U.S. proposes tougher rules for railroad mergers

Wednesday, October 4th 2000, 12:00 am
By: News On 6

By Katherine Yung / The Dallas Morning News

The federal government has altered its stance on railroad mergers for the first time in two decades, issuing preliminary rules Tuesday that will make it harder for large railroads to combine.

"The rulebook for the last 20 years has been rewritten," said Douglas Rockel, a rail analyst at ING Barings LLC in New York. "The burden of proof [to show merger benefits] is going up."

The new merger rules follow several years of service disruptions and other shipping nightmares resulting from previous rail mergers. Faced with the prospect of another round of consolidation, federal regulators imposed a 15-month moratorium on any large deals starting in March while it drew up new industry rules.

The moratorium led to the collapse of a deal to combine Burlington Northern Santa Fe Corp. of Fort Worth with Canadian National Railway Co. The proposed merger, which was announced in December, would have created North America's largest freight railroad, but it also set off concerns that other railroads would have to combine in order to compete with the new giant.

In a written statement issued Tuesday, the U.S. Surface Transportation Board not only released proposed rules but also enunciated a major policy shift. The agency, which has authority over all rail mergers, said the basis for its review process would change from the pro-merger approach that has guided decisions for the last 20 years.

Before any future merger could receive approval, the statement said, the railroads must show that a merger would enhance competition.

"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 statement said.

The industry has until Nov. 17 to make comments to the agency about the preliminary rules.

The agency plans to issue its final rules by June 11.

Both Burlington Northern and Canadian National, which is based in Montreal, declined to comment Tuesday about the preliminary rules except to note that they will respond to the agency by Nov. 17.

"If the board's proposal is adopted, it would raise the bar on future proposed mergers," said Mark Davis, a spokesman for Union Pacific Corp., the nation's largest freight railroad.

With the higher merger hurdles, many railroads are likely to opt for joint ventures or alliances rather than outright marriages, said Anthony Hatch, an independent rail analyst based in New York.

"This puts an additional burden on railroads to prove these mergers are in the interest of the transportation public," he said. "These rules don't stop mergers. It makes clear that here are the concerns you need to have addressed."

Under preliminary rules, large railroads would need to take the following steps to receive merger approval:

•Include provisions for enhanced competition.

•Propose measures that the agency could take if the expected public benefits of the merger don't occur in a timely manner.

•Submit detailed service assurance plans, including contingency plans, that would specify how they will serve customers after the merger. Large railroads would face increased accountability for any service disruptions.

•Establish problem-resolution teams and procedures to address post-merger difficulties.

•Establish a Service Council made up of shippers, railroads and others to discuss merger implementation issues on an ongoing basis.

The rules also state that the agency will consider new criteria during reviews, such as the effects any proposed merger may have in triggering other industry combinations. In addition, the agency plans to take a bigger role in monitoring how mergers are carried out.

While most shippers cautiously praised the preliminary rules, some also expressed doubt about how the agency would be able to effectively implement policy changes.

"They have made a real effort to raise the bar on rail mergers," said Ed Rastatter, director of policy for the National Industrial Transportation League of Washington, a trade organization representing 600 to 800 shippers. "But the devil is in the details."