Mega rail deal under fire: 7 State AGs warn UP-NS merger could drive up shipping costs

 
The current objection centers on Union Pacific (NYSE: UNP) and Norfolk Southern’s (NYSE: NSC) proposed Committed Gateway Pricing, or CGP, arrangement. The plan is intended to establish rate protections for certain existing interline movements involving BNSF Railway (NYSE: BRK-B) and CSX Transportation (NASDAQ: CSX) through Chicago, St. Louis, Memphis and New Orleans.

But the states contend CGP creates no new rail option for shippers. Rather, they say, it would merely allow some current interline movements to continue after the merger – an outcome they characterize as preservation of an existing option, not an enhancement of competition as required by the STB’s merger criteria.

Rate concerns dominate critique

The officials also challenge the formula proposed for CGP rates. According to the letter, UP and NS would set rates at the 70th percentile of their own comparable traffic rates, rather than at a median or below-average benchmark.

That approach, the coalition argued, means many eligible shippers could receive a higher price than they pay today. The letter further cites the applicants’ own expert evidence as acknowledging that the mechanism could incentivize higher rates on the traffic lanes used to calculate the CGP benchmark.

The states also noted that UP and NS have said CGP service would not match post-merger single-line service on speed or reliability and was not designed to compete with it. “If UP and NS admit CGP would not create competitive service, we should take them at their word,” the attorneys general wrote.

Narrow reach, temporary protection

Even under the railroads’ revised proposal, the coalition said CGP would apply to only 0.9% of U.S. rail traffic. The arrangement excludes Canadian National (NYSE: CNI) and CPKC (NYSE: CP) interline traffic, automotive and intermodal shipments, storage-in-transit and railroad-owned transload movements, dimensional loads, and routes where more than one rail option already exists at both ends.

In addition, the protection would be temporary, ending with the STB’s oversight period, which the states said would likely be five years. That limited scope cannot counterbalance a deal that the letter says would create a railroad controlling more than half of the U.S. Class I rail market, the coalition argued.

Call for outright denial

The AGs said rail competition is particularly consequential for agriculture, mining, forestry and manufacturing, whose customers may depend on a limited number of rail transportation options. They warned that further consolidation could bring fewer routing choices, higher rates for captive shippers and supply-chain disruptions, particularly in rural markets.

Borrowing on the approach of a recent filing by industrial shippers, the letter asks the STB to determine that UP and NS have failed to make the required prima facie showing – Latin for “on its face” – that the merger is in the public interest and to deny the revised application on that basis. The filing adds a new state-government challenge to the railroads’ effort to defend the proposed combination through claimed operating efficiencies and customer benefits.

Why It Matters: It is significant that the top law enforcement officials from seven states say that the deleterious effects of an historic consolidation will outweigh what the railroads have said will speed rail freight and modernize the U.S. supply chain.

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Read more articles by Stuart Chirls here.

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