Rail shippers are waiting to see whether the merger of Canadian Pacific and Kansas City Southern will actually enhance competition and provide them with more choices.
The Surface Transportation Board issued a decision Wednesday approving the deal, saying CP (NYSE: CP) and KCS would be able to promote competition better as a merged railroad company than as separate entities. The merged company, Canadian Pacific Kansas City or CPKC, is expected to start operating around April 14.
However, STB also placed conditions on the merger, including a seven-year oversight period that will include data collection to ensure network fluidity in congested areas such as Houston and Chicago, as well as initiatives to ensure shippers have continued access to gateways or interchanges where goods can be transferred to another Class I railroad.
“I think it’s important to recognize that this kind of merger does pose a risk to the competition, and the STB took steps to mitigate those risks,” Jeff Sloan, American Chemistry Council (ACC) senior director of regulatory affairs, told FreightWaves. “It’s a new precedent for the board to put in the pro-competitive conditions on an end-to-end merger.”
Sloan noted ACC hadn’t taken a position on the merger, in part, because there wasn’t any unanimity among its members on whether to support or oppose it. But ACC had sought for conditions to be put in place to protect shippers. STB didn’t adopt all the measures ACC had requested, and so the trade group is still reviewing the conditions actually put into place.
“In general, we’re pleased that they did put in conditions to protect commercial access to these gateways that allow a shipper to have competitive transportation options,” Sloan said.
With the merger behind STB, ACC hopes the board can focus again on other issues, such as reciprocal switching, which occurs when a shipper has access to one freight railroad but seeks access to a nearby competing freight railroad to cultivate a competitive pricing environment. A shipper gains that access at an interchange between the two railroads.
“We are hopeful that the board will recognize there’s even a greater need now than ever to address competition in the rail system across the rail network,” Sloan said. “We’re operating in a new reality: the consolidated rail industry. The board has tools to promote competition, and it’s important that they use them.”
Mike Steenhoek, executive director for the Iowa-based Soy Transportation Coalition, also pointed out the differences of opinion among agricultural shippers on supporting the merger. In a Wednesday note, Steenhoek said one of the reasons STB approved the merger was because there was little overlap between CP and KCS’ networks.
“This provides some degree of encouragement among customers — including agricultural shippers — that this acquisition may result in increased service options. …,” Steenhoek said. “The question is what will exert more competitive pressure against the other Class I railroads: 1) Two considerably smaller railroads with more limited and distinct networks, or 2) A single larger railroad with revenue and a network that is more comparable to the other railroads? Time will obviously tell what ends up occurring.”
Indeed, the idea that the merger enhanced competition was a key factor in STB’s decision to approve it.
The Biden administration in July 2021 had urged STB Chairman Marty Oberman to take actions to ensure competition. Oberman said Wednesday the decision is a step in that direction.
As two of the smallest Class I railroads, the CP-KCS merger might enhance competition in a way neither could have achieved separately, Oberman said at a Wednesday news conference to discuss STB’s decision.
“One of the underlying factors that we found in this merger is that putting these two small railroads together will actually provide a stronger competitive landscape in the rail industry vis-a-vis these much larger railroads,” Oberman said. “Because separately these railroads just do not have the same oomph power in providing competitive service than they will together. And I think that’s an important point to keep in mind. It is not the main reason or even the sole reason or even the main reason for our decision, but it is an aspect of the rail network that we have to consider.”
To ensure competition, STB set up a seven-year oversight period as one of the merger’s conditions. It includes provisions to ensure gateway interchanges with other railroads remain open on the same terms that exist today. This plan includes an opportunity for shippers to press a railroad into explaining why it raised a gateway rate higher than the rate of inflation. Shippers may also be able to seek an expedited hearing to challenge a gateway rate.
“Everything that we do here has to be measured against the backdrop of what is our congressional mandate. …” Oberman said. “We are supposed to consider the effect of the proposed transaction on the adequacy of transportation to the public. This is different than in most antitrust laws because there is a pro-transportation policy component to reviewing mergers.
“We are [also] supposed to consider whether the transaction will have an adverse effect on competition. … Both of these concepts are exceptionally important when considering the nature of the rail industry. Ultimately, the Congress has mandated us to approve mergers when we find that the transaction is consistent with the public interest.”
In the decision, STB tossed a request by CN (NYSE: CNI) to force KCS to divest its Springfield line running between Chicago and Kansas City, Missouri, and give it to CN as a merger condition. The board also denied Norfolk Southern’s (NYSE: NSC) request for contingent trackage rights on a stretch of the Meridian Speedway between Shreveport, Louisiana, and Wylie, Texas. NS relies on access to the section of the route owned by KCS running from Shreveport to Wylie.
Merger detractors question decision in light of East Palestine
Not everyone was pleased with STB’s decision. Leaders and community officials representing the western Chicago suburbs that had fought the merger indicated they would consider all their options.
“I’m not done fighting,” said Rep. Raja Krishnamoorthi, D-Ill., at a news conference Wednesday sponsored by the Coalition to Stop CPKC. The group has been raising concerns about an increase of freight rail traffic that would occur as a result of the merger. “But it’s essential we recognize the nature of the STB’s disastrous decision. As our nation contends with one of the most serious questions of railroad safety raised in a generation through the East Palestine derailment, the STB has rushed through this decision without contemplating the impacts of what we’ve learned in East Palestine.”
Krishnamoorthi was also part of a statement issued by Senate Majority Whip Dick Durbin, D-Ill., Sen. Tammy Duckworth, D-Ill., and Rep. Delia Ramirez, D-Ill., that said they would be keeping “a watchful eye on STB to make certain that it is conducting the necessary proper oversight of the merger to keep CP accountable.” The release also said the four lawmakers pressed STB to not render a decision on the merger until there could be a review of the increased traffic of hazardous materials that would result from it.
STB said Wednesday any petitions to reconsider the decision would need to be filed by April 4, while requests for a stay would face a March 27 filing deadline.
Tavengwa Runyowa, a Regina, Saskatchewan-based lawyer who represents three families of CP employees killed during a February 2019 incident involving a CP train, was disappointed STB didn’t take into account his evidence and questions about the railroad’s ability to lawfully exercise its policing powers. Runyowa had provided testimony at STB’s hearing in September on the merger, asking the board to consider how or whether a foreign-run corporate police force operating in the U.S. can abide by American law if it also has an assumed conflict of interest to protect CP’s reputation.
“The East Palestine tragedy has highlighted the urgency of increasing accountability and scrutiny of railway companies across the board,” Runyowa told FreightWaves. “Hopefully, Congress, the Department of Justice, the Federal Trade Commission and the Secretary of Transportation will take the national security and other implications of the merger more seriously. Nevertheless, my clients accept that only the American people can decide whether to accept the authority of a police force that answers to unelected corporate civilians outside of the United States. This is the reality that the STB endorsed and expanded when it allowed CP Railway to integrate its police force with the KCS police through the merger.”
STB’s decision, while following a timeline determined months ago, comes as politicians are questioning freight rail safety following the Feb. 3 derailment of an NS train in East Palestine.
At Wednesday’s news conference, Oberman pointed out that the transport of hazardous materials by rail is safer than by truck. He quoted the Bureau of Transportation Statistics, which determined that 94% of incidents involving hazmat transport occurred by truck and only 1% occurred on rail.
“[The safe transportation of hazmat] is a problem nationwide, [but] it is not a problem caused as the result of this merger,” said Oberman, adding that CP has moved trains containing hazardous materials through greater Chicago and has not experienced any spill. “In fact, to the extent hazardous materials can be moved on rail rather than on the highway, we are better off that more of that traffic be moved to rail.”
Meanwhile, STB noted the approval decision that it examined rail safety as part of the procedure for considering rail mergers through the final environmental impact statement and safety integration plan.
“Approval of this transaction may even enhance safety for the nation as a whole,” the STB decision said. “In addition to the inherent safety advantages that will be gained from shifting approximately 64,000 truckloads from our roads to rail, CP has the best safety record of the Class I railroads over the last 15 years, and KCS will adopt many of CP’s practices following integration. Thus, any rail traffic diverted to CPKC from other railroads will likely mean traffic moving to a railroad with a better safety record.”