# Appendix — Kansas City Southern Railway Co. v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_3172%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1985 - **Citation:** 469 U.S. 1208 ## Text a — | 84- Nos. aT 17 ae IN THE ; CLERK Supreme Court of the Auited States OCTOBER TERM, 1984 THE KANSAS CITY SOUTHERN RAILWAY COMPANY and LOUISIANA & ARKANSAS RAILWAY COMPANY, - Petitioners, THE UNITED STATES OF AMERICA and THE INTERSTATE COMMERCE COMMISSION, Respondents. BROTHERHOOD OF MAINTENANCE OF WAY EMPLOYEES, BROTHERHOOD OF RAILWAY SIGNALMEN, BROTHERHOOD OF RAILWAY & AIRLINE CLERKS, INTERNATIONAL ASSOCIATION OF MACHINISTS & AEROSPACE WORKERS, and UNITED TRANSPORTATION UNION, ‘ Petitioners, THE UNITED STATES OF AMERICA and THE INTERSTATE COMMERCE COMMISSION, Respondents. EDWARD K. WHEELER, Petitioner, Vv. UNITED STATES OF AMERICA and THE INTERSTATE COMMERCE COMMISSION, Respondents. APPENDIX TO PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT [List of Attorneys Appears on Inside Cover] EIT EES, «=| OSE SSIES I NEN VOT OES SE OE IED ITE WILSON - EPES PRINTING Co.,. INC. - 789-0096 - WASHINGTON, D.C. 20001 JOHN O’B. CLARKE, JR.* HIGHSAW & MAHONEY Suite 210 1050 17th Street, N.W. Washington, D.C. 20036 Attorneys for Brotherhood of Maintenance of Way Employes, et al. RICHARD H. STREETER * WHEELER & WHEELER 1728 H Street, N.W. Washington, D.C. 20006 (202) 337-6500 Attorneys for Edward H. Wheeler * Counsel of Record JOSEPH AUERBACH * Morris RAKER HARVEY E. BINES MARGARET H. RAYMOND SULLIVAN & WORCESTER One Post Office Square Boston, Massachusetts 92109 (617) 338-2800 ROBERT E. ZIMMERMAN ROBERT K. DREILING 114 W. Eleventh Street Kansas City, Missouri 64105 (816) 556-0410 Of Counsel: DAVID M. ScHWarRTz SULLIVAN & WORCESTER 1025 Connecticut Ave., N.W. Washington, D.C. 20036 (202) 775-8190 Attorneys for The Kansas City Southern Railway Company and Louisiana & Arkansas Railway Company APPENDIX A. APPENDIX B. APPENDIX C. APPENDIX D. APPENDIX E. TABLE OF CONTENTS? Opinion of Court of Appeals for District of Columbia Circuit ............ Opinion of Interstate Commerce ae aeabietihisaiion Judgment of Court of Appeals for District of Columbia Circuit ............. Denial of Petitions for Rehearing and Suggestions for Rehearing En la eheabodemmaie I lee Se accom wren ng ae Constitutional Provision, Statutes and Regulation Involved .................... Due Process Clause of the United States Constitution, 5th Amend- Administrative Procedure Act, 5 ch eae S| Bs ee Interstate Commerce Act, 49 U.S.C. $1010la (1962) ................ Interstate Commerce Act, 49 U.S.C. §10701a (1982) ................ Interstate Commerce Act, 49 U.S.C. § 10709 (1982) -...... Paonia Interstate Commerce Act, 49 U.S.C. § 11343 (Supp. IV 1980).. Interstate Commerce Act, 49 U.S.C. § 11344 (Supp. IV 1980).. 49 C.F.R. § 1180.1 (1983) ............. Page la 39a 616a 621la 621la 623a 626a 630a 630a 630a 63la 633a 635a 6394 641la 644a 1The list of subsidiaries, parents and affiliates of petitioners The Kansas City Southern Railway Company and Louisiana & Arkansas Railway Company (KCS) required by Supreme Court Rule 28.1 appear in KCS’ petition for certiorari. ii TABLE OF CONTENTS—Continued Page APPENDIX F. Excerpt from Brief of Department of Transportation to Commission... 649a APPENDIX G. Commission Memoranda Relating to Votes of Commissioners and Concur- rences of Commissioners Taylor and NEO rat Pa 653a APPENDIX H. Excerpt from Commission’s Brief to Court of Appeals 00 678a on econ la APPENDIX A UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT No. 82-2253 SOUTHERN PACIFIC TRANSPORTATION COMPANY and St. Louis SOUTHWESTERN RAILWAY COMPANY, -. Petitioners INTERSTATE COMMERCE COMMISSION and UNITED STATES OF AMERICA, | Respondents DENVER & R10 GRANDE WESTERN RAILROAD COMPANY, ATCHISON, TOPEKA & SANTA FE RAILWAY COMPANY, UNION PACIFIC CORPORATION, ET AL., and CHICAGO & NORTH WESTERN TRANSPORTATION COMPANY, Intervenors No. 82-2323 DENVER & RIO GRANDE WESTERN RAILROAD COMPANY, - ‘Petitioner INTERSTATE COMMERCE COMMISSION and UNITED STATES OF AMERICA, Respondents CHICAGO & NORTH WESTERN TRANSPORTATION COMPANY, Intervenor 2a [2] No. 82-2342 EDWARD K. WHEELER, Petitioner Vv. INTERSTATE COMMERCE COMMISSION and UNITED STATES OF AMERICA, Respondenis CHICAGO & NORTH WESTERN TRANSPORTATION COMPANY, Intervenor No. 82-2370 KANSAS CITY SOUTHERN RAILWAY COMPANY and LOUISIANA & ARKANSAS RAILWAY COMPANY, . Petitioners INTERSTATE COMMERCE COMMISSION and UNITED STATES OF AMERICA, Respondents CHICAGO & NORTH WESTERN TRANSPORTATION COMPANY, UNION PACIFIC RAILROAD COMPANY, DENVER & RIO GRANDE WESTERN RAILROAD COMPANY, ATCHISON, TOPEKA & SANTA FE RAILWAY COMPANY, SOUTHERN PACIFIC TRANSPORTATION COMPANY, and ST. LouIs SOUTHWESTERN RAILWAY COMPANY, Intervenors No. 82-2371 ATCHISON, TOPEKA & SANTA FE RAILWAY COMPANY, . Petitioner INTERSTATE COMMERCE COMMISSION and UNITED STATES OF AMERICA, Respondents UNION PACIFIC RAILROAD COMPANY, ET AL., DENVER & WESTERN RAILROAD COMPANY, and CHICAGO & NORTH WESTERN TRANSPORTATION COMPANY, Intervenors 3a [3] No. 82-2418 BROTHERHOOD OF MAINTENANCE OF WAY EMPLOYEES, BROTHERHOOD OF RAILWAY SIGNALMEN, BROTHERHOOD OF RAILWAY & AIRLINE CLERKS, INTERNATIONAL ASSOCIATION OF MACHINISTS & AEROSPACE WORKERS, and UNITED TRANSPORTATION UNION, . Petitioners INTERSTATE COMMERCE COMMISSION and UNITED STATES OF AMERICA, Respondents UNION PACIFIC RAILROAD COMPANY, ET AL., and CHICAGO & NORTH WESTERN TRANSPORTATION COMPANY, Intervenors No. 82-2340 ATCHISON, TOPEKA & SANTA FE RAILWAY COMPANY, . Petitioner UNITED STATES OF AMERICA and INTERSTATE COMMERCE COMMISSION, Respondents UNION PACIFIC RAILROAD COMPANY, ET AL., and DENVER & RIO GRANDE WESTERN RAILROAD COMPANY, Intervenors No. 82-2479 AMERICAN TRAIN DISPATCHERS ASSOCIATION, . Petitioner INTERSTATE COMMERCE COMMISSION and UNITED STATES OF AMERICA, Respondents CHICAGO & NORTH WESTERN TRANSPORTATION COMPANY, Intervenor 4a [4] Petitions for Review of an Order of the Interstate Commerce Commission Argued June 6, 1983 Decided May 22, 1984 Richard L. Dashefsky for petitioners in No. 82-2370. William R. Hyde, Jr., Robert C. Eager, and Peter Sul- ivan entered appearances for petitioners in No. 82-2253. John H. Caldwell, with whom Kendall T. Sanford and Denise M. O’Brien were on the brief, for petitioner in No. 82-2323. John G. DeGooyer entered an appearance for petitioner in No. 82-2323. Richard H. Streeter for petitioner in No. 82-2342. Ed- ward K. Wheeler entered an appearance for petitioner in No. 82-2342. Joseph Auerbach for petitioners in No. 82-2370. Hay- wood H. Hillyer, Jr., David M. Schwartz, Robert L. Calhoun, and Morris Raker entered appearances for pe- titioners in No. 82-2370. Dennis W. Wilson, with whom Milton E. Nelson, Jr. and Robert R. Cowell were on the brief, for petitioner in Nos. 82-2371 and 82-2430. Richard E. Weicher entered an appearance for petitioner in No. 82-2371. John O’B. Clarke, Jr., with whom Kimberly A. Madigan was on the brief, for petitioner in No. 82-2418. Gordon P. MacDougall was on the brief for petitioner in No. 82-2479. Henri F. Rush, Associate General Counsel, Interstate Commerce Commission, with whom John Broadley, Gen- eral Counsel, and Laurence H. Schecker and John J. McCarthy, Jr., Attorneys, Interstate Commerce Commis- 5a sion, and John J. Powers, III and Neil R. Ellis, Attor- neys, [5] Department of Justice, were on the brief, for respondents. Nancy C. Garrison and Kenneth P. Kolson, Attorneys, Department of Justice, entered appearances for respondents. Fritz R. Kahn, William C. Evans, L. John Osborn, and Elizabeth A. Campbell were on the brief for intervenor Chicago & North Western Transportation Company. M. Lauck Walton was on the brief for intervenors Missouri Pacific Corporation and Missouri Pacific Rail- road Company. Charles A. Miller, Joanne B. Grossman, and Gregg H. Levy were on the brief for intervenors Union Pacific Corporation, et al. Walter G. Treanor entered an appearance for inter- venor Western Pacific Railroad Company. Before WRIGHT, Mikva, and Bork, Circuit Judges. Opinion per curiam. PER CURIAM: The Interstate Commerce Commission decision that gives rise to these appeals responds to ap- plications seeking authority for the Union Pacific Cor- poration (UPC) and its subsidiaries to acquire and exer- cise control over Missouri Pacific Corporation (MPC) and its carrier subsidiaries, and over Western Pacific Rail- road Company (WP) and its carrier subsidiaries. Under the proposed consolidations the existing railroads and holding companies will retain their separate corporate identities but will be under the control of UPC and a new railroad holding company, Pacific Rail System, Inc. (PRSI). After extensive hearings, the Commission ap- proved the consolidations, subject to certain conditions. Union Pacific Corp., Pacific Rail System, Inc., and Union Pacific R.R.—Control—Missouri Pacific Corp. and Mis- souri Pacific R.R. (UPC-Control], 366 I.C.C. 459 (1982). 6a [6] The Commission Decision The applications for authority to create the consolida- tions at issue were filed on September 15, 1980.1 The Commission accepted these applications for filing and pub- lished notice of the filing in the Federal Register, 45 Fed. Reg. 68,484 (Oct. 15, 1980). In response a long list of shippers, railroads, labor organizations, state governments, federal agencies, and shareholders filed comments either supporting or opposing the proposed consolidations or, in the event of Commission approval, seeking imposition of conditions upon the consolidations.” Public hearings were conducted before two Administra- tive Law Judges from March 3, 1981 until January 6, 1982. On October 20, 1982, the Commission issued its final decision approving the consolidations but attaching certain conditions.* The opinion explaining the Commis- sion’s decision is comprehensive, consisting of 166 pages C7] with 12 appendices that comprise an additional 164 pages. See UPC-Control, 366 I.C.C. at 459-819. 1 The case involves two separate applications. Union Pacific Cor- poration, Pacific Rail System, Inc., and Missouri Pacific Railroad Company jointly filed an application seeking authority for UPC to control MPC. At the same time UPC and Western Pacific Rail- road Company jointly filed an application seeking authority for UPC to control WP. 2 For a useful summary of the positions taken toward the pro- posed consolidation by various parties, see UPC-Control, 366 I.C.C. at 474-482. % At a press conference on September 13, 1982, the chairman of the Commission announced that the Commission had voted to approve the consolidations, with conditions, and that the decision of the Commission would be issued on or before October 20, 1982. That announcement immediately gave rise to a petition for review. This court dismissed that petition, however, because it was filed before the Commission’s issuance of a final order. Southern Pacific Transportation Co. v. ICC, No. 82-2057 (D.C. Cir. Nov. 15, 1982). See also Denver & Rio Grande Western R.R. Co. v. United States, No. 82-2106 (10th Cir. Nov. 2, 1982) (dismissing related petition on same basis). ON Oe CE EEE Ta In considering the applications to consolidate UPC, MPC and WP the Commission noted first that under the Interstate Commerce Act (the Act) it is required to ap- prove the consolidation if it finds the transaction to be “consistent with the public interest.” See 49 U.S.C. § 11344(c) (Supp. V 1981). The Commission looked to a variety of factors that Congress has directed it to con- sider in determining whether a proposed consolidation meets the Act’s broad public interest standard. These factors include criteria set forth in the Interstate Com- merce Act, 49 U.S.C. § 11844(b) (Supp. V 1981), includ- ing an additional criterion added by the Staggers Act, 49 U.S.C. § 11344(b) (3); the Transportation Policy of 49 U.S.C. § 10101 (Supp. V 1981), as amended by the Bus Regulatory Reform Act of 1982, Pub. L. No. 97-261, § 5, 96 Stat. 11038, and the Rail Transportation Policy of 49 U.S.C. § 10101a (Supp. V 1981); recent rai! reform leg- islation, especially the Railroad Revitalization and Regu- latory Reform Act of 1976, Pub. L. No. 94-210, 90 Stat. 31 (4R Act); antitrust legislaticn, especially the Clay- ton and Sherman Acts; and the Commission’s own policy statement on rail consolidations, Railroad Consolidation Procedures, 366 I.C.C. 75 (1982), see UPC-Control, 366 1.C.C. at 483-87. After considering this multitude of factors, the Com- mission weighed the public benefits likely to result from the proposed consolidation against its likely harmful con- sequences. In evaluating the potential harm arising from the consolidation, the Commission stated that it was par- ticularly attentive to detrimental effects upon competition, the essential services of competing carriers, and the in- terests of employees. UPC-Centrol, 366 I.C.C. at 487. The Commission concluded that the consolidation will re- sult in substantial public benefits stemming from the im- proved efficiency and reliability of a single-system service. [8] The Commission estimated that in quantitative terms the benefits will result in public savings of $47 million annually. /d. 8a On the other hand, the Commission observed that the proposed consolidation would entail certain negative con- sequences. Specifically, the Commission found that the proposed consolidation will have a significant adverse competitive effect on rail transportation of transconti- nental traffic and on rail transportation in the Midwest. 366 I.C.C. at 533. The Commission, however, imposed conditions on the consolidations to allay these negative effects. As conditioned, the Commission found that the public benefits from the consolidations outweighed their negative effects. The Commission therefore approved the applications for consolidations, subject to the conditions it imposed. Jd. at 642. The Conditions Imposed In deciding whether and what conditions to impose, the Commission’s guide is the pubiic interest. 49 U.S.C. § 11344(c). The conditions at issue were initially pro- posed by competitors or other opponents of the carriers seeking consolidation. In general, these opponents sought to convince the Commission to disapprove the consolida- tion altogether. Failing that, they sought to convince the Commission to impose conditions upon the consolidation that would lessen its impact upon their interests. The Commission adopted some of their proposals but rejected others.* Kansas City Southern Railway Company (KCS) sought (1) imposition of trackage rights over MPC lines, (2) the right to purchase segments of MPC right-of-way trackage, and (3) certain traffic-protective conditions. [9] The Commission denied ali of KCS’s proposed con- ditions. It rejected empowering KCS with trackage rights and the right to purchase segments of MPC’s right-of- way trackage because, in the Commission’s view, neither * We discuss only those proposals that are at issue in this appeal. For a summary of al] the proposals directed to the Commission in these proceedings, see UPC-Control, 366 I.C.C. at 562-601. a cen Cae Me 9a of these conditions was shown to relate to the effects of the consolidation. The Commission rejected imposing traffic-protective conditions upon the consolidation on be- half of KCS because KCS had failed to demonstrate ade- quately its need for such protection. See UPC-Control, 366 I.C.C. at 593-97. Denver & Rio Grande Western Railroad Company (DRGW) sought (1) trackage rights over lines owned by MPC and the Atchison, Topeka & Santa Fe Railway Company (ATSF), (2) independent ratemaking authority (IRA) over WP, and (3) traffic-protective conditions. The Commission granted DRGW’s request for trackage rights, noting that this condition will mitigate competi- tive harms resulting from the consolidation, that it is operationally feasible, and that any harm the condition might cause to the consolidated system will be outweighed by the public benefit of added competition. 366 I.C.C. at 578. ATSF challenged that part of the Commission’s or- der which provided DRGW with trackage rights over certain segments of ATSF lines. ATSF claimed that the Commission was without jurisdiction to impose trackage rights over these segments of its lines. The Commission rejected ATSF’s challenge on the ground that the line segments at issue come within its statutory authority under 49 U.S.C. § 11103 (Supp. V 1981) to require ter- minal facilities, including mainline tracks for a reasonable distance outside of a terminal, to be used by another rail carrier if the Commission finds that use to be practicable and in the public interest. 366 I.C.C. at 573-78. The Commission denied DRGW’s request for independ- ent ratemaking authority and traffic-protective conditions. DRGW sought the merged system’s automatic concur- rence to rates set by DRGW when it uses a route which includes WP’s northern California lines. The proposed [10] independent ratemaking authority would enable DRGW to quote rates between northern California and Kansas City while providing service between Utah and 10a Kansas City. The Commission rejected the proposal on the ground that empowering DRGW with the authority it sought would decrease its incentive to cooperate with an- other carrier, Southern Pacific Transportation Company (SP), in creating alternative services to those provided by the consolidated systems and therefore decrease over- all competition. 366 I.C.C. at 578-79. The Commission rejected DRGW’s request for traffic-protective conditions because, in its view, such conditions are generally anti- competitive and DRGW failed to show any special cir- cumstances justifying imposition of such conditions. Id. The Commission stated that in addition to considering the effects of the proposed consolidation upon competing carriers, it must also consider the interests of, and provide protection for, the employees of the consolidating carriers. See 49 U.S.C. §§ 11847 and 11344(b) (4) (Supp. V 1981). Labor organizations, including the Brotherhood of Mainte- nance of Way Employees (BMWE) and the American Train Dispatchers Association (ATDA), proposed impos- ing a wide variety of labor-protective conditions upon the consolidations. The Commission imposed what it describes as “the minimum protections to be afforded those em- ployees affected by a consolidation, absent a voluntarily negotiated agreement.” UPC-Control, 366 I.C.C. at 619. These protections are derived from the Commission’s decision in New York Dock, New York Dock Ry.—Con- trol—Brooklyn Eastern District, 360 1.C.C. 60, aff'd sub nom. New York Dock Ry. v. United States, 609 F.2d 83 (2d Cir. 1979). These protections include a mandated 90-day notice of employment actions, negotiated imple- mentation of employment changes resulting from a con- solidation with compulsory arbitration of disputes, and ~ compensation for dismissed employees. The Commission rejected labor-protective conditions broader in scope than those established in New York Dock because, in the [11] Commission’s view, these organizations failed to show un- usual circumstances which would warrant increased pro- tection. UPC-Control, 366 I.C.C. at 620. Picci lla In deciding whether to approve the proposed consolida- tions, the Commission also considered whether the terms it offered to affected stockholders were fair and reason- able. See 49 U.S.C. § 11344; Schwabacher v. United States, 334 U.S. 182 (1948). Edward K. Wheeler, a minority stockholder of SP stock, objected to the $20 per share price offered for WP Class A common stock on the ground that that price fails to reflect the full range of WP’s assets and is therefore unreasonably low. The Commission, using a different method of computation from that suggested by Wheeler, found that the $20 per share price was fair and rejected Wheeler’s objection. UPC-Control, 366 I.C.C. at 632-40. Standard of Judicial Review The Interstate Commerce Act has empowered the Com- mission with broad authority to approve railroad con- solidations and to impose conditions upon them. A corol- lary to this grant of wide authority is that courts must show considerable deference to the Commission’s deter- minations. The Administrative Procedure Act (APA), 5 U.S.C. § 706 (1982), governs the scope of our review of the Commission. See Illinois Central R.R. v. Norfolk & Western Ry., 385 U.S. 57, 66 (1966); Missouri- Kansas-Texas R.R. v. United States, 632 F.2d 392, 399 (5th Cir. 1980), cert. denied, 451 U.S. 1017 (1981). Under the APA we must (2) hold unlawful and set aside agency actions, findings, and conclusiess found to be— (A) arbitrary, capricious, an abuse of discre- tion, or otherwise not in accordance with law; [or] [12] (E) unsupported by substantial evidence ** # [.] 5 U.S.C. § 706(2) (A) & (E). 12a The Fifth Circuit has ably described the practical ap- plication of this standard to Commission decisions, ob- serving that it is not a court’s task “to re-weigh the evidence or to draw our own inferences from the evidence before the Commission. * * * We can ask only whether the Commission has observed the statutory limits that Congress has set for its discretion, whether its action was arbitrary or capricious, or whether its findings are sup- ported by adequate analysis and substantial evidence in the record considered as a whole.” Missouri-Kansas-Texas R.R. v. United States, 632 F.2d at 398-99. If the Com- mission’s decision meets these deferential standards, we must affirm it. We are persuaded that it does. Issues on Appeal ® This appeal principally involves six issues. They are as follows: 1. Did the Commission properly decide that the proposed consolidation is consistent with the public interest? 2. Did the Commission properly deny KCS’s re- quest for certain trackage rights? [13] 3. Did the Commission have jurisdiction to order that certain segments of ATSF track be made available to SP and DRGW? 5 This appeal marks the fourth time this court has encountered this case. We mention above that this court dismissed a petition for review that was filed prior to issuance of the Commission’s final order. See note 3 supra. This court encountered this case a second time when petitions for review were filed immediately upon issuance of the Commission’s final order. Southern Pacific i‘ransportation Co. v. ICC, No. 82-2253 (D.C. Cir. filed Oct. 20, 1982). Petitioners filed motions to stay the Commission’s decision. This court denied the motions for stay but entered a temporary stay to allow the parties to seek a stay from the Supreme Court. The Supreme Court also denied petitioners’ request. Subsequently, two of the petitioners filed motions with this court requesting that it sum- marily reverse the Commission’s decisions. These motions, too, were denied. 13a 4. Did the Commission properly deny DRGW’s request for independent ratemaking authority? 5. Did the Commission properly deny protective conditions requested by labor organizations? 6. Did the Commission properly evaluate the fair- ness of the price per share offered to minority shareholders of WP stock? We affirm the Commission’s decision on all issues ex- cept the fourth, which we remand to the Commission for further proceedings not inconsistent with this opinion. Additional, relatively minor, issues were raised by peti- tioners and will be referred to where appropriate. How- ever, having carefully considered these subsidiary issues and the challenges giving rise to them, we find petition- ers’ arguments concerning these matters to be without merit. 1. The Public Interest Decision Petitioners challenge the Commission’s determination that the proposed consolidation is “consistent with the public interest” on a number of grounds. Petitioners’ pri- mary contention is that the ICC ignored Congress’ direc- tive that “competitive considerations and the policies of the antitrust laws assume critical and, indeed, controlling significance in any assessment of whether a merger should be approved.” Brief for Petitioners SP at 14. Petition- ers argue that the conceded anticompetitive effects of the merger outweigh any public benefits the merger may create. Brief of Petitioners KCS at 17-24. In addition, petitioners maintain that the ameliorative conditions im- posed on the merger by the ICC were insufficient to offset the anticompetitive consequences of the merged system. See, e.g., Brief for Petitioner DRGW at 16. [14] (a) The role of competitive effects in the statutory scheme Petitioners’ basic contention is that Congress has re- cently changed the law so as to forbid the Commission 14a from approving any merger with admittedly anticompeti- tive effects such as this one. See, e.g., Brief for Petition- ers SP at 14 (“[T]he ICC... refused to employ a standard which incorporates recent changes in Congres- sional direction regarding the rail industry.”). We do not agree that the Commission is required to give anti- competitive effects not merely substantial but dispositive weight. We think that the Commission properly recog- nized that while competition is a “major factor” in its calculus, its “primary inquiry” is still to be conducted under the terms of the Interstate Commerce Act. In deciding whether a proposed merger is “consistent with the public interest,” 49 U.S.C. §11344(c) (Supp. III 1979), the Commission has traditionally considered four factors: 1. the effect of the proposed transaction on the adequacy of transportation to the public. 2. the effect on the public interest of including, or failing to include, other rail carriers in the area involved in the proposed transaction. 3. the total fixed charges that result from the pro- posed transaction. 4, the interest of carrier employees affected by the proposed transaction. 49 U.S.C. §$11844(b) (Supp. III 1979). After this merger had been submitted to the Commission, Congress passed the Staggers Act, which added a fifth factor to this list: “whether the proposed transaction would have an adverse effect on competition among carriers in the affected area.” 49 U.S.C. §11344(b) (5) (Supp. IV 1980). Although the Staggers Act is not formally ap- plicable to this proceeding, the Commission elected to ad- here to its policies. UPC-Control, 366 I.C.C. at 488. The Commission’s determination as to a proposed merger is also guided by the criterion set forth in the Transporta- [15] tion Policy of 49 U.S.C. 10101 (Supp. V 1981), as 15a amended by the Bus Regulatory Reform Act of 1982, Pub. L. No. 97-261, § 5, 96 Stat. 1103,* the Rail Trans- portation Policy of 49 U.S.C. §1010la (Supp. V 1981),’ 6 49 U.S.C. § 10101 (a) Except where policy has an impact on rail carriers, in which case the principles of section 10101a of this title shall govern, to ensure the development, coordination, and preser- vation of a transportation system that meets the transporta- tion needs of the United States, including the United States Postal Service and national defense, it is the policy of the United States Government to provide for the impartial regula- tion of the modes of transportation subject to this subtitle, and— (1) in regulating those modes— (A) to recognize and preserve the inherent advan- tage of each mode of transportation; (B) to promote safe, adequate, economical, and efficient transportation ; (C) to encourage sound economic conditions in transportation, including sound economic conditions among carriers; (D) to encourage the establishment and mainte- nance of reasonable rates for transportation, without unreasonable discrimination or unfair or destructive competitive practices ; (E) to cooperate with each State and the officials of each State on transportation matters; and (F) to encourage fair wages and working condi- tions in the transportation industry; 749 U.S.C. § 10101a In regulating the railroad industry, it is the policy of the United States Government— (1) to allow, to the maximum extent possible, compe- tition and the demand for services to establish reasonable rates for transportation by rail; (2) to minimize the need for Federal regulatory con- trol over the rail transportation system and to require fair and expeditious regulatory decisions when regula- tion is required ; [Continued ] l6a [16] and the Railroad Revitalization and Regulatory Re- form Act of 1976 (4R Act), which encourages “efforts to 7 [Continued ] (3) to promote a safe and efficient rail transportation system by allowing rail carriers to earn adequate reve- nues, as determined by the Interstate Commerce Com- mission; (4) to ensure the development and continuation of a sound rail transportation system with effective competi- tion among rail carriers and with other modes, to meet the needs of the public and the national defense; (5) to foster sound economic conditions in transporta- tion and to ensure effective competition and coordination between rail carriers and other modes; (6) to maintain reasonable rates where there is an absence of effective competition and where rail rates pro- vide revenues which exceed the amount necessary to main- tain the rail system and to attract capital; (7) to reduce regulatory barriers to entry into and exit from the industry ; (8) to operate transportation facilities and equipment without detriment to the public health and safety; (9) to cooperate with the States on transportation matters to assure that intrastate regulatory jurisdiction is exercised in accordance with the standards established in this subtitle; (10) to encourage honest and efficient management of railroads and, in particular, the elimination of noncom- pensatory rates for rail transportation; (11) to require rail carriers, to the maximum extent practicable, to rely on individual rate increases, and to limit the use of increases of general applicability; (12) to encourage fair wages and safe and suitable working conditions in the railroad industry; (18) to prohibit predatory pricing and practices, to avoid undue concentrations of market power and to pro- hibit unlawful discriminaticn; (14) to ensure the availability of accurate cost informa- tion in regulatory proceedings, while minimizing the burden on rail carriers of developing and maintaining the capability of providing such information; and (15) to encourage and promote energy conservation. eae, ei ahaa 17a re- [17] structure the [railway system of the Unitea States] on a more economically justified basis.” 45 U.S.C. § 801 (1982). Taken together, these statutes, both new and old, evince Congress’ intent that a merger’s effects on competition be accorded substantial weight in determin- ing whether the merger should be approved. The recent changes—more specifically, the Staggers Act and section 1010la—have not, however, changed the law so drasti- cally such that the Commission was incorrect in stating that its “primary inquiry is conducted under the terms of the Interstate Commerce Act.” 366 I.C.C. at 503. The very terms of the relevant statutes, focusing as they do on numerous factors in addition to competition, belie the assertion that Congress intended the effect upon com- petition to outweigh all other factors combined. The increased emphasis upon competition required by Congress modifies but does not basically alter the ICC’s traditional approach, which has always considered the competitive impact of a proposed merger, but not to the exclusion of other factors. The antitrust laws do give “understandable content to the broad statutory concept of the public interest,” Federal Maritime Commission v. Aktiebolaget Svenska Amerika Linien, 390 U.S. 238, 244 (1968), but the Supreme Court has held that, in deciding whether to approve a carrier consolidation the Commission must estimate the scope and ap- praise the effects of the curtailment of competition [18] which will result from the proposed consolida- tion and consider them along with the advantages of improved service, safer operation, lower costs, etc., to determine whether the consolidation will assist in effectuating the over-all transportation policy. Re solving these considerations is a complex task which requires extensive facilities, expert judgment and considerable knowledge of the transportation indus- try. Congress left that task to the Commission “to the end that the wisdom and experience of that Com- 18a mission may be used not only in connection with this form of transportation, but in its coordination of all other forms.” “The wisdom and experience of that commission,” 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 (1944) (citations omitted). In short, the Commission has never sat “as an antitrust court [to determine] com- pliance with the Clayton, Sherman, or related antitrust acts.” 366 I.C.C. at 485, citing United States v. ICC, 396 U.S. 491, 514 (1970). Its statutory mandate is consider- ably broader. The ICC can disapprove mergers which would not violate the antitrust laws and can approve mergers even if they otherwise would violate the anti- trust laws. United States v. ICC, 396 U.S. at 513-14. The Commission has acknowledged that section 1010la and the Staggers Act require it to “take even greater care to identify harmful competitive effects and to miti- gate those effects where possible,” 366 I.C.C. at 502, but its basic approach remains unchanged. The Commission has always, and should continue, to perform a balancing test which takes a myriad of factors—including competi- tion—into consideration and weighs “the potential bene- fits to applicants and the public against the potential harm to the public.” Jd. at 486, quoting 49 C.F.R. §1111.10(¢c) (1981). Here, the Commission did just that. Basically, the ICC balanced the admittedly serious anticompetitive effects of [19] the proposed merger against the benefits anticipated to the public and concluded that, subject to certain condi- tions, this merger is consistent with the public interest. It is a truism that we owe the Commission substantial deference in reviewing its decisions. Jilinois Central R.R. v. Norfolk & Western Ry., 385 U.S. 57, 69 (1966) (in reviewing Commission consolidation decisions, courts are limited to determining whether the Commission’s conclu- 19a sions are reasonably drawn from the evidence and find- ings in the case); Florida East Coast Ry. v. United States, 259 F. Supp. 993, 1002 (M.D. Fla. 1966), aff'd, 386 U.S. 544 (1967) (three-judge district court) (A court’s “task is at an end when [the court is satisfied] that the Commission has made adequate findings sup- ported by substantial evidence, that it has perceived the danger areas, and judging by the statutory standards has concluded that the public interest is best served by allowing the merger.’’). Given this standard of review, it is clear that the Commission’s decision here must be upheld. A review of the Commission’s opinion reveais that it did not ignore the importance of competition in considering whether to approve the proposed consolidation. See, e.g., UPC-Con- trol, 366 I.C.C. at 501-33. On the contrary, the Commis- sion expressly stated that “[t]he competitive impact of a consolidation proposal is a major factor in our considera- tion of the public interest.” Jd. at 501. The Commission was “cognizant of the increased importance of [its] com- petitive analysis,” zd. at 502, and took “substantial guid- ance” from the antitrust laws but held that, ultimately, its “primary inquiry is conducted under the terms of the Interstate Commerce Act.” Jd. at 503. The Commis- sion’s opinion exhaustively reviews the competitive effects of the proposed merger. /d. at 501-33. Its survey of both the parallel and end-to-end effects (roughly analo- gous to horizontal and vertical effects, respectively, see id. at 505) in the relevant geographic markets and sub- markets led it to conclude that [20] [t]he proposed transactions will have a sig- nificant adverse competitive effect (1) on rail trans- portation of transcontinental traffic, especially in the central corridor; and (2) on rail transportation in the Midwest, especially traffic moving through the corridor between Omaha/Council Bluffs and destined to the Gulf. 20a Id. at 533. The Commission found no “significant ad- verse competitive effects in any other area which arise from the consolidations.” Jd. Because the Commission believed that the negative effects could be ameliorated, it approved the proposed merger. Petitioners are not satisfied with this. They object to the ICC’s failure to base its decisions on a post-merger “market share analysis.” See, e.g., Brief of Petitioner ATSF at 21-30. Had such an analysis been conducted, petitioners maintain, the mammoth market share ac- quired by intervenor UP in the central corridor route would have compelled the Commission to disapprove of the proposed merger. There are at least two problems with this argument. First, as noted above, the Commis- sion is not limited to a consideration of only the competi- tive impact of the merger. If the Commission believes that. a proposed merger will substantially benefit the public, it can approve that merger even if those benefits are unrelated to competition. Petitioners’ argument here is simply a repetition of their contention, which we have already rejected, that a showing of the likelihood of anti- competitive consequences sweeps the board. Second, the traditiona] market-share analysis may not be mechani- cally applied in this context. The market shares in the rail industry, both before and after the merger, are “ex- tremely high by conventional antitrust standards.” 366 I.C.C. at 512. But merely adding the pre-market shares of the merging railroads would not necessarily have told the Commission anything definitive. One of the condi- tions the Commission imposed on this merger created a wholly new competitor in the central corridor, the SP/ [21] DRGW route. The Commission sought to predict the economic viability of the new route based upon the known technical and business characteristics of its com- ponent railroads. In reviewing other mergers, the Com- mission has recognized that diversion projections are of limited utility because they presuppose a static market 21a when experience has shown that the competitive response of competing carriers following Commission approval of a consolidation will dramatically alter a marketplace’s dynamics. Burlington Northern, Inc.—Control & Merger —St. Louis-San Francisco Ry., 360 I.C.C. 784, 962, aff'd sub nom. Missouri-Kansas-Texas R.R. v. United States, 632 F.2d 392, 406 (5th Cir. 1980), cert. denied, 451 U.S. 1017 (1981) ; CSX Corp.—Control—Chessie & Sea- board Coast Line Industries, Inc., 363 I.C.C. 518, 631-32 (1980).* This is especially relevant here, where the Com- 8 This competitive response is also at the heart of the Commis- sion’s decision to remove the so-called “Bieber” conditions it imposed on Burlington Northern (“BN”) in Great Northern Pacific—Merger—Great Northern, 331 I.C.C. 228, 281-82, 352-54 (1967), aff'd sub nom. United States v. United States, 296 F. Supp. 853 (D.D.C. 1968) (three-judge court), aff'd sub nom. Northern Lines Merger Cases, 396 U.S. 441 (1970). These traffic protective conditions help preserve the route between Bieber and Keddie, Cali- fornia by requiring BN to maintain rates over that route that are at least as favorable as those offered over alternative routes. UPC-Controi, 366 I.C.C. at 592; Joint Brief for the ICC and the USA at 49 n.27. They also require BN preferentially to solicit traffic for the Bieber rovte. /d. These conditions were orginally imposed to cure specific competitive harms which the Commission believed would befall ATSF, WP and the shipping public if the Bieber route were allowed to deteriorate. 331 I.C.C. at 282-83. The Commission removed the conditions for two reasons. First, “the justification for the Bieber conditions will no longer exist after consolidation,” because WP will no longer be dependent upor inter- changes with BN, SP or ATSF. 366 I.C.C. at 592. Second, the Commission believed that the proposed consolidation might harm competition in the West Coast north-south market. It was relying on the competitive response of other railroads, especially the BN, SP and DRGW, to offset the adverse competitive effects of the merger in this market. Therefore, the Commission was unwilling to “limit BN’s competitive response to the new system” by “|c|ontinu- ing to require BN to hand off traffic to WP at Bieber.” Jd. When the Bieber conditions were first imposed, the WP was “a small, neutral interline carrier, and 20 percent of its total freight reve- nues were obtained from Bieber traffic.” Jd. After the consolida- tion, the WP will not need the protection of these conditions. To that extent the Commission is correct that the justification for the 22a [22] mission has created an entirely new line through the transcontinental central corridor. See, e.g., 366 I.C.C. at 515, 576-78 (explaining what will mitigate the anti- competitive effects of the merger with respect to SP and assessing the competitive capacity of DRGW). Under such circumstances, the arithmetic of today’s market shares cannot control the Commission’s inquiry. (b) The public benefits Next, petitioners attack the “benefit” side of the equa- tion, arguing that the merger would not produce the [23] benefits to the public that the Commission believes it would. The Commission found that [t]he proposed consolidation of UP-MP-WP will re- sult in substantial public benefits. Shippers and the general public will benefit by the improved efficiency and reliability of single system service, as well as the efficiency related savings of $4% million an- nually. These savings are likely to result in rate de- creases, deferrals of rate increases, and a more financially viable system. conditions no longer exists. Moreover, ATSF’s contention that there may be adverse competitive effects which the Commission failed to consider is based on a premise that is by no means in- evitable—that BN will down-grade the Bieber route. Brief of Petitioner ATSF at 61. The Commission expressly found that “UP will have an economic incentive for continued participation in movements over WP’s Bieber route.” 366 I.C.C. at 527. As such, BN will continue to route traffic over WP’s Bieber route (and eventually to ATSF), so long as it is economically prudent for it to do so. It is the ICC’s intention that “economic conditions and competi- tion . . . dictate appropriate routes” after the merger. 366 I.C.C. at 528. Removal of the Bieber conditions helps to ensure that “BN, SP and DRGW are positioned to compete for traffic which otherwise would go to the new UP system.” Jd. at 592. Given the importance of the competitive response of other railroads to the Commission’s approval of this merger, we uphold the Com- mission’s decision to lift the Bieber conditions. | 23a : 366 I.C.C. at 501. This $47 million figure is the sum of net revenue gains or $7.9 million derived from inter- modal (motor carrier to rail carrier) diversion; cost savings of $5 million from the consolidation of facilities leading to reduced equipment needs, lower car hire and car maintenance expenses, reduced labor force and lower terminal company charges; annual cost savings of $32 million due to improved equipment utilization; and sav- ings of $1.5 million due to improved administrative co- ordination as a result of the consolidation of UP and WP mechanical and maintenance departments and be- catise joint purchases will permit volume discounts by equipment manufacturers. OE ONE ae Da Petitioners challenge these figures as being “wholly unreliable.” Brief of Petitioners KCS at 25. According to KCS, the Commission’s calculation of quantifiable pub- lice advantage was technically faulty and the actual present-value figure for public benefits (calculated before the costs of reduced competition are taken into account) would be, at most, $11.9 million. Jd. at 36. Taking into account uncorrected anticompetitive effects, KCS main- tains, the annual net cost to the public of the proposed merger is at least $7.1 million per year. Id. at 38. A review of the Cost and Benefit Analysis in Appendix II to the Commission’s opinion convinces us that we should accept the Commission’s figures. A decision as which of two costing methodologies to adopt is precisely the [24] kind of judgment which agencies, not courts, ought to make. The Commission satisfied itself that the methodology employed was acceptable. For example, here the Commission accepted, and indeed commended, the applicants’ approach as making “achievable” “a figure for both the annual net benefits and combined annual net benefits plus one-time benefits.” 366 I.C.C. at 776. The Commission was not, however, uncritical; it did not accept applicants’ approach wholesale. Thus, when the applicants sought to equate the return on value of equip- 24a ment saved with the value (replacement cost) for equip- ment required, the Commission demurred and adjusted the claimed saving downward. Id. at 777. Moreover, the Commission recognized that the cost-benefit analyses at- tempted necessarily required that certain estimates and assumptions be made. Id. at 776. We do not mean to focus attention on any particular item in the calculation but only to illustrate the sort of task that KCS would have us undertake. Were we to attempt a review so detailed and searching, we would be duplicating the ex- tensive work of the Commission and doing so without its resources or expertise. That is not, and cannot be, the function of a reviewing court. We are not free to con- sider whether this consolidation satisfies our own concep- tion of the public interest—that is the Commission’s job. Penn Central Merger Cases, 389 U.S. 486, 498-99 (1968) ; Brotherhood of Maintenance of Way Employees v. United States, 221 F. Supp. 19, 30 (E.D. Mich), aff'd, 375 U.S. 216 (1963). The record clearly shows that the ICC exercised its independent judgment and expertise with respect to the calculation of public benefits. That must be enough for us, particularly in such a fact-bound and technical area.® ——s.- —_--- [25] (c) The conditions imposed Petitioners also challenge the conditions imposed by the ICC on the merger. The Commission did find that this merger, without certain ameliorative conditions, would have significant adverse impact on competition. 366 *In this appeal the Commission also emphasizes the significance of non-quantifiable public benefits. This troubles petitioners be- cause a reviewing court is forced to defer substantially to the Commission in assessing such a finding. This may be true, but it is not particularly germane to this case; the non-quantifiable benefits on which the Commission relies, for example, the increased flexibility of a single system’s integrated management, are suffi- ciently obvious to assure us that the Commission’s decision here rests on firm ground. ———— 25a 1.C.C. at 517, 533. Therefore, the Commission granted DRGW trackage rights over the merged system from Kansas City to Pueblo, Colorado and SP rights between St. Louis and Kansas City. The effect of this extensive grant was to create a new central corridor route from St. Louis to the West, with SP at either end and DRGW in the middle. The Commission concluded that this new route would “provide an effective competitive alternative to the UP system in the central corridor.” Jd. at 577. This finding was based on the Commission’s assessment of the strategic location of the SP and DRGW lines and those railroads’ operational capabilities. See, e.g., id. at 515 (western end of SP more extensive and efficient than WP). Also, the Commission carefully tailored the track- age rights to match anticompetitive effects. See, e.g., id. at 515-16 (importance to DRGW of loss of neutral Pueblo-Kansas City carrier). We noted above that in analyzing the response of a dynamic market, the Com- mission was entitled to engage in such operational scru- tiny without presenting quite possibly irrelevant market- share figures. Plainly, this issue involved the kind of “judgmental or predictive’ conclusion with respect to which judicial deference to agency expertise is especially appropriate. FCC v. National Citizens Committee for Broadcasting, 436 U.S. 775, 813-14 (1978). In fact, our scope of review of the Commission’s decisions as to pro- tective conditions is even more narrow than our scrutiny of its public interest determination. See supra p. 24. The Commission has [26] extraordinarily broad discre- tion to impose protective conditions, 49 U.S.C. § 11344 (c), and courts have appropriately given the Commis- sion’s selection of such conditions great deference. Sea- board Coast Line R.R. v. United States, 599 F.2d 650, 652 (5th Cir. 1979); Florida East Coast Ry. v. United States, 259 F. Supp. 993, 1001 (M.D. Fla. 1966), aff'd, 386 U.S. 544 (1967). While the Commission accorded SP and DRGW ex- tensive trackage rights over the merged line, it did not set the terms under which UP would be paid for the use 26a of its track. Rather, the Commission instructed the parties to seek to negotiate agreeable compensation terms according to general criteria outlined in the decision, sub- ject to the ICC’s power to fix terms in the absence of an agreement. 366 I.C.C. at 589-90. This procedure was entirely rational, in that the ICC specifically provided that the terms, whether agreed to or imposed, must be such as to make the new transcontinental corridor (SP/ DRGW) competitive with the merged system. 7d. at 590. Southern Pacific’s argument that absent fixed terms it is impossible to tell whether the SP-DRGW route will be competitive is thus upside-down; we trust the Commis- sion to ensure that the compensation terms will not de- feat the purpose of the trackage rights. The ICC has in fact guaranteed that it will see to the proper functioning of the trackage rights. Id. See Baltimore & Ohio R.R. v. United States, 386 U.S. 372, 389 (1967) (ICC faulted for failing to provide protection it thought necessary). Nor was there anything cryptic about the Commission’s decision on this point, as DRGW suggests, we sustain the ICC’s decision on trackage rights compensation terms.” 10 Petitioner SP also contends that the ICC’s approval of this merger violates the Pacific Railroad Acts. Act of July 1, 1862, ch. 120, 12 Stat. 489; Act of July 2, 1864, ch. 216, 13 Stat. 356, codified at 45 U.S.C. § 83 (1982). We disagree. In approving a consolidation such as this one, the ICC has the express authority to “exempt [a carrier] from the antitrust laws and from all other law, including State and municipal law, as necessary to let that person carry out the transaction... .” 49 U.S.C. § 11341(a) (Supp. V 1981) (emphasis added). The Supreme Court long ago expressly rejected SP’s argument that the ICC’s exemption authority is limited to antitrust and similar restraining and prohibitory laws. Texas v. United States, 292 U.S. 522, 534 (1934). The ICC need only consider the policies expressed in those Acts in determining whether the consolidation is in the public interest. See Northern Lines Merger Cases, 396 U.S. at 511-13. We are satisfied that the Commission adequately considered the Pacific Railroad Acts’ poli- cies. 366 I.C.C. at 548-62. The Commission held, first, that the proposed merger did not violate the statutory requirement that “te whole line of said rail- road shall be operated and used for all purposes ... as one con- i CNNERE lain hii ee a ee se, RI wk iy alae, nial ce 27a [27] 2. The Commission’s Denial of Trackage Rights to KCS Petitioner KCS challenges the Commission’s denial of its application for trackage rights on MPC lines to ex- pand KCS8’s service within eastern Texas and Louisiana. nected continuous line.” 45 U.S.C. § 83. Southern Pacific’s con- tention is that the Acts “required much more than a mere physi- cally continuous railroad.” Brief for Petitioners SP at 65. The Supreme Court has made clear that this part of the Act was intended to secure the permanent physical connection of a trans- continental route and the conduct of through operations over it. See Union Pacific R.R. v. Hall, 91 U.S. 343, 353-54 (1876). See also United States v. Union Pacific R.R., 226 U.S. 61, 91-.. (1912); Seuthern Pacific Co. v. United States, 277 F. Supp. 671, 679 (D. Neb. 1967). After the consolidation, UP will continue to inter- change traffic with SP at the Utah gateway, thus ensuring that SP and UP are still part of “one continuous line” of transcontinental traffic. Also, we agree with the Commission that “the fundamental purpose of the ‘one continuous line’ provision will . . . be satisfied by the existence of several other alternative transcontinental routes .... 366 I.C.C. at 552. Second, the Commission rejected SP’s contention that the Pacific Railroad Acts granted to it certain unspecified “vested rights” that are violated by the merger. South- ern Pacific’s claim is specious. The Acts create contract rights between the party railroads and the federal government, not be- tween the party railroads themselves. The Commission’s action does not impair any rights SP has with respect to the federal govern- ment. See Burke v. Southern Pacific R.R., 234 U.S. 669, 680 (1914); United States v. Union Pacific R.R., 98 U.S. 569, 613-14 (1878). The Commission concedes that SP’s final claim—that the approval merger violates the nondiscrimination provision of the Pacific Rail- road Acts—has merit, but it held that it was not barred from “immuniz[ing] the carriers from operation of the nondiscrimina- tion provisions where, as here, we have found that the UP/WP consolidation is in the public interest.” 366 I.C.C. at 553. Although the ICC’s explanation is not entirely clear, we read its opinion to mean that, in the Commission’s view, the other benefits of this merger outweigh the harmful effects of discrimination which the Pacific Railroad Acts seek to avoid. Since, as noted above, the Commission’s determination of the public interest is entitled to def- erence, see supra p. 24, we uphold the Commission’s decision. 28a [28] The theory of KCS’s application is that the public interest in effective rail competition requires the imposi- tion of this condition upon the consolidation. KCS claims that, absent the grant of the trackage rights its requests, the public will never have effective rail competition in these markets. The conditions KCS proposed were concededly unrelated to the consolidation at issue. They were not designed to mitigate any anti-competitive consequences stemming di- rectly from the consolidation. Rather, KCS’s proposed conditions represent its vision of what effective rail com- petition in eastern Texas and Louisiana requires irrespec- tive of the consolidation. The Commission properly denied KCS’s request. See UPC-Control, 366 I.C.C. at 562-65. The Commission’s criteria regarding the imposition of conditions clearly establish that conditions are not to be used to address problems unrelated to a merger or consolidation. See, e.g., Burlington Northern, Inc.—Control & Merger—St. Louis-San Francisco Ry., 360 1.C.C. at 952 (“conditions on a merger are not to be used to ameliorate longstanding problems which were not created by the merger”); Rail- road Consolidation Procedures, 366 I.C.C. at 92. This [29] position, strongly supported by both the Department of Justice and the Department of Transportation, reason- ably effectuates the Commission’s statutory mandate. As the Commission noted, “[i]mposing conditions unrelated to a merger’s impact, upon a transaction otherwise con- sistent with the public interest, would be at odds with the Congressional policy that privately-initiated transactions should be approved so long as they are consistent with the public interest.” UPC-Control, 366 I.C.C. at 564. Once the Commission determined that the conditions imposed upon the consolidation had rendered that consolidation consistent with the public interest, it was under no com- pulsion further to reform the proposed consolidation. KCS sought to use the proposed consolidation as a spring- 29a board from which to launch a request for conditions hav- ing no connection with that consolidation. But the Com- mission is not required to act as a roving ombudsman re- structuring railroads on its own in order to satisfy an ; individual carrier’s notion of what effective competition may require. 3. The Commission’s Jurisdiction over ATSF‘s Track The MPC lines over which the Commission granted SP and DRGW trackage rights involve two segments of track, one eight miles long and the other twelve, owned by ATSF. ATSF challenges the Commission’s decision to award SP and DRGW rights over its track on three grounds: 1) the Commission lacks jurisdiction under 49 U.S.C. § 11103(a) to make such an award; 2) even if jurisdiction exists, the Commission violated 49 U.S.C. § 11103(a) by allowing SP and DRGW to use ATSF’s track before compensation had been “paid or adequately secured”; and 3) the interim agreement between UPC and DRGW allowing DRGW to move its cars in MPC’s trains along a segment of ATSF’s track is illegal because it is a pooling arrangement and was not approved under 49 U.S.C. § 11342 (Supp. V 1981). We have fully con- sidered ATSF’s arguments and conclude that the Com- [30] mission’s decision to grant SP and DRGW rights over ATSF’s track was not improper. Under 49 U.S.C. § 11103(a), the Commission has the authority to order one carrier to allow another carrier to use its “terminal facilities, including main-line tracks for a reasonable distance outside of a terminal” if the use is “practicable and in the public interest.” ATSF argues that the term “terminal facilities” is limited in meaning to trackage that is within the operating limits of the terminal area and that is used for terminal purposes. It contends that SP and DRGW will use the segments for through service only and that the segments are not within the operating limits of the Kansas City or Pueblo * - ™ i Maks wg aa 30a terminals. In addition, ATSF claims that the Commis- sion did not limit its consideration of the “public inter- est” to an examination of the improvements in rail serv- ice in the relevant terminal area. The Commission has long held that the “terminal fa- cilities” should be broadly construed because the purpose of the section is highly remedial. See, e.g., CSX Corp.— Control—Chessie System, Inc. & Seaboard Coast Line Industries, Inc., 363 I.C.C. at 585; City of Milwaukee v. Chicago & N.W. Ry., 283 I.C.C. 311, 314 (1951). The purpose of this section is to avoid “unnecessarily dupli- cated” lines, and it is not necessarily limited to benefiting the rail service in the relevant terminal area. See Spo- kane, Portland & Seattle Ry., 348 I.C.C. 109, 142-43 (1975). Here, the Commission held that the use of ATSF’s track was necessary to allow SP and DRGW to enter the Kansas City and Pueblo terminals and that the use was practicable and in the public interest because it allowed the Commission to create a competitive alterna- tive in the central corridor to the new UPC system. See UPC-Control, 366 1.C.C. at 573-78 (DRGW-Pueblo), 586- 89 (SP-Kansas City). This determination is consistent with Commission precedent. In Chicago & Alton R.R. v. T.P. & W. Ry., 146 I1.C.C. 171, 179 (1928), and [31] Spokane, Portland & Seattle Ry., 348 1.C.C. at 142- 43, the Commission granted one carrier the right to move over twelve and six-and-three-quarter mile segments of another carrier’s line. In both those cases, the Commis- sion granted the rights so that the carriers might “bridge the gap” between their line and the terminal. It did not require in either case that the segments be used for ter- minal purposes. The Commission has never held 49 U.S.C. § 11103(a) or its predecessor to require that the term “terminal facilities” be limited to the trackage within the operating limits of the terminal. In any event, the segment near the Pueblo terminal is actually within that terminal’s sla limits, UPC-Control, 366 I.C.C. at 574, and the segment { near the Kansas City terminal is halfway within that terminal’s limits. Jd. at 587-88. We hold, therefore, that the Commission has the jurisdiction to make the trackage rights awards. Under 49 U.S.C. § 11103(a) there is an additional re- quirement that the compensation for use of the “terminal facilities’ must be “paid or adequately secured” before the use can commence. ATSF argues that this condition } was not met because the trackage rights were made im- mediately effective and no agreement as to compensation was made. It is true that the Commission directed the parties to negotiate the terms of compensation among themselves, UPC-Control, 366 I.C.C. at 589-90, and that no agreement was reached prior to the commencement of the transaction. Nonetheless, the Commission did indi- cate that if the parties failed to agree it would “apply the principles for compensation in condemnation proceed- ings.” Jd. at 576 n.114. We hold that the Commission is bound by this statement and that it fulfills the require- ment of the term “adequately secured” under 49 U.S.C. § 11103(a). We find it appropriate to note at this time that, because the use of ATSF’s track was adequately secured, ATSF has suffered no injury under the Interstate [32] Commerce Act and that its arguments are more di- rected at derailing the merger rather than protecting its rights. ATSF’s final argument is that the interim agreement -between UPC and DRGW allowing DRGW to move its cars in MPC’s trains along a segment of ATSF’s track is illegal because it is a pooling arrangement and was not approved under 49 U.S.C. § 11342. This argument has been fully considered and rejected by the Commission. See Joint Appendix at 357-62, 365-70. In any event, ATSF’s claim is now moot because the interim agreement is no longer in effect. or Pha Ph ABR MS OT ok: na Sot hee ares: ali rs Sia ee oe 32a 4, DRGW’s Request for Independent Ratemaking Au- thority In addition to trackage rights, DRGW requested that the Commission approve a condition for independent rate- making authority (“IRA”) over the WP portion of the merged system. This IRA, set out in Appendix D-2 of the Commission’s opinion, would have required WP to accede to rates set by DRGW." It would have provided the merged system’s automatic concurrence to any rate the DRGW wished to set in conjunction with WP rout- ings on competition with the merged system. The IRA would therefore have allowed DRGW to quote its own rates from Kansas City to Northern California while, because of its trackage rights on the UP system, provid- ing service between Utah and Kansas City. DRGW con- tends that the IRA was “designed to offset the merged system’s domination of Utah junction traffic and provide what would be, in effect, independent competition to the monopolistic control exerted by UP in the central cor- ridor.” Brief for Petitioner DRGW at 20. By allowing the DRGW to offer competitive rates for shipments pass- [33] ing through the Utah junctions without advance WP concurrence, “the previous competitive rate environment at Utah junctions” would be preserved because DRGW could offer “an independent alternative to the UP in the central corridor.” /d. at 21. Basically, DRGW fears that without this IRA it will be foreclosed from participating in California traffic because UP will favor WP while SP will shift to its long haul southern routes. Alternately, DRGW fears that SP will arrive at a collusive accom- modation with UP in Utah to share California traffic. The Commission found that granting DRGW the rate making authority would enable it to attract California 11The UP system, however, would be guaranteed revenue cal- culated on the basis of WP divisions of revenue according to the higher of the UP or DRGW formulas as of the date the merger proposal was submitted to the Commission. A 33a traffic itself, thus reducing DRGW’s incentive to work with SP, its western interchange partner. This would weaken the new SP/DRGW line, which the Commission was relying on to provide competition in the central cor- ridor. 366 I.C.C. at 578-79. This reasoning does not satisfy our central concerns. Granting the IRA would have an effect that the Commis- sion’s opinion simply does not address—namely, it would create a third transcontinental route over SP from St. Louis to Kansas City, DRGW from Kansas City to Utah and from Utah to Northern California on the WP. As- suming that WP’s lines provide a strong route to Cali- fornia, this third route would seem to be a good alterna- tive to the merged system. If the WP lines are inadequate to serve the Utah-Northern California traffic, SP’s com- peting line (the gathering area of which impressed the ICC) would be a sufficiently viable and strong competitor with WP to force DRGW to deal with SP. Moreover, given SP’s southern corridor, which is certainly capable of handling transcontinental traffic, DRGW may need the “leverage” afforded by an independent route to the West Coast in order to induce SP participation in the central corridor route. In short, if WP’s lines are good enough to serve Cali- fornia, the Commission has not adequately explained why [34] the IRA should not be granted to create a third transcontinental central route. If, on the other hand, the WP lines are not good enough to create such a route, the Commission’s theory—that DRGW would have a reduced incentive to deal with SP—is undercut by the competitive advantage SP’s lines have over those of WP. Given these unanswered questions, we remand the decision as to the requested IRA to the ICC for further consideration and explanation. 5. The Labor Issues Petitioners ATDA and BMWE challenge the Commis- sion’s denial of their requests that the New York Dock 34a conditions imposed on the applicant carriers be extended to protect the interests of the employees of non-applicant carriers. ATDA also challenges the Commission’s refusai to impose two specific conditions over and above those outlined in New York Dock. These proposed conditions would require the Commission to approve, after notice and opportunity for a hearing, any changes in the form of UPC’s corporate control over MPC and WP and any transfer of MPC or WP train dispatching work or train dispatchers. We have fully considered petitioners’ argu- ments and conclude that the Commission properly denied their requests. Petitioners’ first argument—that 49 U.S.C. §§ 11344 (b) (1) (D) and 11347 require the Commission to protect the interests of all affected railroad employees—has been recently considered and rejected by this court. See La- moille Valley R.R. v. ICC, 711 F.2d 295, 323-24 (D.C. Cir. 1983). We see no need at this point to add to the thorough discussion of that opinion nor do we find any different result warranted. The Commission’s refusal to impose the two specific conditions also was proper. First, ATDA is concerned that, unless the Commission were to require notice and [35] opportunity for a hearing prior to allowing a change in the form of UPC’s corporate control over MPC and WP, the affected employees would not have an effective right to be-heard with respect to protection above the minimum level outlined in New York Dock until after consumation of the transaction. See 49 C.F.R. § 1180.4(g) (1983). The Commission’s power to allow changes in the corporate form of a carrier is set out at 49 U.S.C. § 10505 (Supp. V 1981). That section allows the Commission to exempt a carrier’s change in corporate form from many requirements of the Interstate Commerce Act, but it spe- cifically forbids the Commission “to relieve a carrier of its obligation to protect the interests of employees as re- quired by [the Interstate Commerce Act].” Jd. § 10505 85a (g) (2). Thus, regardless of whether the employees are entitled to complain before or after the transaction oc- curs, they are entitled to complain if the labor protective conditions imposed are not sufficient, making imposition of ATDA’s first condition unnecessary. Second, ATDA is concerned that, unless the Commis- sion were to require notice and opportunity for a hearing prior to allowing UPC to transfer WP and MPC train dispatching work or train dispatchers, the interests of the affected train dispatchers would not be adequately considered. The Commission concluded that, “in the event employees might be impacted in the future, . . . they will be afforded the protections [i.e., the New York Dock con- ditions] we imposed here.” UPC-Control, 366 I.C.C. at 622. This conclusion is consistent with this court’s deci- tion in American Train Dispatchers Association v. ICC, 671 F.2d 580 (D.C. Cir. 1982). Moreover, it is supported by the Commission’s findings that there is no evidence in the record that transfers of work or dispatchers are con- templated and that requiring a hearing would be “unduly burdensome” and would “fetter applicants’ operating ca- pabilities.” The Commission’s refusal to impose this con- dition is not arbitrary or capricious. [36] 6. The Fairness of the Terms of the Consolidation Petitioner Edward K. Wheeler, a minority shareholder of WP Class A common stock, objects to the finding of the Commission that the terms of the consolidation with re- spect to the interests of minority shareholders are “fair and reasonable” as required by the Act. See 49 U.S.C. § 11344; Schwabacher v. United States, 334 U.S. 182, 201 (1948) (the Commission “is under a duty to see that minority interests are protected, especially when there is an absence of arm’s length bargaining or the terms of the merger have been imposed by management interests ad- verse to any class of stockholders”). He contends that the $20 per share purchase price offered by UPC to WP | 86a stockholders is unreasonably low because that price fails to reflect WP’s industrial land holdings and, more im- portantly, fails to reflect the benefits that will accrue to UPC as a result of its consolidation with WP. Petitioner Wheeler does not ask that we set aside the Commission’s approval of the consolidation. He only requests that we remand the question of the valuation of WP stock back to the Commission for further consideration. We con- clude, however, that the Commiasion’s methodology of valuation is reasonable and that its conclusions are sup- ported by substantial evidence in the record. First, contrary to Wheeler’s principal complaint, the Commission explicitly took into account the enhanced value of WP stock as a result of the consolidation. See UPC-Control, 366 I.C.C. at 636-38. It calculated the difference in the market value of WP stock immediately prior to UPC’s tender offer and the present value of the stock in light of the consolidation, describing that difference in value as “the merger premium.” The Com- mission then allocated a variable share of the merger premium to WP shareholders, concluding that the result- ing amounts added to the market value of the WP stock before the tender offer would yield a range of reasonable prices from $16.85 per share to $26.25 per share. Be- [37] cause the $20 per share to be paid by UPC under the terms of the consolidation falls within this range, the Commission found that price to be fair and reasonable. Petitioner Wheeler attacks the Commission’s conclusion on the ground that the studies relied upon by the WP management in accepting UPC’s terms for consolidation were flawed. Wheeler also contends that the Commission erred in finding that UPC’s offer was the result of arm’s length negotiations. These contentions, however, are un- availing. First, the Commission did not simply rely upon the judgments of WP’s financial experts in determining the fairness of the consolidation terms, although it did consider those judgments. Rather, the Commission found 87a that the $20 per share price for WP stock was fair on the basis of its own independent analysis. Second, there exists substartial record evidence to support the Commis- sion’s finding of arm’s length negotiations between WP and UPC. WP was assisted in the negotiations by an independent investment banking firm, Solomon Brothers, which advised WP that $20 per share was a fair price for its stock.* Moreover, this price was approved by WP’s Board of Directors in light of Solomon Brothers’ advice. Finally, petitioner Wheeler contends that the Commis- sion unreasonably disregarded WP’s industrial landhold- ings in determining the fairness of UPC’s tender offer. But contrary to Wheeler’s assertions, the Commission did not simply disregard WP’s landholdings. Rather, it stated that such holdings are relatively unimportant in the context of the methodology the Commission used in de- terminig [sic] a reasonable range of prices for WP’s stock. Because WP is a going concern, the Commission deter- mined that the value of its stock can best be measured by WP’s earning [38] power as reflected by performance in the stock market rather than the book value of the company. Cf. Seaboard World Airlines, Inc. v. Tiger In- ternational, Inc., 600 F.2d 355, 361-62 (2d Cir. 1979); Mills v. Electric Auto-Lite Co., 552 F.2d 1239, 1247-49 (7th Cir. 1977). Using the stock market as a guide in ascertaining value, $20 per share for WP’s stock repre- sented a 38 percent premium over the $14.50 WP’s stock sold for the day before the public announcement of the tender offer. It is true that the Commission’s discussion of this issue is unduly condensed. See UPC-Control, 366 I.C.C. at 636. Nonetheless, the Commission’s approval of UPC’s tender offer meets the deferential standards of re- view applicable in this context. “[A]lthough the Com- ‘UPC did not seek outside advice with respect to the fairness of its offer to UPC stockholders. UPC claims that it did not obtain such advice because of the relatively small size of the trans- action. See UPC-Control, supra note 2, 366 ICC at 635. 88a mission in fulfilling its statutory responsibilities is to carefully review all of the terms of a merger proposal and determine whether they are just and reasonable, it is not for the agency, much less the courts, to dictate the terms of the merger agreement once this standard has been met.” Northern Lines Merger Cases, 396 U.S. at 520. Therefore, we affirm the decision of the Commission to approve this merger and remand the case for reconsid- eration of DRGW’s request for independent ratemaking authority. So ordered. 39a APPENDIX B Served October 20, 1982 F-9932 INTERSTATE COMMERCE COMMISSION FINANCE DOCKET No. 30,000 UNION PACIFIC CORPORATON, PACFIC RAIL SYSTEM, INC., AND UNION PACIFIC RAILROAD COMPANY-CONTROL— MISSOURI PACIFIC CORPORATION AND MISSOURI PACIFIC RAILROAD COMPANY 40a [459] TABLE OF CONTENTS Page IIE xscriciicnccsststeneneniniecanasnensesingiionnmniasansnhdaipanitichasienansibmaitl [468] TI, iveisisticse so cniinsnpsninsecterviniccaingilinsvniaeinaaemenantiadl [471] Nature and Scope of the Primary Applications .............. [472] aes OE Se TI isicenrsiceittinstccnccnintntzeessneessnstanintigatontom [474] Discussion and Conclusions ................-.---.-c-ccc--e-eseeeeeeeoeeeeee [483] Statutory Criterion: The Public Interest ................ [483] I DS ssitiictecnitcarapnccmtninlgreinecxcomaintil [483] Antitrust Considerations ..................-2.222..-2-.22---- [485] iia voctrenccasacremnaceinntmbeniansscatinnet [485] Environment and Energy Factors .................... [485] I ea drctcseoninccenbecbeeneth [486 ] Standards Applicable to Responsive Applica- aa nscocnsaumianhassoin [486 ] Byvaluation of the RGCOre ..........202022....ccccccecereceons [487] Adequacy of Transportation ..................-.---------------- [487] a smciisnenmeatouenetscnsin [487] Service Improvements ................. FCMEY EES TENE [489 ] Operating Changes ............ ae a i Loa Se [493] a cedilinabeetie [493] i csticieniaalibn [494] Common Point Consolidations _................ [494] Kansas City Terminal Operations ............ [496] Equipment Utilization ............................---. [498] Mechanical and Maintenance-of-Way Co- ordinations ............ FOL Cra a CT a [498] Management Information Services and Communications Operations ................. [500] I I, aio che Lav ngncicndacibiniencesaielabunsinnti [501] Ge nt os oc semsndnandaninligooeniee [501] CI oi eccsnsticccesotioraninncimnegencencagatbanteatinionn [501] rr CE. | ccnnteanienieseusaaeneien [503 } UI I sa iene neenanaele [503] COTES TET 3. oncccecccnccsniccnececsceceseesnes [504] ee Se ee re a ee eee Be ee oe re ee te ee. Te Ala TABLE OF CONTENTS—Continued Page Commute Try niece [505] nT ae [506] Transcontinental traffic [506] (1) Central corridor ................ [507] (2) Other transcontinental NED ace [517] (3) Conclusion on transconti- nental competitive effects.... [525] IU CI is etic cco casero ee [525] (1) Kansas City-Omaha/Coun- cil Bluffs corridor ................ [526] I aa [526] LN LEE EPRI [527] End-to-End Effects ...00..0.00.....-o.ee eee [528] Source competition [528] I I oo ooceecccnacconcceesnsseseane [529] Conglomerate Effects _......... [531] en cccauaieicun [533] [460] PEAT ee ae [533] I a [534] Competition between applicants [535] Competition with other carriers ..................... [535] Characteristics of ex ante competition _.. [536] Characteristics of ex post competition _..... [537] Application to competition for PRB coal.. [542] Denver & Rio Grande Western Coal traffic _..... [545] Transportation of export coal .......................... [545] IL ARIE SE IER NCS ETT [545] Den ee Se [546] STO ee OE [548] Passage of the Pacific Railroad Acts [549] Specific Provisions of the Pacific Railroad Acts ...... [550] 42a TABLE OF CONTENTS—Continued Page One Catlins BIO increase eine [550] The Nondiscrimination Clause ._..................-.... [552] Contract Rights Under the Pacific Railroad NDTIS... siniscistanisileicuitdiatse aster dacheas ie reales ade cia ae [553] The Transportation Act of 1920 ............0022222.0022------.. [556] The Commission’s Immunity Power _.............. [556] The Act of 1920 as an Amendment of the Pa- ee TN TI iin [557] Application to the Pacific Railroad Acts _................ [558] Historical Development of the Pacific Railroads after the Pacific Railroad Acts ..................0.2.2..--... [559] CaCI nies stenccierinions succeed [562] CIE take advantage of the complementary peak seasonal de- mands on the constituent railroads, which will have a combined fleet of over 126,000 freight cars. Centralized and computerized control over equipment distribution and repair will provide efficient operations and reduce over- all transit time. It will enable the system to reduce empty cross-hauls, to ensure that equipment is repaired at the nearest shop, to reduce transit time and car hire charges, and to improve equipment availability. Appli- cants project a 3 percent gain in fleet efficiency, which will produce substantial dollar savings to them, and re- duced car hire and inventory costs to shippers. Annual cost savings due to improved equipment utilization will cel Pea kt AEM ABR Ay A De VT sab 101la be over $32 million. A discussion of applicants’ equip- ment utilization study appears in Appendix H. Mechanical and Maintenance-of-Way Coordinations The consolidated system will be able to achieve sig- nificant cost reductions through more effective use of the applicants’ mechanical and repair facilities and through coordination of maintenance-of-way activities. The [499] bulk of the savings will be realized in four general areas: (1) coordinated repair of rolling stock; (2) manufacture and reclamation of equipment and equipment components; (3) shared use of maintenance- of-way equipment and materials; and (4) administrative coordinations. Coordinated repair of freight cars and locomotives will ~ result in substantial! cost-savings. The applicant carriers each have shops and repair facilities at common points. The closing of a facility by transfer of the work and personnel to another facility in a terminal will produce significant savings. The coordinated use of various shops with certain specific repair functions will avoid the ne- cessity for the consolidated system to invest in new facilities. The new system will realize substantial savings an- nually through the coordinated use of the applicants’ equipment manufacturing and component repair and reclamation facilities. The largest savings will be ob- tained by using UP’s car-building facility at Albina, OR for construction of hopper cars for WP and MP. Other savings will be effected through the use of MP shops at Sedalia and De Soto, MO for construction of UP ea- booses, and at North Little Rock and Omaha for various component fabrications and repairs. Of the $19.5 million savings anticipated from coordi- nations of various shop and repair facilities, approxi- mately $9.6 million reflect savings due to internalized 102a production which we do not consider to be public benefits. As we stated in CSX, 363 I.C.C. at 561, and Norfolk- Southern, 366 I.C.C., at 210, internalized production as anticipated here cannot be considered a public benefit unless applicants have shown that their variable costs of production are lower than those of other manufacturers. The cost to society of producing a car is the incremental cost of resources required to produce that unit, and not the market price of the car. The market price reflects fixed costs, which will be incurred by all car manufac- turers regardless of where UP’s cars are purchased. The annual savings of $9.6 million which the system will achieve due to producing goods or services internally which the component railroads now purchase in the marketplace is a private benefit of the transaction.” Further savings will be realized by the use of major shops such as Omaha and North Little Rock for rebuild- ing and fabrication of system locomotive and freight car components. The consolidated system will [500] obtain savings through the shared access to maintenance-of-way equipment and materials. Principal areas of savings will be in reduced transportation costs and lower costs of main- tenance-of-way materials. Other areas of savings will be realized through more efficient use of maintenance-of- way equipment. For example, ties needed for the eastern portion of UP’s lines can be treated at the MP’s tie plant at Little Rock rather than at UP’s Laramie, WY facility, *1 We do consider the $20,000 annual savings due to UP’s use of MP’s freight car doors to be a public benefit. This reflects the sav- ings to UP to acquire doors which MP manufactures for itself un- der patent. There is evidence that the doors are more efficient than those otherwise available, and the public will benefit not only from the cost savings but by expanding the use of an efficient door to shippers who would not receive that benefit without consolidation. The $4.1 million in manufacturing and rebuilding savings, which are presently done internally and will be switched from one carrier to another are public benefits, and are reflected in Attachment A of Appendix H. 103a saving considerable transportation costs. WP and MP will be able to use UP’s specialized ballast cars during winter months when such equipment cannot be used on UP’s lines due to weather conditions. Administrative coordination of mechanical and main- tenance-of-way functions will result in annual savings primarily as a result of the consolidation of UP and WP mechanical and maintenance departments. Joint pur- chases will permit volume discounts offered by equipment manufacturers. These coordinations will result in sav- ings of about $1.5 million annually. Management Information Services and Communications Operations The consolidated carriers will fully coordinate through the common policy direction of PRSI the functions of UP’s Complete Operating Information System (COIN) and MP’s Transportation Control System (TCS). These systems will be directly linked to one another. This direct interconnection will ensure operational reliability and facilitate efficient operations by the new system. With respect to the WP system, it will be completely con- verted to the UP’s COIN system. UP and WP communi- cation organizations will be integrated; the MP and UP communications system is already connected at Kansas City. Upon consolidation this link will be expanded to support smooth and efficient single-system operation. These management and communication links will serve several objectives, such as to ensure efficient single sys- tem operations, more efficient use of freight cars and locomotives, and faster tracing of shippers’ cars over the applicants’ lines. Annual savings should exceed $1.5 million. Further savings are anticipated through the use of UP’s Automated Claims Processing System. This com- puterized system permits electronic collection of support 104a data essential to review freight claims. It will further support a large, uniform data base to furnish statistical claim analysis for the purpose of identifying recurring claim patterns, enabling the carriers to focus on par- ticular causes of freight loss. About $3.6 million in annual fuel savings will be realized as a result of intermodal traffic diversions from truck to rail and through internal rerouting of traffic by the new system. [501] Financial Viability The consolidated system will be financially viable. UPRR and MPRR are viable and are financially healthy. They have been consistently and increasingly profitable in recent years (see Appendix J). WPRR is financially viable at present. Its financial position is not strong, however, and it incurred a loss in 1981 (see Appendix J). As part of the consolidated system WPRR will sig- nificantly improve its financial position. Although applicants are all viable at present, and UPRR and MPRR are financially strong, none of the applicants has adequate revenues pursuant to 49 U.S.C. 10704(a). See Railroad Revenue Adequacy—1980 Deter- mination, 365 I.C.C. 285 (1981). The proposed consoli- dation will strengthen applicants financially and the esti- mated total net annual benefits of the transactions, abeut $85 million, will help the applicants te app.oach ade- quate revenues. Conclusion We conclude that the proposed consolidation of UP- MP-WP will result in substantial public benefits. Ship- pers and the general public will benefit by the improved efficiency and reliability of single system service, as well as the efficiency related savings of $47 million annually. These savings are likely to result in rate decreases, 105a deferrals of rate increases, and a more financially viable system. The additional $38 million in private benefits will further aid the system in remaining financially viable and competitive. COMPETITION The competitive impact of a consolidation proposal is a major factor in our consideration of the public interest because under most conditions strong competition pro- motes efficiency. We have historically considered com- petition in our balancing of the public interest in rail consolidation proceedings. In Seaboard Air Line R. R.— Merger—Atiantic Coast Line R.R., 320 1.C.C. 122, 128- 29 (1973) we observed “Our primary task is to recon- cile the objective of ‘preventing injurious waste and in securing sure efficient transportation,’ * * * with the general concern of Congress ‘that tendencies toward con- centration in industry are to be curbed in their in- cipiency * * *.’ In short our problem is one of accom- modation of section [11343] and the antitrust legisla- tion.” See also BN-Frisco, 360 I.C.C. at 932-33; Tucum- cari, 361 1.C.C. at 340-41; CSX, 363 I.C.C. at 550-51. The [502] Staggers Act codified the need to evaluate competition in consolidation proceedings by adding a fifth factor to 49 U.S.C. 11344 (b).* While the Staggers Act simply codified the need to consider competitive effects of consolidations, it has ac- 22 Section 228(a) (2) of the Staggers Act requires us to consider “whether the proposed transaction would have an adverse effect on competition among rai! carriers in the affected region.” We are aware that 49 U.S.C. 11344(b) (5) does not specifically apply to this preceeding. However, the new provision has simply codified our past practice. In explaining the purpose of this provision, its sponsor, Congressman Leon Panetta noted that competition already “plays an important role in the Commission’s decision making in railroad mergers. This is as it should be. My amendment would insure that this remains the case.” 126 Cong. Rec. H8664 (daily ed. Sept. 9, 1980). 106a tually increased the need to identify carefully any anti- competitive effects and to balance those effects against the benefits of a transaction. Prior to the Staggers Act the emphasis of the National Transportation Policy, 49 U.S.C. 10101, was “on achieving an adequate, efficient, and economical system of transportation through close supervision of business operations and practice rather than through heavy reliance on the enforcement of free competition * * *” McLean, 321 U.S. at 83. The new Rail Transportation Policy, 49 U.S.C. 10101la, included as section 101 of the Staggers Act, adopted new policies in regulating the railroad industry. It is the policy of the United States Government “to allow, to the maximum extent possible, competition and the demand for services to establish reasonable rates for transportation by rail * * *” 49 U.S.C. 10101a(1). The new policy favor- ing increased reliance on competition to regulate activi- ties will govern the environment in which the new sys- tem will operate. The ability of the railroads to take various actions free of regulatory restraints will make it easier to exert or abuse market power gained as a result of consolidation. For these reasons we must take even greater care to identify harmful competitive effects and to mitigate those effects where possible. While we are cognizant of the increased importance of our competitive analysis, Railroad Consolidation Pro- cedures, 363 I.C.C. at 791 and 49 CFR 1111.10(a) (1981) (now codified at 49 CFR 1111.1(a)), we reject the contention that antitrust considerations might as- sume controlling importance in railroad consolidations after the Staggers Act. The Supreme Court has clearly held that the Commission is not an antitrust court, and cannot enforce the Sherman Act.” While we do have 23 “The Commission has no power to enforce the Sherman Act as such. It cannot decide definitely whether the transaction contem- plated constitutes a restraint of trade or an attempt to monopolize which is forbidden by that Act. The Commission’s task is to en- ~— 107a concurrent jurisdiction to enforce section 7 of the Clay- ton Act, in the context of a pro- [503] posed rail con- solidation our primary inquiry is conducted under the terms of the Interstate Commerce Act. We will continue to examine consolidations under the terms of the Inter- state Commerce Act where competition is but one factor, albeit an important one, in determining the public inter- est. Nonetheless, the principles of the antitrust laws, specifically of section 7 of the Clayton Act, and sections 1 and 2 of the Sherman Act” provide substantial guid- ance in our assessment of the competitive impact of rail consolidations under the Interstate Commerce Act. In the following discussion we will evaluate competi- tive effects by defining existing markets, measuring the anticipated effects in those markets, and determining whether the anticipated effects in those markets are sub- stantial. We also will determine whether adverse com- petitive effects of the proposed transactions can be amel- iorated by means available to us under the Interstate Commerce Act. In light of the importance of railroads in the transportation of coal, we will discuss the impact of the proposed transactions on coal separately after examining the general competitive effects. force the Interstate Commerce Act and the legislation which deals specifically with transportation facilities and problems.” McLean, 321 U.S. at 79. *415 U.S.C. 18 (1981). Mergers subject to section 7 are pro- hibited if their effect ‘“‘may be substantially to lessen competition, or to tend to create a monopoly.” Section 11 of the Clayton Act, 15 U.S.C. 21 (1981), confers jurisdiction on both the Commission and DOJ to enforce section 7 of the Act as to regulated carriers. See Denver & R. G. W. R., 387 U.S. 495. 2515 U.S.C. 1, 2 (1981). Mergers subject to section 1 are prohib- ited if they constitute a “contract, combination * * *, or conspir- acy in restraint of trade.” Section 2 provides criminal penalties for persons “who shall monopolize, or attempt to monopolize, or combine or conspire to monopolize trade * * *”. 108a Market Definition The first step in analyzing any consolidation is to define the markets that the merger is likely to affect. A relevant market is the “area of effective competition,” Standard Oil Co. v. United States, 387 U.S. 293, 299- 300 n.5 (1949), and necessarily has two dimensions, product and geographic. Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962) (Brown Shoe). Rele- vant markets must be defined in terms of commercial - realities, United States v. Grinnell Corp., 384 U.S. 563, 572 (1966). Product Market. A relevant product market requires a grouping together of products that are “reasonably interchangeable.” United States v. E. I. duPont de- Nemours & Co., 357 U.S. 377, 395 (1956). In Brown Shoe, 370 U.S. at 325, the Court looked to the “cross- elasticity of demand between the product itself and sub- stitutes for it” and “the [504] reasonable interchange- ability of use * * * between the product itself and sub- stitutes for it.” The “product” sold by railroads is the transportation of freight. The first issue to be resolved in this proceed- ing is whether motor carrier freight transportation 26 Tn the United States Department of Justice Merger Guidelines, issued June 14, 1982, the market definition used by the Department was stated formally as follows: “a market consists of a group of products and an associated geographic area such that (in the ab- sence of new entry) a hypothetical, unregulated firm that made all the sales of those products in that area could increase its profits through a small but significant and non-transitory increase in price (above prevailing or likely future levels).” Merger Guidelines is- sued June 14, 1982, page 4 n.6. ' The Merger Guidelines indicate the policy of the Department of Justice, but they are not binding on the Department, the courts or this Commission. United States v. Atlantic Richfield Co., 297 F. Supp. 1061 (S.D.N.Y. 1969), aff'd sub nom. Bartlett v. United States, 401 U.S. 906 (1971). 109a should be included in the same product market as rail freight transportation for determining competitive im- pacts of the proposed transactions. Applicants argue that motor carriers are competitive for most markets and should be included in our analysis. Most other parties argue that rail transportation shov'd be analyzed separate product market. This is not to say that motor carriers do not present substantial competitive con- straints to railroad market power,” only that, at the margin, motor carriers are unlikely to be direct sub- stitutes for rail transportation in the markets affected by the proposed transactions. In such circumstances a rise in rail rates would not necessarily result in a sig- nificant amount of traffic shifting between modes and the railroad could effectively increase its profit by raising its rates absent other competitive factors. Our treatment of rail freight transportation is con- sistent with cases decided under Clayton section 7 where it is rare to group technically different products or serv- ices in the same product market. In United States v. Philadelphia National Bank, 374 US. 321, 356-57 (1963) (Philadelphia National Bank), the Supreme Court found commercial banking to be a separate line of commerce despite the offering of numerous services interchangeable with commercial banking services by savings and loans, credit unions, and various credit com- panies. The Court has also found that the market for aluminum conductors was a separate product market despite their almost complete interchangeability with *7 Motor carriers handle almost two-thirds of the nation’s inter- city freight tonnage and we have recognized the general restrain- ing effect of intermodal competition upon railroad operations. See Norfolk Southern, 366 1.C.C. at 221 and 223; Guilford Transporta- tion Industries, Inc.-Control-D&H Ry. Co., 366 I.C.C. 396 (1982); and Guilford Transp. Industries, Inc.-Control-B&M Corp., 366 1.C.C. 294 (1982). Motor carriers often provide an umbrella, or cap, on the ability of railroads to raise rates. However, the viability of this constraint generally depends upon the commodity transported and the distance moved. a 110a copper conductors. United States v. Aluminum Company of America, 377 U.S. 271, 275 (1964) (Aluminum Company). Finally, evaluation of rail freight transportation as a separate product market is consistent with the man- date to consider “whether the proposed transaction would have an adverse affect on competition among rail car- riers in the affected region.” 49 U.S.C. 11344(b) (5). Geographic Market: Like product markets, geographic markets must “correspond to economic realities.” Brown Shoe, 370 U.S. at 336. In Clayton section 7 cases the relevant geographic market has been described as the area in which providers of a particular product or serv- ice operate and to which purchasers can turn for such products or services. Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961) (Tam- [505] pa Elec- tric). The geographic market, referred to in Clayton section 7 as “any section of the country,” was found in Brown Shoe, 370 U.S. at 328, 340, to include markets as small as individual cities and a market as large as the entire country. It is necessary also to examine any “economically significant submarket” where the effect of the transaction “may be substantially to lessen competi- tion.” 370 U.S. at 325. See also United States v. Lever Bros. Co., 216 F. Supp. 887 (S.D.N.Y. 1963). For the reasons set forth below, we have determined that relevant geographic markets in this proceeding are (1) transcontinental traffic (a) over the central cor- ridor and (b) over all routes; (2) Midwest traffic (a) between Omaha/Council Bluffs and Kansas City, (b) between points in Kansas, and (c) between the upper Midwest and the Gulf of Mexico; and (3) traffic between points on the West Coast.” 28 We note that the distinctions between product and geographic markets are not as clear in transportation as they are in other in- dustries, for carriers, in particular railroads, effectively sell their geography. llla Competitive E ffects Section 7 of the Clayton Act was enacted “to create an effective tool for preventing all mergers having dem- onstrable anticompetitive eff ** *” Brown Shoe, 370 U.S. at 319. In order to identify those effects the Court in Brown Shoe looked separately at the horizontal and vertical aspects of the proposed consolidation. Hori- zontal consolidations were defined to be “economic ar- rangement[s] between companies performing similar functions in the production or sale of comparable goods or services,” 370 U.S. at 334. Vertical consolidations were defined to be “economic arrangements between com- panies in a supplier-customer relationship * * *” 370 US. at 323. In the context of railroad consolidations, the Commis- sion has analyzed competitive effects of proposed trans- actions in terms of parallel and end-to-end effects. Nor- folk Southern, 366 1.C.C. at 216 and Railroad Consolida- tion Procedures, 363 I.C.C. 784. While these terms are roughly analogous, analysis in terms of the actual lines of railroad, i.e. parallel and end-to-end, rather than the theoretical function served by those lines, i.e. horizontal or vertical effects, provides a clearer approach to identi- fying competitive problems in rail consolidations. This is especially true where, as in this proceeding, elements of each effect are present Various lines of railroads can fulfill both theoretical roles,” customer- [506] supplier (or vertical) and direct competitor (or horizontal) and 29 We reject the argument offered by the Santa Fe that since one connection does not receive payment from the other in return for delivering interline rail traffic to that connection there can be cus- tomer-supplier or vertical relationship. Santa Fe argues that only railroad mergers with shippers or consignees can be considered vertical. Originating railroads have substantial control over the traffic on their lines and often determine the route, gateway, and/or connecting carrier over which their traffic will move. In this sense it is clear that the originating road is a “supplier” of traffic to its connecting carriers. 112a it becomes difficult to segregate competitive effects along clear horizontal or vertical lines. Many of the major parties, including DOJ, also adopted this approach in arguing their positions. We will discuss specific vertical or horizontal effects as they appear. Parallel Effects: While the proposed transactions are primarily end-to-end in nature, there are substantial parallel aspects. These aspects of the transaction must be examined closely, for they will generally eliminate com- petition between the consolidating railroads. The record indicates four areas where UP and MP or WP lines are parallel: transcontinental traffic both through the central corridor and over all routes, the Kansas City-Omaha corridor, Kansas, and the West Coast. Transcontinental traffic: UP, MP and WP each pres- ently participate in the movement of transcontinental traffic. WP serves points in northern California and in- terchanges traffic with UP and DRGW at Salt Lake City. MP participates in traffic to and from points in north- ern California and Oregon over its central corridor line to Pueblo where it also interchanges with DRGW. MP also participates in traffic to or from California points over its line to El Paso. On its southern corridor route MP inter- changes traffic with ATSF at Sweetwater, TX, and with SP at El Paso. UP provides direct services from Kansas City to the Pacific Northwest and to Los Angeles. UP also partic- ipates in northern California traffic through interchange with the SP at Ogden, UT, and with the WP at Salt Lake City. Because the consolidated system will reach all five of the major midcontinent gateways as well as major mar- % Chicago, St. Louis, Kansas City, Memphis, and New Orleans. ateaie 113a kets and ports on the West Coast, we are concerned with the potential impact of the transactions on transconti- nental traffic. Applicants presently compete primarily through various interline routes in the provision of trans- continental service to and from northern California * over the central corridor (for example, WP-DRGW-MP and SP-UP or SP-DRGW-MP) .*” WP operates primarily in the central corridor and is one of three major railroads serving northern California (along with SP and ATSF). The UP operates as one of two bridge carriers in the central corridor over the con- tinental divide (along with DRGW). Finally, MP oper- ates as one of several routes connecting with DRGW for transcontinental traffic moving east of Denver over the Great Plains (Pueblo to Kansas City). The [507] MP interline route is a direct competitor of the UP for traffic moving to and from Kansas City. The central corridor is clearly the area in which the applicants’ transcontinental rail freight operations are concentrated and is, therefore, a relevant geographic market for our competitive anal- ysis. Tampa Electric, 365 U.S. at 327. We will discuss first the competitive impacts in the cen- tral corridor. Then we will analyze other transconti- nental routes under the second part of the Tampa Elec- trict test—the area to which purchasers can practicably turn for transcontinental rail freight service. (1) Central corridor. The central corridor (also known as the overland route) has traditionally been recognized as a separate market with a “natural advantage’ for cer- tain transcontinental traffic. Tucumcari, 363 I.C.C. at 31 Shippers at points in southwest Oregon served by SP generally use the SP-UP service over Ogden for transcontinental traffic. 32 MP aiso competes for traffic over its southern corridor route to El Paso. We will discuss this route infra. 1ll4a 383.*° However, measuring the central corridor market, and railroad markets in general, is complicated by the presence of extensive interlining. Congress neither adopted nor rejected specifically any tests for measuring relevant markets in Clayton section 7, see Brown Shoe, supra. Nor has this Commission adopted specific tests for analyzing competitive effects under the Interstate Commerce Act. In the past, we have used techniques analyzing traffic flows in regional cor- ridors, Tucumcari, 363 I.C.C. at 349, 415-17 and CSX, 363 L.C.C. at 565-67; State-to-State traffic flows, Norfolk Southern, 366 1.C.C. at 216-19; and point-to-point traffic flows, CSX, 363 I.C.C. at 564. To assist in measuring the markets in this proceeding we made available to the par- ties our 1979 one percent waybill sample. Additionally, we required five of the major railroad parties to provide a two percent sample of all transcontinental traffic han- dled by their systems in 1979.* The following tables indi- cate the market shares held by various central corridor routes for traffic moving between northern California and Oregon and eight regions: * 33 When SP was authorized to control the Central Pacific Railway Company (CP), the approval was conditioned on a requirement that SP preferentially solicit traffic between points in southern Oregon and central California, on the one hand, and certain points in the East and Midwest, on the other, for interchange at Ogden with UP. See Central Pac. Ry. Co. Control, 76 1.C.C. 508 (1923). Later modification permitted solicitation via DRGW. See Central Pac. Ry. Co. Control, 328 1.C.C. 345 (1966) (Central Pacific). * Finance Docket No. 30,000, Union Pacific Corporation and Un- ion Pacific Railroad Company-Control-Missouri Pacific Corporation and Missouri Pacific Railroad Company, Southern Pacific Transpor- tation Company-Petition for Access to Certain Data, (not printed) decided December 19, 1980. 35 These market shares are based on the two percent transconti- nental traffic sample. ——— ES SS 115a *Putpunor 04 ONp OO} Tenbe you few TByOo] 0°00t 0°O00+ 0°00 | 0°00! 0°00t 0*004 0°00} 0°00t 0°00! 0°001 0° S° ¢° 2. 6° v° Z* o*t 0° 2° e°s¢ a4 2°s A! z°9t e°zt S*vl O°2t v°vi 6°¢h z78 6762 $102 | 6:62 €°92 L126 Griz | Srve 9°82 get . . . . . a a . m t v°? eae | tod | ESE | See] ER OY eee iis | 4s io 8° 0°00t 0°00} 0°00t | 0°00! 0°001 0°00t 0°00! 0°001 0°00t 0*001 0° t° 0° ‘° 0° ‘° 0° 0° 0° y 8°se €°02 0°. , ae dud.r-dS sIs (08ST 9°v 0 gOS Orr 8s ee Ve S66 SY te, 7 eee ds (3°08 0°02 L’°@% 8°vE 262 9°68 OZP 9°92 ae a cena ASLV qUuao1ag Speolze) PIW YON yynog = otURy puepsuy SAM YHON yes “"uCodSULI J, PIA MON FTO uIay}ON punog3se M TeO.L TerzueD pSPOYVION yseoyynos ODL] [DJUIULZUOBBUDL] DIUL0f{yDD U9IY740N t Wav C739] 386a [685] SP SP alleges that Commission approval of the proposed consolidation will enhance and extend UP’s (current) dominant market position in the central corridor, par- ticularly with respect to transcontinental traffic moving between northern California and Oregon, on the one hand, and the upper midwest and the northeast, on the other. The market power that would accrue to UP would permit the consolidated system to unilaterally control routings at the Utah gateway and to control rates and service levels in the central corridor, to the detriment of shippers and other carriers. In reaching this conclusion, SP first determines that rail transportation alone is the relevant product market in this proceeding, and that certain traffic in the central corridor is the relevant geographic market. It then as- sesses the impact of the proposed consolidation on competi- tion in that market. PRODUCT MARKETS SP agrees with the analyses and conclusions of DRGW and DOJ concerning relevant product markets. These parties refuted applicants’ use of modal split statistics to show rail/truck competition, and relied instead on econ- ometric studies of rail/truck demand and other sources to show that, for certain commodities and lengths of haul relevant to this proceeding, motor carriers do not act as an effective competitive restraint on railroads. SP added to these parties analyses by referring to the testimony of forty shippers, many of whom were spon- sored by the applicants. SP states that these shippers have noted in the record that they do not use extensive motor carrier service for long hauls, either because of the greatly increased costs or the sheer impracticality for their particular commodities. For example, SP alleges that if its exclusively served shippers were required to 887a direct their rail traffic from SP exclusive points to motor carriers, their transportation costs would increase by an average of seventy percent. SP also presents its own modal split statistics, restated here at Table 1. SP states that this data shows that, in each of 18 transcontinental freight markets, the rail market share was over eighty percent, suggesting that for a very large volume of rail freight, truck competition is ineffective. SP also asserts that trucks are becoming less competi- tive with railroads over time. SP states that the national trend of increasing motor carrier participation in total transportation markets has reversed since 1978, due in part to rising fuel costs. And, SP notes that fuel costs are expected to escalate, suggesting that the ability of motor carriers to compete with more fuel efficient rail- roads will continue to decline. RELEVANT GEOGRAPHIC MARKETS SP states that it agrees with DOJ that individual origin and destination points constitute relevant geo- graphic markets to assess the impact of the consolidation. However, while DOJ defines markets in terms of origin/ destination county pairs, SP defines them in terms of origin/destination regions. SP defines three western regions as origin or destina- tion points for transcontinental traffic, defined as traffic that crosses the Rocky Mountains: Oregon/Washington, northern Calfiornia, [sic] and southern California. SP then defines three eastern regions as origin and destina- tion points for trancontinental traffic: the Great Plains, and Northeast, and the Southeast. These six regions are used to define nine transcontinental markets in each di- rection (3 x 3), for a total of eighteen transcontinental markets. [686] Using the two percent sample of 1979 trans- continental rail carload traffic filed by carriers in this 388a proceeding, SP develops several sets of tables for these 18 transcontinental markets. First, SP presents the per- centages of carload traffic participated in by the various carriers. Then, SP shows how these carriers’ participa- tion shares would change if the merger were consum- mated, without taking account of traffic diversions. Finally, SP shows how these participation shares would be affected by the applicants’ diversion studies and by the diversion studies of the protesting carriers. SP concentrates its analysis on the impact of the merger on competition in the central corridor. It is in agreement with DRGW and DOJ that the relevant mar- kets consist of transcontinental transportation of specific commodities by rail through the central corridor between points in northern California and southwest Oregon on the [one] [sic] hand, and the Great Plains and North- east, on the other. SP asserts that these are separate and distinct markets from origin and destination points located in other areas and/or using other corridors. BN’s northern corridor route is not competitive with the central corridor for this traffic, since BN has only a one percent share of traffic between northern California and the Great Plains or the Northeast and only a ten percent carload share for traffic between Southwest Oregon and the Great Plains or the Northeast. SP also notes that, while ATSF carries 29 percent of Northern California traffic on its southern corridor route, the largest part of this traffic is accounted for by a few commodities (intermodal, wine, canned goods, and sugar) shipped from limited locations. SP argues that for two-thirds of northern California traffic, ATSF has a minor share—only 11 percent—and is there- fore not an effective competitive factor. SP asserts that its own southern corridor routings, even after the Tucumcari acquistion, are not a major competitive factor for Northern California originations, 389a with only 12 percent of such traffic and only about one percent of SP’s Northern California traffic moving on the Tucumcari route. Thus SP concludes that the central corridor is a sepa- rate and relevant market for important traffic flows, and that for many shippers the next best alternative to utilizing the central corridor is either paying higher rates to motor carriers or having increased transit times through the Southern corridor. IMPACT OF THE PROPOSED CONSOLIDATION ON COMPETITION IN THE CENTRAL CORRIDOR SP notes that today central corridor markets are char- acterized by high levels of concentration and insurmount- able barriers to entry. SP’s Table 2, below, shows the current dominant market share of traffic participated in by UP in the central corridor. SP asserts that UP’s dominant position is due to the natural superiority of the UP route, in terms of both service and costs. It is this natural route superiority that SP alleges will precisely measure UP’s “latitude of ex- ploitation” in a post-consolidation environment. SP asserts that DRGW, its only central corridor inter- line partner other than UP, has routes that are 8 percent to 13 percent more circuitous than UP’s route, with greater curvature and grade than UP, so that the DRGW routes must be more costly and/or slower than the UP route. Thus SP asserts that DRGW acts as a “pricing umbrella” for UP in the central corridor. SP notes that in 1980 it interchanged 70 percent of its traffic in Utah with UP and 30 percent with DRGW. However, it asserts that UP obtains 78 percent to 98 percent of high rated, time sensitive traffic (such as 390a perishables, autos and parts, and freight forwarder traffic) in comparison to DRGW. SP presents evidence submitted by DRGW and by ap- plicants (Table 3) to show the extent that UP’s dominant central corridor position will be enhanced by the consoli- dation. [687] These data show UP’s post-consolidation participation shares in various central corridor markets to be at least 85 percent. And SP presents its own esti- mates in Table 4 that show UP’s market shares (in- corporating protestants’ diversion studies) over all routes (including the southern corridor) for traffic moving be- tween Northern California and both the Northeast and the Great Plains. UP’s post-consolidation participation share in these broadened markets ranges from 54.5 per- cent to 77.9 percent, assuming the validity of protestants’ diversion studies. Finally, SP presents market share data for transcontinental traffic flows between Northern California and all regions and between Oregon and all regions (Table 5) and between Northern California and Oregon (combined) and all regions (Table 6). SP asserts that the applicants’ share of traffic in these markets—no matter how it is caleulated—is of such mag- nitude the proposed consolidation, measured against tra- ditional! antitrust precepts, must be considered a violation of the antitrust laws. SP translates these market shares into Herfindahl indices to demonstrate that, using the central corridor alone or all northern California traffic, the consolidation would be in violation of recent DOJ merger guidelines meant to be utilized in cases involving application of section 7 of the Clayton Act. These esti- mates of Herfindahl indices appear in Tables 7 and 8. SP asserts that UP will utilize its dominant market position in the central corridor to divert traffic at the Utah gateways, and that, at Ogden, DOT’s market power diversion analysis is consistent with SP’s competitive analysis. @ wee ee ae a eee ee 391a SP states that it will have limited capability to offer competitive resistance to UP. It suggests its southern corridor routes are not competitive with the central cor- ridor routings for northern California traffic, since they are more circuitous and less fuel efficient. SP states that an SP/DRGW route will not be adequate competition for UP, because of DRGW’s circuity and limited capacity, and because DRGW’s major eastern connection is MP, which it will lose as a friendly connection after the merger. Whether DRGW reaches Kansas City via trackage rights or via joint line connection does not alter the cost disadvantage of the present DRGW line, and SP does not regard DRGW as a feasible, long-run competitive alterna- tive to the UP in the central corridor. SP notes that for both northern California and Oregon traffic, SP-DRGW- Other (than applicants) routes captures an average of less than 5 percent of the transcontinental traffic. SP asserts that UP would be able to unilaterally exert its post-consolidation market power in the central cor- ridor to manipulate prices to the detriment of competi- tion through the use of price squeezes, to deliberately degrade service, and to chill competition among railroads. It is the increased market power through end-to-end consolidation, with the potential of foreclosure of SP at Utah, that SP highlights in its analysis. SP suggests that, since MP and WP connect with DRGW and SP in competition with UP, the consolidation cannot accurately be described as end-to-end. SP also anticipates adverse “parallel” competitive effects on local traffic in the central corridor related to the proposed merger of the parallel MP and UP, on southern California traffic currently moving UP/MP in the central corridor in competition with MP southern corridor routes, and on north/south traffic on the west coast where UP parallels WP. 892a [688] TABLE 1 Market shares Rail vs. Truck : 18 Transcontinental freight markets Rail —“ Truck F Market share share percent percent Dic, Comiiarln Gk Ti ciicciteicencetcctcasenictillastaahins 80.7 19.3 Dice, Coe Rermrralen: Ch Taian setntterestntimnensiniri 85.8 14.2 No. California to Great Plains....................0....--:c--eee1ee0+ 82.1 17.9 a, CI Bh Fs deere ctstiecincnerenneeninintnicinati 59.8 40.2 Ben, Cama Ct icici stincicinnninceniteriscmtniisiasitiiniaian 67.3 32.7 So. California to Great Plains.........22....20..2..ecee-ceeeeeeeeee 75.2 24.8 Oregon-Washington to Northeast............0..200.2.2..-.:0000--- 91.0 9.0 Oregon-Washington to Southeast.............2...22.22-.22.02200- 88.5 11.5 Oregon-Washington to Great Plains........................-.--.-- 93.3 6.7 a AA TE ST 82.9 17.1 NMortinemat Go Bie. CITB O CTR. nncnccccccsecrncsercenccctatnicensvenseres 78.2 21.8 BRR Be TA: CI is ccttcseneisteeeinctenseviitcinianleritbasie 72.1 27.9 Northeast to Oregon-Washington...........0..220.222...2:c [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_3172%3A2. Public record. Not legal advice.