How much responsibility should Canadian Pacific and Kansas City Southern bear to keep international gateways open and keep the rail networks through Chicago and Houston fluid? That question was one of five themes explored during the latter half of public hearings that the Surface Transportation Board recently concluded on CP’s proposed acquisition of KCS.
Shareholders of CP and KCS approved the $31 billion merger in December and the deal is now before STB for review. CP and KCS maintain the merger would create a single rail system known as Canadian Pacific Kansas City, or CPKC, with a network that would extend from Canada into the U.S. and Mexico.
Now that the board has wrapped up the public hearings, the next steps are to receive all the final briefs and the final environmental impact statement, close the record and make a decision. Regulations mandate that the deadline for STB to make a decision on the merger is somewhere around February 2023, although the board could render a decision earlier or it could take a week or two longer to make the decision.
FreightWaves had reported on seven themes from the first three days of the public hearing. Below are five more takeaways from the last four days:
1. Shippers, STB, competing railroads agree on keeping open opportunities for competition
Although the proposed merger has an end in sight with a STB decision in early 2023 — some of the issues raised by competing Class I railroads on why STB should set conditions on the merger have also been long-standing concerns of shippers.
One long-standing concern is that of open access. Shippers such as the American Chemistry Council (ACC) argue that open access to international gateways should apply not only to CP and KCS but to other railroads as well.
“From where we sit, this is all interrelated from this proposed merger,” Jeff Sloan, ACC senior director of regulatory and technical affairs, told FreightWaves after the seven-day hearing.
Requiring the same service conditions to be placed not just on CP and KCS but also on the other railroads was something mentioned several times during the hearing by both CP officials and STB Chairman Marty Oberman.
“I agree with one of the points made by CP and KCS, [which] is that they don’t want to be subject to conditions that only apply to them. And that makes some sense,” Sloan said. “We think that access to competition should be looked at broadly across the rail network. And that’s why we’re very much wanting to see this reciprocal switching rulemaking get finalized. After more than 10 years, it’s been sitting before the board.”
ACC is asking for several conditions. The first is ensuring that chemicals shippers and other shippers have access to other railroads via the gateways, because the issue isn’t just about losing access to multiple railroads but the possibility that the merged company might extend how long a shipper is captive to one railroad, Sloan told FreightWaves.
In Canada, shippers have access to both CN and CP via interswitching, which is called reciprocal switching in the U.S. Both concepts entail a shipment starting off with one railroad but then getting switched off to another railroad at an interchange in order to reach a destination on the other railroad’s network. The practice is aimed at providing shippers with more choices.
But with a merged CP-KCS network, a shipper might not long have the option to use other rail options in Kansas City, Missouri. A shipper using KCS might not be able to transfer its shipments to a non-KCS railroad and may have to be “stuck” using the CP-KCS network to a facility in Canada, according to Sloan.
“We’re worried that they’re going to make it infeasible to use another railroad — essentially block you from accessing competition,” Sloan said. “And that really does connect to the broader issues of access to competition and the rail sector.”
A second concern is gateway access to Mexico and ensuring that CPKC wouldn’t manipulate rates for cross-border traffic that would compel a shipper to stay on CPKC’s network. To do this, ACC, The Fertilizer Institute and National Industrial Transportation League proposed a rate formula mechanism during the hearing, and they say their mechanism is similar to one proposed by Union Pacific (NYSE: UNP).
“It wasn’t just shippers that were asking for the conditions that would protect competition. Some of the other railroads were actually raising arguments that were very similar to what Jeff Moreno [a transportation attorney representing ACC and other shippers] was saying in his testimony. And the solutions that they were offering to ensure that those gateways remain accessible to the traffic were very similar to ours,” Sloan said. “You contrast that with the CP saying no, there is absolutely no competitive concern here, even though shippers and most of the other railroads were saying yes, there is a concern here about how you’re foreclosing access to competition.”
The third is a concern that CP has overly restrictive requirements for shipping certain hazardous materials, which in turn make it more difficult for chemicals and energy products shippers to use CP. According to Sloan, the requirements are written in such a way that prevents the railroad from being liable for any incident that happens on the railroad that might endanger cargo. Insurance requirements for these shipments are also higher.
“Our concern with the merger is that instead of that [restrictive requirement] just being on the CP network, that it will be on the whole CP-KCS merged network. … Some companies, in testimony, have said they avoid shipping on CP solely because of those restrictions. And they have that option now to go with a different railroad, to go with CN typically, but they can’t do that” on a combined CP-KCS network, Sloan said.
Meanwhile, CP continues to say the merger will enhance competition: “It’s not just the shippers who move their traffic over the CPKC routes [that will benefit from the merger],” said transportation attorney David Meyer on behalf of CP. “It’s all the shippers in all the markets we’re going to be serving because what we’re going to be doing is sparking a competitive response by the other railroads and the other transportation providers in all those markets.”
2. But other shippers see CPKC as opening up new transcontinental opportunities
But a number of individual shippers and stakeholders, particularly grain shippers, cold storage facilities operators and vessel operators that have access to several North American ports along the western coast, said a merged railroad could benefit shippers seeking to send their goods across the continent.
North Dakota is a captive rail state, with more than 80% of grain shipped by rail, according to Mark Hovland, immediate past president of the North Dakota Grain Dealers Association, who said the merger would open new markets as well as complement existing service on CP and BNSF.
Gerardo Magno, vice president of logistics for Mastronardi Produce, also said CPKC “would open up transportation operations that don’t exist today.” His company operates conventional greenhouses in North America and produce from those greenhouses ships from 12 Mexican states and Laredo, Texas, to distribution centers for customers in the U.S. and Canada.
Uffe Ostergaard, president of Hapag-Lloyd’s American operations, said the merger could unlock new routes and improve its access to markets on the West and Gulf coasts. The merger could also improve access to key Midwest markets such as Chicago and Minneapolis via the port at Lazaro Cardenas in Mexico.
3. West Coast ports concerned US hasn’t invested as much as Canada in port infrastructure
However, that access to Canadian and Mexican ports is something that U.S. port officials and advocates are concerned about, telling STB that the access could cost U.S. port interests.
“When U.S. ports lose cargo, we lose the jobs in handling that cargo,” said Heather Stebbings, executive director of the Pacific Northwest Waterways Association.
She said, as Commissioner Carl W. Bentzel of the Federal Maritime Commission has also argued, that the merger could result in a shift of cargo from U.S. West Coast ports to ports in Canada and Mexico, particularly since the Canadian government has made significant investments to bolster Canada’s port-supporting transportation network.
If vessel operators reduce their calls to the Pacific Northwest ports, that could impact inland farmers such as those in Idaho since they rely on those ports to export goods, Stebbings said.
Even though the recent Infrastructure Act doled out millions of dollars to support the U.S. ports, “the issue is that Canada has been outspending us for 15-plus years, so we’re behind the curve,” she said.
4. Granting merger approval could boost passenger rail in the South
Meanwhile, Louisiana officials want STB to approve the merger because CP and KCS have committed to spending resources that would help bring about passenger rail to the region.
Already, Louisiana and neighboring states are engaged in three projects aimed at bringing about passenger rail service: one to bring service between Baton Rouge, Louisiana, and New Orleans; another to extend Amtrak’s existing Crescent service between Meridian, Mississippi, and Dallas-Fort Worth in Texas; and a study to explore adding service between Baton Rouge and Shreveport, Louisiana, according to Knox Ross, chairman for the Southern Rail Commission.
“This is a radical departure of our previous host relationships” with freight railroads, and we’ve welcomed their collaboration, Ross said, adding that CP has worked with his group on an initial engineering study and the railroad has attended meetings with the commission in Washington over federal grant funding for those passenger rail projects.
5. Laredo as a prime place for truck-to-rail conversion
Freight rail’s share in the Laredo market has fallen in recent years: KCS estimates the rail’s market share was about 9.8% in 2005 but 9% in 2021. Of that, KCS’ share was 3.1% in 2005 and 3.4% in 2021.
Part of the reason why KCS hasn’t taken more share is that KCS has served as wholesalers in the Laredo market, and so it hasn’t dealt with customers directly. KCS’ customers are IMCs for the region, according to KCS President and CEO Pat Ottensmeyer.
For rail to have a greater share of the freight market, customers must commit to adding capacity to that market.
“There are barriers and beliefs and biases about the cross-border market that we are slowly trying to break down,” Ottensmeyer said. “If you fly over Lardeo, Texas, you’ll see millions of square feet of distribution, warehouses, cross-docks, breakbulk facilities. … Warehousing and freight handling is a very big business.”
While it might take a while for shippers to get comfortable with shipping more via rail, a CPKC merger could help sway customers that need to know that rail will address their capacity needs.
“I do believe over time, just rail-to-rail conversion is going to be less of our success, and I think road-to-rail is going to be a bigger piece of the pie,” said CP Chief Marketing Officer John Brooks, who described the amount of potential truck conversion as “staggering.”
“It’s like a new frontier in some of these areas” such as refrigerated and heated goods and breakbulk, Brooks said.
In addition to talking about Laredo, CP addressed the issues raised by its competitors and others in the first few days of the hearing in late September.
Although CP has said it would invest $276 million in infrastructure to support the combined network, additional investments could be available as money frees up post-merger, according to CP President and CEO Keith Creel. For instance, CP would reduce spending on overhauling its locomotives because it would have a surplus of locomotives that would come from KCS.
Creel also said it would continue its existing partnerships in Chicago and Houston.
To address community concerns, CP said it would provide STB with additional service metrics during the time the merger is within STB’s five-year oversight. These metrics would include monthly reports on train counts, train lengths and transit times in Houston and Chicago. CP said it would also report delays to Metra trains as they relate to CP freight operations, regardless of whether they lead to declines in Metra’s on-time performance.
However, Creel disagreed with Metra’s suggestion from an earlier hearing day that Metra should dispatch CP trains in Chicago instead of CP. When CP dispatches its trains, the railroad keeps in mind the broader rail network outside of Chicago instead of focusing just on local traffic, Creel said.
As for Houston, most of the grade crossings that might be more prone to accidents, per data from the Federal Railroad Administration, are outside of KCS’ network.
Meyer disagreed with requests by UP, BNSF and shippers to require CPKC to provide some sort of rate mechanism to ensure fair rates.
But if the board wishes to impose a condition whose purpose is to honor collaboration with UP and BNSF, “what we don’t want the board to do is to make our commitment to them [as] a way for them to use [it] as a hammer against us,” Meyer said, pointing out that CPKC’s obligation must be reciprocated.
If traffic through Houston is a continued concern, there is the possibility of using the UP route between Laredo and Texarhana, Texas, and Shreveport as a bypass. UP uses the line for automotive and intermodal shipments to Chicago.
That route could support three to four existing KCS trains per day requiring no additional work on the route, according to CP. The route could also be used only for emergencies.
But UP would need to grant trackage rights at compensation levels comparable to existing KCS-UP terms, a CP slide said.
Meyer also disputed UP and BNSF’s reasoning for how CPKC could manipulate rates from Mexico into the U.S., saying that Mexican regulations prohibit operating railroads to set railroads that would favor a certain railroad. When setting rates for movements from Mexico and into U.S. markets such as Portland, Oregon, or Denver, CPKC would have to charge whatever the railroad thinks the market could support, he said.
Meanwhile, shippers’ request for regulating bottleneck rates is part of a longtime request for STB to address rate regulation, Meyer said.
“What they say the board ought to do is force all gateways open, have completely open access across the rail network,” Meyer said. “I personally think that that ignores the history of railroads becoming more efficient over driving traffic to the efficient gateways and building their services and investing around those efficient nodes on their networks. The history of rail mergers and the history of the rail network would suggest that’s really what has been in the interest of most shippers, but we can leave that debate for another time.”
He continued, shippers “have been fighting a fight for many decades to simplify rate regulation, and unfortunately for us, CPKC is unfortunately the current target of opportunity.”
Meyer also said there are significant differences between a CPKC merger and those involving UP and Southern Pacific as well as the division of Conrail between CSX and Norfolk Southern.
Merging UP and Southern Pacific involved “stitching” together their lines, which ran parallel to each other, Meyers said. As a result, every terminal and yard had to restructure operating patterns. Furthermore, Southern Pacific had not been performing well financially, and so the railroad had not been investing in its infrastructure, including the Englewood yard in Houston.
“Englewood Yard in Houston was a basket case and as soon as traffic was pushed into that yard, it collapsed. … Nothing like that is going to happen in this case, and there’s nothing like that for us to plan for,” Meyer said.
STB extended the public hearing on the merger from three days to seven days. Hearings were held Sept. 28 to 30 and for four days during the week of Oct. 3.