UP Challenging CPKC Merger—After the Fact

Written by William C. Vantuono, Editor-in-Chief

Roughly two months after the Surface Transportation Board approved, with certain conditions, the Canadian Pacific-Kansas City Southern merger to create transnational CPKC (Canadian Pacific Kansas City), Union Pacific on May 3 filed a federal lawsuit against the STB in the U.S. Court of Appeals for the District of Columbia on May 3 seeking overturn of the historic transaction.

UP’s attorneys wrote that the railroad “seeks relief on the grounds that the agency action is in excess of the Board’s authority; that it is arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law; and that it is not supported by substantial evidence. Union Pacific requests that this Court vacate the order under review and grant such additional relief as may be necessary and appropriate.”

The 234-page filing (download below) is highly unusual in that competing railroads historically have always challenged mergers during the STB (or predecessor Interstate Commerce Commission) review process, not after approval and the transaction’s physical completion. In CPKC’s case, the merger formally occurred on April 14.

Of the 234 pages in UP’s filing, 213 are “Exhibit A,” a copy of STB’s CPKC approval decision. It appears to me that UP deems “arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law” several STB points concerning UP’s (and other railroads’) objections, such as:

  • “The other Class I railroads, all of which are larger than the combined CPKC system, seek conditions on the Transaction, including conditions that would protect or enhance their market share and that are more rigorous than those that were imposed in their own major mergers over the past 30 years.”
  • “The Board notes that UP, C, and BNSF have completed their own major mergers. These carriers, not surprisingly, oppose the Transaction and seek conditions that could frustrate its success.”
  • “UP echoes BNSF’s claim that Mexican regulations create the potential for rate manipulation, but neither UP nor any shipper contends that foreclosure at Laredo occurred after the KCS-Tex Mex transaction.” and “the Transaction will allow CPKC to compete more effectively against the larger Class I railroads that surround it. Figure 1 (below) highlights that the new CPKC network will provide stronger competitive options, particularly for north-south traffic flows in which these larger railroads already offer single-line routes.”
  • “The fact that some efficiencies might be achievable without a merger, as claimed by certain competing railroads, does not negate the benefits of the Transaction. The Board and the Interstate Commerce Commission (ICC), the Board’s predecessor agency, have consistently recognized that railroad mergers frequently can achieve a degree of coordination beyond that which is available under voluntary coordination agreements. Indeed, a similar scenario existed when the ICC examined UP’s acquisition of the Chicago & North Western Railway Company. Although those railroads already had extensive voluntary coordination agreements in place, the agency specifically rejected arguments that there were no additional merger synergies resulting from UP’s proposed control. As the agency concluded there, many of the projected efficiency gains from control require more structure than can be realized through selective cooperative agreements.”
  • “UP and BNSF also raise concerns about new traffic on jointly used lines, with particular emphasis on shared lines in the Houston area. UP asks that if the Board allows the proposed Transaction to proceed, it should not allow Applicants to increase their operations on such shared lines above pre-merger levels until Applicants agree to (1) ‘cooperate with UP and BNSF to select an independent consultant who will study the need for infrastructure in the Houston area … to accommodate Applicants’ proposed merger-related traffic growth and recommend specific infrastructure projects,’ (2) ‘provide information requested by the consultant,’ and (3) ‘implement the consultant’s recommendations (or cooperate with UP and BNSF to implement those recommendations, as necessary).’ UP also asks the Board to require that ‘disputes over funding any new infrastructure should be resolved under the terms of the joint use agreements governing the facilities at issue.”

STB flatly rejected those conditions, stating:

  • “The Board will not impose the conditions sought by the carriers. The Board acknowledges concerns raised about future capacity on jointly used lines. However, as discussed in the Capacity section, the Board expects traffic to increase incrementally in the years following the Transaction, and Applicants and other users of shared lines will be incentivized to ensure continued fluidity through the implementation of operational changes and infrastructure improvements. Moreover, preexisting trackage rights agreements govern each carrier’s rights and responsibilities on the shared lines, which will continue in effect after the Transaction.”
  • “Additionally, Applicants [CP and KCS] state that ‘CPKC is committed to working collaboratively with UP and BNSF to ensure that operations on these shared lines work for all users.’ According to Applicants, if new infrastructure investments are needed, “CPKC will support the work needed to identify the optimal approach” to capacity expansion (including using RTC analysis if warranted), install that capacity, and pay for that capacity ‘based on the provisions and processes already established in the governing agreements.’ The Board will therefore not impose conditions restricting the addition of the new CPKC traffic, nor will it become involved, at this time, in the implementation of future projects on these lines.”
  • “Nevertheless, as explained in the Capacity section, the Board will closely monitor capacity issues on certain portions of the combined CPKC network to evaluate and help ensure post-merger fluidity and, if warranted, order further action.”
  • Conclusions. In sum, the criticisms regarding Applicants’ public interest presentation have not persuaded the Board that the Transaction does not have important public benefits. Moreover, even if it is difficult to quantify the precise level of benefits, there will be efficiencies and other advantages gained by the single-line service created by the combination of CP and KCS that would give rise to public benefits … The Board anticipates studying the benefits achieved by the Transaction during the [seven-year] oversight period, and to that end, may require submission of Applicants’ 100% traffic tapes. Such efforts could yield important insights into the benefits of vertical rail mergers more generally. Because the merger-related harms are adequately addressed by the conditions the Board will impose in this decision, the qualitative benefits shown on this record, by themselves, are consistent with approval under the public interest standard.”

Interestingly, UP, with CN and GMXT (Grupo Mexico Transportes, comprising Ferromex, Ferrosur and IMEX), on April 25 introduced Mexico-U.S.-Canada “Falcon Premium” interline intermodal service, presumably as a competitive response to CPKC’s single-line offerings. Note that UP has no fewer than six Mexican border crossing points. CPKC has just one, at Laredo/Nuevo Laredo.

Frankly, UP’s after-the-fact, after-the-wedding-reception court filing puzzles me. What’s the point? From my perspective, it looks like UP is spinning its wheels. I’m reasonably certain that other industry observers will agree. I humbly suggest that UP would make better use of its time fighting politically motivated, virtually useless legislation like the Rail Safety Act, currently winding its way through the Senate Commerce Committee. That, and other pending legislation like it, is the real threat, not a merger of the two smallest Class I’s to create what is still the smallest Class I.

Obviously I’m missing something here. Someone at UP please tell me what it is. Could it be you’re miffed that STB didn’t agree with your objections to the merger? Whatever is troubling you, my very large friend, I’ll give you the opportunity to air your grievances and publish it in this space. I respectfully suggest you concentrate on fixing your customer service and field service employee problems. And be mindful that we’re all on the same team, with identical service, market share growth and safety goals.

Railway Age Capitol Hill Contributing Editor Frank N. Wilner says UP’s post-CPKC-merger legal maneuver isn’t all that surprising. See “Shockah’: UP Pursues Self Interest.”

Tags: , , ,