Before: Williams, Ginsburg and Rogers, Circuit Judges.
FOR THE DISTRICT OF COLUMBIA CIRCUIT
On Petitions for Review of an Order of the Surface Transportation Board
Opinion for the Court filed by Circuit Judge Williams.
On August 16, 1995 the Interstate Commerce Commission approved the merger of Burlington Northern, Inc. ("BN") and The Atchinson, Topeka and Santa Fe Railway Company ("Santa Fe"), two railways that serve the West with about 35,000 miles of track. Burlington Northern Inc. & Burlington Northern R.R. Co.-Control & Merger-Santa Fe Pacific Corp. & The Atchison, Topeka & Santa Fe Ry. Co., Finance Docket No. 32549, Decision No. 38 (August 16, 1995) (hereinafter "Burlington Northern"). Although the Commission granted numerous requests for protective conditions by parties who claimed they would be harmed by the loss of competition between the two railways, it denied many others. The petitioners here-four electric utilities (SPS/TUCO, Western Resources, Houston Lighting, Arizona Electric), a utility trade association (Western Coal Traffic League), and a utility fuel-supply cooperative (Western Fuels)-complain that the merger will harm their (or their members') ability to ship coal from various mines to their utilities and thus that the Commission erred in denying their requests for trackage rights and rate caps.
The disputed aspects of the merger involve almost exclusively vertical integration. For the most part, BN and Santa Fe did not operate lines over the same or similar routes; rather Santa Fe, which has a monopoly on rail delivery of coal to most of the utilities bringing challenges here, linked up "end-to-end" with BN. As a result, the controversy before us largely revolves around the so-called "one-lump" theory-the proposition that there is only one monopoly rent to be "gained from the sale of an end-product." Phillip Areeda & Donald F. Turner, 3 Antitrust Law Para(s) 725b, at 199 (1978). The theory posits that where the stage of production just before final sale is monopolized (and thus the end-stage producer is collecting the monopoly rent), the monopolist's upstream vertical integration (even if accompanied by monopolization of prior phases) will normally not affect the end-product customer adversely. The Commission relied on the theory to deny the requests and petitioners contest its application.
Besides the claims of uncured adverse effects on competition, one petitioner contends that the Commission's compressed briefing schedule deprived it of its procedural rights.
We find the Commission's findings as to competitive harm supported by substantial evidence, and we find that petitioner waived the procedural claims by failing to raise them before the Commission. Although the Commission has been abolished and replaced by the Surface Transportation Board, *fn1 we generally refer to the agency as the Commission, as it was known when it decided this case.
BN and Santa Fe filed a merger application with the Commission on October 13, 1994. At the time the Commission had jurisdiction over the merger under 49 U.S.C. Section(s) 11343 and was guided by the procedures and standards set out in 49 U.S.C. Section(s) 11344-47. *fn2 Section 11344(c) requires that the Commission approve mergers that are consistent with the public interest. See Penn-Central Merger Cases, 389 U.S. 486, 498-99 (1968); Missouri-Kansas-Texas R.R. Co. v. United States, 632 F.2d 392, 395 (5th Cir. 1980). When the Commission evaluates a merger involving at least two class I railroads, *fn3 as is the case here, one of the five factors it must consider is "whether the proposed transaction would have an adverse effect on competition among rail carriers." Former 49 U.S.C. Section(s) 11344(b)(1)(E), new 49 U.S.C. 11324(b)(5). *fn4 In determining the public interest, it balances the gains in operating efficiency and market capability that result from consolidation against any reduction in competition or harm to essential services. See 49 CFR Section(s) 1180.1(c); Southern Pacific Transp. Co. v. ICC, 736 F.2d 708, 717 (D.C. Cir. 1984). It also has the power to impose conditions upon proposed mergers to remedy any resulting harms, former 49 U.S.C. Section(s) 11344(c), new 49 U.S.C. Section(s) 11324(c), and its policy is to do so if necessary to cure a merger's anticompetitive effects on the public or to protect essential services for a connecting carrier, subject to various qualifications that are irrelevant here. Railroad Consolidation Procedures, 363 I.C.C. 784, 788-89 (1981), codified at 49 CFR Section(s) 1180.1(d).
BN and Santa Fe argued before the Commission that the proposed merger would benefit the public interest in a variety of ways. Among other things, single-line BN/Santa Fe rail service would result in significant operating efficiencies and cost reductions (estimated by the railways at a little under $500 million a year) and would create new competition for railroads, trucks, and water carriers in a number of regions. By contrast, a number of electric utility interests asserted the competitive harms to which we now turn.
We first address the only claim concerning horizontal aspects of the merger, which the Commission rejected because of defects in the petitioner's market definition. Without the broad definition urged by the petitioner, it was apparent that BN and Santa Fe competed only as to a single basin (indeed, a single coal mine), and petitioners do not press the issue of the diminution of competition there.
The Western Coal Traffic League is a trade association consisting of electric utilities that use rail carriers to transport coal from mines located west of the Mississippi River to their generating stations. The League argued before the Commission that the merger would reduce the number of class I carriers capable of originating coal (i.e., transporting coal starting at the minemouth) in the eight principal basins in Wyoming, Montana, Colorado, and New Mexico, from four to three and would dramatically increase market concentration. Verified Statement of Thomas D. Crowley at 4, 8, 10. It pointed to a 496-point increase in the Herfindahl-Hirschman Index (a standard measure of market concentration) from 4080 to 4576, which the Justice Department regards as presumptively violating the antitrust laws. See 1992 Horizontal Merger Guidelines, 57 Fed. Reg. 41552, 41558 (1992).
The Commission rejected the League's assumption that one could properly view the coal transportation market as encompassing those railways that operate in the eight main western coal basins. As the Commission noted, the quality and type of coal differs from region to region, so that it is far from self-evident that an electric utility could readily switch from, say, high-sulphur coal mined in the San Juan Basin to low-sulphur coal mined in the Powder River Basin. Burlington Northern at 69. At some price differentials, perhaps, the ability of power plants to substitute one type of coal for another is enough to make inter-basin competition viable, but the League offered almost no evidence of substitutability. It submitted a list of what it claimed were concrete examples of competition between coal mines located in different basins, see Joint Appendix at 317-18, but in only one of these instances does the utility appear to have gone beyond soliciting bids or expressing an interest in alternative sources. Id. at 318. In the one exception, the purchase was only of "test burn coal." Id. Though this market segmentation seems surprising, the League failed to undermine the Commission's finding. See 5 U.S.C. Section(s) 706(2)(E) (substantial evidence standard); Illinois Central R.R. Co. v. Norfolk & Western Ry. Co., 385 U.S. 57, 66 (1966); Southern Pacific Transp. Co. v. ICC, 736 F.2d 708, 714 (D.C. Cir. 1984). *fn5
Although the Commission ruled out petitioner's broad market definition, as we mentioned above, it did find one instance where BN and Santa Fe directly competed to originate coal from a mine in Colorado. Burlington Northern at 69. But that mine was also served by Southern Pacific ("SP"), so that after the merger there were two competitors left. Id. The Commission did not explicitly address the suitability of attaching conditions to protect ...