28-11-2012, 03:48 PM
Manifest Destiny? The Union Pacific and Southern Pacific Railroad Merger (1996)
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INTRODUCTION
The Union Pacific (UP) and the Southern Pacific (SP) railroads have had
long and intertwined histories. The UP and the Central Pacific (a predecessor
to the SP) were the two railroads commissioned by President Abraham
Lincoln in 1862 to construct a transcontinental rail system. The UP laid rail
westward from Kansas while the CP began construction in Sacramento.
The driving of the Golden Spike into the rail that joined the two at Promontory,
Utah, in 1869 helped realize the country’s “manifest destiny” of integrating
from coast to coast.
Over the next century the UP and the SP (in various corporate guises)
provided rail transportation services throughout the western United States.
They expanded and in the early 1900s even sought to combine, though they
were rebuffed by the courts.1 In 1995 they tried again, this time successfully.
In August of that year the managements of the UP and SP announced
their intentions to merge into a single integrated railroad.
THE ANTITRUST REVOLUTION
2By contrast, the antitrust agencies have traditionally been more skeptical with respect to efficiency
claims.
3As discussed below, trackage rights permit a second railroad access to otherwise captive shippers
over the first railroad’s tracks. The adequacy of such remedial conditions is a matter of continuing
controversy.
4Railroad managements understood this presumption quite well. When the ICC was abolished, they
lobbied strenuously and successfully to transfer antitrust authority to the STB rather than allow it
to go to the Justice Department’s Antitrust Division. The chief proponent of the STB plan was the
CEO of the UP (Machalaba and Nomani, 1996; Wilner, 1997, p. 306).
combination immediately sparked controversy, which persisted well after
its approval and implementation.
Though U.S. railroads were deregulated extensively in 1980, vestiges
of regulation have remained, including a special regime for dealing with
mergers. Instead of being subject to the Department of Justice’s or Federal
Trade Commission’s merger review and enforcement procedures that apply
to most other companies, railroad mergers were reviewed by the Interstate
Commerce Commission (ICC) until the end of 1995 and since then by the
ICC’s successor, the Surface Transportation Board (STB).
The ICC/STB’s legislative mandate in assessing mergers is broader
than that of Section 7 of the Clayton Act. Rather than focusing just on the
competition and efficiency issues and the trade-offs (if any) between them,
the ICC/STB is instructed by legislation also to consider a railroad merger’s
effects on “the adequacy of transportation to the public” and “the interest of
carrier employees,” among other things. But a major focus of the agency
has been on the same antitrust issues—market power versus efficiencies—
that have held the attention of traditional antitrust merger enforcement.
Analyzing Railroad Competition
Railroad competition has some unique properties that bear examination. To
begin, the basic output or service provided by railroads is the transportation
of commodities from suppliers (shippers) to their customers. Since the locations
of both the shipper and its customer are fixed (at least in the short
run), rail service must connect the point of origin with the destination in an
efficient manner. But the technology and costs of rail service drastically
limit the number of viable connections; any rail connection involves huge
fixed and (literally) sunk costs in the form of rights-of-way, bridges, tunnels,
the track itself, and the maintenance of all of these facilities. Such a
cost structure implies that a substantial range of declining long-run unit
costs is likely and that relatively high volumes of freight are necessary for
break-even operation.
Intermodal Competition
Some types of rail freight, for some distances, and at some locations
can be economically hauled by alternative modes: truck, barge, or pipeline.
Truck is most competitive for shipments over shorter distances (usually less
than 500 miles), for shipments that are not in large volumes, and for “highvalue”
goods (i.e., goods that have a high sales value per weight or cubic
measure).1