United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 11, 1998 Decided March 23, 1999
No. 96-1373
Western Coal Traffic League, et al.,
Petitioners
v.
Surface Transportation Board and
United States of America,
Respondents
Union Pacific Corporation, et al.,
Intervenors
On Petition for Review of an Order of the
Surface Transportation Board
William L. Slover argued the cause for petitioners. With
him on the joint briefs were C. Michael Loftus, John H.
LeSeur, Christopher A. Mills and Andrew B. Kolesar, III.
Louis Mackall, V, Attorney, Surface Transportation Board,
argued the cause for respondent. With him on the brief was
Henri F. Rush, General Counsel. Robert B. Nicholson and
John P. Fonte, Attorneys, U.S. Department of Justice, and
Evelyn G. Kitay, Attorney, Surface Transportation Board,
entered appearances.
Arvid E. Roach, II, argued the cause for intervenors.
With him on the brief were J. Michael Hemmer and Carolyn
F. Corwin. James V. Dolan and Louise A. Rinn entered
appearances.
Before: Williams, Sentelle and Rogers, Circuit Judges.
Opinion for the Court filed by Circuit Judge Sentelle.
Sentelle, Circuit Judge: Western Coal Traffic League
petitions for review of the Surface Transportation Board's
order approving the merger of two major western railroads--
the Union Pacific Railroad Company and the Southern Pacific
Rail Corporation. In 1996, the Surface Transportation Board
approved the merger application under the Interstate Com-
merce Act, 49 U.S.C. s 11343 et seq., but imposed certain
conditions. Western Coal Traffic League claims that the
merger will have anticompetitive effects outweighing its bene-
fits and therefore argues that the Board erred in not denying
the merger or requiring divestiture of certain lines. We
conclude that the Board's actions were warranted, and deny
the petitions for review.
I. The Union Pacific/Southern Pacific Merger
On November 30, 1995, Union Pacific Corporation and
Union Pacific Railroad Company ("UP") and Southern Pacific
Rail Corporation ("SP") filed an application with the Surface
Transportation Board ("STB" or "Board") for the acquisition
of control of SP by a wholly owned UP subsidiary, and the
subsequent consolidation of the rail operations of UP and SP.
Because UP and SP ran side by side across much of the
West, an unconditioned UP/SP merger would have reduced
many shippers' options from two to one. To address this
decrease in competition, UP and SP agreed in September
1995 to grant extensive "trackage rights" to the Burlington
Northern and Santa Fe Railway Company ("BNSF").1 That
agreement was incorporated in the merger application. Sev-
eral parties filed comments arguing that, even with the BNSF
agreement, the merger would create reduced competition
outweighing its benefits, and that the Board should refuse the
merger or require divestiture of portions of SP's lines to
other rail carriers. On August 12, 1996, the Board approved
the merger. See Union Pac. Corp., Union Pac. R.R., and
Missouri Pac. R.R.--Control & Merger--Southern Pac. Rail
Corp., Southern Pac. Transp. Co., St. Louis Southwestern
Ry., SPCSL Corp., and The Denver and Rio Grande Western
R.R., Finance Docket No. 32760, Decision No. 44, 1996 WL
467636 (STB Aug. 12, 1996) ("UP/SP"). The Board found
that the merger would result in better service and lower
costs, and that these benefits outweighed any anticompetitive
effects. Id. at 104. The Board further found that requiring
divestiture of SP lines would negate many of the benefits of
the merger. Id. at 156-64.
The Board did, however, impose a number of conditions on
the merger in order to reduce potential anticompetitive ef-
fects. Id. at 144-56. First, the Board imposed conditions
which originated in the settlement agreement between the
applicants (UP and SP) and BNSF. Thus, the Board provid-
ed that any shippers who would go from having two directly
serving railroads before the merger to one after the merger
("2-to-1 shippers") could be served by BNSF after the
merger. Id. at 103, 145. This would be achieved by granting
BNSF trackage rights over about 4,000 miles of UP and SP
lines, and permitting all 2-to-1 shippers to open up existing
contracts with UP and SP to ensure BNSF access to a traffic
__________
1 The Burlington Northern Railroad and The Atchison, Topeka
and Santa Fe Railway were previously separate entities. Their
parent companies merged in 1995 with the approval of the Inter-
state Commerce Commission. See Burlington Northern Inc.-Con-
trol & Merger-Santa Fe Pacific Corp., Finance Docket No. 32549,
Decision No. 38, 1995 WL 528184 (ICC Aug. 23, 1995), aff'd sub
nom. Western Resources, Inc. v. STB, 109 F.3d 782 (D.C. Cir. 1997)
and Grainbelt Corp. v. STB, 109 F.3d 794 (D.C. Cir. 1997).
base. Id. at 146. With a few exceptions, the only existing
shippers that BNSF would be allowed to serve would be
2-to-1 shippers, not other shippers on these lines. However,
the Board gave BNSF the right to serve all new facilities on
the UP and SP lines on which it obtained trackage rights.
Id. at 145-46. In addition, the Board imposed a five-year
oversight provision, allowing it to continue to monitor the
impact of the merger and whether additional conditions were
necessary. Id. at 146.
Western Coal Traffic League ("WCTL"), a trade organiza-
tion representing electric utility companies interested in rail
shipment of coal, petitions for review of the Board's decision.2
WCTL participated in the STB proceedings, opposing the
merger or alternatively seeking the imposition of additional
conditions, such as divestiture of certain SP lines. In approv-
ing the merger, the Board rejected WCTL's arguments.
WCTL claims that the Board erred in not denying the
merger or requiring divestiture, arguing that the merger will
have significant anticompetitive effects within the western
coal transportation market.
II. Western Coal Traffic League's Claims
A. Background
The merger application of UP and SP was filed pursuant to
the Interstate Commerce Act, 49 U.S.C. s 11343 et seq., as in
effect prior to the ICC Termination Act of 1995.3 The statute
__________
2 Two additional petitioners, BNSF and the City of Reno, were
involved in this case at the time of oral argument, but have since
withdrawn their objections to the Board's decision.
3 The ICC Termination Act of 1995, Pub. L. No. 104-88, 109
Stat. 803, enacted December 29, 1995, abolished the Interstate
Commerce Commission and transferred certain functions and pro-
ceedings to the Surface Transportation Board. Section 204(b)(1) of
the Act provides that proceedings pending before the ICC on the
effective date of the Act shall be decided under law as in effect prior
to that date insofar as the proceedings involved functions retained
by the Board after the Act. Because the proceeding at issue here
was pending with the ICC when the Act became effective, the
provides that a merger is to be approved if "consistent with
the public interest." Former 49 U.S.C. s 11344(c). See
Penn-Central Merger and N & W Inclusion Cases, 389 U.S.
486, 498-99 (1968); Western Resources, Inc. v. STB, 109 F.3d
782, 784 (D.C. Cir. 1997). The Interstate Commerce Act
includes a nonexhaustive list of factors to be considered in
making the public interest determination, including "whether
the proposed transaction would have an adverse effect on
competition among rail carriers in the affected region." For-
mer 42 U.S.C. s 11344(b)(1)(E). In determining the public
interest, the Board balances the gains in operating efficiency
against any reduction in competition or harm to essential
services. See 49 C.F.R. s 1180.1(c); Western Resources, 109
F.3d at 784; Southern Pac. Transp. Co. v. ICC, 736 F.2d 708,
717 (D.C. Cir. 1984).
The Board's balancing of the various competing interests
under the public interest test is entitled to considerable
deference. See Southern Pac., 736 F.2d at 714; Minneapolis
& St. Louis Ry. v. United States, 361 U.S. 173 (1959). The
Supreme Court has observed that determining whether to
approve a carrier consolidation is a complex task requiring
considerable knowledge of the transportation industry, and
that the wisdom and experience of the expert agency, not of
the courts, must determine whether the proposed consolida-
tion is consistent with the public interest. McLean Trucking
Co. v. United States, 321 U.S. 67, 87-88 (1944). Nonetheless,
although the Board's decision is entitled to substantial defer-
ence, we must set it aside if it is arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law,
or if its findings of fact are unsupported by substantial
evidence in the administrative record. 5 U.S.C. s 706; Illi-
nois Cent. R.R. v. Norfolk & Western Ry., 385 U.S. 57, 66
(1966); Southern Pac., 736 F.2d at 714. We will not upset
the Board's decision so long as it is "supported by substantial
__________
earlier law is applicable in this case. Although the ICC Termination
Act did make changes in the wording of the agency's pertinent
authority, compare former 49 U.S.C. s 11344(a) with new 49 U.S.C.
s 11324(a), no party claims the changes would have any significance
in the present case.
evidence in the record and was reached by reasoned decision-
making." Grainbelt Corp. v. STB, 109 F.3d 794, 798-99 (D.C.
Cir. 1997).
WCTL argues that the merger was not consistent with the
public interest and points to three principal difficulties with
the Board's decision, all of which WCTL had argued before
the Board. WCTL claims that (1) the merger would lead to
duopoly pricing in the western coal market; (2) the merger
would reduce source competition between UP-served mines in
the Powder River Basin ("PRB") of Wyoming and Montana
and SP-served mines in the Uinta Basin of Colorado and
Utah; and (3) the settlement agreement between UP and
BNSF will not serve competition because the trackage fee
charged to BNSF is too high. The Board argues that it
considered each of WCTL's arguments below, and that its
decisions are supported by substantial evidence. We agree.
B.Duopoly Pricing
WCTL and others argued before the Board that by creat-
ing two-railroad competition between UP/SP and BNSF in
much of the West, the merger would result in duopoly
pricing. However, the Board addressed WCTL's duopoly
pricing argument in detail, and concluded that the merger
would result in rivalry, not collusion. UP/SP at 42-43, 116-
21, 267-73. The Board noted that "the outcome where just
two companies offer the only significant competitive alterna-
tives in a market may range all the way from intense rivalry
to collusion, depending on the circumstances of the industry."
Id. at 117. The Board analyzed the economic evidence of
several witnesses, id. at 267-73, and concluded that tacit
collusion was unlikely in this situation. In addition, the
decision noted that there was wide support for the merger
among shippers whose rail service options would decrease
from three railroads to two as a result of the merger,
indicating a lack of concern about possible collusion. More-
over, the Board concluded that since it was retaining jurisdic-
tion to oversee competitive developments for five years, it
would be able to take any necessary corrective action should
there be evidence of collusion. Id. at 118.
Several of the Board's stated reasons for concluding that
duopoly pricing was unlikely are challenged by WCTL. In
particular, in rejecting the duopoly argument, the Board
observed that there is no evidence that railroads have collud-
ed to maintain above-market rate levels. Id. at 118. WCTL
claims that it had demonstrated that collusion has occurred
between railroads, as illustrated by ETSI Pipeline Project v.
Burlington Northern, Inc., Civil Action No. B-84-797-CA,
1989 U.S. Dist. LEXIS 18796 (E.D. Tex. June 5, 1989). In
ETSI, the court found the evidence "overwhelming" that
several railroads conspired to prevent or delay the entry of a
coal slurry pipeline into the interstate coal transportation
business, and accordingly granted a directed verdict. What-
ever relevance ETSI might have to the possibility of railroad
collusion regarding market entry, a type of behavior not at
issue in this case, it does not imply that post-merger price
collusion between UP and BNSF was necessarily likely. We
see no tension between ETSI and the Board's conclusion that
"[t]here is no evidence that railroads have colluded, overtly or
tacitly, to maintain inefficient operations, unresponsive ser-
vice, or above-market rate levels." UP/SP at 118 (emphasis
added). None of these matters were involved in ETSI.
In addition, the Board claimed that collusion was unlikely
due to the secrecy about prices and services that pervades the
rail industry. Id. at 267. WCTL argues that this reasoning
was erroneous, given the fact that WCTL's witness David
Weishaar had testified that approximations of rail rates can
be derived from public data obtained from the Federal Ener-
gy Regulatory Commission. However, the Board's conclusion
was supported by other evidence in the record. In particular,
the statements of witnesses Barber and Sharp indicated that
publicly available information on delivered coal prices would
not allow one railroad to determine the transportation rate
charged by another.
In rejecting the argument that collusion would be likely in
a two-carrier market, the Board noted that the Powder River
Basin has been a two-carrier market, yet the rates of BNSF
and UP in that region have continued to decline. UP/SP at
118. WCTL claims that the Board's reliance on this example
was erroneous, given evidence presented by WCTL that the
factors that gave rise to that competition were no longer
operative. However, the Board's reliance on the PRB exam-
ple was supported by the statements of witnesses Peterson
and Sharp, which were record evidence that the competition
in the PRB did illustrate the viability of two-carrier markets.
In addition, the Board itself gave another example of a
competitive two-carrier market that WCTL apparently does
not dispute, noting that CSX and Norfolk Southern are the
only two rail carriers in a large portion of the East, and that
the competitive pressures there have resulted in lower rates
and better service. See id. at 118.
Finally, WCTL argues that the Board departed from its
precedent in an earlier case where the Commission noted that
a merger resulting in a two-railroad market might risk collu-
sion. See Santa Fe Southern Pac. Corp.-Control-Southern
Pac. Transp. Co., 2 I.C.C.2d 709 (1986) ("SFSP"). However,
the Board adequately justified its change of course, explain-
ing that it now had the benefit of nine years of additional
experience since the SFSP decision, during which it had
witnessed decreasing rates in two-carrier markets. UP/SP at
117. Accordingly, we conclude that the Board gave a rea-
soned explanation for its decision that the merger would not
result in duopoly pricing, and that that conclusion was sup-
ported by substantial evidence.
C. Source Competition
In approving the merger, the Board also rejected argu-
ments by WCTL that the merger would lead to decreased
competition in rail transportation of various sources of west-
ern coal. Prior to the merger, UP and BNSF primarily
shipped Powder River Basin coal, and SP primarily shipped
coal from the Uinta Basin of Utah and Colorado. Coal from
the PRB is lower-BTU coal, while the coal from the Uinta
Basin is higher-BTU, and generally higher-cost as well.
WCTL argues that, prior to the merger, one element of coal
competition in the West was the competition between the
admittedly different types of coal in the SP-served Uinta
Basin and the UP-served Powder River Basin. While these
types of coal are by no means interchangeable, WCTL claims
that there are a number of utilities that can use either, or
that can at least vary the proportions they use in "blending"
in response to the delivered prices of these two coals. Post-
merger, both the Uinta Basin and the Powder River Basin
will be UP-served. Therefore, WCTL suggests that UP will
not have an incentive to set aggressive rates for shipping
Uinta Basin coal, since the PRB lines are more profitable,
and that the "western coal market" will therefore suffer
decreased competition.
The Board, however, rejected the claim that there is a
single "western coal market" with meaningful competition
between PRB coal and Uinta Basin coal. Id. at 126. WCTL
claims that the Board's view was not justified, since WCTL
presented testimony of several witnesses who described the
competition between coal from the two areas in great detail.
These witnesses explained that the competitive reach of
cleaner-burning Uinta Basin coals had been expanded by
marketing incentives, and by the impending deadline for
compliance with the 1990 Clean Air Act Amendments. The
testimony also provided 17 specific examples of utilities capa-
ble of burning either Uinta Basin or PRB coals.
Nonetheless, the Board concluded that there is "little
meaningful source competition between UP and SP for coal
because each originates coal that typically serves different
markets." Id. at 127. The Board explained that because
PRB coal is lower-cost, plants that can burn PRB coal do so,
except to the extent that they need higher-BTU coal for
blending. In addition, an increasing number of utilities are
making capital investments allowing them to burn PRB coal.
Thus, the Board found that UP competed intensively against
BNSF for originations of PRB coal, not against SP move-
ments of Uinta Basin coal. Id. at 127. Because it concluded
that pre-merger competition between UP-served PRB coal
and SP-served Uinta Basin coal was quite limited, the Board
did not share WCTL's concerns that such competition would
be harmed by UP's origination of coal from both areas post-
merger. Indeed, the Board expressed confidence that UP
would aggressively develop its origination of coal from both
areas. Id. at 128.
We conclude that the Board's position was justified. The
"source competition" argument advanced by WCTL is virtual-
ly identical to that it advanced in Western Resources, Inc. v.
STB, 109 F.3d 782 (D.C. Cir. 1997). The Commission there,
like the Board here, rejected WCTL's broad definition of the
"western coal market." This court upheld the Commission's
decision. However, there, "the League offered almost no
evidence of substitutability [of Uinta Basin coal for PRB
coal]." Id. at 785. Here, the evidence of substitutability is
more substantial--the statements of several witnesses, includ-
ing Borts, Crowley, Weishaar, and Malhotra, supported this
view. However, the evidence to the contrary is also substan-
tial. As the Board's decision noted, applicants' witnesses
Sharp and Sansom argued that, based on aggregate industry
trends as well as plant-by-plant analyses, there was little pre-
merger competition between PRB and Uinta Basin coals.
See UP/SP at 127. Further, the Board cited the statement of
witness Nock, who explained that the merged system would
be able to expand competition in the Uinta Basin significant-
ly. Id. at 128. In its decision, the Board acknowledged
WCTL's arguments that some utilities can burn either type of
coal, id. at 43, 127, but nonetheless concluded that there is
actually little or no real competition between the two types of
coal, id. at 127. Finding that the evidence supporting the
Board's conclusion is substantial, we decline WCTL's invita-
tion to reweigh it.
D.BNSF Trackage Fee
Finally, WCTL argues that the conditions imposed by the
Board will not ameliorate the merger's anticompetitive ef-
fects. In particular, WCTL argues that the trackage rights
fee charged to BNSF under the settlement agreement incor-
porated as a merger condition is too high and will make it
impossible for BNSF to compete effectively. Board prece-
dent requires that charges for trackage rights imposed in
mergers must put the tenant on an equal footing with the
landlord. See, e.g., Burlington Northern Inc.--Control &
Merger--Santa Fe Pac. Corp., Finance Docket No. 32549,
Decision No. 38, 1995 WL 528184, at 90 (ICC Aug. 23, 1995)
("BN/Santa Fe"), aff'd sub nom. Western Resources, Inc. v.
STB, 109 F.3d 782 (D.C. Cir. 1997) and Grainbelt Corp. v.
STB, 109 F.3d 794 (D.C. Cir. 1997). WCTL argues that the
current rates do not do that, but instead reward UP/SP with
"monopoly rents."
We find WCTL's argument that the Board erred in adopt-
ing the negotiated trackage rights fee unpersuasive. The
Board extensively discussed the trackage rights issue in its
decision and found the negotiated trackage fee of 3.0 to 3.1
mills per gross ton-mile to be fully consistent with the princi-
ples set forth in its precedents. See UP/SP at 140-42. The
standard method for establishing the level of compensation
for trackage rights is described in St. Louis Southwestern
Railway-Trackage Rights, 8 I.C.C.2d 213 (1991) ("SSW Com-
pensation"), where the ICC explained that to place a track-
age rights tenant in the same position as a landlord, compen-
sation for trackage rights must include not only the variable
costs to the landlord resulting from the tenant's use of the
track, but also a portion of fixed costs and a return element
on the value of the rail properties. In the present decision,
the Board concluded that the fee the parties agreed to in the
settlement agreement was actually considerably lower than
that the Board would have independently calculated under
the usual SSW Compensation method. UP/SP at 140-41.
While WCTL witness Crowley argued that under the SSW
Compensation method, a rate of 1.8 mills would be correct,
the Board's decision explained that that calculation contained
several specific errors. The Board noted that correcting
what it viewed as obvious errors in Crowley's calculation
would lead to a rate of 3.84 mills, far higher than that
negotiated by the parties. The Board's conclusion was sup-
ported by its citation to the statements of Kauders and
Rebensdorf in the record. In addition, the Board noted that
the settlement agreement gave BNSF the option of paying an
alternative fee based on actual maintenance and operating
expenses if desired. UP/SP at 142. Finally, the Board
retained full authority to adjust the rates if necessary to
competition during the five-year oversight period. Id. at 146.
Accordingly, "we trust the [Board] to ensure that the com-
pensation terms will not defeat the purpose of the trackage
rights." Southern Pac., 736 F.2d at 721.
III. Conclusion
We hold that the challenged conclusions of the Board were
supported by substantial evidence and were reached by rea-
soned decisionmaking, and accordingly deny the petition for
review.