Senators call on STB to closely scrutinize proposed Union Pacific–Norfolk Southern merger

Late last week, a bipartisan Senate duo—John Hoeven (R-N.D.) and Amy Klobuchar (D-Minn.)—penned a letter to leadership at the Surface Transportation Board (STB), including STB Chairman Patrick Fuchs, Vice Chair Michelle Schultz and Member Karen Hedlund, in which they stated they plan to “closely scrutinize” the proposed Class I railroad merger between Union Pacific and Norfolk Southern, with a focus on being able to demonstrate long-term competition in the freight rail sector, with clear and tangible improvements. 

Other U.S. senators co-signing the letter included: Tim Sheehy (R-Mont.), Martin Heinrich (D-N.M.), Bill Cassidy (R-La.), Tina Smith (D-Minn.), Steve Daines (R-Mont.), Raphael Warnock (D-Ga.), Roger Marshall (R-Kan.), Patty Murray (D-Wash.), Mike Rounds (R-S.D.), Ruben Gallego (D-Ariz.), Roger Wicker (R-Miss.), Tammy Baldwin (D-Wisc.), Jim Banks (R-Ind.), Tammy Duckworth (D-Ill.), Joni Ernst (R-Iowa) and Dick Durbin (D-Ill.).

“The STBs post-2001 ‘Major Rail Consolidation Procedures’ were adopted specifically to place heightened emphasis on whether Class I railroad mergers enhance, rather than merely preserve, competition… The proposed UP/NS merger will be the first to come before the Board under these rules, and it is essential that you establish a strong precedent and apply these heightened standards in the way they were intended,” wrote the senators. “If approved, a combined UP/NS would handle more than 40 percent of all U.S. freight rail traffic… a transcontinental system spanning 50,000 route miles across 43 states. Service interruptions of this magnitude could have severe consequences, especially for agricultural producers. Time-sensitive shipments during harvest could be delayed or spoiled, export windows could be missed, and access to global markets could be sharply reduced.”

And the senators added that, in conducting its review, it strongly encourages the STB to take into consideration the impact the proposed merger, if approved, might have on the nation’s agricultural producers, and on the STBs mandate to preserve long-term competition and ensure efficient, economically viable rail service, too.

Since the proposed UP-NS merger was initially announced over the summer, some industry groups have voiced their respective opposition to it.

In 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, said it has long been 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 the 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.”

Under the new STB merger rules set in 2001, which have never been applied, a Class I merger must be in the public interest and demonstrate enhanced competition to be approved. For most shippers, this means enhanced railroad-to-railroad competition, not just enhanced competition to truck, particularly as trucking is not a viable option for most carload shippers, the organization said.  It stated that “particularly important to FRCA members is that a transcontinental merger provide enhanced competition for those who ship via unit train, typically point-to-point, and can utilize only a single rail carrier.”

Other groups that have voice opposition to the merger include: the National Industrial Transportation League, the American Chemistry Council, and the Alliance for Chemical Distribution. 

Union Pacific CEO Jim Vena said over the summer that that combined single-line service between UP and NS 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.

That view was not shared by Keith Creel, CEO of CPKC, the byproduct of a the most recent high-profile freight railroad merger between Canadian Pacific and Kansas City Southern, with the STB approving the deal in March 2023.

On the company’s third quarter earnings call, Creel said that CPKC strongly believes further consolidation is not necessary at this time and is not in best interest of the industry, the shippers, or the U.S. economy.

“As we said before, we remain and we'll be active participants throughout the regulatory process to ensure that the facts are not understood about what a merger of this size and scale means,” he said. The proposed merger would result in one single line of railroad handling about 40% of freight rail traffic in the United States. This proposed merger, in spite of what's been said, represents overlap in key markets such as Chicago, Memphis, St. Louis and New Orleans. This is not a simple end-to-end merger. The merger of this magnitude introduces unprecedented risk, by heavily concentrating much of decision-making for our national rail network with undeniable implications on the entire supply chain.”