The U.S. Department of Justice’s (DOJ) Antitrust Division on Jan. 24 reaffirmed its “support for the [Surface Transportation] Board’s review process and careful scrutiny of the competitive implications of the proposed transaction” that would merge Canadian Pacific (CP) and Kansas City Southern (KCS). The railroads respond.
In September 2021, the two Class I railroads agreed to merge; two months later, the STB accepted for consideration their merger application. The combined network, to be called CPKC (Canadian Pacific Kansas City), would extend from Canada, through the U.S., and into Mexico, and include approximately 20,350 miles of track, some 8,600 miles of which is in the U.S.
The STB in fall 2022 held public hearings on the question of whether CP and KCS should be permitted to combine, and under what conditions. A decision is now pending, following the upcoming release of the final Environmental Impact Statement from the STB’s Office of Environmental Analysis.
The DOJ reported in its Jan. 24 filing (download below) that its interest in the merger proceeding stems from its mission “to promote competition in the American economy and because of the Attorney General’s statutory right to intervene in Class I merger proceedings.” It told the STB that it was writing “to emphasize the importance of protecting and promoting competition in the railroad industry, and to clarify the Department’s position on the proposed merger. …”
During the STB’s Sept. 28, 2022 hearing, “the applicants argued that the Board should infer that the Antitrust Division does not believe the transaction has the potential to cause harm,” the DOJ wrote. “No such inference should be drawn. In its initial comment [on the merger submitted to the STB in April 2021], the Antitrust Division encouraged the Board to ‘thoroughly examine the competition concerns raised by commenters.’ That filing made clear, among other things, that the Antitrust Division shares the Board’s serious concerns about increasing consolidation in the industry. The consolidation of Class I railroads presents substantial concerns, including: (i) lessened competition among Class I railroads to attract new industry locations; (ii) reduced incentive to invest in research and implementation of important new technologies such as Positive Train Control; and (iii) the danger of industry-wide understandings and agreements that become more likely as the industry becomes more concentrated. The Antitrust Division emphasizes that the Board should not interpret the Antitrust Division’s absence from the Board’s September 2022 proceedings to imply otherwise.”
According to the DOJ, the President Executive Order on Promoting Competition in the American Economy “directs all agencies with authority over mergers to consider their role in promoting competition. Class I freight rail was a significantly concentrated industry before the proposed transaction. In light of the trend toward concentration in the industry, the Board should carefully consider the competition impacts of further consolidation. This is especially relevant in light of the recent supply chain disruptions that have wreaked havoc on American consumers and businesses. Freight rail connects us, from farms to cities, and from the ports through the heartland, and carries the goods that Americans depend on. Competition in this critical infrastructure is essential. The Board should scrutinize any transaction that could weaken our freight rail system.”
The DOJ went on to say that the STB’s “attention to competition issues at the hearing—including the possible implications of this transaction on rivals’ ability to provide effective competition to the merged railroad—is essential to ensure that ‘the transaction is consistent with the public interest.’” It noted that comments filed by various groups “address many of the issues that the Antitrust Division typically considers important to the ultimate determination of whether a merger is anticompetitive. A merger’s impacts on rivals’ ability to compete often raise concerns in transactions that the Antitrust Division examines.”
According to the DOJ, even “beyond the elimination of head-to-head competition, mergers that increase market power can harm competition in several ways.” They can “empower the merged railroad to deny shippers access to the lowest cost or fastest end-to-end routings,” and also, “in the absence of a complete refusal to interchange traffic, mergers may enable firms to foreclose competition in other ways, such as raising costs for their rivals through control over inputs or access.” Additionally, such mergers “can create a more conducive structure for post-merger coordination between direct competitors by facilitating communication or discipline through the new integrated asset,” the DOJ reported.
The railroad sector in particular, “with its relatively high fixed and sunk costs, often enjoys substantial structural entry barriers and advantages that may facilitate or incentivize anticompetitive behavior,” according to the DOJ. For example, the DOJ reported, “railroads may anticompetitively refuse to interchange traffic and/or favor the newly integrated company’s long-haul route over a more efficient joint line route. While this can increase the profits of the integrated company, denying such traffic to a rival can reduce the incentives for that rival to invest in maintenance and improvements.”
Commenters also raised concerns about “the potential for the merger to give rise to anticompetitive diversion of traffic,” DOJ reported. The Department provided the following examples:
- The transaction “may divert ‘significant volumes of traffic’ to ‘longer, less efficient routes, and without reducing rates.’”
- There is “the potential that the merged entity may divert traffic ‘to its own network by using its control over the Mexican portion of the movement.’”
- The transaction could “give the merged firm additional leverage over competitors by allowing the merged firm to foreclose competition from other railroads, exert more extensive power over bottlenecks, and threaten the commercial viability of interchange rates.”
These concerns, according to the DOJ, “echo the types of concerns that the Antitrust Division carefully considers in assessing competitive effects, and the Antitrust Division encourages the Board to take them seriously as it evaluates the facts and other evidence. … As previously noted, ‘the Board should thoroughly examine the competition concerns raised by commenters and ensure that this transaction would not exacerbate these trends. The Antitrust Division’s commentary here and in its previous comment should in no way imply that the Antitrust Division lacks concerns or supports the transaction.”
In sum, the DOJ wrote, “The Antitrust Division supports and appreciates the Board’s careful attention to protecting competition in this important industry, and, as always, appreciates the opportunity to cooperate on this important priority.”
CP, KCS Respond
CP and KCS on Jan. 25 responded to the DOJ, regarding DOJ’s “absence from the Board’s September 2022 proceedings.” Railway Age reproduces their joint STB filing in its entirety: “Applicants have reviewed DOJ’s Comment and agree with DOJ’s bottom line: that the Board should pay ‘careful attention to protecting competition in this important industry’ and ‘thoroughly examine the competition concerns raised by commenters.’ … As Applicants’ extensive submissions in this proceeding demonstrate, we have taken very seriously all competition claims (most notably by certain Class I railroads), and have engaged thoroughly with those claims on factual record in this case. Applicants certainly did not mean to suggest that DOJ had ever affirmatively concluded that any particular competition claim lacked merit or expressed affirmative support for the Transaction. However, as the long-closed factual record developed in this case establishes, Applicants have demonstrated both that the effect of the Transaction will be strongly procompetitive and that, especially in light of the commitments Applicants have made to the Board and the public, the claims of commenters raising competitive concerns lack merit and do not warrant conditions beyond those Applicants have already accepted.”