Tuesday, October 14, 2014

What lurks behind the door Hunter Harrison opened?

Written by  Frank N. Wilner, Contributing Editor
What lurks behind the door Hunter Harrison opened?
At age 70, when most of his contemporaries have retired, Canadian Pacific (CP) Chairman Hunter Harrison is plotting his legacy—a seamless North American transcontinental rail duopoly initiated by his proposed CP-CSX merger.

Electrifying are the productivity improvement prospects. Equally exhilarating is that captive shippers could be supportive were Canadian-style procompetitive features, which Harrison accepts as benign, included. Terrifying—at least to American rail executives—is the threat such procompetitive features pose to revenue adequacy south of the Canadian border.

Stitching together a transcontinental merger plan palatable to railroads, shippers, and regulators may require a god of sky and thunder equivalent to Zeus, with a triumphant outcome achieving for Harrison—who has made a career of upsetting the status quo and taking few prisoners in the process—a place in history beside E. H. Harriman, Jim Hill, Grenville Dodge, Alexander Cassatt, and Commodore Vanderbilt.

That Harrison and his CP initially were rebuffed as the dominant marriage partner by CSX Chairman Michael Ward, whose railroad’s annual freight revenue is twice that of CP, is of minor consequence. For better or worse, Harrison opened a door U.S. rail CEOs would have preferred remain shut, as also lumbering through it is the prospect of regulatory agency-imposed open access under which CP and CN operate profitably in Canada, and for which captive U.S. shippers salivate. Indeed, the price of a new round of railroad mergers could be, as a condition of U.S. regulatory approval, that sole-served U.S. rail shippers gain access, via trackage rights, to a second railroad. And that is what most worries U.S. rail CEOs.

Regardless, the intrepid Harrison—acquired out of retirement from the CEO post at CN as part of a 2012 CP board coup by activist investor Bill Ackman—is not one to retreat. Termed a “tough, polarizing rail chief [with] a board of directors totally in his thrall” by Toronto’s Globe & Mail newspaper, Harrison could next be banging less politely on Ward’s door, with a money-man the likes of Warren Buffett in tow to initiate a hostile financial takeover, or cooing toward Norfolk Southern’s Wick Moorman.

And don’t doubt that the brain trusts at BNSF, CN, CSX, NS, and Union Pacific haven’t been diagramming their own North American rail-map revisions—each likely looking hungrily at Kansas City Southern.

Oh, were it that simple.

In the world of railroad regulation, an application to merge often begets responsive merger applications—such as NS-CN or NS-UP or NS-BNSF—as well as inconsistent applications by which another railroad seeks to include itself in an already proposed transaction, or substitute itself for one of the first applicants. During a round of major mergers during the 1990s, the Surface Transportation Board (STB), which alone approves or denies rail merger applications, said, “We have no reason to doubt the assertions of the CEOs of the major railroads that if [one major merger] goes forward, they would have no choice but to seek their own merger partners.”

In approving a rail merger, the three-member STB can order, as a precondition, a variety of pro-competitive conditions limited only by its own creativity.

STB Chairman Dan Elliott, a Democrat and former labor union attorney, is heading toward a term-ending exit, leaving Republican Ann Begeman and Democrat Deb Miller awaiting a second Democrat to be nominated by the White House and confirmed by the Senate.

Begeman, while in the political minority with no chance to chair the agency as long as a Democrat is in the White House, is no novice to rail merger issues. She counseled Senate Republicans on rail matters during the 1990s and early 2000s, when Burlington Northern combined with Santa Fe, Union Pacific acquired Chicago & North Western and Southern Pacific, and Conrail was apportioned between CSX and Norfolk Southern.

It was a time of embarrassing stumbles and bumbles while integrating operations, creating massive service failures and precipitating, in 2000, a 15-month STB-imposed merger moratorium that derailed a proposed BNSF-CN combination. During the time out, the STB rewrote its merger rules, refocusing on enhancing—rather than preserving—competition and requiring applicants submit a service assurance plan indicating how shippers might gain relief should the merged railroads deliver less-than-optimum operations post-merger. And there hasn’t been a Class I merger application filed since.

Miller, notwithstanding formidable leadership credentials at the Kansas DOT, is a newbie to the rail merger scene. The third seat is expected to be vacant come Jan. 1, requiring an Obama Administration nomination and Senate confirmation. Among STB professional staff, considerable institutional knowledge has departed through retirement since the 1990s.

Under the statute, the STB has 16 months, from the time a merger application is filed—and including responsive and inconsistent applications—to approve or deny. Canadian regulatory approval would be required were a Canadian railroad involved. It is not clear, in the post 9/11 environment, what other agencies might assert a right—perhaps for political rather than security reasons—to intervene.

Today’s massive and widespread rail service failures have many causes, but can any railroad’s armada of experts demonstrate sufficiently that a new round of mergers is an appropriate remedy? Given an almost unceasing history of post-merger service meltdowns, and apprehension over unspecified procompetitive conditions imposed by an STB with one untested newcomer and an unknown for the third seat, some sobering up might be in order before chasing a giddy infatuation to make history.

(Frank N. Wilner is author of “Railroad Mergers: History, Analysis, Insight,” available from Simmons-Boardman Books, 1-800-228-9670)

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