Rail Merger Clears Final Hurdle Regulators Ok Deal Between Union Pacific, Southern Pacific

Federal regulators gave their blessing Wednesday to the $5.4 billion marriage of Union Pacific and Southern Pacific railroads, rejecting arguments that creation of the nation’s largest railroad would destroy freight competition.

The three-member Surface Transportation Board unanimously sanctioned the merger in a ruling that becomes official Aug. 12, though it set 35 conditions designed to minimize anti-competitive aspects of the deal.

“We are satisfied. I guess I should say well satisfied,” said Drew Lewis, chairman of Union Pacific Corp., based in Bethlehem, Pa.

With more than 35,000 miles of track in 25 states and Mexico and Canada, the post-merger Union Pacific-Southern Pacific would vault ahead of Burlington Northern-Santa Fe. Together, the two rail companies control 90 percent of all freight traffic west of the Mississippi River.

Assistant Attorney General Anne Bingaman, on Monday termed the deal “the most anti-competitive rail merger in our history.”

“We continue to believe that a competitive market structure - and not more regulation - is the best way to keep prices low in the railroad industry, as in every industry,” she said.

But the transportation board found that reducing the number of railroads serving a market doesn’t necessarily translate into higher prices.

“History has shown that restructuring in the rail industry has strengthened the rail transportation system in the form of better service and lower rates,” said board Chairwoman Linda J. Morgan. “And this merger should be no exception.”

Alliance supporters contend Union PacificSouthern Pacific will be able to compete more effectively with Burlington Northern, thus holding down rates. The potential partners project $750 million in annual savings, some of which would result from the planned elimination of 3,400 jobs. The transportation board’s staff estimates annual savings of $627 million.

Fort Worth, Texas-based Burlington Northern didn’t oppose its rivals’ merger, under which it would purchase 335 miles of track and gain use of an additional 3,900 miles.

Board members acknowledged the merger may cause some competitive harm, but said their ruling modified the initial proposal enough to make it an overall economic boon for shippers, the public and the railroads.

They also noted that Union Pacific’s takeover of San Francisco-based Southern Pacific will boost that railroad’s flagging fortunes. Union Pacific plans to spend $1.3 billion upgrading Southern Pacific.

“What we have achieved will allow the greatest good to be achieved with the minimum harm,” said board member Gus Owen.

Chief among the conditions imposed are increased access to Union Pacific-Southern Pacific tracks and facilities by other competitors, especially Burlington Northern.

The board also carved out new trackage rights for Texas Mexican Railway Co., responding to concerns that the new combined railroad would have excessive dominance of freight to Mexico and along the Gulf Coast.

In its ruling, the board also gave itself five years of oversight, during which it could force track sale or other conditions if the merger partners violate the ruling.

The board’s decision made clear Wednesday its distaste for forcing divestiture of track as a condition of the deal - a provision sought by the departments of Justice, Transportation and Agriculture.

The three agencies opposed the merger as structured, saying it could cost consumers $800 million annually in higher prices and also harm farmers and U.S. exporters.

“Divestiture may be an obvious fix for some, but it’s not an obvious fix for me in this case,” said Morgan. “This remedy goes beyond the harm to be addressed.”

Opponents were quick to voice their discontent.

“I can’t say we won’t be hurt by it, because we will,” said spokesman William Galligan of Kansas City Southern Railway Co. “However, the real ones we feel are really going to be hurt by the merger probably are the shipping community.”

Kansas City Railway has been mentioned as the party most likely to seek legal action blocking the ruling on anti-competitive grounds, something Galligan said hasn’t been decided.