Four Class I railroads urge more stringent regulatory review of CP-KCS merger

WASHINGTON — BNSF Railway, Canadian National, and Union Pacific have joined Norfolk Southern in asking federal regulators to apply the more stringent 2001 merger review rules to Canadian Pacific’s proposed acquisition of Kansas City Southern.

As the smallest Class I, KCS received a waiver from the current merger review rules, and CP and KCS have sought to have the Surface Transportation Board review their $29 billion deal under the old rules.

CSX Transportation, in a filing on the STB website today, was the only Class I railroad to support the KCS waiver.

But BNSF, CN, and UP, in filings posted today, all urged the board to apply the current rules, which would require CP and KCS to submit service assurance plans, demonstrate that the deal would provide public benefits and enhance competition, and explain how existing gateways would be preserved.

CP CEO Keith Creel has said that the deal, announced on March 21, would pass regulatory muster under the old or current rules because combining the CP and KCS networks in an end-to-end merger will increase rail competition.

The Class I railroads note that KCS of 2021 is a vastly different railroad than the KCS of 2001, with significantly more revenue, traffic, and mileage under its control thanks to the company gaining a full interest in the Texas Mexican Railway and KCS de Mexico.

“Any justification for the potential KCS exception has evaporated,” CN wrote in its filing. “KCS’s expansion of its Mexican operations post-2000 make it a transnational carrier and a very different railroad from the one it was in 2000. Indeed, KCS’s revenues now exceed the $1 billion threshold that it claimed in 2000 would be an appropriate trigger for full review under the new rules.”

UP said the board never should have adopted a waiver for KCS — and noted that CP in 2001 argued against the KCS waiver. At the time, CP argued that exempting KCS from the tougher merger rules was “illogical” and said that the “revised merger regulations should apply equally to all Class I carriers.”

BNSF said all Class I railroad mergers should be judged by the same standards and argues that the creation of the first railroad linking Canada, the U.S., and Mexico raises transnational concerns that make the KCS waiver inappropriate.

The current merger rules, enacted after the mega-mergers of the 1990s, remain untested as no Class I merger application has made it to the board for review.

“BNSF believes that as a matter of policy, the public and freight rail stakeholder community would benefit in the future from the guidance gained by the Board’s application of its current standards to this and all future transaction proposals,” BNSF said in its filing, which was signed by Chief Legal Officer Roger Nober, who served as chairman of the STB from 2002 to 2006.

CSX said the board has all the tools it needs to review the merger under the old rules. “By far the smallest Class I carrier in 2001 and now, KCS had not been a party to the prior Class I consolidations and therefore its merger with another Class I carrier was deemed unlikely to precipitate either a service meltdown or a downstream transaction threatening competition,” CSX wrote.

NS, in a filing posted Thursday, said the old rules are out of step with the industry today.

“The prior rules are antiquated, adopted over 40 years ago. The railroad industry has transformed itself since then, and the STB modernized its major merger guidelines in sync with those changes,” NS attorneys wrote. “KCS has similarly grown in size and stature since 2001. Winding back the clock to antiquated guidelines would deny the agency the suite of modern tools to gauge and address the broad implications of any major rail merger in the current economic and operational environment.”

In a filing posted today, the Freight Rail Customer Alliance, National Coal Transportation Alliance, and Private Railcar Food and Beverage Association also asked the board to apply the current rules to the CP-KCS combination.

The shipper groups noted that while CP-KCS has the “potential to increase both efficiency and competition for the benefit of shippers,” whether those benefits are realized may depend on application of the STB’s current rules.

CP says it is reviewing the railroad and shipper submissions to the STB.

”We thank the more than 250 shippers, customers, short line railroads and other stakeholders that have written to the STB in support of CP and KCS’ application, underscoring the pro-shipper and pro-competition nature of the transaction,” spokesman Jeremy Berry says.

“We believe this transaction should be reviewed and approved as quickly as possible so the many end-to-end benefits can be realized for all stakeholders,” he says.

CP does not foresee service disruptions arising from the merger and says the deal will provide improved single-line service, expanded market reach for its customers, and lead to job growth on the railroads.