate.'? 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 resulting decrease in the
condition of the rural road infrastructure also affects the safety of the rural residents traveling

those roads.

The Staggers Act relies upon the effectiveness of competition to discipline the marketplace. One

of the key assumptions underlying the deregulation of the rail industry was that there would be
sufficient competition to improve allocative and technical efficiency. Thus, the authors of the
Staggers Act of 1980 and the Interstate Commerce Commission Termination Act of 1995
(ICCTA) included the preservation of effective competition as one of the rail transportation
policy goals of the United States. Not only does effective competition promote reasonable rates
and minimize the need for regulatory control, but it also encourages honest and efficient

management of railroads.

In many agricultural production regions of the Nation, truck and barge transportation
provide adequate competition to constrain rail prices. However, barge transportation is not
available to those agricultural producers located in the western portions of the Plains States, and

truck transportation is not cost-effective due to the long distances to market. Thus, for

'3 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.

9


CERTIFICATE OF SERVICE
The undersigned hereby certifies,that on November 17, 2000, he caused a copy of the
Department of Agriculture’s comments to be served by first-class mail, postage paid, on all

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

MO cn

James { Caron

Acting Associate Deputy Administrator
Transportation and Marketing Programs
Agricultural Marketing Service


y ~—« RECEIVED
BEFORE THE H
NOV 17 2000"
SURFACE TRANSPORTATION BOARD

MAIL
MANAGEMENT
STB

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

MAJOR RAIL CONSOLIDATION PROCEDURES

COMMENTS ON THE PROPOSED RULES
SUBMITTED BY 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: November 17, 2000


that rail safety would be degraded, and the existence of transnational trade and operational issues

arising from the merger of Canadian and U.S. railroads.

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

such effects.'°

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 more difficult to achieve. The potential costs of these mergers
upon shippers, communities, and other railroads, however-as well as the probability of those
costs occurring-will become increasing large, particularly to rural communities. The Board’s
final rules must include provisions to protect shippers from the costs of further major rail

consolidations.

'SUS.C. § 11324(0).

12


management. Whatever the reason for the increased potential for violation of antitrust statutes,
USDA asserts that if railroads were subject to the same antitrust scrutiny as most other
industries, many of their practices would be prohibited. Thus, as the Board revises its proposed
major merger rules, it should consider the increased potential for violations of antitrust law and
the effects these violations, should they occur, can have upon shippers and smaller connecting

railroads.

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.

Concerns that caused the Board to initiate this proceeding included the following effects
of further major mergers: Reduced competition, downstream effects, the important role of
smaller railroads in the rail network, the possibility of major service disruptions which could

spread throughout the entire rail network, the measurement of merger benefits, the possibility

11


but also, due to the multiplier effect, the incomes of those living in rural communities
decrease-resulting in smaller municipal budgets from which to support schools, emergency
services, hospitals, roads, and other local governmental services. Therefore, an affordable,
reliable transportation network is an indispensable ingredient to the strength and competitiveness

of United States agriculture and the economic well-being of our rural communities.

Recently, U.S. agricultural policy has changed, requiring agricultural producers to
respond more to forces in the market place rather than relying upon government for price
support. The ability of agricultural producers to compete in world export markets, and thus, the
success of the Federal Agricultural Improvement and Reform Act (1996 Farm Bill), is highly
dependent upon the ability of the U.S. transportation sector to provide competitively priced
transportation services and to perform reliably. If farm incomes cannot be expanded through
exports of raw and value-added goods due to inadequate or non-competitive transportation
services, the freedom provided under the 1996 Farm Bill to farmers to plant and compete will

have less value.

Effects the loss of rail service has upon rural road maintenance costs. Increased truck

traffic—caused by shipping to locations on Class I railroads and/or the loss of rural rail
lines-greatly increases highway maintenance costs because many of the roads in rural
agricultural production regions were not designed for heavy truck traffic. The damage a loaded
semi-trailer 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

8


foreign governments should affect the Board’s public interest assessment. USDA appreciates the

Board’s decision to include these provisions which address much of our prior recommendations.

USDA proposes a minor change to the wording of the last sentence in proposed
§1180.1(k). Instead of "... and be detrimental to the interests of the United States rail

network... ", insert the words "and shippers" after "rail network".

Proposed § 1180.10: Service assurance plans. The proposed rule requires major railroad merger

applicants to submit a service assurance plan, which, in concert with the operating plan
requirements will identify the precise steps to be taken by applicants to ensure that projected

service levels are attainable and that key elements of the operating plan will improve service.

USDA applauds the Board for adding this section which recognizes the importance of
adequate service to shippers and other affected parties. The comprehensive information required
in the service assurance plan addresses numerous issues of concern to shippers. USDA
particularly appreciates the requirement that applicant railroads furnish dwell time information
for one year prior to the transaction. The availability of prior benchmarks is essential for the

Board to be able to assess post-merger service levels.

USDA recommends that the Board require applicant railroads to provide historical

data on the transit times for major origin-destination pairs.

22


accomplished at great cost to agricultural producers and rural communities. This is particularly
true in large areas of the Midwest and Plains States where shippers have little direct access to
inland waterway transportation and the distances involved make truck transportation

uneconomical.

The size of the freight bill that U.S. agriculture pays-along with the railroad modal shares
of grains, oilseeds, lumber, and fertilizer movements-demonstrates the importance of adequate
and efficient rail services and capacity for the marketing of U.S. agricultural products and the
delivery of needed farm supplies. 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. 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. Class I railroads,
however, promote unit-train movements of grain, even though the emergence of genetically

modified crops will require identity-preserved handling in much smaller quantities.


USDA recommends changing the wording of the fifth sentence in this paragraph to
require the Board, where both carriers are financially sound, "to make broad use of the
powers available to it... to condition its approval to preserve and enhance competition."
Also, should the conditions proposed by the consolidating firms be inadequate to fully alleviate
the effects of reduced competition, or if the plan proposed by the consolidating carriers fails to
remedy specific competitive or other harms that are threatened by the merger, the Board
should be required to condition the transaction to accomplish the goal of preserving and

enhancing competition.

In addition, the words "financially sound" should be defined in specific terms so that
the exemption from Board imposed conditions refers to those railroads in immediate danger of
bankruptcy or service discontinuance only, rather than to instances where the consolidating

carriers, as determined by the Board, are not "revenue adequate".

Proposed § 1180.1(c)(1): Potential benefits. This proposal requires merger applicants to make a

good faith effort to calculate the net public benefits their merger will generate and to propose
additional measures that the Board might take if the anticipated public benefits fail to materialize
in a timely manner. USDA applauds the Board’s intention to more carefully evaluate merger
applicants’ claims of the net public benefits a merger will generate, however, USDA does not
believe that any penalties suggested by the applicants will sufficiently protect the public

interest-particularly that of shippers and financially vulnerable smaller railroads.


USDA strongly urges the Board to prohibit carriers from charging shippers higher
tariffs to recover the "premiums" paid for the acquired railroad or to take advantage of their
increased market power. This could be accomplished by capping post-merger tariff rate
increases to no more than the increase in the adjusted rail cost adjustment factor for a period

of five years subsequent to the merger.

USDA also recommends that antitrust statutes be applied more rigorously to those
Class I railroads proposing further consolidations. In addition, USDA suggests that the
Board be required to seek and consider the opinions of the U. S. Department of Justice and
the Federal Trade Commission before approving any further consolidations involving Class I

railroads.

Proposed § 1180.1(c)(2): Potential harm. (ii) Harm to essential services. This proposed rule

states that the Board must ensure that essential freight, passenger, and commuter rail services are

preserved.

USDA is pleased that the Board recognizes the importance of preserving essential freight,
passenger, and commuter services by considering whether projected shifts in traffic patterns
could undermine the ability of the various network links (including Class II and Class III rail

carriers and ports) to sustain essential services.


oilseed movements decreased sharply to 31.1 percent by 1998, while the truck share increased to

51.7 percent.?

Historically, nearly 80 percent of all interstate wheat shipments from Plains States are by
rail, and rail has accounted for 90 percent of all export traffic from the region. Rail has been the
dominant mode of transportation for interstate shipment of wheat, historically accounting for
approximately 80 percent of such shipments in the Upper Great Plains States.* However, rail
transportation has consistently lost modal share in recent years. From 1990 to 1995, rail moved,
on average, about one-third of the corn, about two-thirds of the wheat, and about one-quarter of
the soybeans in the United States in any year. Preliminary data indicate that, by 1998, rail share
decreased to only 25.4 percent of corn, 54.8 percent of wheat, and 19.5 percent of soybean

movements.

The U. S. Department of Agriculture (USDA) believes that the severe service disruptions
associated with recent rail mergers have been a major reason for the recent loss of rail share.
Since rail is the only cost-effective transportation mode for those agricultural producers distant

from markets and water transportation, the shift to truck transportation could only have been

3 Eriksen, Ken A., Jerry D. Norton, and Paul J. Bertels. Transportation of U.S. Grains: A Modal
Share Analysis, 1978-1995. U.S. Department of Agriculture, Agricultural Marketing Service, 1998.

4 Ferguson, Allen R. U. S. Agricultural Interests and the Merger of the Burlington Northern and
the Atcheson, Topeka and Santa Fe Railroads. Report to the U. S. Department of Agriculture, July 1995,
pg. 10.

5 Eriksen, Ken A., Jerry D. Norton, and Paul J. Bertels. Transportation of U.S. Grains: A Modal
Share Analysis, 1978-1995. U.S. Department of Agriculture, Agricultural Marketing Service, 1998.

3


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 Surface Transportation Board (Board) proceedings

involving rates, charges, tariffs, practices, and services.

Although the Board has attempted to address the concerns expressed by shippers, USDA
and its agricultural constituents believe that the proposed regulations governing major railroad
consolidations fall far short of protecting the public interest. There is a lack of specificity in the

rules and the Board relies upon voluntary offers, negotiations, and applicant-proposed penalties.

In 1999, American farmers produced nearly 15.5 billion bushels of grain and oilseeds and
agricultural shippers paid nearly $3.5 billion in freight costs just to the U.S. Class I railroads to
transport agricultural products.' Rail moved, on a ton-mile basis, about 44 percent of field crops
(such as grains and oilseeds), about 23 percent of lumber and wood products, and about 40
percent of fertilizers and pesticides in the United States during 1993.” Although an average of
about 40 percent of the grain and oilseeds moved in the United States between 1990 and 1995

were transported by rail, preliminary data indicate that railroad share of domestic grain and

' Freight cost data is obtained from the Association of American Railroads, Freight Commodity
Statistics, 2000.

> U.S. Department of Agriculture. Agricultural Transportation Challenges for the 21" Century:
A Framework for Discussion, July 1998, pg. 8. This is the most recent data of this type that USDA has

2


The substantial service disruptions associated with many of the recent railroad
consolidations demonstrate 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.

The U. S. Department of Agriculture (USDA) applauds the Board for its effort in
proposing changes to the regulations governing major rail consolidation procedures. USDA
recognizes that the complexity of the issues and the large number of the comments from affected

parties made the Board’s job especially difficult.

Although the Board has attempted to address the concerns expressed by shippers, USDA
and its agricultural constituents believe that the proposed regulations governing major rail
consolidations fall far short of protecting the public interest. There is a lack of specificity in the
rules and the Board relies upon voluntary offers, negotiations, and applicant-proposed penalties.
Therefore, USDA asks the Board to consider the following suggestions regarding the proposed

regulations.

SPECIFIC COMMENTS REGARDING THE PROPOSED RULES

Proposed § 1180.1(b): Consolidation criteria. The proposed rule requires that an "approved

transaction will promote a competitive, efficient, and reliable national rail system." The word

13


Proposed § 1180.1(c)(2): Potential harm. (i) Reduction of competition. This proposed rule

requires merger applicants to propose remedies to mitigate and offset competitive harms caused

by a merger transaction.

USDA concurs with the Board’s recognition that additional consolidation of Class I
railroads is likely to have anticompetitive effects, such as the loss of geographic and product
competition, that are increasingly difficult to remedy directly or proportionately. USDA
appreciates the Board’s awareness that many of these anticompetitive effects are a result of Class
I railroad decisions-particularly as the size of Class I railroads have increased-that exploit their
increased market power. USDA applauds the Board’s attempt, in the case of "bottlenecks"
created by the consolidation, to preserve the opportunity for shippers to enter into contracts for
movement of freight over the non-bottleneck segment. However, the Board has failed to protect
shippers from being forced to pay for a railroad merger through higher tariffs. If the public
benefits of a merger truly outweigh its costs, consolidating railroads would not need to force

shippers to pay for the merger.

USDA strongly urges the Board to require consolidating railroads to preserve
competitive options ~such as those involving the use of major existing gateways and build-outs
or build-ins-both physically and economically, rather than just requiring them to propose

remedies to mitigate and offset competitive harms.

16