On January 27, the Surface Transportation Board (“Board”) issued the Final Environmental Impact Statement in the first major rail proceeding in over twenty years, meaning a final decision on that proceeding should be rendered in about a month or so. A decision approving this transaction would reduce this already overly consolidated industry from seven to six Class I carriers in the US. The question now arises whether this transaction will be good or bad for rail shippers if it is approved.
As background, on March 21, 2021, Canadian Pacific Railway (“CP”) announced that it would purchase the Kansas City Southern Railway (“KCS”). On April 23, the STB found that review of this transaction would take place under the “old merger guidelines” in effect before July 11, 2001, pursuant to a waiver for “major transactions” involving KCS. This decision was important because the otherwise applicable “new merger guidelines” set a higher bar for approval of the transaction and the voting trust. Most importantly, the “new merger guidelines” require applicants to demonstrate enhanced competition while the “old merger guidelines” only require a demonstration of no adverse effect on competition from the transaction.
While this was happening, on April 20, Canadian National Railway (“CN”) submitted a substantially higher competing bid than CP to acquire KCS and filed its notice of intent to acquire KCS at the STB. Therefore, the STB had dueling merger proceedings before it. Unlike CP, CN agreed to proceed as a demonstration of good faith under the “new merger guidelines” which meant its voting trust, identical to the CP voting trust, was formally reviewed by the STB under an untested public interest standard. The Board then approved the CP voting trust under the more lenient standard. Eventually, the STB rejected CN’s voting trust approval request under this more difficult public interest standard under the “new merger guidelines. As a result, KCS chose to engage with CP instead of CN allowing the merger to proceed under the less stringent standard in the “old merger guidelines.”
The CP/KCS transaction involves the two smallest Class I railroads in the U.S. that only connect in Kansas City, thereby making it an end-to-end rail merger. As a result, CP has argued that this transaction will not hurt rail competition in the U.S.
However, not all parties in this proceeding agree with that viewpoint. As the U.S. Department of Justice explained in its comments to the Board:
Although on its face this transaction may raise fewer competitive problems than other possible combinations of Class I railroads, the Board should carefully consider the competition implications posed by this transaction. As the Board has recognized, a railroad merger can harm competition even if the parties do not compete head to head to provide single-line service between the same origin and destination pairs. As one example, railroads can also compete through “source competition”—that is, the ability of shippers to choose between railroads that can carry their goods to (or receive goods from) different endpoints. As the Board has explained:
[S]ignificant losses in geographic competition could occur even where carriers truly are “end-to-end,” because there are many commodities (such as phosphate and soda ash) that have a limited number of sources. Similarly, a merger between BNSF and a Canadian carrier, even if largely end-to-end, could raise potential competitive concerns in western export wheat markets. End-to-end carriers that compete with each other geographically would stand to gain market power if we were to approve their merger without imposing effective conditions, which, as discussed above, could be difficult.
Railroads can also compete by serving portions of longer multi-carrier or multi-modal shipping routes. For instance, CP and KCS might each provide part of competing multi-modal routes between Asia and the eastern United States, or might compete to serve north-south routes by each partnering with other rail lines. A merger could reduce this type of competition by depriving current or future interchange partners of CP or KCS of a means to compete for this traffic, and thus reduce choices for shippers and ultimately raise prices.
Assuming most experts are correct, the Board will probably approve this merger when it does rule in the next month or so. As a result, CP and KCS shippers will then be subject to these anticompetitive effects forewarned of by Justice. In its decision, the Board will issue conditions to its approval to remedy any adverse competitive effects. It will be important for shippers to carefully review this final decision which could be helpful to them as they learn to deal with this larger and more powerful railroad.