Surface Transportation Board issues new rules for rail mergers

The U.S. Surface Transportation Board has released new rules for rail mergers. The rules reflect a significant change in the way the Board will apply the statutory public interest test to any major rail merger application.

Because of the small number of remaining Class I railroads, the STB states that because of the fact that rail mergers are no longer needed to address excess capacity in the rail industry, and the transitional service problems that have accompanied recent rail mergers, future merger applicants will be required to bear a heavier burden to show that a major rail combination is consistent with the public interest.

This shift in policy is meant to place greater emphasis in the public interest assessment on enhancing competition, while ensuring a stable, balanced, and reliable rail transportation system in a way that accounts for smaller railroads, ports, and passenger and commuter services.

The new rules would seek to counter merger-related harms that cannot be directly or effectively mitigated, says the Board. The STB indicated that such competitive enhancements could include, but would not be limited to, reciprocal switching arrangements, trackage rights, and efforts to eliminate restrictions on interchanges by shortline railroads.

Because the realization of benefits in recent mergers has been delayed or frustrated by transitional service problems, future merger proposals should be met with a more sceptical, “show me” attitude towards claims of merger benefits and towards claims that transitional service problems will not occur. The Board said that it will also consider the extent to which various claimed merger benefits can be achieved, short of merger, through cooperative agreements among railroads. Given the size of the transactions that may be proposed in the future, and, given the dangers involved should such transactions fail, the benefits claimed by future merger applicants will be very closely scrutinized.

Merger applicants will have to submit a Service Assurance Plan with their initial application and operating plan, which would also take into account plans to deal with any potential adverse service effects during implementation and plans to accommodate such less-than-optimum operations. In particular, a Service Assurance Plan would have to include information about proposed operational integration, training, information technology systems, customer service, freight and passenger operations coordination, yard and terminal operations management, service disruption contingency plans, how traffic-level changes or increases will be accommodated by the combined system, infrastructure improvement, labor issues, service benchmarking, and timetables for the completion of implementation activities, as appropriate.

With regard to transnational issues, because future major transnational mergers are likely to raise novel jurisdictional, national interest, and public interest issues, it will be necessary to gather information about relevant facts, laws, and policies important to an accurate and comprehensive understanding of such merger applications.

The new rules therefore provide that, in addition to full-system competitive analyses and operating plans required of applicants with transnational operations, all applicants will be required to address any ownership restrictions (by law or corporate initiative) and any pertinent governmental restrictions or preferences.

Canadian National’s president and CEO Paul M. Tellier, says he is pleased with the rules.

“CN is pleased that the rules adopted by the STB will raise the bar for the quality of customer service in future railroad mergers. CN had urged the agency to adopt such an approach last year. CN is also pleased that the STB appears to have heard its concerns and plans to apply higher public interest standards for mergers equally to all applicants – both domestic U.S. companies and foreign-headquartered corporations. If the goal of treating U.S. and foreign-headquartered railroads equally is met in the implementation of the rules, that will help stimulate competion in our industry,” he said.