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The STB posted its proposed new merger rules this week. As part of its Ex Parte 582 decision the Bard said the new rules would substantially increase the burden on applicants to demonstrate that a proposed transaction is in the public interest. Among other things, these new rules would require merger applicants to demonstrate that the transaction would enhance competition and mitigate potential negative impacts resulting from service disruptions.
As the STB itself puts it, “Our proposed revisions represent a paradigm shift in our review of major mergers. Through mergers and other activities, railroads have now reduced most or all of their excess capacity, and have greatly improved the efficiency of their operations. Thus we believe that it is appropriate to require merger applicants to bear a heavier burden to show that a major merger proposal is in the public interest.
“The Board must balance various, sometimes conflicting, goals in determining the public interest under our governing statute. While we have always used a balancing test, we are changing how we would weigh these goals and are adding new elements to the mix. We would upgrade the importance of competition. We would recognize that redundant capacity is no longer the issue it once was, and that improved carrier efficiency would not have the overriding priority in our balancing that it had before. We would give greater attention to the potential for transitional service harms. And we would place greater emphasis on the role of railroads (including Class II and III carriers) in the broader transportation infrastructure.
“Under our proposed rule, potential harms would be included in our balancing test. Gains that can be experienced only over time would accordingly be given somewhat less weight. There will be increased scrutiny of claimed merger benefits and we would also give increased consideration to the extent to which various claimed merger benefits can be achieved through cooperative agreements among carriers short of a merger.
“To ensure that applicants are careful in the presentation of public benefits, we would require them to suggest additional measures that we could take if those benefits are not realized within a reasonable time. Many of the benefits claimed by applicants in recent mergers have been delayed by transitional service problems. The Board would take particular care to scrutinize future claims of merger benefits and associated timeframes to ensure that they are well-documented and reasonable projections.
“A new category of possible merger harm -- transitional service problems - will require applicants to explain how they would cooperate with other carriers in overcoming serious service problems during the transitional period and afterwards. We have given increased emphasis to the role of smaller carriers and welcome merger applications that propose to enhance competition by expanding access for shippers and Class II and III carriers.” The complete decision is available at www.stb.dot.gov.
Reaction as mixed and pretty much as expected. The American Shortline and Regional Railroad Assn wanted more guarantees for their member roads. In a press release the ASLRRA said it would have the STB “require merger applicants to agree, as a condition for merger approval, to ensure that small railroads have a right to compensation for merger-related service failures, and a right to interchange and routing freedom, competitive and nondiscriminatory pricing, and fair and nondiscriminatory car supply."
According to an article in Reuters the NIT League’s Ed Rastatter says, “ We think it may well prevent most mergers in the future whether good or bad” and that they want more specifics on how commitments and promises will be enforced. Wall Street’s response was muted at best. Rail shares got a slight bump midweek only to close down slightly. It’s pretty clear by now that investors don’t like mergers much, either, what with rail stocks beginning their downward slide about the time UP and BN started their merger programs. Here’s how the majors fared this week:
And for the last five years, you can see where the break comes: It’s not like we didn’t know what was coming in this recent STB session. As far back as Feb we wrote, “The STB wants to know five things. Whether further rail consolidation is necessarily good or bad and, if good, on what schedule; the impact of further consolidation on rates, service, capacity, infrastructure, and finance; possible changes needed in the current regulatory process; and what more mergers mean to the future of the North American rail network.
“Chairman Morgan, in a precise, drill-down address to the Freight Car Forum meeting in San Antonio, laid out these ‘guiding principles’ for the upcoming hearings. First, the preservation of a rail system responsive to all users. Second, sustaining capital investment to insure uninterrupted service. Third, minimizing downstream effects of any mergers that do take place, and fourth, restoring financial stability which will enhance rail service and bring more freight, not less, to the rails.” See http://www.rblanchard.com/corp/wk-rev/00q1/000219.html. I think they done good.
RailAmerica has sold off another chunk of railroad in its program to focus on “core” lines, strengthen the franchise, and reduce debt. The latest target is a 200-mile segment of the Lake Lakeland & Waterways Railway (LWR) in Canada, sold to Alberta Ltd. for approximately $4.5 million. This line was part of the former RaiLink Ltd. holding company acquired by RAIL in July 1999 for some $US50 mm. It is a fairly light-density line as I recall and extends from Boyle to Lynton, Alberta.
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