Surface Transportation Board receives earful on CP-KCS merger

A red train with the words "Canadian Pacific" on its side travels through a railroad crossing.

The Surface Transportation Board has been receiving testimony on the proposed merger between Canadian Pacific and Kansas City Southern — and it’s been an earful.

Shareholders of CP (NYSE: CP) and KCS approved the $31 billion deal in December and the merger is now before STB for review. CP has said it hopes for STB approval by early 2023.

Below is just a smattering of excerpts from recent testimony provided to the board:

BNSF: Ensure access to Laredo Gateway and address potential traffic jams in Houston

BNSF has two key concerns with the proposed merger between CP and KCS, according to a July 12 filing — that it would adversely affect competition for traffic going in and out of Mexico and that it would “produce debilitating congestion” in Houston.

“Unless the transaction is appropriately conditioned, CP-KCS will be able to foreclose cross-border traffic from competitors by manipulating rates on the bottleneck segment of the cross-border movements through the Laredo gateway,” attorneys for BNSF said.

BNSF attorneys said the merged company could lock out the Laredo Gateway from competitors by either increasing the rates KCS’ Mexico trains charge there for movements that can originate or terminate in the U.S. on another carrier to make those movements noncompetitive, or lowering CP-KCS rates on the U.S. portion of the movement to compensate for the increased Mexican rates and drive the traffic onto a less-efficient CP-KCS route.

BNSF (NYSE: BRK.B) added that testimonies from Canadian railway CN (NYSE: CNI) and Union Pacific (NYSE: UNP) support BNSF’s conclusions about cross-border traffic impacts.

“The commenting parties all agree that a general open gateway commitment is insufficient — too vague and toothless — to protect against these competitive harms,” BNSF said.

BNSF urged the board to require CP and KCS to submit an analysis of infrastructure needs in Houston in order to avoid rail traffic congestion in the Texas Gulf region.

The railroad also noted testimony from the North Dakota Wheat Commission and others on how low rates for grain shipments within Canada could be used to incentivize the movement of the country’s grain into U.S. and Mexican markets. Canadian regulatory policies mandate these low rates, BNSF said.

In separate testimony, J.B. Hunt (NASDAQ: JBHT) said it supports BNSF’s concerns about how the merger might affect intermodal traffic to and from Mexico via the Laredo Gateway. The company said its joint service with BNSF in and out of Mexico is “entirely dependent” on the willingness of CP and KCS to continue to offer service commitments and competitive pricing on movements that take place south of Robstown and Laredo in Texas.

To address these concerns, the board should condition any approval of the merger “on the establishment of an enforceable, transparent mechanism that calculates the proportional rates CPKC may charge for its portion of joint line intermodal movements in and out of Mexico involving other Class I railroads,” attorneys for J.B. Hunt said. “Such a condition is mandatory in order to preserve existing competition for intermodal traffic into and out of Mexico via the Laredo Gateway.”

CN: CP-KCS should divest line and give it to CN

CP rival CN continues to insist that CP and KCS should divest KCS’ Springfield Line in Missouri and Illinois as a condition for obtaining federal regulatory approval of the proposed merger. CN would take over the line and invest $250 million into it.

“CN has shown that divestiture of the KCS Springfield Line to CN and more detailed gateway commitments would mitigate that harm and provide substantial public benefits, from improving competitive options, to taking more long-haul trucks off the road than the entire proposed CP-KCS merger, to providing a competitive route for intermodal and automotive traffic that avoids exacerbating Chicago congestion,” attorneys for CN said in a July 12 filing.

CN described CP and KCS’ post-merger operating plan as “sketchy,” contending the plan fails to adequately address the substantial traffic impacts that would result from the unification.

“The consistent themes from commenters reflect deep concern about applicants’ push for an essentially unconditioned merger and their extraordinary demand that the board grant such approval based on an unreliable set of ‘modeled’ traffic data and no public plan for preventing the service disruptions that will inevitably result from this inadequate planning and modeling,” CN said. “The comments thus reinforce the need for robust conditions to protect the public interest, including divestiture of the parallel KCS Springfield Line to CN, a concrete and enforceable gateway commitment, a service assurance plan and significant board oversight and monitoring.”

Should CN acquire the Springfield Line, the company would keep it “physically and commercially open,” adding that it would provide shippers with a second railroad option with access to different geographic markets, as well as negotiating leverage of access to an additional railroad.

The Coalition to Stop KCPC, a group formed by eight Illinois communities that argues the merger would increase freight traffic through their towns, support CN’s proposal to acquire the Springfield Line.

CN’s plan “would reinforce and enhance an existing parallel alternative to the merged CPKC for transporting trains — particularly automotive and intermodal traffic — to and from Kansas City and the Chicago metropolitan area,” the coalition wrote. “If established and made effective by CN, this alternative routing could potentially result in fewer freight trains running through the Coalition communities, thereby alleviating some of the harm that will be caused by the merger as proposed.”

But Amtrak panned CN’s plan, saying CN’s intent to operate additional freight trains on existing segments would be disruptive because CN “does not have adequate capacity to accommodate even existing Amtrak and CN operations [in Illinois].”

Added Amtrak: “Although CN has committed to invest at least $250 million for capital improvements on other rail-line segments on which freight traffic will increase if its responsive application is granted … CN has no plans to make any investments to increase capacity on any of the lines over which Amtrak operates — and apparently has not even assessed whether investments are necessary.”

Norfolk Southern seeks trackage rights on Meridian Speedway

Norfolk Southern (NYSE: NSC) is seeking trackage rights along a stretch of the Meridian Speedway, a route that serves NS’ intermodal segment and goes between the Southeast and the central Texas markets and the Southeast and Southwest markets in California and Arizona.

The route starts in Meridian, Mississippi, and heads west. NS relies on access to the section of the route owned by KCS running from Shreveport, Louisiana, to Wylie, Texas. NS is seeking trackage rights for this section.

But the Port of New Orleans and the New Orleans Public Belt Railroad (NOPB), which says this section is “important for the economy of southeast Louisiana,” contends granting the trackage rights would not alleve potential congestion.

“Both Port NOLA and NOPB fully appreciate that NSR’s request in its responsive application for trackage rights over the KCS Shreveport-Wylie segment is contingent on the presumptively merged CPKC’s performance on current haulage obligations to NSR,” the port said in a July 12 filing. “For such trackage rights to be triggered would indicate that the capacity of the segment would be exceeded, a situation that NSR warns of in its responsive application. Should such a situation arise, however, the granting of trackage rights alone to NSR, while giving NSR a measure of control over its own trains, would not resolve the congestion issues that triggered the contingency in the first place.

“In fact, adding more trains run by a second carrier over the segment would likely exacerbate the problem. As a result, the board should not grant those contingent trackage rights unless there is a plan made that would resolve the potential congestion.”

NS competitor CSX (NASDAQ: CSX) maintains the agreement between NS and KCS over the Meridian Speedway is “unlawful” because it closes it to any other rail carrier except NS.

NS responded that CSX’s “surprise attack on the Meridian Speedway Joint Venture does not meet the standard set by the board for the review of the CP-KCS transaction, which is the sole focus of this proceeding.”

The question of public interest

With concerns about how the merger might affect access to Mexico, the broader question of defining when a merger is considered to be in the “public interest” should be addressed, CN said.

“Most alleged benefits of the proposed transaction are plainly private benefits accruing to the applicants, not public benefits,” attorneys for CN said. “Indeed, applicants’ exhibit showing ‘quantified public benefits’ is literally a balance sheet purporting to show the combined railroad’s additional earnings. And even those private benefits are substantially exaggerated; they are predicted on illogical assumptions that the merger will immediately generate massive traffic diversions, despite the absence of meaningful rate reductions or significant capital investments that could attract such traffic.”

CP countered that the merger is in the public interest because it has found support from “hundreds” of shippers and others.

“The application is compellingly in the public interest and should be approved without conditions beyond those embodying the commitments applicants are making … to ensure that the public interest benefits of the combination of CP and KCS come to pass,” attorneys representing CP said. “The transaction is supported by hundreds of shippers, shortlines, passenger rail interests, labor organizations and others. No shipper or shipper association requests that the transaction be denied.”

CP also noted that STB is considering the transaction under less stringent rules governing mergers that were in effect through 2001.

“Unfortunately, many of the comments (and all of the responsive applications) continue to ignore that the pre-2001 rules apply,” CP said. “They predicate requests for relief — in some cases extraordinary relief — on principles that have no grounding in board precedent under the pre-2001 rules but emanate instead from requirements established in the 2001 rules — most notably the notion the board might impose conditions to ‘enhance’ competition relative to the pre-merger status quo and mandate the preparation of a formal ‘Service Assurance Plan.’ ”

Canadian Pacific touts competition benefits

CP countered that the concerns outlined by its Class I peers reflect the threats the railroads feel over the competition that will arise from the merger.

“The most vehement opposition to the transaction comes not from shippers but rather from the Class I railroads who will compete most directly with the new transportation services that the CP/KCS transaction will enable,” attorneys for CP said. “Their opposition, and the self-serving conditions they seek, are not motivated by any need to protect the public interest from harm but by desire to protect themselves from change — i.e., the new, more intense competition CPKC will provide — or to get something valuable for themselves in the process. The board should reject their efforts.”

CP also said its filing from last Wednesday — 4,374 pages — addresses the criticisms of CP’s operating plan and calculations.

“As we demonstrate, there will be no capacity shortfall. Many of these lines have successfully handled more trains than the transaction anticipates in the past using less robust infrastructure than exists today (even before additional infrastructure will be added by CPKC and others),” said CP, referring to concerns from BNSF, UP and CN. “With the capacity expansion projects already underway along with the additional investments CPKC will make to expand capacity, the lines CPKC uses will support CPKC’s added trains alongside all of the other uses of that trackage, including UP, BNSF, Amtrak, Metra and others.”

Separate sections within the filing addressed the concerns laid out by CP’s Class I peers.

“[They] are missing the forest for the trees: Whatever measure of success CPKC achieves, the combination of the end-to-end CP and KCS networks will be a catalyst for investment in a new and improved North-South rail option that will inject new competition into the industry,” CP said. “If it really were the case that CPKC’s estimates were wildly off base, and the Class I railroads did not expect much of their own traffic to be diverted to the CPKC network, they would not be objecting so vigorously.

“It is telling that the Class I railroads say nothing about their own competitive responses to CPKC. Their preferred strategy is to prevent new competition from CPKC from ever getting off the ground, using regulatory tools, rather than meeting CPKC in the marketplace.”

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