STB to weigh CP/KCS merger in September hearing

Opposition to the combination has emerged; board must also consider conditions requested by railroads, shippers.

The Surface Transportation Board (STB) will be holding a three-day public hearing on the proposed merger between the Canadian Pacific Railway (CP) and the Kansas City Southern Railway (KCS) in late September. At the top of the usual agenda for rail mergers is whether the combination will reduce competition.

In this particular case, anti-competitive considerations in the CP-KCS merger, to be known as CPKC, if approved, are less prominent than in some others, such as the 2021 proposed takeover of KCS by the Canadian National Railway which lost out to the CP proposal because of the potential for regulatory objections over competitiveness. The CP and KCS are the smallest of North America’s Class I railroads and touch each other only at one point, in Kansas City, mitigating the anti-competitive implications.

Voices on the Merger

Shippers have been almost unanimous in their support for the CP-KC merger, but opposition has emerged from other quarters. The board’s deliberations will also need to address demands from other Class I railroads for trackage concessions from CPKC, and from shippers for interchange protections.

The comments of Zekelman Industries, which ships structural steel and pipe products from Harrow, Ontario, were typical of those approving of the merger. “New single-line offerings will expand market reach and offer new competitive transportation options” which will improve transit times and reliability, said Jeff Shulman, the company’s vice president of logistics, in written comments to the board.

CP and KCS currently operate some joint routes, Shulman noted, “but as separate companies they have not been able to offer the kind of seamless, single-line service we have come to expect from our transportation providers.”

In an unusual move, Federal Maritime Commissioner (FMC) Louis Sola, in his capacity as an individual commissioner, voiced opposition to the merger. “The consolidation of any limited asset integral to the supply chain merits close examination,” he wrote.

The merger has also encountered opposition from members of the Illinois congressional delegation and from local communities. Illinois’s two senators, Dick Durbin, and Tammy Duckworth, and two Chicago-area House members, all Democrats, wrote STB Chairman Martin Oberman voicing concerns over noise pollution, blocked crossings, safety conditions, and commuter rail delays.

“The proposed merger will reportedly more than triple freight rail traffic on the CP rail line that runs between Bensenville and Elgin, Illinois,” they wrote, and that “could significantly increase delays for those traveling for work” on the Metra commuter rail line.

Suburban Chicago DuPage County also announced opposition to the merger, citing some of the same arguments, and adding that CP trains travel across 18 street crossings within the county. DuPage County is part of the Coalition to Stop CPKC, which also includes half a dozen municipalities.

Attaching Concessions to the Merger

CN and BNSF have requested that the STB impose concessions on the merger. CN wants KCS to divest its line between Kansas City, Missouri, and Springfield, Illinois, asserting it would “promote the public interest by driving investment in an underutilized route.” BNSF wants trackage rights on KCS lines in Texas and Louisiana and on a line operated in Illinois and Iowa by CP subsidiary Soo Line Railroad Company.

Several shipper groups, including the American Chemistry Council, the Fertilizer Institute, and the National Industrial Transportation League, also asked the STB to impose conditions on the CP-KCS merger, including gateway and interchange protections, the ability to challenge interchange rates, and mandating arbitration to settle rate disputes. Others, including the Private Railcar Food and Beverage Association, the Chlorine Institute, and the Industrial Minerals Association requested reciprocal switching or other measures that would provide relief to sole-served shippers. The latter also asked for limitations on CPKC rate increases to 10% during the first five years following the merger.

CP and KCS have responded to BNSF by saying that “additional service-related conditions would unduly burden CPKC’s competition for no valid purpose” and that CPKC traffic growth will not overwhelm rail capacity. They characterize CN’s request to purchase the Springfield line as a “gambit” designed “to disrupt or delay the CP/KCS transaction.” They also deny that the transaction will adversely impact Metra’s commuter services and will “not meaningfully increase freight traffic on lines shared with Metra.”

They also note that the STB’s rules “require applicants to demonstrate that, among other things, a proposed transaction would enhance competition where necessary to offset negative effects of the transaction…” The CP-KCS merger, they assert, would make CP more competitive with CN.

STB’s Position

In order to rule on the railroad requests, the STB would first have to determine whether they constitute “minor transactions,” i.e., that they clearly would not detract from competition, or “significant” ones. The STB has already ruled that neither BNSF nor CN has provided enough information to rule on that issue, signaling disapproval of the railroads’ requests. The STB has also said that it would “not impose conditions on a railroad consolidation unless it finds that the merger produces effects harmful to the public interest (such as a significant loss of competition) that a condition will ameliorate or eliminate,” also indicating that the BNSF and CN requests will be denied and that the merger will be approved.

The STB’s ultimate decision will likely be informed by testimonials like that of Bryan Fitzsimmons, CEO of Centerville Iron & Metal, which ships scrap to steel mills in the Midwest from its facility in Iowa. Fitzsimmons sees, as among the benefits of the merger, “a larger network, with reduced switching fees, allowing expansion and growth of business to markets around North America which we don’t currently have access to.” “These markets,” he wrote, “might include Mexico and customers or mills in that country.”

The single-line service to be offered by CPKC will provide quicker and more efficient transportation, he asserted. “Seeing little to no overlap between the networks…should result in a service improvement that is greater than the sum of the parts,” Fitzsimmons wrote.

“As a small business,” he added, “it is important for us to have access to these benefits. Small businesses rely upon access to rail service, and the markets they can open up for a company are critical to their growth.”