UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


WE COAL TRAF LEAG

v.

STB


96-1373a

D.C. Cir. 1999


*	*	*


Sentelle, Circuit Judge: Western Coal Traffic League  petitions for
review of the Surface Transportation Board's  order approving the
merger of two major western railroads-- the Union Pacific Railroad
Company and the Southern Pacific  Rail Corporation. In 1996, the
Surface Transportation Board  approved the merger application under
the Interstate Com- merce Act, 49 U.S.C. s 11343 et seq., but imposed
certain  conditions. Western Coal Traffic League claims that the 
merger will have anticompetitive effects outweighing its bene- fits
and therefore argues that the Board erred in not denying  the merger
or requiring divestiture of certain lines. We  conclude that the
Board's actions were warranted, and deny  the petitions for review.


I. The Union Pacific/Southern Pacific Merger


On November 30, 1995, Union Pacific Corporation and  Union Pacific
Railroad Company ("UP") and Southern Pacific  Rail Corporation ("SP")
filed an application with the Surface  Transportation Board ("STB" or
"Board") for the acquisition  of control of SP by a wholly owned UP
subsidiary, and the  subsequent consolidation of the rail operations
of UP and SP.  Because UP and SP ran side by side across much of the 
West, an unconditioned UP/SP merger would have reduced  many shippers'
options from two to one. To address this  decrease in competition, UP
and SP agreed in September 


1995 to grant extensive "trackage rights" to the Burlington  Northern
and Santa Fe Railway Company ("BNSF").1 That  agreement was
incorporated in the merger application. Sev- eral parties filed
comments arguing that, even with the BNSF  agreement, the merger would
create reduced competition  outweighing its benefits, and that the
Board should refuse the  merger or require divestiture of portions of
SP's lines to  other rail carriers. On August 12, 1996, the Board
approved  the merger. See Union Pac. Corp., Union Pac. R.R., and 
Missouri Pac. R.R.--Control & Merger--Southern Pac. Rail  Corp.,
Southern Pac. Transp. Co., St. Louis Southwestern  Ry., SPCSL Corp.,
and The Denver and Rio Grande Western  R.R., Finance Docket No. 32760,
Decision No. 44, 1996 WL  467636 (STB Aug. 12, 1996) ("UP/SP"). The
Board found  that the merger would result in better service and lower 
costs, and that these benefits outweighed any anticompetitive 
effects. Id. at 104. The Board further found that requiring 
divestiture of SP lines would negate many of the benefits of  the


The Board did, however, impose a number of conditions on  the merger in
order to reduce potential anticompetitive ef- fects. Id. at 144-56.
First, the Board imposed conditions  which originated in the
settlement agreement between the  applicants (UP and SP) and BNSF.
Thus, the Board provid- ed that any shippers who would go from having
two directly  serving railroads before the merger to one after the
merger  ("2-to-1 shippers") could be served by BNSF after the  merger.
Id. at 103, 145. This would be achieved by granting  BNSF trackage
rights over about 4,000 miles of UP and SP  lines, and permitting all
2-to-1 shippers to open up existing  contracts with UP and SP to
ensure BNSF access to a traffic 




__________

n 1 The Burlington Northern Railroad and The Atchison, Topeka  and
Santa Fe Railway were previously separate entities. Their  parent
companies merged in 1995 with the approval of the Inter- state
Commerce Commission. See Burlington Northern Inc.-Con- trol &
Merger-Santa Fe Pacific Corp., Finance Docket No. 32549,  Decision No.
38, 1995 WL 528184 (ICC Aug. 23, 1995), aff'd sub  nom. Western
Resources, Inc. v. STB, 109 F.3d 782 (D.C. Cir. 1997)  and Grainbelt
Corp. v. STB, 109 F.3d 794 (D.C. Cir. 1997).


base. Id. at 146. With a few exceptions, the only existing  shippers
that BNSF would be allowed to serve would be  2-to-1 shippers, not
other shippers on these lines. However,  the Board gave BNSF the right
to serve all new facilities on  the UP and SP lines on which it
obtained trackage rights.  Id. at 145-46. In addition, the Board
imposed a five-year  oversight provision, allowing it to continue to
monitor the  impact of the merger and whether additional conditions
were  necessary. Id. at 146.


Western Coal Traffic League ("WCTL"), a trade organiza- tion
representing electric utility companies interested in rail  shipment
of coal, petitions for review of the Board's decision.2  WCTL
participated in the STB proceedings, opposing the  merger or
alternatively seeking the imposition of additional  conditions, such
as divestiture of certain SP lines. In approv- ing the merger, the
Board rejected WCTL's arguments.  WCTL claims that the Board erred in
not denying the  merger or requiring divestiture, arguing that the
merger will  have significant anticompetitive effects within the


II. Western Coal Traffic League's Claims


A. Background


The merger application of UP and SP was filed pursuant to  the
Interstate Commerce Act, 49 U.S.C. s 11343 et seq., as in  effect
prior to the ICC Termination Act of 1995.3 The statute 




__________

n 2 Two additional petitioners, BNSF and the City of Reno, were 
involved in this case at the time of oral argument, but have since 
withdrawn their objections to the Board's decision.


3 The ICC Termination Act of 1995, Pub. L. No. 104-88, 109  Stat. 803,
enacted December 29, 1995, abolished the Interstate  Commerce
Commission and transferred certain functions and pro- ceedings to the
Surface Transportation Board. Section 204(b)(1) of  the Act provides
that proceedings pending before the ICC on the  effective date of the
Act shall be decided under law as in effect prior  to that date
insofar as the proceedings involved functions retained  by the Board
after the Act. Because the proceeding at issue here  was pending with
the ICC when the Act became effective, the 


provides that a merger is to be approved if "consistent with  the
public interest." Former 49 U.S.C. s 11344(c). See  Penn-Central
Merger and N & W Inclusion Cases, 389 U.S.  486, 498-99 (1968);
Western Resources, Inc. v. STB, 109 F.3d  782, 784 (D.C. Cir. 1997).
The Interstate Commerce Act  includes a nonexhaustive list of factors
to be considered in  making the public interest determination,
including "whether  the proposed transaction would have an adverse
effect on  competition among rail carriers in the affected region."
For- mer 42 U.S.C. s 11344(b)(1)(E). In determining the public 
interest, the Board balances the gains in operating efficiency 
against any reduction in competition or harm to essential  services.
See 49 C.F.R. s 1180.1(c); Western Resources, 109  F.3d at 784;
Southern Pac. Transp. Co. v. ICC, 736 F.2d 708,  717 (D.C. Cir.


The Board's balancing of the various competing interests  under the
public interest test is entitled to considerable  deference. See
Southern Pac., 736 F.2d at 714; Minneapolis  & St. Louis Ry. v. United
States, 361 U.S. 173 (1959). The  Supreme Court has observed that
determining whether to  approve a carrier consolidation is a complex
task requiring  considerable knowledge of the transportation industry,
and  that the wisdom and experience of the expert agency, not of  the
courts, must determine whether the proposed consolida- tion is
consistent with the public interest. McLean Trucking  Co. v. United
States, 321 U.S. 67, 87-88 (1944). Nonetheless,  although the Board's
decision is entitled to substantial defer- ence, we must set it aside
if it is arbitrary, capricious, an  abuse of discretion, or otherwise
not in accordance with law,  or if its findings of fact are
unsupported by substantial  evidence in the administrative record. 5
U.S.C. s 706; Illi- nois Cent. R.R. v. Norfolk & Western Ry., 385 U.S.
57, 66  (1966); Southern Pac., 736 F.2d at 714. We will not upset  the
Board's decision so long as it is "supported by substantial 




__________

n earlier law is applicable in this case. Although the ICC Termination 
Act did make changes in the wording of the agency's pertinent 
authority, compare former 49 U.S.C. s 11344(a) with new 49 U.S.C.  s
11324(a), no party claims the changes would have any significance  in
the present case.


evidence in the record and was reached by reasoned decision- making."
Grainbelt Corp. v. STB, 109 F.3d 794, 798-99 (D.C.  Cir. 1997).


WCTL argues that the merger was not consistent with the  public
interest and points to three principal difficulties with  the Board's
decision, all of which WCTL had argued before  the Board. WCTL claims
that (1) the merger would lead to  duopoly pricing in the western coal
market; (2) the merger  would reduce source competition between
UP-served mines in  the Powder River Basin ("PRB") of Wyoming and
Montana  and SP-served mines in the Uinta Basin of Colorado and  Utah;
and (3) the settlement agreement between UP and  BNSF will not serve
competition because the trackage fee  charged to BNSF is too high. The
Board argues that it  considered each of WCTL's arguments below, and
that its  decisions are supported by substantial evidence. We agree.


B.Duopoly Pricing


WCTL and others argued before the Board that by creat- ing two-railroad
competition between UP/SP and BNSF in  much of the West, the merger
would result in duopoly  pricing. However, the Board addressed WCTL's
duopoly  pricing argument in detail, and concluded that the merger 
would result in rivalry, not collusion. UP/SP at 42-43, 116- 21,
267-73. The Board noted that "the outcome where just  two companies
offer the only significant competitive alterna- tives in a market may
range all the way from intense rivalry  to collusion, depending on the
circumstances of the industry."  Id. at 117. The Board analyzed the
economic evidence of  several witnesses, id. at 267-73, and concluded
that tacit  collusion was unlikely in this situation. In addition, the
 decision noted that there was wide support for the merger  among
shippers whose rail service options would decrease  from three
railroads to two as a result of the merger,  indicating a lack of
concern about possible collusion. More- over, the Board concluded that
since it was retaining jurisdic- tion to oversee competitive
developments for five years, it  would be able to take any necessary
corrective action should  there be evidence of collusion. Id. at


Several of the Board's stated reasons for concluding that  duopoly
pricing was unlikely are challenged by WCTL. In  particular, in
rejecting the duopoly argument, the Board  observed that there is no
evidence that railroads have collud- ed to maintain above-market rate
levels. Id. at 118. WCTL  claims that it had demonstrated that
collusion has occurred  between railroads, as illustrated by ETSI
Pipeline Project v.  Burlington Northern, Inc., Civil Action No.
B-84-797-CA,  1989 U.S. Dist. LEXIS 18796 (E.D. Tex. June 5, 1989). In
 ETSI, the court found the evidence "overwhelming" that  several
railroads conspired to prevent or delay the entry of a  coal slurry
pipeline into the interstate coal transportation  business, and
accordingly granted a directed verdict. What- ever relevance ETSI
might have to the possibility of railroad  collusion regarding market
entry, a type of behavior not at  issue in this case, it does not
imply that post-merger price  collusion between UP and BNSF was
necessarily likely. We  see no tension between ETSI and the Board's
conclusion that  "[t]here is no evidence that railroads have colluded,
overtly or  tacitly, to maintain inefficient operations, unresponsive
ser- vice, or above-market rate levels." UP/SP at 118 (emphasis 


In addition, the Board claimed that collusion was unlikely  due to the
secrecy about prices and services that pervades the  rail industry.
Id. at 267. WCTL argues that this reasoning  was erroneous, given the
fact that WCTL's witness David  Weishaar had testified that
approximations of rail rates can  be derived from public data obtained
from the Federal Ener- gy Regulatory Commission. However, the Board's
conclusion  was supported by other evidence in the record. In
particular,  the statements of witnesses Barber and Sharp indicated
that  publicly available information on delivered coal prices would 
not allow one railroad to determine the transportation rate  charged


In rejecting the argument that collusion would be likely in  a
two-carrier market, the Board noted that the Powder River  Basin has
been a two-carrier market, yet the rates of BNSF  and UP in that
region have continued to decline. UP/SP at  118. WCTL claims that the
Board's reliance on this example  was erroneous, given evidence
presented by WCTL that the 


factors that gave rise to that competition were no longer  operative.
However, the Board's reliance on the PRB exam- ple was supported by
the statements of witnesses Peterson  and Sharp, which were record
evidence that the competition  in the PRB did illustrate the viability
of two-carrier markets.  In addition, the Board itself gave another
example of a  competitive two-carrier market that WCTL apparently does
 not dispute, noting that CSX and Norfolk Southern are the  only two
rail carriers in a large portion of the East, and that  the
competitive pressures there have resulted in lower rates  and better
service. See id. at 118.


Finally, WCTL argues that the Board departed from its  precedent in an
earlier case where the Commission noted that  a merger resulting in a
two-railroad market might risk collu- sion. See Santa Fe Southern Pac.
Corp.-Control-Southern  Pac. Transp. Co., 2 I.C.C.2d 709 (1986)
("SFSP"). However,  the Board adequately justified its change of
course, explain- ing that it now had the benefit of nine years of
additional  experience since the SFSP decision, during which it had 
witnessed decreasing rates in two-carrier markets. UP/SP at  117.
Accordingly, we conclude that the Board gave a rea- soned explanation
for its decision that the merger would not  result in duopoly pricing,
and that that conclusion was sup- ported by substantial evidence.


C. Source Competition


In approving the merger, the Board also rejected argu- ments by WCTL
that the merger would lead to decreased  competition in rail
transportation of various sources of west- ern coal. Prior to the
merger, UP and BNSF primarily  shipped Powder River Basin coal, and SP
primarily shipped  coal from the Uinta Basin of Utah and Colorado.
Coal from  the PRB is lower-BTU coal, while the coal from the Uinta 
Basin is higher-BTU, and generally higher-cost as well.  WCTL argues
that, prior to the merger, one element of coal  competition in the
West was the competition between the  admittedly different types of
coal in the SP-served Uinta  Basin and the UP-served Powder River


types of coal are by no means interchangeable, WCTL claims  that there
are a number of utilities that can use either, or  that can at least
vary the proportions they use in "blending"  in response to the
delivered prices of these two coals. Post- merger, both the Uinta
Basin and the Powder River Basin  will be UP-served. Therefore, WCTL
suggests that UP will  not have an incentive to set aggressive rates
for shipping  Uinta Basin coal, since the PRB lines are more
profitable,  and that the "western coal market" will therefore suffer 
decreased competition.


The Board, however, rejected the claim that there is a  single "western
coal market" with meaningful competition  between PRB coal and Uinta
Basin coal. Id. at 126. WCTL  claims that the Board's view was not
justified, since WCTL  presented testimony of several witnesses who
described the  competition between coal from the two areas in great
detail.  These witnesses explained that the competitive reach of 
cleaner-burning Uinta Basin coals had been expanded by  marketing
incentives, and by the impending deadline for  compliance with the
1990 Clean Air Act Amendments. The  testimony also provided 17
specific examples of utilities capa- ble of burning either Uinta Basin


Nonetheless, the Board concluded that there is "little  meaningful
source competition between UP and SP for coal  because each originates
coal that typically serves different  markets." Id. at 127. The Board
explained that because  PRB coal is lower-cost, plants that can burn
PRB coal do so,  except to the extent that they need higher-BTU coal
for  blending. In addition, an increasing number of utilities are 
making capital investments allowing them to burn PRB coal.  Thus, the
Board found that UP competed intensively against  BNSF for
originations of PRB coal, not against SP move- ments of Uinta Basin
coal. Id. at 127. Because it concluded  that pre-merger competition
between UP-served PRB coal  and SP-served Uinta Basin coal was quite
limited, the Board  did not share WCTL's concerns that such
competition would  be harmed by UP's origination of coal from both
areas post- merger. Indeed, the Board expressed confidence that UP 


would aggressively develop its origination of coal from both  areas.
Id. at 128.


We conclude that the Board's position was justified. The  "source
competition" argument advanced by WCTL is virtual- ly identical to
that it advanced in Western Resources, Inc. v.  STB, 109 F.3d 782
(D.C. Cir. 1997). The Commission there,  like the Board here, rejected
WCTL's broad definition of the  "western coal market." This court
upheld the Commission's  decision. However, there, "the League offered
almost no  evidence of substitutability [of Uinta Basin coal for PRB 
coal]." Id. at 785. Here, the evidence of substitutability is  more
substantial--the statements of several witnesses, includ- ing Borts,
Crowley, Weishaar, and Malhotra, supported this  view. However, the
evidence to the contrary is also substan- tial. As the Board's
decision noted, applicants' witnesses  Sharp and Sansom argued that,
based on aggregate industry  trends as well as plant-by-plant
analyses, there was little pre- merger competition between PRB and
Uinta Basin coals.  See UP/SP at 127. Further, the Board cited the
statement of  witness Nock, who explained that the merged system would
 be able to expand competition in the Uinta Basin significant- ly. Id.
at 128. In its decision, the Board acknowledged  WCTL's arguments that
some utilities can burn either type of  coal, id. at 43, 127, but
nonetheless concluded that there is  actually little or no real
competition between the two types of  coal, id. at 127. Finding that
the evidence supporting the  Board's conclusion is substantial, we


D.BNSF Trackage Fee


Finally, WCTL argues that the conditions imposed by the  Board will not
ameliorate the merger's anticompetitive ef- fects. In particular, WCTL
argues that the trackage rights  fee charged to BNSF under the
settlement agreement incor- porated as a merger condition is too high
and will make it  impossible for BNSF to compete effectively. Board
prece- dent requires that charges for trackage rights imposed in 
mergers must put the tenant on an equal footing with the 


landlord. See, e.g., Burlington Northern Inc.--Control & 
Merger--Santa Fe Pac. Corp., Finance Docket No. 32549,  Decision No.
38, 1995 WL 528184, at 90 (ICC Aug. 23, 1995)  ("BN/Santa Fe"), aff'd
sub nom. Western Resources, Inc. v.  STB, 109 F.3d 782 (D.C. Cir.
1997) and Grainbelt Corp. v.  STB, 109 F.3d 794 (D.C. Cir. 1997). WCTL
argues that the  current rates do not do that, but instead reward
UP/SP with  "monopoly rents."


We find WCTL's argument that the Board erred in adopt- ing the
negotiated trackage rights fee unpersuasive. The  Board extensively
discussed the trackage rights issue in its  decision and found the
negotiated trackage fee of 3.0 to 3.1  mills per gross ton-mile to be
fully consistent with the princi- ples set forth in its precedents.
See UP/SP at 140-42. The  standard method for establishing the level
of compensation  for trackage rights is described in St. Louis
Southwestern  Railway-Trackage Rights, 8 I.C.C.2d 213 (1991) ("SSW
Com- pensation"), where the ICC explained that to place a track- age
rights tenant in the same position as a landlord, compen- sation for
trackage rights must include not only the variable  costs to the
landlord resulting from the tenant's use of the  track, but also a
portion of fixed costs and a return element  on the value of the rail
properties. In the present decision,  the Board concluded that the fee
the parties agreed to in the  settlement agreement was actually
considerably lower than  that the Board would have independently
calculated under  the usual SSW Compensation method. UP/SP at 140-41. 
While WCTL witness Crowley argued that under the SSW  Compensation
method, a rate of 1.8 mills would be correct,  the Board's decision
explained that that calculation contained  several specific errors.
The Board noted that correcting  what it viewed as obvious errors in
Crowley's calculation  would lead to a rate of 3.84 mills, far higher
than that  negotiated by the parties. The Board's conclusion was sup-
ported by its citation to the statements of Kauders and  Rebensdorf in
the record. In addition, the Board noted that  the settlement
agreement gave BNSF the option of paying an  alternative fee based on
actual maintenance and operating  expenses if desired. UP/SP at 142.
Finally, the Board  retained full authority to adjust the rates if


competition during the five-year oversight period. Id. at 146. 
Accordingly, "we trust the [Board] to ensure that the com- pensation
terms will not defeat the purpose of the trackage  rights." Southern
Pac., 736 F.2d at 721.


III. Conclusion


We hold that the challenged conclusions of the Board were  supported by
substantial evidence and were reached by rea- soned decisionmaking,
and accordingly deny the petition for  review.