Christopher A. Mills
Slover & Loftus
1224 Seventeenth Street, N.W.
Washington, D.C. 20036
(202) 347-7170
Railroad Market Dynamics Seminar
 April 8, 1997
New York City
Shipper Perspectives on Rail-to-Rail Competition

  • Rail Industry Consolidations

  • Regulatory protection of captive shippers from increasing rail market power: the "Bottleneck Rate Cases"

  • Legislative Initiatives to Increase Rail-to-Rail Competition

  • The likely fate of Conrail
Rail Industry Consolidations
  • Recent rail mergers have resulted in a significant concentration of market power in the hands of a few huge rail systems
As a result of western rail mergers, in particular BN/Santa fe and UP/SP, two giant railroads now control virtually all bulk transportation in the West

 Source competition among the four major western coal- producing regions has been eliminated for all practical purposes

 Conrail will soon disappear as a separate entity, producing a similar situation in the East -- and possibly leading to the creation of two transcontinental railroads

 Some shippers have already seen the kind of parallel pricing behavior typical of a duopoly by UP and BNSF in the West. Many fear the ultimate result will be widespread rail rate increases, particularly for captive shippers

  • Trackage rights negotiated between competitors (such as those acquired by BNSF in the recent UP/SP merger proceeding) do not preserve real competition
  • Positive effects claimed by merging railroads (increased operating efficiency, additional single-line service) are viewed with skepticism by shippers
Merger savings are not passed back to shippers in form of rate reductions unless compelled by competition

Example: the major reason for the reduction in rail coal rates over the past 15 years was CNW/UP's entry into the Powder River Basin as a direct competitor to BN -- it had nothing to do with merger efficiencies

  • Captive shippers fear that the premiums being paid by large Class 1 railroads to acquire each other will come out of their pockets
STB Regulation of the Rail Industry
  • Shippers do not believe STB regulation provides adequate protection against the increasing concentration of rail market power due to consolidations

  • Regulation is irrelevant for most shippers, who have at least some competitive options, but it is the only protection many captive shippers have from monopoly pricing

  • Captive shippers' concerns have been heightened by the STB's recent decision in the "bottleneck rate cases"
Bottlenecks are becoming increasingly important due to rail mergers

 Examples of bottleneck situations

Principal STB Holdings in the Bottleneck Cases
  • Where the involved carriers offer only origin-to-destination common carrier rates, the shipper's only maximum rate remedy is to challenge the origin-to-destination rate

  • Where a shipper and a carrier first enter into a rail transportation contract over a non-bottleneck line segment, a shipper may challenge an existing applicable bottleneck segment rate

  • Unclear whether a shipper must in all instances obtain a competitive access order to force a bottleneck carrier to provide a challengeable bottleneck segment rate
"Open Access" in the Rail Industry
  • Shipper calls for legislatively-mandated additional rail-to-rail competition (which may include various forms of open access) are being driven by the two factors previously discussed:
Increasing consolidation in the rail industry, with the resulting perceived increase in market power among a decreasing number of mega-railroads

The failure of the current regulatory regime to provide adequate protection to captive shippers (Evidenced by the STB's perceived failure to address competitive concerns adequately in approving rail mergers and in its decision in the Bottleneck cases)

  • Open rail access is being actively discussed on a number of fronts
Alliance for Rail Competition - Formally organized last month by a broad-based shipper coalition. Studying broad legisla- tive changes to increase rail-to-rail competition

 CURE - An organization formed in the mid-1980's, primarily by electric utilities, to promote reform of the Staggers Act. Interested in cosmetic surgery to the Staggers Act (overrule the Bottleneck decision, require STB to give substantial weight to DOJ concerns in rail merger cases)

Shipper Concerns as to the Future of Conrail
  • In general, shippers concur with NS's "Principles of Balanced Rail Competition"
  1. Competition Requires Rail Systems of Comparable Size and Scope

  3. The Largest Markets Must be Served by (at least) Two Large Railroads

  5. Owned Routes are Essential to Competition; trackage rights work only for short-distance industrial access, and as shortcuts between owned lines

  7. Competition Depends on Effective Terminal Access

  9. Competition is Not Free; competitors must pay a fair portion of the overall purchase price
Shipper Views on the CSX/NS Agreement to Carve Up Conrail
  • Competitors should not decide how Conrail should be divided up without substantial input from shippers

  • CSX and NS should not be permitted to dictate which captive shippers get access to two railroads and which do not.

  • Shippers should not have to bear the $4 billion premium being paid for Conrail
Likely Results of the CXS/NS Settlement Discussions
  • Present competitive options will be preserved for all current affected "2-to-1" shippers
  • Two-carrier access will be provided to the New York/New Jersey/Philadelphia area from the Midwest and from the Southeast

  • NS and CSX will divide up coal mines and power plants now served exclusively by Conrail.
Only one carrier will serve utility power plants now served exclusively by Conrail

 Only one carrier will serve Conrail coal origins in West Virginia

 Both carriers may have access to some Conrail coal origins (Probably Pittsburgh Seam mines in southwestern Pennsyl- vania served by the former Monongahela Railroad)

Shipper Reaction to Such a Carve-Up Agreement
  • 2-to-1 shippers want preservation of an effective two-carrier competitive option; this requires more than trackage rights such as those granted to BNSF in the UP/SP merger case. Competitive access should involve joint ownership and operation of the lines, consistent with the NS "Principles of Balanced Rail Competition"

  • Two-carrier access to the New York market is a political necessity, and will obviously benefit rail users who ship to and from that market -- but it is irrelevant to most shippers of bulk commodities such as Conrail-served electric utilities, who also want two-carrier access to their power plants

  • Coal shippers would also like to see two-carrier access to all Conrail-served mines; why should they be treated any differently than New York?
  • CSX and Conrail compete for coal movements to a greater extent than NS and Conrail. Therefore, at a minimum, short of direct, two-carrier service, coal shippers want NS rather than CSX to have access to Conrail-served mines in West Virginia to preserve effective sourcing options

  • Someone will still have to bear the premium being paid for Conrail
The purchase price represents a $4 billion premium over Conrail's book value

 The premium will likely end up being shared by CSX and NS

 Their willingness to pay substantial premiums, notwithstand- ing that additional rail-to-rail competition is contemplated, means they probably expect to recoup the premiums from captive shippers

  • Shippers may ask the STB to condition its approval of any CSX-NS deal by prohibiting inclusion of the premium in the rate base for revenue-adequacy or other regulatory purposes
  • The Conrail merger situation is different from any other recent merger because of its high political visibility

  • The open access debate will not go away regardless of what happens to Conrail

  • Shipper support for open access legislation will gain further momentum if the carve-up of Conrail is perceived as benefitting CSX and NS at the expense of captive shippers


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