Rail Customer Coalition letter to STB presents various issues relating to proposed Union Pacific-Norfolk Southern merger

A letter sent this week by the Rail Customer Coalition (RCC), a concern comprised of trade associations representing the manufacturing, energy, and agricultural industries reliant on railroads, to the leadership at the Surface Transportation Board (STB), an independent adjudicatory and economic-regulatory agency charged by Congress with resolving railroad rate and service disputes and reviewing proposed railroad mergers, laid out various concerns and reservations that RCC has in regards to the proposed merger between Class I railroad carriers Union Pacific and Norfolk Southern.

Should this $85 billion deal be completed, the railroad carriers said it would create the nation’s first transcontinental railroad—which will connect more than 50,000 route miles across 43 states from the East Coast to the West Coast and connect around 100 ports as well.

While the letter stated that a strong, competitive transportation network is critical in various ways, including strengthening American manufacturing, unleashing energy production, and preserving U.S. leadership in global trade, it explained that rail mergers do not represent a path to that type of needed network.

“Past rail mergers have shown what happens when consolidation goes unchecked: service suffers, costs increase, and jobs disappear,” the letter noted. “Today, just four U.S. Class I railroads control over 90% of all freight traffic. A transcontinental merger could spark a new wave of consolidation, leaving captive shippers with even fewer Class I rail companies and competitive joint line options to choose from. This is in direct contrast to the President’s executive orders aimed at promoting American prosperity, curbing anti-competitive practices, and preventing monopolistic behavior. Rather than fostering economic growth, it would invite supply chain disruptions and make American products less competitive in the global marketplace.”

With reduced competition, should the merger come to fruition, the RCC said that it strongly believes that more, not less, competition in the rail industry is essential for the White House’s economic agenda. And it added that enhanced freight rail competition is essential for producing more goods in America, growing rail volumes and maintaining U.S. leadership in global trade.

As for the STB’s review of the proposed merger, which will be the first review under the STB’s new merger guidelines—in which mergers enhance service, foster competition, and benefit shippers, with the merging parties required to prove the merger is in the public interest—the letter said that the review presents what it described as a critical opportunity to prioritize freight rail competition and protect American shippers and consumers from the adverse impacts that could results from further railroad consolidation.    

“The Board must rigorously evaluate the potential impacts of the merger and take meaningful action to enhance and protect competition, service, and supply chain stability,” wrote RCC. “The STB’s merger rules rightly focus on the need to “enhance competition.” For any transaction that would so dramatically extend a single railroad’s market power, we believe the threshold for enhanced competition should be broadly expanding access to competitive freight rail service, not solely claims that single line service could make certain lanes more competitive with other modes of transportation such as trucking.”

The RCC is not the only shipper group to voice its opposition against the proposed Union Pacific-Norfolk Southern merger. Soon after it was announced, various shipper groups, including some whom are RCC members, made their positions clear in respective statements.

And in early August, the Freight Rail Customer Alliance (FRCA), a group comprised of large trade associations representing more than 3,500 electric utility, agriculture, chemical, and alternative fuel companies, and their consumers, stated it has been long opposed to continued consolidation in the rail industry based on past experiences resulting in increased rates, higher fees and unreliable service.

And it added that at the time of the Staggers Rail Act of 1980, there were 40 railroads, whereas now there are only six, four of which are responsible for moving 90% of our nation's rail freight.  

“This demonstrated market power is a continuing concern as the railroads have lost market share to trucks over the past 20-plus years due to their dismal service and high rates, but the railroads keep increasing their profits and reducing their operating ratios,” said FRCA’s spokesperson Ann Warner. “This growth in and exploitation of railroad market power has also included forcing shippers into contracts that not only fall outside the Surface Transportation Board’s (STB) regulatory jurisdiction but also lack protection from poor service and increased fees.  Any efficiencies achieved under so-called Precision Scheduled Railroading (PSR) have NOT been passed through to shippers—only retained by the railroads and their shareholders to Wall Street's applause.”

From the railroads’ perspective, Union Pacific CEO Jim Vena said in late July, when the proposed merger was announced, that it builds upon President Abraham Lincoln's vision of a transcontinental railroad from nearly 165 years ago, and will usher in a new era of American innovation.

“Railroads are the backbone of the U.S. economy,” said Vena. “We power industries, connect communities and deliver the materials that build homes, grocery stores, factories and cities, you name it, and the railroad likely moved it. The United States has the best freight transportation system in the world, and this transaction will make it even stronger. The Transcontinental Railroad is the right next step toward achieving that goal—combining Union Pacific and Norfolk Southern that unite the nation from East to West, transforms the U.S. supply chain and transportation landscape.”

What’s more, Vena explained that this combined single-line service will create new routes and increase access across the country, making freight rail transportation a cost-effective option for more American shippers, adding that by eliminating interchanges, customers’ products will reach their destination faster, and increased speed and reliability, combined with lower brake costs per mile, makes rail a more attractive option than truck. And with improved service reliability, he said the new railroad will lower its customers inventory and equipment costs with reduced cycle times.”

Chris Jahn, president of the American Chemistry Council (ACC), had a different view, recently telling LM that every single time there's a railroad merger, there's a degradation of service, adding that three-quarters of ACC members’ facilities are captive.

To that end, he said that the rates in non-competitive situations for ACC members over the last 15 years have gone up 240%, with the other 25%—that are not captive and are competitive—have seen their rates have gone up 24%.

“Why is that? It is because they don't have to compete for the business,” said Jahn. “It's literally 10 times as much, well past the rate of inflation. So that's why we're so concerned about this. Number one, every time we get a merger, service gets worse. Number two, we're going to make a situation where we have less competition going forward, which has been such a terrible detriment to our members.”