As the Surface Transportation Board considers the proposed merger between Kansas City Southern and Canadian Pacific, on the forefront of stakeholders’ minds will be how the two will transition their operations to serve one network, according to two transportation attorneys speaking at FTR’s virtual conference last week.
The KCS-CP merger is one of many issues that could keep board members busy through the end of this year and into the next.
Stakeholders will be watching how KCS (NYSE: KSU) and CP (NYSE: CP) plan to keep the gateways open on commercially reasonable terms, how labor will react to the merger and how the railroads will adjust their tariff or rail rate structures, said Michael F. McBride, a partner at Van Ness Feldman who has represented rail shippers such as The Chlorine Institute.
Fellow panelist William Mullins, who is a partner at Baker & Muller and provides legal counsel to KCS and Norfolk Southern (NYSE: NSC), said there are pledges put already in place by STB that require KCS not to use its market power in Laredo, Texas, a gateway that competitor Union Pacific (NYSE: UNP) also services. These pledges are there following KCS’ merger with Texas Mexican Railway.
Although STB has granted CP and KCS to apply for a merger under less strict pre-2001 rules governing Class I railroad mergers, CP and KCS are mindful of today’s market environment and, as a result, are preparing to submit an application in mid-late October that would reflect the “old rules on steroids,” Mullins said.
Another deal that stakeholders will be watching for operational impacts will be CSX’s proposed acquisition of New England short line railroad Pan Am Railways. The board’s decision to convert the proposed merger from a “minor” transaction to a “significant” one shows rail observers that the current board makeup is one that is comfortable with ruling with a regulatory hand, according to Mullins.
McBride countered that the board may have been right in assessing the CSX-Pan Am merger as “significant” because STB is perceiving some broader operations implications regionally and to Amtrak service.
How heavy-handed should the board be?
As STB grapples with a number of long-standing issues, the board should maintain its reluctance to order other rail carriers to take over another rail carrier’s service, Mullins said.
As a whole, the board should avoid issuing specific orders about rail service and instead should suggest mediation or more disclosure of service metrics, Mullins said.
When it comes to whether STB should require the Class I railroads to supply additional data on first-mile and last-mile movements, one question that should be addressed is the usefulness of the data and whether it would be worth the railroads’ time and effort to collect that data, Mullins said. Shippers also should be careful what they ask for because the data could reveal situations in which shippers might have problems with loading and unloading or holding railcars for storage, he said.
It will be incumbent upon shippers to show how first-mile and last-mile data can be useful in forming appropriate service remedies, McBride said.
Reciprocal switching is another contentious issue within the rail industry. The railroads suggest the measure would result in creating operational problems, while shippers contend that the procedure could encourage more competition. Reciprocal switching is when a captive shipper requests service from a competing railroad at an interchange.
“You won’t see dramatic changes in how the railroads would operate … but [it could result in] a more level playing field” as shippers negotiate for better rates or service at the interchange,” McBride said.
Mullins said, “To all of a sudden impose [reciprocal switching] without any commitments in investing in infrastructure … would be a disaster for the shippers.”
Meanwhile, STB must also grapple with how to respond to President Joe Biden’s executive order asking the STB chairman to consider how the board’s actions might encourage freight rail competition.
Since STB is not a member of the executive branch, it has no legal obligation to comply with an executive order, Mullins said. While STB Chairman Marty Oberman has said he’s supportive of the executive order, the board still must issue orders upon facts and the law, he said.
But while the board is not required to comply with the executive order, “the chairman of the board serves at the pleasure of the president,” and Oberman may do what he can to address long-standing issues, McBride said.