DeFazio to STB: Reject CN/KCS Voting Trust

Nearly one month after the Surface Transportation Board’s June 28 deadline for submitting comments on CN and Kansas City Southern’s merger voting trust application, letters continue to be filed and added to the docket. One such letter, filed July 26, comes from House Transportation and Infrastructure Committee Chair Peter DeFazio (D-Ore.), who opposes it.

DeFazio said the merger “will exacerbate U.S. job losses from cross-border trade agreements that prioritize profits over people and inflict harm on worker’s rights, consumer safety and the environment.”  He also criticized the STB itself, saying that, in approving the voting trust, the Board “would signal to the rest of the rail industry that the STB is engaging in business as usual, despite the requirement to consider the public interest, and could launch a new round of mergers.”

Following is the full text of DeFazio‘s letter:

“I am writing to express opposition to the voting trust proposed by Canadian National Railway Company (CN) in its proposed merger with Kansas City Southern Railway Company (KCS). I am concerned that this proposed trust is not in the public interest. The trust would reduce competition and prejudice the outcome of the Surface Transportation Board’s merger proceeding.

“In its May 14, 2021, submission to this docket, the Antitrust Division of the U.S. Department of Justice explained how voting trusts reduce competition both in general for railroad mergers and in particular to the consideration of a voting trust for CN and KCS. In general, putting two formerly competitive businesses under a single holding company immediately reduces the parties’ incentives to engage in competition. While the Surface Transportation Board regularly allowed railroad trusts throughout the many railroad consolidations of the 1980s and 1990s, the Board has made the requirements to approve a voting trust more stringent since 2001 as part of an overall reform of merger rules. Now, according to 49 CFR 1180.4(b)(4)(iv), applicants must demonstrate that trusts would be in the public interest. Approving a CN-KCS trust would signal to the rest of the rail industry that the STB is engaging in business as usual, despite the requirement to consider the public interest, and could launch a new round of mergers. 

“Specifically with regard to the potential for a CN-KCS trust, I am concerned that approximately 300 current customers overlap on the CN and KCS networks. A single holding company responsible for this traffic would likely change rail traffic patterns in the significant areas of parallel service overlap, and that would reduce the rail service options these 300 customers currently enjoy. I am also troubled that this combination of Class I railroads serving all three nations in North America will exacerbate U.S. job losses from cross-border trade agreements that prioritize profits over people and inflict harm on worker’s rights, consumer safety, and the environment.  

“I trust that the Surface Transportation Board will look at the specific facts of this action and conclude that approving a trust is too much, too soon: Too much authority in one company to somehow keep two companies competing against each other that have significant service overlap, and too soon because allowing the trust creates a new floor purchase price for any other potential competitive bidders for KCS railroad.”

Canadian Pacific quickly picked up on DeFazio’s letter, issuing a press release about it with the complete text, plus its own commentary:

“CP-KCS remains the only viable Class 1 combination. As previously announced, CP continues to pursue its application process to acquire KCS so that the pro-competitive CP-KCS combination can be reviewed by the STB and implemented without undue delay, in the event KCS’ agreement with CN is terminated or CN is otherwise unable to acquire control of KCS.

“The STB has already approved CP’s use of a voting trust and affirmed KCS’ waiver from the new rail merger rules it adopted in 2001 because a CP-KCS combination is truly end-to-end, pro-competitive, and the only viable Class 1 combination. 

“A CP-KCS transaction achieves the goals of President Biden’s recent Executive Order, which sent a clear message that no rail mergers should be allowed that reduce competition or hurt passenger service, and that the U.S. economy needs more competition among railways. 

“CP-KCS would raise none of the anti-competitive concerns cited by hundreds of shippers and other stakeholders opposing CN-KCS. Instead, CP-KCS would enhance competition, create new and stronger competitive single-line options against existing single-line routes, as well as taking trucks off the highway. CP-KCS would maintain all existing freight rail gateways and maintains competition in the Baton Rouge to New Orleans corridor, while creating competition on new north-south lanes between Western Canada, the Upper Midwest and the Gulf Coast and Mexico. 

“CN-KCS brings with it more challenges for existing Amtrak service on CN’s lines south of Chicago that already have a history of operating issues and one of the worst on-time performance records in the industry, and challenges for the desired establishment of future passenger service in Louisiana. In contrast, CP has consistently received an A rating from Amtrak, leading the industry for the previous five years-plus, in its annual host railroad report card recognizing its industry-leading on-time performance record. CP is willing to host intercity passenger rail service between New Orleans and Baton Rouge, an outcome with far more operational flexibility and less risk to Louisiana taxpayers.

“A CP-KCS transaction would diminish the pressure for downstream railroad consolidation by preserving the basic six-railroad structure of the North American rail network: two in the west, two in the east and two in Canada, each with access to the U.S. Gulf Coast. By contrast, a CN-KCS transaction would fundamentally disrupt this balance.

“CP-KCS would be a positive step toward more competition—not less—in the freight rail industry and would be better for Amtrak, while CN-KCS would reinforce the problems the [Executive Order] is trying to solve.

“For more information on the benefits of a CP-KCS combination and the risks that a CN-KCS transaction would pose to the railway industry and North America, visit FutureForFreight.com.”