Rail Deal a Little Too Generous

Did Congress and the Clinton administration go too far in gutting the old Interstate Commerce Commission? The question arises in the matter of the $5.4-billion merger of Union Pacific and Southern Pacific, which would create the nation’s largest railroad.

The prospect for California is mixed. The new railroad would cut 1,940 jobs here, but Union Pacific would invest $350 million in upgrading Southern Pacific facilities.

The merger would create a company carrying 80% of all rail traffic to and from Mexico and 75% of the petrochemical goods produced along the American Gulf Coast. In parts of the Midwest and through the Rocky Mountains to California, the merged line would have no direct competition.

At issue is not so much that the fledgling agency that succeeded the ICC--the Surface Transportation Board--gave preliminary approval to the merger but how it did so. The STB placed surprisingly few stipulations on the deal, requiring only that the new railroad share some track rights with rail competitors, provide further access to track that runs past some plants owned by shippers like Union Carbide and that there be five years of oversight by the board to ensure compliance.

The deal is “unlike any merger ever considered by this board or its predecessor,” noted Anne Bingamin, the Justice Department’s assistant attorney general in charge of antitrust policy. She said that the two railroads were asking the board to “allow the most anti-competitive rail merger ever proposed.”

Justice Department officials said that the merger should be contingent on the sale of specific sections of track to competitors; the Transportation Department said that several regions could suffer a loss of rail competition; and the Agriculture Department said that the deal would drive up the cost of transporting soybeans, wheat and other crops, as well as restrict competition in shipment of agricultural goods to various ports for shipment abroad.

The Surface Transportation Board hasn’t addressed those concerns. Union Pacific said that any requirement of large-scale divestiture of track would have scuttled the deal, but the board did little to test that statement.

For their part, Union Pacific and Southern Pacific say they are locked in serious competition with other forms of transport, especially the trucking industry, and will be compelled to keep costs and rates low.

That brings us back to the ICC, which had until recently enforced rules for the transportation industry, including rail, trucking and barge lines. The ICC had been a target for anti-regulatory dismemberment as far back as 1986, when then-President Ronald Reagan offered it up to meet Gramm-Rudman deficit-reduction spending cuts. When the Congress finally shut the ICC down last year, only its rail regulatory function remained, in the form of the new Surface Transportation Board.

In this the STB’s first major merger decision, the question can rightly be asked whether the pendulum has swung too far, given the concerns expressed at the departments of Justice, Transportation and Agriculture.

The board would do well to reconsider its mild stipulations before it releases its formal, written decision on the merger next month. A failure to do so would only increase the chances of a protracted legal challenge to the merger.