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By Linda J. Morgan

I>Chairman

urface Transportation Board

The past several years have been a volatile period for the freight rail sector. Much of the debate surrounding the rail sector during this period has focused on competitive issues. However, the underlying concern has really been about how to improve rail service and make it consistently reliable. In recent years, customers have complained that rail carriers have not viewed them as business partners, focusing little attention on customer needs, providing limited follow-up about whether needs have been met, and not being proactive enough about preventing or resolving service issues. And this view has only been exacerbated by recent merger integration problems.

I do believe that positive changes have been taking place, however. In light of the Surface Transportation Board’s 1998 rail access and competition proceeding and its oversight of merger implementation problems, the rail industry has undertaken initiatives focused on improving rail service and customer relations. Publicly available operational data are now more commonplace, and important operational improvements such as joint dispatching and facility sharing have been instituted. Private-sector dispute resolution agreements and enhanced customer service programs are in place. Individual railroads are using e-commerce more to interface with customers, pursuing more scheduled service and other initiatives to use limited rail capacity to the fullest, and promoting other value-added programs focused on providing improved service and greater reliability.

While important progress has been made, more can always be done.

Improved and more efficient service and better customer relations should lead to more customer confidence and better utilization of capacity, which can lead to more business and a greater ability to handle it. Growth leads to greater investor confidence, and more investment, which in turn allows the growth cycle to start all over again. Service and reliability are keys to the rail industry’s realizing its full potential.

Some believe that we can jump-start the service improvement process by providing a regulatory scheme by which every shipper is guaranteed the opportunity to be served by at least two rail carriers. But adding competition in this way may not be the best approach to improving rail service nationwide. Effecting such a scheme could alter the way our rail network looks today by reducing certain rates at least for the short term, thereby lowering revenues and putting capital investment at risk. What could result is a smaller rail system serving fewer shippers along more select high-density rail corridors. Given those possible consequences, we need to look hard before we leap.

Any additional major rail mergers will clearly impact the rail service provided in the future. We have learned a lot from our experience with the last round of mergers, but even with the board’s fine-tuning of its merger review throughout the last round, a policy more appropriate for the future is needed.

Given the likelihood that the next round of consolidation could result in two transcontinental railroads, the board’s reexamination of its major rail merger policy has focused on three issues: First, we cannot afford the service and financial problems associated with the last round; second, the policy must reflect competitive concerns with further consolidation; and third, because of the risks and finality associated with the next round, the policy must ensure that future mergers add value and provide benefits that clearly outweigh any potential harm.

The proposed policy and rules reflect these objectives in several ways. They would require merger applicants to affirmatively show that a proposal will enhance competition and improve service. They would require more accountability for benefits that are claimed and a showing that such benefits could not be realized by means other than a merger. And they would require more details up front regarding the service that would be provided, as well as contingency planning and problem resolution in the event of service failures.

It is my hope that the final major merger rules will reflect the lessons learned from the past in a way that allows for the needs of the marketplace of the future. Whether more major mergers are pursued depends on the state of the economy, how our final rules are viewed, how customers feel about more mergers, and how the investment community assesses additional consolidation in the industry. The goal of our policy is to ensure that, if further mergers are pursued, we can properly evaluate whether such proposals are truly in the public interest.

As we move ahead, we must make sure that all of the actions taken, whether in the private sector or by government, will result in a stronger rail network capable of meeting the service needs of its customers and continuing to fulfill its important role in our economy well into the future. A continued focus on improved rail service, a merger policy that is reflective of the past and attentive to the future, and an overall regulatory framework that results in the kind of rail network that we want and need are all important to that end.

On June 11, the STB is scheduled to issue new rules on railroad mergers. Ms. Morgan’s commentary originally appeared in the Railway Progress Institute’s 2000 Annual Report.

This story appears in the May 7 print edition of Transport Topics. .