Opinion ID: 421082
Heading Depth: 2
Heading Rank: 2

Heading: ICC Railroad Merger Policy

Text: 27 In response to the congressional directives in the 4R Act and the Staggers Rail Act, the ICC has established policy guidelines which favor railroad mergers that improve efficiency and disfavor imposing conditions on a merger that might reduce potential efficiency gains. 49 C.F.R. § 1180.1 (1982); see Railroad Consolidation Procedures, 363 I.C.C. 200 (1981) (statement of basis and purpose). 7 In general, the Commission encourages ... rationalization of the nation's rail facilities and reduction of its excess capacity. 49 C.F.R. § 1180.1(a) (1982). In deciding whether a merger is in the public interest, the Commission performs a balancing test, weighing the potential benefits to applicants and the public against the potential harm to the public. Id. § 1180.1(c). 28 In weighing potential harm to the public, the ICC considers two principal factors--the degree of reduction of competition from a merger and the harm, if any, to essential services. In determining whether competition will be significantly reduced, the Commission considers both intramodal competition among rail carriers and intermodal competition with trucks, barges, pipelines, and ships. Id. § 1180.1(c)(2)(i). The ICC defines rail service as essential if there is a sufficient public need for the service and adequate alternative transportation is not available. Id. § 1180.1(c)(2)(ii). The Commission does not take into account potential harm to individual competitors (except insofar as harm to competitors significantly reduces competition) because it is concerned only with rail service to the public, not the survival of particular carriers. Id. § 1180.1(c)(2)(ii). 29 The ICC believes that protective conditions are generally not in the public interest because they may lessen the benefits of a consolidation to both the carrier and the public. Id. § 1180.1(d)(1). It recognizes that competition creates an incentive to provide efficient service and therefore will impose conditions when needed to ameliorat[e] potential anticompetitive effects of a consolidation. But it will not normally impose conditions on a merger to protect a carrier unless the conditions are needed to preserve essential services and will neither impose unreasonable costs on the consolidated carrier nor frustrate the ability of the consolidated carrier to obtain the anticipated public benefits. Id. 8 [229 U.S.App.D.C. 25] C. The Railroads Involved in this Case 30 Guilford Transportation Industries (Guilford) is a holding company that is 100% owned by Timothy Mellon. Guilford owns the Maine Central Railroad, a profitable railroad with a near-monopoly over rail service to the Maine paper and forest products industries. 31 The bulk of the traffic carried by the Maine Central originates in Maine and travels west (to Montreal, Buffalo, Chicago, etc.) or south (to Boston, New York, and the mid-Atlantic states); there are also significant shipments of grain from the Midwest to the Maine poultry industry. Rail traffic that originates on the Maine Central can move south over the Boston & Maine Railroad. Traffic from the Maine Central can move west over four routes: over the Canadian National Railway to Montreal and points west; over the Canadian Pacific Railroad to Montreal and points west; over the Lamoille Valley Railroad to the Canadian National to Montreal and points west; and over the Boston & Maine to Albany and from there via Conrail or the Delaware & Hudson Railroad to Buffalo and points west. 32 The Canadian National and the Canadian Pacific are large and profitable transcontinental railroads. The Lamoille Valley operates a single 98-mile east-west line between Swanton, Vt. (its western gateway, connecting to the Canadian National) and St. Johnsbury, Vt. (its eastern gateway, connecting to the Maine Central). Only a small volume of traffic originates or terminates on Lamoille Valley's line. Thus, it depends on overhead traffic (carried from the Maine Central over the Lamoille Valley to the Canadian National or vice-versa) for financial viability. Even with its current level of overhead traffic, the Lamoille Valley has been only marginally profitable, and then only because the State of Vermont spent some $16 million during the 1970's in upgrading Lamoille Valley's track and equipment. 33 The Boston & Maine operates east-west and north-south rail lines in Vermont, New Hampshire, Massachusetts, Connecticut, and New York. It is bankrupt and has been in reorganization since 1970. The Boston & Maine has lost money for the last 25 years; its revenue insufficient to support its extensive network of rail lines. 9 34 The Providence & Worcester is a small, profitable railroad serving Rhode Island and Connecticut. It connects primarily with the Boston & Maine and the Canadian National in the north and Conrail in the west. D. Proceedings Below 35 On October 28, 1981, Guilford applied to the ICC for permission to acquire the Boston & Maine. Its plan to make the Boston & Maine profitable depended on three major elements: federal subsidy (in the form of low-interest loans); operating cost savings from merging the Boston & Maine with the Maine Central; and increased revenue from diverting to the Boston & Maine some of the east-west traffic that now travels over the Canadian National, the Canadian Pacific, or the Lamoille Valley. 36
37 Petitioner Lamoille Valley did not oppose the basic merger. Lamoille Valley claimed, however, that diversion of east-west traffic from it to the Boston & Maine would cause [229 U.S.App.D.C. 26] it to go bankrupt. Lamoille Valley therefore sought to obtain a substitute source of revenue by purchasing part of a Boston & Maine line that would carry some of the diverted traffic. 38 Petitioner Canadian National 10 also did not oppose the overall merger. It was concerned, however, that Guilford might seek to increase traffic diversion from the Maine Central/Canadian National east-west route to the Maine Central/Boston & Maine route by delaying the interchange of traffic between the Maine Central and the Canadian National. This would reduce the time advantage of the Maine Central/Canadian National route over the Maine Central/Boston & Maine route. Canadian National therefore asked the ICC to require Guilford to maintain current interchange service at Danville and Yarmouth Junctions, Maine. 11 39 Petitioner Providence & Worcester is not a direct competitor of the Boston & Maine but rather carries north-south traffic that originates on the Boston & Maine to Connecticut and Rhode Island. Providence & Worcester opposed the merger on the grounds that the merged railroad would not be financially viable and would be unable to maintain current service over those Boston & Maine lines that connect with the Providence & Worcester.
40 The ICC approved the merger and denied all requests for protective conditions. It found that the quintessential public benefit from the merger was the emergence of the [Boston & Maine] from reorganization as part of a potentially strong unified rail network. Boston & Maine Merger, 366 I.C.C. at 336. The Commission also found that [t]he primary competitive impacts of the [merger] are favorable. Id. at 340. There would be no direct reduction of competition because the Boston & Maine and the Maine Central meet end-to-end and do not operate any parallel lines. Id. at 341. In addition, the combined Maine Central/Boston & Maine would be a stronger competitor against the Canadian lines and Conrail. Id. 41 The ICC further found that the merger would not lead to cessation of essential services. The Commission rejected Canadian National's request for protective conditions on traffic interchanges at Danville and Yarmouth Junctions for several reasons. In particular, it was not convinced that Guilford intended to delay interchanges. Also, Canadian National's ratemaking flexibility gave it sufficient competitive leverage to adequately combat any possible diversions of traffic. Id. at 352. 42 As for Lamoille Valley's request to buy track from the Boston & Maine, the ICC agreed that the diversion of much of Lamoille Valley's overhead traffic to the Boston & Maine would be a devastating financial blow to Lamoille Valley. Id. at 353. Nevertheless, it rejected Lamoille Valley's request because Lamoille Valley's service was not essential--shippers could use truck transportation instead. While truck transportation was more expensive than rail transportation, it was not so expensive that shippers would be forced out of business. Id. E. Issues Presented 43 Lamoille Valley, supported by intervenors Eastern Magnesia Talc Co. (a shipper that uses the Lamoille Valley) and State of Vermont, claims that the ICC's test for whether a rail line provides essential services--will shippers go out of business if the line shuts down--is too strict and does not comport with the statutory directive that the ICC consider adequacy of transportation to the public. 49 U.S.C. § 11,344(b)(1)(A). Lamoille Valley also claims that the Commission [229 U.S.App.D.C. 27] erred in not requiring Timothy Mellon, the sole owner of Guilford, to join the merger application and in failing to consider the interests of Lamoille Valley employees who may lose their jobs as a result of the merger. 44 Canadian National joins Lamoille Valley in arguing that the ICC's essential services test is too strict. It also charges that the Commission misanalyzed both Guilford's incentive to delay interchanges at Danville and Yarmouth Junctions and the effect of such an action on Canadian National's willingness to remain in competition with the Boston & Maine. Finally, Canadian National argues that the expedited procedural schedule used by the ICC in considering the merger was a rule within the meaning of the Administrative Procedure Act (APA), 5 U.S.C. §§ 551(4), 553, and was improperly issued without notice and comment. 45 Providence & Worcester joins Lamoille Valley in objecting to the ICC's failure to require Timothy Mellon to join the control application. In addition, it objects to the Commission's finding that the Boston & Maine would be financially viable after the merger. Finally, Providence & Worcester raises several procedural objections: the ICC improperly failed to exercise jurisdiction over Guilford's issuance of securities to Timothy Mellon in connection with the merger; the ICC erred in approving Guilford's acquisition of the Vermont & Massachusetts Co. (which owns a single 56-mile long rail line leased by the Boston & Maine under a 999-year lease) without requiring a formal control application; and the ICC allowed Guilford prematurely to control the Boston & Maine. 12 46 Intervenors Guilford and Trustees of the Boston & Maine support the ICC's decision. 47 In part II of this opinion, we defer, under principles of equitable abstention, to the reorganization court's finding that the merged Boston & Maine will be financially viable, and conclude that the ICC properly approved the merger as a whole. In part III, we find that the ICC's essential services test for determining when protective conditions may be needed, on its face, complies with the statute. Nevertheless, we find that the test, as applied to Lamoille Valley, is too strict. In part IV, we find that the ICC failed adequately to explain why Guilford would not downgrade service at Danville and Yarmouth Junctions and that the Commission placed undue weight on Canadian National's system-wide revenues in assessing Canadian National's willingness to provide service to Maine. In part V, we conclude that the ICC properly declined to take into account the interests of Lamoille Valley's employees in continued employment. 48 Part VI deals with the procedural issues. We conclude that the ICC's failure to require Timothy Mellon to join the merger application, if error, is not prejudicial in this case. We further conclude that the expedited procedural schedule used by the ICC is exempt from the APA's notice and comment requirements as a rule[ ] of agency ... procedure, 5 U.S.C. § 553(b)(A), and that Providence & Worcester's various procedural objections are without merit. Part VII is a conclusion. 49