Fuel Management for Competitive Power Generation -- Selected Papers
Publication No. EPRITR-107639
December 1996
C. Michael Loftus
Slover & Loftus


        The regulatory and competitive frameworks of rail transportation in the United States will be significantly affected by the enactment of the ICC Termination Act of 1995, and by the transformation of the western rail industry arising from approved and pending railroad mergers.(1) This paper examines the effects that this new legislation and the recent railroad merger activity may have on utility coal shippers.

        On December 29, 1995, President Clinton signed into law the ICC Termination Act of 1995 ("ICCTA" or "the Act").(2) The ICCTA abolished the 108-year old Interstate Commerce Commission ("ICC" or "Commission") but transferred some of its regulatory functions to the newly created Surface Transportation Board ("STB" or "Board"). The Board is an independent agency within the Department of Transportation ("DOT").

        The ICCTA is in large part a continuation of the deregulatory process initiated with the Railroad Revitalization and Regulatory Reform Act of 1976 ("the 4R Act"),(3) and then advanced by the Staggers Rail Act of 1980.(4) Both of these previous acts reduced various aspects of the ICC's economic regulation of railroads -- but put in place rail market-dominance regulation to protect "captive shippers" from unreasonably high rates. For rail shippers who enjoy the benefits of competition, rail rate regulation was discontinued in 1976.

        Sunset of the ICC has been proposed repeatedly since the early 1980s. It was perceived to be a serious threat in June, 1994 when the House of Representatives voted 234-192 to zero fund the agency. Although that effort to kill the agency was subsequently defeated, it set the stage for a searching re-examination of ICC activities and of the need for its continued existence.

        In 1995, with momentum from the Republican takeover of Congress and strong support from the Clinton Administration, there was another run at eliminating the ICC. The terms of the debate by this point assumed that there would be major surgery on the Interstate Commerce Act. The real issue was over how many and which of the ICC's functions needed to be continued. Captive rail shippers and many railroads had a common interest in preserving the agency in some form, and were successful in doing so through the creation of the new STB. In the process, most of the ICC's functions of principal importance to utility coal shippers were continued under the jurisdiction of its successor agency. This paper will review those functions which have been retained and discarded as well as the impact of these changes on utility coal shippers.

        It is ironic that as railroad regulation has been progressively relaxed -- on the theory that market competition should be sufficient to protect rail shippers -- major railroad mergers are steadily increasing concentration in the industry and reducing shippers' competitive options. This paper will review briefly the types of competitive concerns that the ICC has been willing to address in merger cases, and those it has not, and discuss some of the coal-related issues in the proposed UP/SP merger.

        Though the passage of the ICC Termination Act of 1995 assures continuation -- for the short term -- of regulatory protection of captive rail shippers against excessive rail rates, the longer term outlook is unclear. It is entirely possible that forces advocating elimination of virtually all such regulation will be successful at the expiration of the current three year authorization for the STB.

ICC Functions Which Have Been Retained And Which Have Been Discontinued

  • Significant ICC functions retained by the Board include:
  • jurisdiction over maximum rate reasonableness disputes;(5)
  • jurisdiction over, and publication of, the Rail Cost Adjustment Factor;(6)
  • jurisdiction over railroad common carrier obligations;(7)
  • jurisdiction over rail cost and accounting matters;(8)
  • jurisdiction over certain rail line construction projects;(9) and
  • jurisdiction over rail mergers.(10)
The principal reductions in the responsibilities held by the ICC -- but repealed by the ICCTA -- include:
  • elimination of tariff and contract summary filings (except grain products);(11)
  • elimination of authority to establish minimum rates;(12)
  • elimination of state certification to regulate intrastate rail transportation;(13)
  • elimination of a special rate regime for recyclable commodities;(14)
  • elimination of automatic three-year review cycle for approved rail merger activities;(15)
  • elimination of commodities clause (which limited a railroad's ability to haul commodities it manufactured, mined or produced);(16) and
  • elimination of non-SEC regulation of railroad securities.(17)
Assessing The ICC's Successor Agency

        The structure of the STB has been modified from that of the previous Commission. While the ICC had five Commissioners, the STB consists of three members. The three remaining ICC Commissioners serving prior to the agency's sunset, automatically became new members of the Board and will serve out the remainder of the terms to which they were appointed. New Board members will serve five-year terms, with a two-term limit on service.

        The levels of funding and staffing for the Board were both reduced from previous Commission levels. The Board is authorized for a three-year period, with authorized funding set at $12 million annually.(18) It is anticipated that the Board will employ approximately 125-130 employees -- down from the approximately 325 staff employed by the ICC at the end of calendar year 1995. For the present, the Board is continuing to operate out of the building previously occupied by the ICC.

        While the Board is established within the DOT, it is an independent entity and is structured to operate outside of DOT direction or control. The Board Chairman is specifically authorized to appoint and supervise Board employees, and thus retain control over the operation and functioning of the agency.

        The ICCTA provides for the transfer of pending proceedings to the new Board for resolution (except for matters with respect to which the applicable statute is repealed by the Act). All transferred proceedings are to be decided under the law in effect prior to the enactment of the ICCTA. The ICCTA does not affect court proceedings begun prior to the Act's enactment; nor does the ICCTA affect appeals taken from suits which were commenced prior to the Act's enactment. Such proceedings will be concluded under the applicable prior law. However, the ICCTA does specify that for any cases remanded by a court to the Board, any subsequent proceeding will be conducted under the provisions of the new Act.

        The ICCTA also provides that "[a]ll orders, determinations, rules, regulations, permits" that were issued or followed by the ICC are to continue in effect under the Board (or at least until the Board affirmatively repeals or amends such provisions). Substitution of the Board for the ICC is further facilitated by a specification in the Act that any references to the ICC in any federal law, rule or regulation are to be treated as references to the Board.

Evaluating The Impact Of The ICC Sunset Legislation On Utility Coal Shippers

        For utility coal shippers, the critical functions of the ICC relate to rate reasonableness, publication of the Rail Cost Adjustment Factor and the related productivity adjustment, spur line construction, and railroad mergers. The STB has been provided continuing jurisdiction in each of these areas.

        Today, most coal traffic moves under rail transportation contracts. Aside from a repeal of the requirement that contract summaries be filed, the law concerning rail transportation contracts is essentially unchanged.

        Since railroads have no obligation to enter into contracts for rail services, maintaining railroads' common carrier obligations was a critical goal of rail shippers in the legislative process resulting in the new Act. Although the tariff filing requirements for common carrier traffic were repealed by the Act, the common carrier service obligation remains. Accordingly, a railroad is obligated, upon reasonable request, to provide common carrier service to a rail shipper at reasonable rates and other terms.

        The ICCTA retains the basic Staggers Act standards for evaluating the reasonableness of rail rates. These standards include the criteria pertaining to market dominance;(19) the duty of rail carriers to establish rates, classifications and through rates;(20) and Board authority to review and order changes in rates, classifications and intercarrier dealings.(21) The new Act retains the prior 180 percent revenue-variable cost jurisdictional market-dominance standard, as well as the qualitative standards developed by the ICC for evaluating market dominance.(22) Those qualitative standards call for evaluation of intramodal competition, intermodal competition, geographic competition and product competition in determining whether a railroad faces effective competition. Increasingly, the last of these factors, product competition, is the focus of railroads' contentions that their rates are restrained by a utility's other options (e.g., to dispatch other generating units or to purchase power).

        The principal test of whether a challenged rate exceeds a maximum reasonable level continues to be stand-alone costs (i.e., the cost at which a least-cost, most efficient, hypothetical competitor could haul the traffic of (a) the complaining shipper and (b) any other shipper whose traffic the complaining shipper wants to include as a customer of the hypothetical competitor). As a practical matter, results obtained under this methodology are very heavily influenced by traffic densities over affected routes. The more units of traffic the stand-alone system can carry, the lower the costs to haul each unit of traffic (e.g., ton of coal) will be.

        The Act continues the requirement that the Board compute and publish the Rail Cost Adjustment Factor ("RCAF").(23) The RCAF is a quarterly inflation cost index that reflects railroad costs. In addition, the Act codifies the ICC's practice of calculating an adjustment to the RCAF which accounts for changes in productivity. The Board will publish the RCAF both with and without the productivity adjustment.

        The ICCTA replaces the sections of the law, which previously governed railroad consolidations and mergers.(24) While the new Act retains the public interest standard used in merger proceedings, the criteria are now broadened to include evaluation of adverse effects on competition in the national rail system -- not just "in the affected region."(25) Furthermore, the Board is explicitly authorized to impose certain conditions on merger approvals -- including divestiture of parallel tracks and/or the granting of trackage rights. Where trackage rights are imposed, the Board is required to provide for operating terms and compensation levels to ensure the alleviation of anti-competitive effects. A 15-month maximum time limit is imposed for Class I merger proceedings. Additionally, the imposition of employee protective arrangements resulting from mergers is adjusted. Finally, the new statute expressly authorizes ex parte communications with the Board and with its staff in a Class I merger application proceeding.

        The Board retains jurisdiction over constructions, acquisitions, and operations of common carrier rail lines. This jurisdiction includes authority to order one railroad whose tracks block the access of another railroad to allow for a rail crossing. The Act implements a new 120-day limit for disposition of crossing cases by the Board. The "public convenience and necessity" standard necessary for a rail carrier to discontinue or abandon particular service or lines is retained. Provisions governing "forced sales" of lines proposed for abandonment are also retained, as is Board authority to examine alternative public uses for lines proposed for abandonment. Additionally, it should be noted that the passage of the ICCTA did not alter the ability of a rail shipper to build a non-common carrier line(26) exempt from prior agency approval, or, if the rail shipper so chooses, to form a common carrier rail line.(27)

        The ICCTA retains the provisions of prior law that allow exemptions from many of the requirements of the law. These procedures have been especially important in new line constructions, line sales and abandonments. Exemptions will continue to be granted in those instances where regulation is not necessary to protect against market abuse. The exemption procedures under the prior law are streamlined, with a 90-day limit for the Board to decide whether to conduct an administrative proceeding, and a 9-month limit on concluding any ensuing proceeding. Additionally, the Act emphasizes that exemptions should be granted to the "maximum" extent consistent with applicable law and policy.

Significant Rulemakings To Be Performed By The Board

        The STB has been given the responsibility to develop a significant number of rules to effect full implementation of the ICCTA. For several of these rulemakings, the ICCTA sets specific time frames -- thus the Board will be required to act expeditiously to develop and issue the new rules.

        Of most interest to rail shippers are those rules pertaining to common carrier rates and service terms (replacing the duty to publish tariffs), non-coal rate guidelines, assurance of expeditious procedures for the handling of rate-reasonableness cases, cost accounting principles, and the development of the railroad-shipper transportation advisory council.

        The Board is required to issue implementing regulations within 180 days to clarify the obligation of a carrier to make its common carrier rates and service terms available to any person on request.(28) The Act requires that such regulations "shall provide for immediate disclosure and dissemination of rates and service terms, including classifications, rules, and practices, and their effective dates." It also requires the Board to establish rules to accommodate the use of electronic media in disseminating the information. Until the Board completes this rulemaking, the railroads are continuing to maintain and observe their tariffs that were in effect on December 31, 1995 (subject to changes that are made in compliance with statutory notice requirements).

        Within one year, the Board is required to complete the pending non-coal rate guidelines proceeding and to establish a simplified and expedited method for rate-reasonableness cases in those instances in which a full stand-alone cost case is too expensive. Although referred to as non-coal rate guidelines, the standards established in this proceeding may be applicable to some coal movements.

        Within 9 months, the Board is required to establish procedures to ensure the expeditious handling of railroad rate-reasonableness cases. The Board must also establish measures to avoid delay in the discovery and evidentiary phases of rate and exemption or revocation proceedings. This is an especially important rulemaking for potential rate litigants because historically extensive delays have been caused by various railroad tactics.

        The ICCTA retains the agency's jurisdiction over railroad accounting practices. The Act requires the Board to "periodically review its cost accounting rules and [to] make such changes in those rules as are required to achieve the regulatory purposes of this part."(29) The Board also must ensure that the rules promulgated in this area are efficient and are the "least burdensome means by which the required information may be developed for regulatory purposes."(30) The cost accounting rules are of major importance to rail shippers for a variety of reasons including use of cost data in rate cases and in preparation of the RCAF.

        The final pertinent rulemaking responsibility assigned to the STB is the creation of a 19-member council to advise the government on significant rail transportation policy issues of concern to "small shippers and small railroads, including car supply, rates, competition, trackage rights, and effective procedures for addressing legitimate shipper and other claims."(31) The Council will meet at least semiannually and is required to prepare an annual report.

The Bottom Line: What Regulatory Protection Will Captive Utility Coal Shippers Have Against Monopoly Rail Pricing?

        For rail transportation, the ICCTA maintains the ICC's core economic regulatory functions under the direction and control of the new Board. However, because of a significantly reduced work force, the Board faces significant challenges in setting up a management structure which can handle this continuing case workload. These challenges are exacerbated in 1996 due to the added demands of the several rulemakings discussed above. Recognizing this, Chairman Morgan has stressed the message of "expedition, efficiency, and reform" -- all of which will be necessary for the system to work effectively.

        Observation of the early months of the STB's activities is encouraging. Of particular significance to coal shippers is a decision issued by the STB in its Docket No. 41191, West Texas Utilities Company v. Burlington Northern Railroad Company, on May 3, 1996. In that proceeding, West Texas Utilities Company ("WTU") had challenged a Burlington Northern Railroad Company ("BN") tariff rate for the movement of coal from the Wyoming Powder River Basin to WTU's Oklaunion plant near Vernon, Texas -- a distance of some 1110 miles. The challenged rate was $19.36 per ton in railroad-supplied equipment. The Board ruled that the BN had market dominance over WTU's traffic and that the maximum reasonable rate level was $13.68 per ton for a reduction of $5.68 per ton off the challenged rate. BN was also ordered to pay reparations for coal traffic that had moved under the tariff rate since October, 1995, when a WTU rail contract with the BN had expired. Several other coal rate cases are pending at the STB.

        The pending UP/SP merger proceeding, discussed below, presents a number of troubling issues for coal shippers, particularly in light of the recently approved BN/Santa Fe merger. The manner in which the Board decides those issues will provide a significant reading on the future of economic regulation of the rail industry.

        There has been already, and there will continue to be, significant pressure exerted by the railroads, by some Members of Congress, and by the Administration for continued deregulation of the railroad industry.(32)

        Such pressure could ultimately threaten the hard-fought victories achieved by rail shippers in maintaining regulatory protections in the ICCTA.

Assessing The Impact On Fuel Management Of Recent Merger Activity And The Continuing Concentration Within The Rail Industry

        In 1980, when the Staggers Rail Act was passed, there were forty Class I railroads in the United States. As a result of subsequent merger activity, today there are only eleven. If the proposed UP/SP merger is approved, there will be ten Class I's, with only two large systems in the west (BNSF and UPSP), and three large systems in the east (Conrail, CSXT and Norfolk Southern).

        A railroad merger presents utility coal shippers with the potential for both positive and negative effects.

        Potential Benefits of Mergers to Coal Shippers

        Often mergers make possible operational changes (e.g., shorter routings, more efficient crew change points, directional traffic flows, single -- rather than joint line -- service) that reduce the railroads' cost of providing service. For a shipper with effective bargaining leverage (ideally origin-to-destination competition) it may be possible to force a pass-through of some of these cost savings in the form of lower rates. Additionally, in some situations, mergers may open up additional coal origins as viable options due to cost efficiencies that allow lower rates.

        Potential Negative Impacts of Merger Activities

        A utility coal shipper should be concerned about several possible negative effects stemming from a railroad merger. Identification and discussion of six such effects follows.

        First is the possibility of reduced rail competition. Although the STB has authority to impose conditions on merger applications to ameliorate the anti-competitive effects of a merger, the ICC has traditionally refused to acknowledge certain types of anti-competitive impacts. The potential for a reduction of competition from a merger is significant and may cause considerable harm to a coal shipper.

        Second is the loss of source competition. Where the two merging carriers serve different competing coal origin areas, the merger may reduce the effectiveness of such competition. The combined carrier may have incentives to prefer one geographic area over another and rail transportation rates may reflect this geographic discrimination. In addition, where rates for one of the merger partners for coal from one geographic area have been restrained by delivered price competition for coal from another area served by the other merger partner, that restraint may be eliminated.

        Third, competitive access options may be lost. Coal shippers have turned in growing numbers to construction of rail lines to create rail service competition. Depending upon the factual circumstances, construction options that have not been seriously pursued in advance of a merger may be jeopardized or lost as a result of a merger. If the possibility of rail line construction to a competing carrier is foreclosed by a merger, any current or potential future constraint on rail rates due to the potential competition will be lost.

        Fourth, the cost of trackage rights established to deflect claims of lost competition may be excessive. Particularly in recent mergers, which have relied upon trackage rights on an unprecedented scale to "fix" anti-competitive effects, the trackage rights fees may effectively raise the level of "competitive" rates. Excessive compensation for trackage rights tends to promote higher rail rates -- rather than constrain such high rates through effective competition.

        Fifth is the probability of reductions in the intensity of competition. The increasing concentration in the rail industry has raised shippers' concerns that the remaining carriers in the market will reduce the intensity of price competition, thus causing a gradual increase in "competitive" rate levels. The existent of only two (or at the most three) carriers serving a particular region increases the possibility that such tacit pricing behavior may occur.

        Finally, a sixth negative effect is the likelihood of service problems. As the recent experience of the UP/CNW merger demonstrates, the process of integrating the operations of merger participants may produce substantial operational problems, which increase unit train cycle times and decrease equipment productivity.

Evaluating The Implications Of The BNSF Merger Decision For Future Mergers

        In July, 1995, the ICC approved the merger of the BN and the Santa Fe creating the largest rail system in the United States with over 31,000 miles of track, and projected annual revenues of approximately $7.5 billion. This merger had major impacts on a number of major coal shippers, but the ICC was not receptive to most of the coal shippers complaints and denied relief in all but one very limited circumstance.

        Anti-Competitive Effects of the Merger Complained of By Utility Coal Shippers

        Several utilities complained about the loss of origin competition stemming from the BNSF merger (vertical foreclosure). Such a situation may occur when a shipper loses a neutral carrier (at destination, at origin, or as a bridge carrier) that had permitted the shipper to obtain the benefits of competition between other connecting carriers. The general fact pattern for loss of a neutral destination carrier may be illustrated as follows where Railroads A and C are the merger applicants:

Graphic:  Loss of a neutral destination carrier
        A few shippers, including one utility, claimed that the merger would deprive them of the competitive benefits of a build-out option. The fact pattern for a build-out situation may be illustrated as follows where Railroads A and C are the merger applicants:
Graphic:  Build-out Situation
           Source competition was another major concern of coal shippers. Specifically, shippers complained about the loss of such competition between Santa Fe coal origins in Colorado and New Mexico, and BN coal origins in Colorado and the Powder River Basin.

        Finally, coal shippers complained about the increased potential for reduced competition and collusive activity as a result of the reduction of major railroad involvement in western coal hauling from four carriers (BN, UP, Santa Fe and SP) to three.

        Why the ICC Rejected Most of the Utilities' Requests for Protective Conditions
        The ICC rejected utilities(33) claims of competitive injury due to the loss of a neutral carrier primarily on the basis of the so called "one-lump theory."(34) The one-lump theory holds that a carrier with a monopoly segment of a movement (e.g., destination monopoly) is presumed to be extracting the maximum monopoly profit available (the one-lump). Therefore "the merger of a bottleneck destination carrier with one of several origin or bridge carriers will not enhance or extend the bottleneck carrier's market power, and thus will not harm shippers."(35)

        Evidence presented by utility shippers that demonstrated that they had, in fact, benefitted from competition from origin carriers was rejected on two alternative grounds. First was that the benefits and, therefore, the harm caused by the merger would not be "substantial":

 Our focus here is properly on substantial harm to competition. Our experience has been that where a single rail carrier controls a destination segment, and no transportation alternatives are available, the shipper will be captive and the single rail carrier will be able to capture the preponderance of the economic profits. Conversely, when certain factors are present that limit a carrier's ability to take full advantage of a bottleneck, those factors will remain in place as effective safeguards after the merger. We have consistently adhered to these principles in assessing harm in merger cases and in making market dominance determinations in rate cases. The fact that a bottleneck carrier might not have sufficient information to execute a perfect price squeeze or to extract the last penny of economic profits does not mean that substantial benefits to shippers will be lost when the bottleneck carrier merges with a connecting carrier.(36)
        The second ground was that the claimed benefits were not the results of origin/rail competition, but of other factors such as a utility's ability to decrease coal/rail transport purchases through economic dispatch of units or power purchases:
These reductions, the utility parties claim, resulted from the active bidding of origin carriers for the movements, with the destination bottleneck carrier appearing to pass through some part of these reductions to the shipper. In response, applicants have shown that these incremental tonnages are relatively price-sensitive movements because of the ability of utilities to shift electricity production, at the margin, to other plants or to purchase power from other utilities. Some pass-through of origin competition for these demand-sensitive movements is consistent with the one lump theory. Utilities that have received this pass-through in the past will not be harmed by the merger because the competitive forces that made these lower rates possible pre-merger will still be present post-merger.(37)
        The Commission even rejected evidence that the Santa Fe, as a destination monopolist, had set its revenue demands on joint rates without knowledge of the joint rates to be quoted by the origin carriers, and furthermore that the utilities had entered into refund arrangements with competing origin carriers that were secret from the Santa Fe. This evidence was rejected as failing to establish that the benefits of origin competition had been passed through to the utilities.

        Another reason given by the ICC for dismissing the claims of utilities complaining of vertical foreclosure was that the relief they requested -- typically trackage rights that would establish origin competition -- would result in creating a greater level of rail competition than existed prior to the merger. The ICC rejected complaints of harm to geographic competition on the ground that after the merger, the competitive relationships of different origins would be largely the same -- particularly in light of differing regional coal characteristics.

        Identifying the Limited Factual Circumstances Deemed to Justify Relief for Coal Shippers

        The only situation in which the ICC granted relief to a coal shipper in connection with the BNSF merger was based on the loss of destination competition in the form of a potential build-out. The utility involved, Oklahoma Gas & Electric Company ("OG&E"), was served by only Santa Fe but had threatened, during negotiations for a contract signed in 1993, to build a 13-mile spur to the BN. The Commission found that this threat "was perceived to be real, and Santa Fe priced its services accordingly."(38) The ICC also recognized that the BNSF merger would practicably eliminate the usefulness of a BN spur.

        Even though it found that the merger would eliminate the build-out threat, the Commission refused to grant the relief OG&E had requested -- namely, trackage rights to allow competitive service at the plant -- because this remedy would significantly improve OG&E's competitive posture. Instead, the Commission granted trackage rights to a point to which OG&E might build a spur in the future. Similar relief was granted in one other build-out situation.

        Trackage Rights Compensation: A Critical Element of the "Remedy" to Prevent Reductions in Rail Competition
        In order to deal with a number of clear anti-competitive effects of their proposed merger, the BN and Santa Fe entered into settlements with certain railroads -- the SP, the UP, the KCS and others. The settlement with SP was particularly notable, as it involved a significant grant of trackage rights miles in favor of SP that the Applicants argued were sufficient to offset any meaningful anti-competitive effects of the merger by ensuring competition by at least two carriers at points which otherwise would be reduced to one serving carrier as a result of the merger. The Applicants agreed that the principal terms of this settlement should be imposed as a condition of approval of the merger.

        The effectiveness of trackage rights as a remedy for anti-competitive effects depends, in significant part, upon the trackage rights compensation (track rental charges) that the user of the trackage rights must pay the owner of the tracks. The reasonableness of the trackage rights compensation in the BNSF-SP settlement was challenged by several utilities and by the Department of Justice. The Commission refused to upset the compensation on the basis that its established policy is to approve any reasonable terms agreed to by the tenant and landlord railroads and that the complaining parties had failed to present sufficient evidence to demonstrate that the compensation terms were unreasonable. In particular, the Commission found that the cost evidence challenging the compensation did not adequately reflect fixed costs or an appropriate interest rental based upon the replacement cost of the lines involved.(39)

Evaluating The Proposed UP/SP Merger

        Shortly after the ICC approved the BN/Santa Fe merger, the UP and SP announced their plans to merge. Unlike the BN/Santa Fe merger, the UP/SP proposal has encountered stiff resistance from a wide variety of shippers, shipper groups and governmental entities, including three federal agencies -- the Department of Justice, the Department of Transportation, and the Department of Agriculture.

        Competitive Concerns for Utility Coal Shippers

        The UP/SP merger would further reduce the number of major railroads engaged in western coal transportation and thus presents concerns similar to those which emerged from the BNSF merger. However, because the UP/SP merger would leave only two major railroads in the western United States, the concerns evident in BNSF are magnified. The overarching concerns relate to the tacit relaxation of rail carrier competition and the increased likelihood of duopoly pricing by the two remaining rail systems in the transformed market. Underlying these comprehensive considerations are several more limited competitive concerns.

        First, the proposed UP/SP combination again raises geographic competition concerns. In recent years, the SP has been aggressive in its efforts to increase traffic volumes of SP-origin coals from Colorado and Utah. Despite differing qualities, these coals are competitive, in certain areas, with UP-origin Wyoming coals. This geographic competition would be reduced or destroyed by the merger. Apart from the issue of geographic competition, there is concern that aggressive SP pricing for SP-origin coals has acted as a competitive constraint on the delivered cost of other coals. Such price constraint will be lost due to UP/SP's unwillingness to price at the more competitive levels.

        Second, coal shippers, in particular, have expressed grave concerns about deteriorating service quality emerging from a UP/SP merger. Despite the close operating relationship between UP and CNW/WRPI, the merger of these entities caused major service disruptions. The operating plan for the UP/SP merger proposes numerous route changes and other operating changes, and thus raises significant concerns about adverse operating impacts.

        A third concern of utility coal shippers relates to potential build-out options. Although the UP/SP-BNSF Settlement ("BNSF Settlement"), discussed further below, purports to address all situations where a shipper's service options go from two to one as a result of the merger, there are unaddressed situations where build-out options would be lost. Particularly susceptible to build-out foreclosure are those utilities which have considered a possible build-out, but which have not yet aggressively pursued the option due to such factors as existing transportation contracts.

        A fourth problem pertains to the trackage rights compensation for bulk commodities in the BNSF Settlement (3.0 mills per gross ton-mile -- not to be confused with mills per revenue ton-mile often used to express coal rail rates). This compensation is believed to be significantly higher than UP/SP's costs (including maintenance-of-way, dispatching and return elements) that would be associated with BNSF's use of its tracks. As such, it could foreclose meaningful competition via use of the trackage rights, or, alternatively artificially inflate the price level at which "competition" will occur.

        A final concern pertains to the broad-scale self-prescribed solutions for anti-competitive effects which are claimed to be effectuated via the BNSF Settlement. There are fundamental policy concerns about the propriety of allowing the two remaining major railroads in the West to work out between themselves the "solution" to the acknowledged major anti-competitive effects created by the proposed merger. The threat of tacit relaxation of competition or actual collusion undoubtedly exists and should be checked by legitimate oversight.

        The Significance of the Comprehensive Settlement Between UP/SP and BNSF

        As stated above, UP/SP submitted a comprehensive settlement between UP/SP and BNSF (the BNSF Settlement) as part of the UP/SP merger application. The BNSF Settlement involves 3967 miles of trackage rights for BNSF and 376 miles of trackage rights for UP/SP. UP/SP claims that the BNSF Settlement fixes all adverse impacts on competition. However, such a claim overlooks many very serious concerns.

        First, although the BNSF Settlement will address most "two-to-one" situations -- it does nothing to address "three-to-two" impacts. Second, the possibility of uncritical acceptance of such purported global "fixes" by the STB reduces the prospects for obtaining relief in individual situations. And third, the proliferation of such broad scale trackage rights deals may create the illusion of maintaining competition while the reality is a significant reduction in the benefits of competition due to such factors as: (a) trackage rights compensation that provide landlord railroads significant cost advantage; and (b) real world differences between operations on a carrier's own lines versus operations via trackage rights/haulage rights.

Attempting To Protect Against The Effects Of Future Mergers
        The specific protections from merger effects that might be sought by any utility coal shipper will always depend on the specific situation faced by that utility. Recognizing this, there are a few general protective possibilities worthy of note.

        The first is the protection of potential rail build-out options. Since the preservation of competitive options in the form of a build-out may turn on the perceived "reality" of the competition based upon evidence of discussions with railroads, engineering analyses, etc., it may be wise to develop the necessary analysis now, rather than to defer such prospects, even if current contractual commitments make such options distant prospects.

        A second possibility is the implementation of contractual protections. In contract negotiations, protective measures against future mergers can be incorporated and should be sought (e.g., granting of trackage rights to competitor railroad upon the conclusion of a contract term or in the event of a merger).

        Other potential protections against adverse effects of rail mergers include the utilization of system economic dispatch opportunities, power purchases and other methods to reduce reliance on rail transported coal (where feasible). Finally, as ongoing discussions about further deregulation of the rail industry progress, utilities may wish to support legislative changes to the current statutory scheme that would enhance competition among railroads by allowing competitive access over bottleneck rail facilities.

        It seems elemental that if regulation is to be removed, competition must be allowed free reign. Thus far, however, the railroad industry has been remarkably successful in preserving its market power while progressively reducing regulatory oversight of its activities.


        Despite the termination of the ICC, the rail regulatory functions of most importance to utility coal shippers have been preserved within the jurisdiction of the STB. If the STB exercises its jurisdiction in a fair and even-handed manner, captive utility rail shippers should have effective remedies against abusive pricing on their coal movements. The STB's disposition of a number of pending coal rate disputes, and of the UP/SP merger, will be instructive in this regard. Reductions in coal shippers' competitive options caused by the increasing concentration within the rail industry due to rail mergers make the availability of effective regulatory protection against excessive rail rates especially critical.

        For the longer term, coal shipping utilities should be involved in the continuing debate about further deregulation of the railroads. Particularly in light of the changes the utility industry is now experiencing, if there is to be further rail deregulation, there is much to commend an approach that relies upon competition by requiring open access over bottleneck rail facilities at a trackage rights fee that is set at a level designed to promote effective competition.

Return to Publications Page

Return to Slover & Loftus Home Page


1. I.e., the Burlington Northern ("BN") and Santa Fe ("SF") merger which was approved by the Interstate Commerce Commission on August 16, 1995 (see Burlington Northern Inc. and Burlington Northern Railroad Company--Control and Merger--Santa Fe Pacific Corporation and the Atchison, Topeka and Santa Fe Railway Company, F.D. No. 32549 (decision served Aug. 23, 1995) ("BNSF Merger")); and the proposed merger between Union Pacific ("UP") and Southern Pacific ("SP") presently before the Surface Transportation Board for consideration (see 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, F.D. No. 32760 ("UP/SP Merger")).

2. 2 Pub. L. 104-88, 109 Stat. 803 (1995).

3. 3 Pub. L. 94-210, 90 Stat. 31 (1976).

4. 4 Pub. L. 96-448, 94 Stat. 1895 (1980).

5. 5 49 U.S.C. §§ 10701 and 10704.

6. 6 49 U.S.C. § 10708.

7. 7 49 U.S.C. § 11101.

8. 8 49 U.S.C. §§ 11161-11164.

9. 9 49 U.S.C. § 10901.

10. 10 49 U.S.C. § 11323.

11. 11 Previously found at 49 U.S.C. §§ 10761-10762.

12. Previously found at 49 U.S.C. §§ 10704-10705 (provision deleted in new sections 10704 and 10705).

13. 13 Previously found at 49 U.S.C. § 11501.

14. 14 Previously found at 49 U.S.C. §§ 10731 and 10733.

15. 15 Previously found in 49 U.S.C. § 11345 (provision deleted in new section 11325).

16. 16 Previously found at 49 U.S.C. § 10746.

17. 17 Previously found at 49 U.S.C. § 11301.

18. 18 49 U.S.C. § 705. Actual funding is set annually through the appropriations process.

19. 19 49 U.S.C. § 10701.

20. 20 49 U.S.C. §§ 10702 and 10703.

21. 21 49 U.S.C. §§ 10704 and 10705.

22. 22 49 U.S.C. § 10707.

23. 23 49 U.S.C. § 10708.

24. 24 I.e., former 49 U.S.C. §§ 11343-46. Note that since the ICCTA is prospective, these changes do not affect the current UP/SP merger proceedings.

25. 25 49 U.S.C. § 11324(b)(5), (c).

26. 26 This point is specifically addressed in the Conference Report on the ICCTA, which states:

[T]he Conference intends no change in existing law with respect to the coverage of regulatory authority over construction of rail lines. Specifically, non-railroad companies who construct rail lines to serve their own facilities, whether or not such lines would be classified as a spur or other auxiliary track exempt from agency jurisdiction, are not required to obtain agency approval to engage in such construction....

H.R. Conf. Rep. No. 422, 104th Cong., 1st Sess. 179 (1995).

27. 27 This is not directly stated in the ICCTA. Rather this principle developed through court and Commission decisions; the ICCTA does not affect these decisions. See Pennsylvania R. Co. v. Pittsburgh, Lisbon & W. R.R. Co., 83 F.2d 861 (6th Cir.), cert. denied, 299 U.S. 572 (1936); New York Central R.R. Co. v. Southern Ry. Co., 226 F. Supp. 463 (N.D. Ill.), aff'd, 338 F.2d 667 (7th Cir. 1964); Hanson Natural Resources Company -- Non-Common Carrier Status -- Petition for a Declaratory Order, F.D. No. 32258 (decision served Dec. 5, 1994).

28. 28 49 U.S.C. § 11101(f).

29. 29 49 U.S.C. § 11161.

30. 30 Id.

31. 31 49 U.S.C. § 726.

32. A "Statement by the President" released on December 30, 1995 in conjunction with the signing of the ICCTA, reflects the Administration's discomfort with the new law.

I am disappointed in this bill. While it eliminates the ICC, it creates a new independent agency, the STB, within the Transportation Department. Overall, the bill falls short of my Administration's much bolder proposal for extensive deregulation of transportation industries.

* * *

The bill provides for the authorization of appropriations for the Board to expire after 3 years. During this period, my Administration will monitor the regulatory activities of the Board to determine whether it should continue and whether further reforms would be beneficial. My Administration remains committed to continued deregulation of the transportation industry.

33. Complaining utilities included Houston Lighting & Power Company, Southwestern Public Service Company, Central Power and Light Company, Arizona Public Service Company, Arizona Electric Power Cooperative, Western Resources, Inc., Tucson Electric Power Company, Western Fuels Service Corp., as well as the Western Coal Traffic League on behalf of its members generally.

34. 34 See BN/SF Merger, F.D. No. 32549 (decision served Aug. 23, 1995) 72-79.

35. 35 Id. at 72.

36. 36 Id. at 74 (emphasis in original).

37. 37 Id. at 77.

38. 38 Id. at 68.

39. 39 Id. at 88-89.

  back to top
  Please click here for the Publications and Presentations Archive