Stop and Read the Documents

Written by Jim Blaze, J.C. Rooney and Karl R. Ziebarth
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File Stack and Magnifying Glass

Well, this one’s on the STB. What to do in the face of the STB’s decision about the voting trust sought by CN in which CN would have gained control of the Kansas City Southern? That avenue has been foreclosed by the Board’s recent decision to reject the voting trust.

Meanwhile, the long knives have come out alleging willy-nilly incompetence of CN’s Board and management for having signed onto outrageously expensive merger agreement terms and having failed to perceive the mood at the STB favoring competitive options over financial returns. 

This outpouring of commentary appears neither fact-based nor even internally consistent.

Some critics are alleging CN’s “financial results have lagged significantly behind other railroads” and extolling the operational excellence of the more recent proponents of PSR, while they would have CN—the original test bed for PSR—engage even more earnestly in cost cutting and service consolidation. 

In stark contrast, other commentators are lamenting the dominance of PSR—which, it must be noted, has come under widespread suspicion, including from STB members for its impact on service and clients. In fact, it would not be stretching the tapestry too far to suggest a near universal concern for service quality, not only for freight, but also passengers, is motivating the STB’s responses. 

We suggest the letter and opinion writers stop and read the documents available from public sources.

A first truth is that the STB did not find for the worthiness or unworthiness of the yet completely unheard competitive arguments for a CN-KCS merger. They specifically held that CN could proceed without the voting trust protection and held that the voting trust format could not be applied, in their views, to this transaction. Aside from innuendo, there is no basis here for concluding the CN could not find conditions to demonstrate sufficient net positive public benefit to prevail in a full-blown merger proceeding under the “new rules.” 

CN did offer to preserve competitive gateways for shippers using the KCS. As former STB Chief Economist Dr. William Huneke describes in his June 22, 2021 Railway Age article, CN has already offered to maintain gateways on commercially reasonable terms. It seems likely to us that those words, uttered in the abstract here in the U.S., could ultimately have taken on significantly different meaning as applied in Canada, to the benefit of shippers. 

In that regard, a second truth is that CN comes from a competitive culture where market access is differently and potentially universally secured by virtue of reciprocal and long-haul interswitching, rather than geographical franchise concepts that have been and are the norm in the U.S. Who knows what competitive remedies might ultimately have been tendered by applicants or imposed by the STB beyond the 70 miles of line sales already mentioned if a full-blown merger proceeding were to take place? 

(In Canada, if a shipper is located on one freight railroad line, and it is within 18 miles (30 kilometers) of a point where there is a competing railroad interchange, that shipper may elect to access the competing railroad at the point of interchange. By law, the incumbent railroad is obligated to perform this switching. The shipper pays the switch fee to the incumbent railroad to get access to the competing railroad. That tariff, which is the cost of transport from the origination point to the interchange point, is established and overseen by the Canadian Transportation Agency. Likewise, long haul interswitching may be applied for in certain limited circumstances for longer switching distances where the origin or destination are controlled, but onward line haul service may be offered by more than one carrier.)

Additionally, CN’s returns have been more than adequate since its privatization, and the above noted “lagging improvement” is in part attributable to the fact that CN achieved operational excellence well before its peers—this while operating a service many would argue exceeds that of many U.S. carriers and, again, in a different competitive environment than in the U.S. 

Finally, there have been observations that CN’s Merger Agreement with KCS imposes enormous financial consequences on it from this point forward. A thoughtful reading of the pertinent sections of the merger document does not lead automatically to that conclusion. In fact, there is a reasonable balance here, and this should not enter into merger calculations unless a financial viability argument is to be made, again in a full-blown proceeding.

There is no way of knowing the outcome of the “new rules” for reckoning the benefits and disbenefits of a merger in this environment. However there is a likelihood that the necessity of achieving maximum benefit could have led to much less institutionally constrained and more innovative competitive remedies. Unless CN decides to proceed without the protection of a voting trust, we will not find out in this proceeding. The potential CN-KCS merger—with its divestiture commitment and its offer to protect gateways commercially—could be a huge step forward for competition. But shippers will not be able to avail themselves of either the new single-line efficiencies or the gateway commitment if the CN-KCS merger is never considered by the STB in the first place.

Jim Blaze is an independent journalist, a Railway Age contributing editor, and due diligence investigator with a railroad economist/engineer perspective. J. C. (Chris) Rooney was Deputy Federal Railroad Administrator, co-founder of the Wheeling & Lake Erie Railroad, and is President of Vanness Company, a financial/economic advisor to railroads and ports. Karl R Ziebarth was Executive Vice President of the Missouri-Kansas-Texas Railroad and has been an officer of and investor in regional and short line railroads, including Canadian roads, for the past several decades.

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