CN’s offer to keep gateways open on commercially reasonable terms is not getting the attention that it is due. This offer is a key part of its proposal to combine with Kansas City Southern—a transaction that significantly enhances competition.
CN’s open gateways offer is a big deal. It means new, enhanced rail-to-rail competition. But for this to even be considered, the Surface Transportation Board must first approve the CN/KCS voting trust.
I was the STB’s chief economist for 10 years, and I am surprised by the lack of attention to the open gateways commitment. This commitment ensures that shippers who today enjoy competitive joint line routings with either CN or KCS will continue to have those routings available to them in a post CN/KCS merger environment, even if a merged CN/KCS could handle the entire movement via a single-line routing. This means continued competition, and we know that competition encourages lower rates, better service and innovation.
The commitment is not just about maintaining physical routings, but also about ensuring that the routings are commercially reasonable to the shipper. What is meant by “open on commercially reasonable terms”? This means all market participants, railroads and shippers will benefit: They will get a fair chance to compete. They will pay and receive remunerative rates and get efficient service. If a shipper is not happy with their service, they can switch to another carrier because they will still have a choice.
A CN/KCS combination will create a strong new rail-to-rail competitor that will provide new single-line rail movements in competition with other rail carriers. In addition, with the gateway commitment, shippers will also have the option to use an existing routing or other routings involving more than just the merged CN/KCS.
Single-line hauls have long been a strong benefit of rail mergers because they are more efficient, eliminate costly and time-consuming handlings, and often create better routes. In the past, there was concern that such new single-line combinations might result in closing such gateways and preventing shippers from using routes involving multiple railroads. This is why CN/KCS’s offer to protect existing gateways commercially is a game-changer.
The STB (and its predecessor, the Interstate Commerce Commission) used to impose rigid gateway protection in order to protect a shipper from losing alternative service in a rail merger. For more than three decades the ICC imposed so-called DT&I conditions, which required the merged railroad to preserve the gateway and “to maintain and keep open all routes and channels of trade via existing junctions and gateways” between it and another railroad that connected at that gateway. It also imposed a “rate equalization” condition, which froze rates.
In other words, in addition to the single-line service that the merged railroad could offer, the imposition of the DT&I conditions kept another option in play because the merged railroad could move the freight to the gateway and hand it off to another railroad. That multi-railroad move acted as a competitive constraint to the single-line move of the merged railroad. That was a good thing.
But the rate equalization requirement (requiring equal rates to all railroads at a gateway) meant that the newly merged railroad could not reduce its own rates at the gateways to reflect its new found single-line efficiencies. This rate equalization requirement actually inhibited competition by preventing railroads from adapting to ever changing market conditions or to reduce rates depending upon the route so as to respond to the increased competition by other modes. As such, the ICC abandoned the DT&I gateway conditions and stopped imposing them. It realized that the onerous “rate equalization” feature of that condition prevented rather than enhanced competition.
CN’s gateway commitment is intended to preserve the commendable parts of the DT&I conditions, which were intended to preserve shippers’ choices, but without the anticompetitive elements of rate equalization. Keeping gateways open on commercially reasonable terms will enhance competition by supplementing the benefits of new single line routes, with the opportunity for customers to access other railroads at gateways affected by a merger. The commitment avoids the anti-competitive “rate equalization” features that doomed the prior approach in favor of one that favors flexibility, customer choice and enhanced competition.
Besides keeping gateways open, CN and KCS have also committed to divest KCS’s 70 mile parallel rail line to CN’s rail line between Baton Rouge and New Orleans to address the minimal competitive overlap between the two networks. This too is commendable.
As a result of both the divestiture commitment in Louisiana and the gateway protection commitment, the result is a combined CN/KCS network with no competitive overlaps, commercially open gateways, and a stronger railroad able to offer new and vibrant single-line service to compete rail-to-rail with other Class I’s, especially the two dominant western railroad carriers, Union Pacific and BNSF. The merger thus allows CN/KCS, UP and BNSF to compete across major U.S. rail gateways that include Kansas City, Chicago, New Orleans, St. Louis and Memphis. These are the central hubs of U.S. rail commerce.
The CN/KCS merger—with its divestiture commitment and its offer to protect gateways commercially—is 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 allowed to be considered by the STB in the first place.
For the merger to even be considered, the STB must first approve the use of a voting trust. That is why I am supporting CN’s proposal to use a voting trust and urge shippers and other interested parties to do so as well. Without the voting trust, shippers will not benefit from the pro-competitive commitments made by CN and KCS, squandering the unique opportunity to enhance competition through the gateway commitment. I support this new, enhanced competition in the rail sector and ask others to do so as well.
Dr. Huneke is former Director of the Office of Economics and Chief Economist at the Surface Transportation Board. He is now a consulting economist and provides economic advice to private sector clients. He has provided testimony and litigation advice to Class I railroads, including KCS, and to the American Short Line and Regional Railroads Association.