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Rail merger rules offered
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October 3, 2000: 4:18 p.m. ET
New rules would give federal regulators greater say in future railroad mergers
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NEW YORK (CNNfn) - The U.S. Surface Transportation Board proposed significant rule changes Tuesday aimed at derailing major North American railroad mergers unless the companies can make a strong case that the union would enhance competition.
By the federal agency's own account, the proposed rules represent a major shift away from the "pro-merger" stance that has guided the STB during merger deliberations for the last 20 years. Instead, the agency argued the need for further consolidation in the industry is long passed.
"The board noted that there is no longer the pressing need that the nation's largest railroads once had to consolidate their operations to reduce excess capacity because that rationalization has largely been accomplished," the STB said in a report released Tuesday.
The STB also said it hopes to avoid the "significant transitional service problems" of recent consolidations.
CSX Corp. (CSX: Research, Estimates) saw significant service level problems in 1999, a year after it integrated about half of Conrail into its system.
The proposed rules come seven months after the STB stepped in and proposed a 15-month moratorium on all railroad mergers so it could devise specific guidelines that would ensure competition and smoother mergers. The agency noted consolidation through the last 10 years had left only six major North American railroads and caused several problems during the consolidation process, including rail car shortages, shipping delays and depressed stock prices.
The moratorium scuttled the proposed $5.1 billion merger between Burlington Northern Santa Fe (BNI: Research, Estimates) and Canadian National Railway (CNI: Research, Estimates), which lost its appeal to overturn the moratorium in the U.S. Court of Appeals.
"We must be confident that at the end of the day a balanced and sustainable rail transportation system is in place," the board said.
Both Union Pacific Corp. (UNP: Research, Estimates) and Burlington, the top two railroad companies in terms of market capitalization, said they were reading the proposed rules and would comment at the appropriate time.
Comments regarding the rule changes are due Nov. 17, replies are due Dec. 18, and rebuttal comments are due Jan. 11, 2001. The three commissioners at the STB plan to issue final rules no later than June 11.
Strong focus on ensuring competition
Specifically, the STB is seeking to require merger applicants to include provisions for enhanced competition as an "essential aspect" of their plans. At a minimum, the board wants to require applicants to offer specific remedies to keep major existing gateways open to competitors, options for building out the railway systems and preserving the opportunity for shippers to obtain contract rates in so-called "bottleneck" situations.
The board promised to give "substantial weight" to this provision during the deliberation process.
The STB also proposed cracking down on overzealous merger benefit projections, noting past technical problems during the transition period. As part of that process, the STB would ask the merger candidates to propose additional measures the board could enact if the anticipated public benefits fall short of expectations.
Other proposals include expanding the agency's post-approval monitoring powers to ensure adequate service is provided, requiring the merged parties to submit ongoing progress reports for at least five years after the merger, and urging the railroads to negotiate system-wide employment issues with the various rail unions. 
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