951116.docx

MEMORANDUM
TO: ALAN G. LANCE, ATTORNEY GENERAL
FROM:DON HOWELL, DEPUTY ATTORNEY GENERAL
DATE:NOVEMBER 16, 1995
RE:PROPOSED VERIFIED STATEMENT IN THE UNION PACIFIC-SOUTHERN PACIFIC RAILROAD MERGER
On or about December 1, 1995, Union Pacific Railroad and Southern Pacific Lines (UP-
SP) will file a Joint Application with the Interstate Commerce Commission (ICC) seeking authority to merge the two railroads.  UP has solicited the support of various Idaho shippers and governmental officials in support of the sale.  UP has requested that supporters submit “verified statements” (i.e., affidavits) and these statements are then included in the merger Application.  Thus far, UP has received verified statements of support from the Governor, Lieutenant Governor, Senate Pro Tem, and Speaker of the House.  The following shippers have also submitted verified statements in support of the Application:  Bennett Lumber; Farmers Grain; Idaho Forest Industries; J.R. Simplot Minerals and Mining Division; Louisiana Pacific; Merritt Bros. Lumber; and Riley Creek Lumber Company.  Charlie Clark, Special Representative to the UP President, has also solicited the support of the Idaho Transportation Department, PUC, the Department of Agriculture, the Department of Commerce, and various agriculture commodity commissions.
B A C K G R O U N D
On October 25, 1995, I attended a meeting of the Governor’s Rail Advisory Committee chaired by Jim Hawkins.  Members of the committee include the Department of Commerce, ITD, Mary Hartung, and the Department of Agriculture.  Also in attendance were representatives from the Wheat and Barley Commissions, Monsanto, and Union Pacific Railroad.  Charlie Clark attended the meeting to solicit support for the UP-SP merger.  At that time, the Governor was still considering whether to support the merger.  Monsanto urged the committee to explore ways to introduce rail competition to southern Idaho.  In particular, Monsanto suggested that UP consider allowing Burlington Northern Railroad (BN) to serve eastern Idaho customers by acquiring “trackage rights” over UP lines.  The objective of granting BN trackage rights over the UP eastern/southern Idaho lines would be to introduce “competition” for Idaho shippers exclusively served by UP.  After some discussion, Charlie indicated he would check with UP management to see if there was any interest in allowing BN trackage rights into Idaho.  The Wheat and Barley Commissions urged the Governor and members of the committee to withhold support for the merger until we heard back from Charlie concerning the possibility of fostering rail additional competition in eastern/southern Idaho.  The concern expressed by some members of the committee was that Idaho “captive customers” may not see lower rail rates in the future because of the absence of rail competition.
On November 1, Charlie told me that UP had rejected Monsanto’s trackage rights proposal.  The following day, the Governor signed a verified statement generally supporting the merger.  As you will note in the verified statement of the Governor (attached), he requested that UP and SP consider implementing a “shared trackage agreement” with BN-Santa Fe.  The Governor observed that such an agreement “would enhance in-state competition since BN and UP currently only compete for traffic in northern Idaho.”
 Although BN initially opposed the UP-SP merger, the railroads reached an accommodation in late September.  UP agreed to grant BN trackage rights to serve all shippers that had previously been served by SP.  In other words, UP granted BN the right to use UP rail lines to serve customers previously served by SP.  The railroads also agreed to ask the ICC to impose the trackage right agreement as a condition to the merger.  The UP-BN agreement will not affect any shippers in Idaho.  
EVALUATION OF THE UP-SP MERGER
Without doubt, the UP-SP merger offers some advantages to Idaho shippers.  In particular, integration of the two railroads provides Idaho shippers with an expanded “single-
shipper” system.  The merger also provides Idaho shippers with faster, more direct routes via Denver to Texas, Gulf Ports, and southern California.  Although the combined BN-Santa Fe system would be larger than UP-SP, the merger will result in two strong competitors serving northern Idaho and other western states.  The merger would also eliminate existing interchange charges levied by SP for shipping cars to southern California markets.  Finally, the merger will allow the combined entity to better allocate critical locomotives throughout the entire system.
Although the merger does offer several advantages, the transaction does raise some concerns.  Most notably, the merger does nothing to foster rail competition in eastern or southern Idaho.  UP is and will remain the sole rail shipper in southern Idaho.  As previously explained, several members of the Rail Advisory Committee expressed concern that captive Idaho shippers may be disadvantaged when compared to shippers with competitive rail alternatives.  Second, although UP indicated that the consolidated refrigerator car fleet of UP and SP may aid commodity shippers in Idaho (most notably potatoes, onions, and other vegetable shippers) sources have indicated that the SP refrigerated car fleet is in poor condition.  Thus, there is some question about the increased reliability of refrigerator cars for Idaho shippers.  Finally, with only two major rail shippers remaining in the western United States, there may be no future opportunity to introduce rail competition in southern Idaho.
R E C O M M E N D A T I O N
Although the merger raises some concerns or illustrates the possibility of “lost opportunities,” I believe the merger will provide good benefits to Idaho rail customers.  As did the Governor, the Attorney General might consider requesting that the ICC impose conditions on the merger to instill competition in southern Idaho.  The ICC has generally refused to impose such conditions.  The ICC normally imposes competitive conditions in merger cases where rail competition already exists.  This is primarily the reason why BN and UP entered into their trackage agreement.  In addition, the die may have already been cast by the Governor and other state officials.  For these reasons, I believe it is reasonable for the Attorney General to support the merger.  Because Union Pacific has already initiated the printing process, the Attorney General could submit his verified statement to UP now in hopes of it being included in the Application or could submit his comments during the public comment cycle (scheduled for early next year).  
DLH/vld/M:Lance