Western Coal Traffic League v. Surface Transp. Bd.

• Decision Date: 23 March 1999
• Docket Number: No. 96-1373,96-1373
• Citation: 169 F.3d 775
• Parties: , 1999-1 Trade Cases P 72,493 WESTERN COAL TRAFFIC LEAGUE, et al., Petitioners, v. SURFACE TRANSPORTATION BOARD and United States of America, Respondents. Union Pacific Corporation, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 775

169 F.3d 775

335 U.S.App.D.C. 147, 1999-1 Trade Cases P 72,493

WESTERN COAL TRAFFIC LEAGUE, et al., Petitioners, v. SURFACE TRANSPORTATION BOARD and United States of America Respondents Union Pacific Corporation, et al., Intervenors.

No. 96-1373.

United States Court of Appeals District of Columbia Circuit.

Argued Sept. 11, 1998.

Decided March 23, 1999.

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 Commerce Act, 49 U.S.C. § 11343 et seq., but imposed certain conditions. Western Coal Traffic League claims that the merger will have anticompetitive effects outweighing its benefits 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. Several 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 effects. 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 provided 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 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 organization 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 approving 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. § 11343 et seq., as in effect prior to the ICC Termination Act of 1995. ³ The statute provides that a merger is to be approved if "consistent with the public interest." Former 49 U.S.C. § 11344(c). See Penn-Central Merger and N & W Inclusion Cases, 389 U.S. 486, 498-99, 88 S.Ct. 602, 19 L.Ed.2d 723 (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." Former 49 U.S.C. § 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. § 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, 80 S.Ct. 229, 4 L.Ed.2d 223 (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 consolidation is consistent with the public interest. McLean Trucking Co. v. United States, 321 U.S. 67, 87-88, 64 S.Ct. 370, 88 L.Ed. 544 (1944). Nonetheless, although the Board's decision is entitled to substantial deference, 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. § 706; Illinois Cent. R. R. v. Norfolk & Western Ry., 385 U.S. 57, 66, 87 S.Ct. 255, 17 L.Ed.2d 162 (1966); Southern Pac., 736 F.2d at 714. We will not upset the Board's decision so long as it is "supported by substantial evidence in the record and was reached by reasoned decisionmaking." 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 creating 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 alternatives 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. Moreover, the Board concluded that since it was retaining jurisdiction 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...