Government board stands ready with rules for any CP-NS combination

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MergerShot
A Union Pacific train near Carlin, Nev., in 2012 included a former Southern Pacific unit that was "patched" with a UP number after the two railroads merged in 1996. The Surface Transportation Board changed the rules for railroad mergers in 2001 making a UP-SP-like deal even more difficult.
Riley Kloepfer
WASHINGTON — After days of denials and demures, Canadian Pacific and Norfolk Southern admit that the Canadian railroad is looking to buy or merge with the Thoroughbred of Transportation. CP is offering money and stock to shareholders and a form of open access for competitors, but that’s the easy part of a purchase. Executives of both railroads — and shareholders — also need to consider the Surface Transportation Board.

“What’s that?” you ask. Why the STB is only the federal agency charged with regulating the economics and competitiveness of railroads in the United States. And in cases of mergers or purchases, the board stands ready with 370 pages of rules and appendices covering every aspect of a potential deal.

What is the Surface Transportation Board?
The STB was created in 1995 as the successor to the Interstate Commerce Commission, which dated back to 1887. The STB is charged with resolving railroad rates and service disputes as well as reviewing mergers, sales, and abandonments. The board's staff is separated into six different offices that focus on various topics, including economic, environmental, and procedural issues.

Those six divisions all answer to three board members who have the final say on all major decisions, including mergers. The board members are appointed by the President and confirmed by the U.S. Senate for five-year terms. Current Board Chairman Daniel R. Elliot is serving his second term on the board and previously worked as an attorney for the United Transportation Union. Vice Chair Ann D. Begeman has been on the board since 2011 and was previously Acting Chief of Staff and Legislative Director for U.S. Sen. John McCain, R-Ariz. Deb Miller was sworn in as a board member in 2014 and was previously the longest serving State Secretary of Transportation in Kansas.

The Roots of Today's Merger Rules
Following the volatile Union Pacific-Southern Pacific merger in 1996, the chaotic Conrail split-up of 1999, and a failed BNSF Railway-Canadian National merger in 2000, the STB instituted a 15-month moratorium on all consolidations so that it could reevaluate its guidelines. The new rules were created to replace “outdated and inadequate” procedures and were meant to address the likelihood of a final round of mega-mergers.

The new rules set up the framework to approve any future railroad mergers. But they've yet to be tested 15 years later. The rules note that any railroads looking to merge would have to prove to the board that the consolidation was in the public's interest and that it would “enhance, not merely preserve, competition.”
ScreenShot20151118at24759PM
Want to merge two railroads? Get ready to pay the Surface Transportation Board. Their initial filing fee is nearly $1.6 million.
How It Works
According to guides available online, it can take up to 16 months for an application to be approved from the time it is first submitted. The first step would be to pre-file a proposed procedural schedule, which would outline a timetable for approving the merger. The schedule would be published in the Federal Register and comments would be solicited before the STB approved a final schedule of the proceedings.

Once a scheduling order is in place, the railroads would file the actual application for merger as well as supporting documents (the STB requires at least 25 copies of all documents for major mergers, possibly resulting in a literally trainload of paper). Applications would have to detail how the merger would protect essential routes, preserve public services (such as passenger trains) and how it would affect nearby short line and regional railroads. The railroads would also have to report on how a possible merger would impact employees (the 2001 guidelines note that the board would “look with extreme disfavor” at any merger that overrides any established collective bargaining agreements). Other parts of the application would include a market analysis, an environmental review, and summaries of how the merger would impact national security and public safety.

But perhaps the most complex part of a merger application would be the “Service Assurance Plan,” which would identify the “precise steps” railroads would need to take to prevent any service disruptions and delays resulting from the consolidation. The Service Assurance Plan would need to include 11 different subsections with detailed plans on how both railroads would integrate their main line operations, how a merger would affect yard and terminal operations and how they would address infrastructure impediments due to traffic increases on certain lines.

Once an application is submitted, the STB would be required to hold an evidentiary proceeding where board members would inspect all of the evidence for a merger.

Once the proceeding was held, the board members would have 90 days to make one of three choices; rejecting the merger, accepting it as is or, the more likely outcome, approving it with conditions, which could include giving trackage rights to other railroads. The STB would also have oversight over the newly merged railroad for up to five years and railroad officials would have to provide annual updates on the consolidation.

In a statement 15 years ago, then-STB Chair Linda Morgan noted that the next round of major railroad mergers could be the last, resulting in just two Class 1s. She said at the time that regardless of how well planned the final round is, there would be disruptions. Morgan was most recently a member of the board of directors for Canadian Pacific. She died on Nov. 4.

“While mergers have their place,” she wrote, “recent events have shown that no major merger takes place in isolation, and that, once a round of mergers begins, it can be all-consuming, distracting, and disruptive, to the detriment of the nation’s transportation system, rail shippers, rail employees, and communities across the country.”
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