STB & CPKC - A Long Day in DC Sets the Tone

Greetings;

Below is some flavor of the STB Hearings for the Final Major Rail Merger of All Time (or at least a very, very long time), the CPKC.  As I wrote yesterday, unlike the legal system, the defense (the merger applicants) led off (and will close out as well, perhaps tomorrow – the Hearings as anyone should have expected, ran late making closing time uncertain).  There were surprisingly few “observers” such as myself in the house.  Those who stayed at home got the blessings of a decent lunch and coffee/water.  As a business hint, opening a decent lunch spot or a Starbucks franchise near the STB is a sure money maker.

Quote of the Day: “Harm to a competitor is not the same thing as harm to competition”

/CP Consultant from Cornerstone

From the Tweets in order:

1. STB/CPKC hearings begin and may set a pattern - some NIMBY opposition (the Chicagoland Congressman, the FMC defending US port interests versus BC ports in defiance, I should think, of USMCA and ignoring the current saturation level of US ports) then CPKC horde attempts to preempt objections (well done) such as countering the CPKC doesn’t like passengers motif; so far very little pushback from the Board….
   1. CPKC pushed “trucks-off-the-highway” which fits into the Board’s ESG beliefs
   2. It was interesting that the FMC worries about Canadian ports – not Mexican ones – as competition for US ports; in other words, even the FMC doesn’t buy into the Lazaro-and-beyond strategy!
   3. Interestingly CPKC’s aggressive stance against rails (UP), which I thought would play into the STB’s “rails are monopolists” stance, was downplayed by the Commissioners as “not real growth” (MO – “Just coming off another railroad”)
   4. KCS CEO Pat Ottensmeyer deflated the BNSF/UNP arguments on open Mexican gateways with a history lesson on his company – “we went through this 17 years ago”
2. STB/CPKC2 Interesting that CP focuses so much on SINGLE-LINE SERVICE; long the argument for the now permanently denied dream of a transcontinental railway – cee KCS COO John Orr’s testimony (etc, etc)
   1. Orr and CP’s Ray Elphick, creators of the CPKC Ops Plan, faced little STB (that being the key takeaway IMHO) pushback to their claims that there is enough capacity now or in their post-merger capital plans in Texas and Chicago, one of the major claims by both carriers and NIMBY (Metra, etc)
   2. CPKC stated there wouldn’t be a “Big Bang” systems conversion but rather a gradual transition, already being planned
3. STB/CPKC3 The other Class Ones don’t begin presenting their opposition/modification arguments til tomorrow; CN could be the most interesting (attack the synergies?); UP should be (the biggest “loser”)
   1. It became clearer over the course of the day that the STB wants some form of 3 or 5-year oversight, on Gateways and other commitments to ensure compliance (and a cynic might think as a CYA)
   2. The STB sees itself representing the USA’s best interest (noting environmental and jobs benefits) but also more – as they don’t see Canada or Mexico having the powers to remedy future overstep etc.
4. STB/CPKC4 Perhaps I spoke too soon in labeling a tepid STB response- after lunch, the Chairman came out swinging on the nature of rail market power (“the system isn’t good”) Why relevant here? Only in M&A does STB have full powers.
   1. 1. Chairman Oberman in stating that “the system isn’t good” (and “we need backstops”)meant rail market power, the opportunity for shipper reaction, etc – here the Chairman is expressing his and to some degree the Board’s views on rails – and as CP’s star lawyer David Meyer noted, isn’t applicable to this merger, per se – that this merger wasn’t to be used as a flagship for a new regime
      2. Commissioner Fuchs raised the point that although in a vacuum, the Class One rail industry has indeed concentrated, it has gone from ill health to full health
5. STB/CPKC5 Can I have a change of heart? I still see the selfishness of NIMBY arguments against rail (economic) growth but to see the panel of local & tribal officials coming to DC to plead their case was seeing Democracy in Action

1. 1. A key NIMBY argument is that CPKC is dramatically understating the growth in trains (starts and lengths) – downplaying the growth synergies of the merger to minimize the perceived disruption to local communities, etc
   2. Maybe, it occurred to me, CP was rather deliberately understating its growth prospects to the Street (under promise/over deliver)?
   3. It's interesting that CPKC is attacked for both over-promising on synergies (CN’s application) and under-promising on Capex in Texas (UP and BNSF) and in Chicago (Metra)….
   4. Metra attacked the data and methodology of the Chicagoland studies conducted for CP by Multi-Modal Associates as being outdated and incomplete.

It was a long day but I already, as with the labor negotiations, know the ending.  The CPKC rebuttal tomorrow (Day 3 – if the schedule is restored!!) will be most interesting….

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com 
anthonybhatch@gmail.com
Twitter @ABHatch18