Wednesday, March 29, 2017

A simple case of “confusion to the enemy”

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A simple case of “confusion to the enemy”

The Mexicans are coming. The Mexicans are coming—and within verbal-indignities-hurling distance of President Donald J. Trump’s Palm Beach, Fla., Mar-a-Lago “Winter White House.”

Wanted or not, they’re arriving by train, and unlikely to stop them are Attorney General Jeff Sessions’ assault on Sanctuary Cities; or the building of The Wall, no matter who pays for it; or shredding of the North American Free Trade Agreement.

Under certain circumstances, the Surface Transportation Board (STB) may stop them, but with the STB currently consisting of two liberal Democrats and a Republican acting chairman who spent most of her career reporting to Trump-nemesis Sen. John McCain (R-Ariz.), the probability of the STB acting solely to satisfy a xenophobic President isn’t the sort of wager favored by the gambling classes.

Spoiler alert: These Mexicans are of a moneyed class—the top 1% on either side of the border, so rather than deportation, perhaps they are candidates for Mar-a-Lago hospitality and special tax breaks.

Que pasa?

One of the most storied railroads in American history, Florida East Coast Railway (FEC), is up for sale by current owner Fortress Investment Group; and Ferrocarril Méxicano (Ferromex), Mexico’s largest and most profitable railroad, has bid more than US$2.1 billion to acquire FEC.

First, an introduction to the cast.

FEC, a 351-mile Class II regional railroad operating freight trains between Jacksonville and Miami (and soon to operate higher-speed passenger trains on its tracks), is the 19th century creation of Henry Morrison Flagler, a John D. Rockefeller henchman who used the substantial market power of Rockefeller’s Standard Oil Co. to coax from railroads freight rebates so ingenious and large that Congress responded with the 1903 Elkins Act outlawing rebates in every form.

FEC’s over-the-water extension from Miami to Key West mostly disappeared Labor Day 1935 during a ferocious hurricane. But the sturdier mainland route helped give birth to Florida resorts, including Palm Beach’s Mar-a-Lago (Spanish, gulp!, meaning “sea by the lake”) by which FEC passes.

Mar-a-Lago was originally constructed in 1926 by breakfast cereals heiress Marjorie Merriweather Post, who bequeathed it, upon her 1973 death, to the federal government to be used as a presidential retreat.

After President Nixon rejected its use in favor of winter leisure at the equally opulent Key Biscayne, Fla., home of friend and confidant Charles “Bebe” Rebozo, and President Carter expressed no interest in lavish lifestyles, the Mar-a-Lago estate was sold to Mr. Trump in 1986.

As for FEC, after falling victim to the 1935 catastrophic hurricane and Great Depression hard times, it was acquired by heirs of the Alfred I. duPont fortune. Three times FEC escaped merger efforts by CSX predecessors (one that included Norfolk Southern predecessor Southern Railway), and kindled a 14-year labor-management conflict by using replacement workers.

After FEC President and duPont family member Ed Ball, a genuine “bad hombre,” annulled money-losing passenger service, the Interstate Commerce Commission ordered it restored, with the defiant Ball doing so, but posting incendiary warnings to discourage its use: “This train may be blown up by the unions.”

Is all that storied enough?

Let’s move on to the equally storied expectant purchaser of FEC:

Ferromex, connecting with U.S. railroads at four points along the U.S. border, is a subsidiary of Grupo México, which owns 74% of Ferromex, while Union Pacific has a 26% financial interest.

Grupo México also controls a U.S. railroad, Texas Pacifico Transportation, operating, under a lease agreement with the State of Texas, between the Mexican border at Presidio and the Texas cities of Alpine (Union Pacific interchange) and Ft. Worth (BNSF interchange).

Another subsidiary of Grupo México is American Smelting and Refining Co. (ASARCO, headquartered in Tucson, Ariz.), which is the world’s third-largest copper producer, and long in the cross-hairs of the U.S. Environmental Protection Agency (EPA), which found ASARCO responsible for environmental pollution at 20 U.S. Superfund sites. An ASARCO subsidiary is Arizona’s Class III Copper Basin Railway, primarily hauling copper ore to a connection with Union Pacific.

Grupo México and its subsidiaries have long-standing adversarial relationships with labor unions on both sides of the border. The United Steel Workers, for example, alleges ASARCO has threatened its workers, violated labor contracts and failed to bargain in good faith.

Given these facts, the question is: Can and should this transaction—Grupo México acquiring Florida East Coast Railway—proceed to fruition?

In more conventional political times, there are two paths to a successful transaction (as will be explained). But these are not conventional political times.

We have a President consumed with xenophobia toward Mexico and its citizens, who is easily irked (perhaps even by super-wealthy Mexicans purchasing a railroad in close proximity to his Mar-a-Lago estate), and who has at his command a demonstrably loyal Attorney General capable of constructing innovative legal theories to block the transaction.

The STB may be the most logical impeder-in-chief of this trans-border transaction. The statute (49 U.S.C. 11323(a)(5)) provides that “acquisition of control of a rail carrier by a person that is not a rail carrier, but that controls any number of rail carriers” (Texas Pacifico Transportation and Copper Basin Railway in the case of Grupo México) must seek and obtain prior STB “approval and authorization.”

However, the statute further provides (49 U.S.C. 10502) that the STB must exempt such a transaction if regulation is found by the STB “not necessary” to carry out congressional rail transportation policy, and either the transaction is of “limited scope,” or regulation is “not needed to protect shippers from the abuse of market power.”

While the history of the STB and its predecessor Interstate Commerce Commission is one of non-partisan and objective decision making—the STB is an independent regulatory agency as opposed to an Executive Branch agency under White House control—Democrats tend to be more sensitive to labor and environmental concerns. What the STB majority will consider “necessary”—in terms of fitness of the purchaser—to carry out congressional rail transportation policy is unknown.

A second option for Grupo México is to avoid the STB approval process entirely by divesting itself of the two small railroads under its financial control.

Recall that following Berkshire Hathaway’s acquisition of BNSF, it was learned that the multinational conglomerate headquartered in Omaha owned two Class III railroads. Berkshire Hathaway, which had not sought prior STB approval, immediately sold those railroads upon discovery of ownership to avoid a sticky wicket of having to seek post-acquisition STB approval. Berkshire Hathaway was, however, assessed a substantial penalty by the STB for its failure to perform properly a due diligence that would have uncovered that ownership earlier.

So here we have another so-called rat hole worth watching—elements of which defy fiction and which even Breitbart News or Infowars likely wouldn’t concoct.

In this examination of the almost surreal, perhaps we should reinject Ed Ball, the FEC chief who battled organized labor much as Mr. Trump has in the past. Ball’s unvarying toast prior to sipping his favored bourbon was, “Confusion to the enemy.” Then, again, defining “the enemy” here is as murky as uncovering certain truths lurking within the White House.

So perhaps it best to call upon the ancient Chinese curse: “May you live in interesting times.” We do.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Frank N. Wilner, Contributing Editor

Frank N. Wilner is author of six books, including, Amtrak: Past, Present, Future; Understanding the Railway Labor Act; and, Railroad Mergers: History, Analysis, Insight. He earned undergraduate and graduate degrees in economics and labor relations from Virginia Tech. He has been assistant vice president, policy, for the Association of American Railroads; a White House appointed chief of staff at the Surface Transportation Board; and director of public relations for the United Transportation Union. He is a past president of the Association of Transportation Law Professionals. Wilner drafted the railroad section of the Heritage Foundation’s Mandate for Change (Volumes I and II), which were policy blueprints for the two Reagan Administrations; and was a guest columnist for the Cato Institute’s Regulation magazine.

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