Rail Giants Await Action Today on Their Merger Plan

Backed by officials from California and 20 other states, one of the West’s most storied railroad companies, Southern Pacific Rail, hopes federal regulators today will approve its $5.4-billion merger with its onetime archrival, Union Pacific Railroad.

The proposed deal, the biggest in transportation history, would create a 37,000-mile rail behemoth linking 25 states, Mexico and Canada. If federal regulators do not alter the merger, it could affect retail prices for a range of consumer goods transported by train.

And it would begin a new chapter for the all-powerful railroad that opened California to the rest of the United States, in the process bringing fabulous wealth to its founders and death to some of those who resisted them.

The three-member federal Surface Transportation Board, which has authority to revise or even kill the deal, has come under intense pressure from those--particularly shippers--who fear a return to the old days of rail monopolies. Critics are demanding that the merged rail line be required to sell parts of its holdings to competitors.

“The proposed merger of UP and SP is unlike any other merger ever considered by this board or its predecessor,” Anne Bingaman, the assistant attorney general in charge of antitrust policy, told the Surface Transportation Board in a hearing earlier this week.

“It is larger, involves more parallel lines [and] would affect competition in many more markets,” Bingaman said. “ . . . Let me be very clear about this. The applicants here are asking the board to do something that is extremely radical: allow the most anti-competitive rail merger ever proposed.”

Bingaman’s Justice Department has no antitrust authority in the transportation field. Instead, the independent Surface Transportation Board, the successor to the Interstate Commerce Commission, the first of the federal regulatory agencies, has authority to hold thumbs up or thumbs down.

If approved, the Union Pacific-Southern Pacific network would carry more than 80% of all rail traffic to and from Mexico and three-quarters of the petrochemical goods produced in the U.S. on the Gulf of Mexico. It would control 11 of the 13 lines serving Houston and would have no direct competition from parts of the Midwest through the Rocky Mountains to California.

Since transportation costs make up as much as 20% of the retail price of goods, experts say such a level of rail concentration could raise consumer prices sufficiently to weaken the economy.

“This merger will have huge economic effects,” said Robert Voltmann, director of policy for the National Industrial Transportation League, a Washington-based trade group. At worst, he said, it “could cause an increase in prices and may cause companies to go out of business.”

In a lengthy oral argument to the board, Union Pacific lawyer Arvid E. Roach disputed such claims, arguing that most shippers would get better service at competitive prices.

“This deal will create more efficiency” and save $580 million by creating shorter transportation routes, Roach said.

Critics say the merger would reduce today’s major rail lines from three to two, the second being the Burlington Northern Santa Fe. “But it’s really like we are going from one to two . . . “ Roach said. “If you do not approve this merger, SP will become a marginal competitor in the West.”

Over the years, Southern Pacific extended its power from its California base across the country to Capitol Hill. Congress, often at Southern Pacific’s bidding, fought off repeated proposals to make costly improvements to the San Pedro harbor to make it more competitive with Southern Pacific’s favored Santa Monica site.

Though the power of the nation’s railroads has declined over the decades, the proposed Southern Pacific-Union Pacific merger shows they remain a force to be reckoned with.

Experts say it is likely that the Surface Transportation Board will order only slight changes in the merger--perhaps only requiring sharing agreements on some of the most critical routes.

If so, that would be a huge victory for Union Pacific and Southern Pacific, which have said that widespread divestitures could kill the deal.