Antitrust Issues In The Rail Transportation Industry

• Pages: 41-112

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CHAPTER II

ANTITRUST ISSUES IN THE RAIL

TRANSPORTATION INDUSTRY

The rail transportation industry is subject to state and federal

antitrust laws and various industry-specific regulations. The Surface

Transportation Board (STB), as the industry primary regulator,1 has

jurisdiction over common carriers. Certain rail industry practices fall

exclusively within the STB’s jurisdiction and outside of the realm of

federal and state antitrust laws. A comprehensive analysis of the antitrust

exemptions and immunities for railroads will be provided throughout this

chapter.

The chapter is structured in four parts. Part A offers an overview of

the U.S. rail transportation industry and of its history of consolidation.

Part B focuses on the history of industry regulation from the Interstate

Commerce Act of 1887 through the ICC Termination Act of 1995 and

the current structure of the STB. Part C analyzes the scope of current

industry regulation with respect to issues such as common carrier

obligations, pooling arrangements, competitive access, entry and exit,

and interline traffic. Part D addresses relevant antitrust issues with

respect to the industry, including mergers and acquisitions, joint

ventures, and alliances. Lastly, Part E discusses the future of railroad

regulation.

A. The U.S. Railroad Industry

U.S. rail freight predominantly operates on a “vertical integrated”

model.2 In other words, U.S. railroads control both the track and rail

services, operating on infrastructure that they own, build, maintain, and

1. The Federal Railroad Administration also has jurisdiction over some

aspects of railroad operations.

2. A vertical integrated rail model is defined as a system in which “a

railroad generally both owns the track and operates trains over that track.”

AAR, America’s Freight Railroads: Global Leaders (Apr. 2013), at 2,

available at https://www.aar.org/keyissues/Documents/Background-

Papers/Americas-RRs-Global-Leaders-October-2012.pdf.

42 Transportation Antitrust Handbook

self-finance.3 This model dates back to the early 1830s with the

completion of the first “common carrier”: the Baltimore & Ohio

Railroad.4 The vertical integrated model is distinct from the various

models found in other countries, where railroads control rail services and

operations, but government or other entities own the trackage and other

infrastructure.5

The STB today classifies U.S. freight railroads into three classes

based on annually adjusted operating revenue thresholds. In 2011, the

revenue threshold was $433 million for Class I railroads, $34.6 million to

$433 million for Class II or regional railroads, and under $34.6 million

for Class III or local line hauls.6 Different rules and regulations apply to

each class of railroads.7

The current U.S. railroad network includes seven Class I railroads

and more than 560 regional and local line haul railroads. The latter are

also known as “short lines.” Class I railroads account for 69 percent of

the industry’s mileage, 90 percent of its employees, and 94 percent of its

freight revenue (but constitute only 1 percent of the number of freight

railroad companies).8 With the exception of Burlington Northern Santa

Fe (BNSF),9 all of the Class I railroads are publically traded: Union

3. AAR, A Short History of U.S. Freight Railroads (Apr. 2013), at 4,

available at https://www.aar.org/keyissues/Documents/Background-

Papers/A-Short-History-of-US-Freight.pdf; AAR, America’s Freight

Railroads: Global Leaders, supra note 2, at 2.

4. Paul Stephen Dempsey, Transportation: A Legal History, 30 TRANSP. L.J.

235, 247 (2003).

5. Makeda F. Jahanshahi, The US Railroad Industry and Open Access, 5

TRANSP. POL’Y 73, 73-81 (1998).

6. For the railroad revenue thresholds for the last five years through 2012,

see http://www.stb.dot.gov/econdata.nsf/DeflatorFactors?OpenView.

7. The STB, for example, applies different criteria to review mergers

between Class I railroads and mergers not involving large rail carriers.

See 2 ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW

DEVELOPMENTS 1499 (7th ed. 2012) [hereinafter ALD].

8. AAR, Overview of America’s Freight Railroads (Apr. 2013), at 1,

available at https://www.aar.org/keyissues/Documents/Background-

Papers/Overview-US-Freight-RRs.pdf.

9. The Federal Role in National Rail Policy: Hearing Before the S. Comm.

on Commerce, Sci., and Transp., 110th Cong. 1 (2010) (statement of

Daniel R. Elliott, III, Chairman, STB). In 2009, Warren Buffett’s

Berkshire Hathaway purchased BNSF for $34 billion. American

Railways—High-Speed Railroading, ECONOMIST, July 24, 2010, at 69

[hereinafter American Railways].

Antitrust Issues in the Rail Transportation Industry 43

Pacific (UP), CSX, Norfolk Southern (NS), Grand Trunk, Soo Line, and

Kansas City Southern (KCS).10

Notably, none of these privately held rail carriers provides passenger

transportation. Since the creation of Amtrak by the Rail Passenger

Service Act of 1970, Class I rail carriers no longer provide passenger

transportation in the United States.11

Railroads generate freight revenue primarily from the shipment of

commodities, in particular coal. In 2011, coal accounted for 43 percent

by volume and 25 percent by value of U.S. Class I railroad business.12

More than 70 percent of the coal delivered to coal-fueled power plants is

delivered by rail,13 but the volume of coal shipments has slowly declined

since 2008. This is due principally to lower natural gas prices, which

increase the competitiveness of electricity generated from natural gas as

opposed to coal, and new EPA regulations, which place new coal-fired

power plants under more restrictive carbon dioxide emission

requirements.14

After coal, the railroad business’ three most important commonly

shipped commodities are chemicals, farm products, and non-metallic

10. Grand Trunk consists of the U.S. operations of Canadian National,

including the former Grand Trunk Western, Illinois Central, and

Wisconsin Central. Soo Line is owned by Canadian Pacific. See AAR,

Overview of America’s Freight Railroads (May 2008), at 1, available at

http://www.ontrackamerica.org/files/AAR%206_08%20Freight%20Rail

%20Overview.pdf.

11. Rail Passenger Service Act of 1970, Pub. L. No. 91-518, 84 Stat 1327.

On the rationale for the creation of Amtrak, see AAR, A Short History of

U.S. Freight Railroads, supra note 3, at 3; Laurence E. Tobey, Costs,

Benefits, and the Future of Amtrak, 15 TRANSP. L.J. 245 (1987).

12. AAR, Class I Railroad Statistics (May 10, 2012), at 3, available at

https://www.aar.org/StatisticsAndPublications/Documents/AAR-Stats-

2012-05-10.pdf.

13. AAR, Railroads and Coal (Aug. 2013), at 1, available at

https://www.aar.org/keyissues/Documents/Background-Papers/Railroads-

and-Coal.pdf.

14. Id. In November 2012, th e AAR petitioned the STB to initiate a

rulemaking procedure to determine whether the existence of indirect

competition coming from natural gas would justify a reassessment of the

STB jurisdiction over coal shipping rates. See Press Release, AAR, AAR

Urges STB to Consider Competition from Natural Gas in Select Coal

Rate Cases (Nov. 19, 2012), available at https://www.aar.org/

newsandevents/Press-Releases/Pages/AAR-Urges-STB-to-Consider-

Competition-from-Natural-Gas-in-Select-Coal-Rate-Cases.aspx.