LETTING THE COMPETITION GENIE OUT OF THE BOTTLE

LETTING THE COMPETITION GENIE OUT OF THE BOTTLE

Much of the transport world is focused on the dramatic court battle being waged over the 15-month rail-merger moratorium declared by the Surface Transportation Board in March.

The efforts by the STB and its allies on the one hand to preserve the moratorium, and by Burlington Northern Santa Fe Corp. and Canadian National Railway Co. and their allies on the other hand to persuade an appeals court to overturn it will delineate the regulatory powers of the STB. The struggle very well may determine how the consolidation of the railroad industry in the United States plays out.But an equally important process is under way at the board. Because of the simultaneous filing of court briefs, it has received relatively little attention. I'm referring to STB's move to develop a new merger policy and rules.

Part of the STB's justification for setting the moratorium was the perception that there is a need for revision in the rules that have governed first the Interstate Commerce Commission, and more recently, the STB in handling merger requests.

The current rules have been in place for about 20 years. Linda Morgan, STB chairman, has pointed out that great changes have occurred since passage of the Staggers Rail Act of 1980, which substantially deregulated the railroad industry.

For starters, there were more than 25 Class 1 railroads in 1980. There are seven such large systems today.

There is a lot less rail-to-rail competition. Where railroads previously were regional systems forced to hand off shipments to other carriers to get them to their destinations, they now handle many more shipments from origin to destination.

This has resulted in closed gateways, refusal to quote bottleneck rates to interchange points when a railroad can serve an entire move, and other actions shippers consider anti-competitive.

The STB has heard the shipper complaints. In perhaps the biggest departure from current rules, the STB asked those responding to its Advance Notice of Proposed Rule Making to comment on whether ''the time has come for us to consider whether we should revise our rail-merger policy, as many have suggested, with an eye towards affirmatively enhancing, rather than simply preserving, competition.''

Rail consolidation is almost as old as the railroad industry. In the 20th century, the urge to merge waxed but seldom waned. For long periods, however, the ICC refused to approve any mergers.

Industry consolidation got rolling in the last 20 years. First BN acquired St. Louis-San Francisco in 1980, and Union Pacific countered in 1982 with its own acquisition of Missouri Pacific and Western Pacific. In the East, Chessie System and Seaboard Coast Line Industries gained merger approval, only to be followed by the combination of Norfolk & Western and Southern Railway.

After a hiatus of more than a decade, activity resumed when UP successfully sought approval to buy the Chicago & North Western stock that it didn't already own, and BN linked up with Atchison, Topeka & Santa Fe after fighting off UP's hostile effort to buy Santa Fe for itself.

UP then turned to Southern Pacific as a strategic response to BNSF. And after Conrail failed to expand its franchise by breaking off what it called SP East, that carrier was acquired by and divided between Norfolk Southern and CSX Transportation. More recently, Canadian National acquired Illinois Central.

A common thread running through many of the mergers was the benefit to carrier and customer that would accrue from elimination of excess capacity. Railroads honed a fine formula convincing regulators that by reducing redundancy they would increase density on facilities and boost return on assets. This in turn would justify reinvestment that would bring improved service to customers. They persuaded Wall Street that the purchase premiums were justified by the savings they would realize.

By the mid-1990s, however, excess rail capacity was largely a fiction. The STB's Morgan says the rail industry now appears to be dealing with inadequate rather than excess capacity.

Triggered by the difficulties railroads have had in implementing their mergers - only the end-to-end CN/IC seems to have gone smoothly - many rail customers are demanding that the agency's reviews of merger proposals focus not so much on system efficiency as on ways to ensure good service after the merger.

One way to do that, many believe, is to increase competition between railroads. Customers believe carriers will be forced to find ways to make themselves more efficient and will focus on improving service quality if they face the possible loss of business to a competitor.

Whether the STB's merger moratorium is upheld or overturned, one thing is clear. The competition genie is out of the bottle and it is unlikely that anyone will be able to get it back in.