A proposed merger between the Canadian National and Kansas City Southern railways that could have major impacts on the shipping of agricultural products and oil has garnered opposition from the three-member North Dakota congressional delegation and former Sen. Byron Dorgan, D-N.D., and may also be less likely after President Biden issued his executive order to encourage more competition.

Canadian Pacific initially made an offer to buy the Kansas City Southern railway, but Canadian National, a larger railroad, offered Kansas City Southern stockholders more money. Kansas City Southern now favors the merger with Canadian National. Canadian Pacific is trying to convince the Surface Transportation Board, which has jurisdiction over the merger, to stop the CN-KCS merger and pave the way for a revival of its proposal to acquire KCS.

Biden’s executive order on competition issued last week expressed concern about railroad mergers and cited the STB as a regulatory agency that should take into consideration the views of the Justice Department and the Federal Trade Commission on mergers.

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Canadian Pacific said in a news release that Biden’s order “sends clear messages: no rail mergers that reduce competition or hurt passenger service and that the U.S. economy needs more competition among railways.

“A CP-KCS combination would be a positive step toward more competition – not less – in the freight rail industry with no need for regulatory solutions. In contrast, a proposed CN-KCS combination creates competitive issues and reduces options for rail customers that will require additional regulation to overcome.”

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RAISING CONCERNS

Even before Biden’s executive order, the prospect of a merger between Canadian National and Kansas City Southern had raised concerns in North Dakota, South Dakota and Minnesota, which are heavily dependent on rail transportation for their agricultural products and inputs.

The North Dakota Grain Growers said, “CN would get stronger by absorbing KCS’s system, much of which is broadly parallel to CN’s existing U.S. network. This implies rationalization of assets, not investment in new competitive routes. And it implies a loss of competitive options – both concrete multi-railroad access to individual shippers and more subtle benefits of having multiple railroads near one another to serve as ‘geographically competitive’ options for transload shipments, grain moving to alternate elevators/terminals, build-ins and build-outs, and other means.”

“The costs of allowing a voting trust here, however are quite significant. … First, from our perspective, the most significant cost associated with allowing CN to use a voting trust to complete its acquisition of KCS is the adverse impact that would have on existing competition between KCS and CN,” said Minnesota Grain & Feed Association.

“Ultimately, we agree with the U.S. Department of Justice’s observation that ‘threats to competition would be present immediately after the CN voting trust is consummated,’” said South Dakota Grain & Feed Association.

In a June 28 letter to STB Chairman Martin Oberman, Sens. John Hoeven and Kevin Cramer and Rep. Kelly Armstrong, all North Dakota Republicans, did not mention the proposed the CN/KCS merger but wrote, “We write to express our support for the proposed merger agreement between Kansas City Southern (KCS) and Canadian Pacific Railway (CP). We believe such an arrangement would serve the public interest by opening new markets for commodities produced in states served by CP, including North Dakota.”

They added, “Currently, shippers in North Dakota have direct access to ports in the Pacific Northwest, and thus much of Asia, through rail transportation provided by both Canadian Pacific and Burlington Northern Santa Fe. A KCS/CP merger would create the first Class I railroad with track in Canada, Mexico, and the United States, opening access to new markets for our state’s producers in Mexico, while also providing a more direct route to markets in the Southern United States.”

RAIL LOBBY

Canadian Pacific, meanwhile, hired Dorgan as an adviser for its lobbying team in Washington.

In an interview, Dorgan noted that he opposed rail mergers when he served in the House and Senate, but said that a merger of Canadian Pacific with Kansas City Southern would “represent the public interest” because it would result in better connections for shipping North Dakota’s grains to both coasts and to the Gulf of Mexico.

But Dorgan added that he believes a Canadian National-Kansas City Southern merger “would be devastating” and “result in a mania for mergers” among other railroads.

The STB, Dorgan said, has not approved a railroad merger in 20 years and has a policy that any railroad merger is supposed to enhance competition, not diminish it.

But the executive order noted that the number of rail companies has declined to seven and that four major rail companies now dominate their respective regions. The order encouraged the STB “to require railroad track owners to provide rights of way to passenger rail and to strengthen their obligations to treat other freight companies fairly.”

STB Chairman Martin Oberman in a statement on the executive order sounded sympathetic to the issues the White House raised and noted his own longer term concerns:

“While recognizing the independence of the Surface Transportation Board, the executive order names the STB as one of the federal agencies statutorily charged with protecting the ‘conditions of fair competition’ through the exercise of its authority. More specifically, the executive order encourages the STB to consider actions which further competition in the rail industry; provide accessible remedies to shippers; and focus on vigorously enforcing and accounting for on-time performance standards to avoid unwarranted delays in passenger rail service.

“During my time on the board, I have been continually concerned with the significant consolidation in the rail industry that happened as a result of a series of mergers decades ago, which dramatically reduced the number of Class I carriers. It is apparent that while consolidation may be beneficial under certain circumstances, it has also created the potential for monopolistic pricing and reductions in service to captive rail customers. Since consolidation, productivity gains often have been retained by carriers in lieu of being passed on to consumers, as would be expected in a truly competitive marketplace. For these reasons, I have previously stated my concerns with the sufficiency of competition in the rail industry and my interest in exploring ways the board can improve the rail industry’s competitive landscape in order to ensure fairer pricing. In my opinion, competition in the freight marketplace is paramount. In the absence of a truly competitive marketplace, the board can and should focus on using its competition-related authorities where feasible and reforming its competition policies where necessary.

“Accordingly, while underscoring that the STB is an independent agency and that maintaining its independence is vital, I welcome the nationwide policy contained in this new executive order. The president’s emphasis on improving the competitive landscape across the entire economy fits well with my view of the board’s mission in the current rail environment.”

The STB website includes comments on all sides of the issues.

DTN/The Progressive Farmer noted that of the 1,700 comments filed, more than 1,000 are in favor of the voting trust that Canadian National and the Kansas City Southern have requested to structure the deal. Sens. Lindsay Graham, R-S.C., and Jerry Moran, R-Kan., have urged the STB to consider the voting trust.