Shippers skeptical on CP proposals

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A freshly repainted Canadian Pacific SD60 leads an eastbound ethanol train along the New River near Radford, Va., as towering rock cliffs make for an interesting background on March 9, 2014.
Samuel Phillips
Reaction to Canadian Pacific’s proposed $28 billion purchase of Norfolk Southern began trickling in today, with markets enthusiastic and some shipper groups and industry observers skeptical.

NS stock closed at $92.49 per share today, up 6.3 percent. CP stock, meanwhile, closed at $146.65, up 5.8 percent. The shares of both companies traded briskly — at nearly four times their average volumes.

Shipper associations were less impressed. Despite CP’s assurances that the deal would be pro-competitive because of better service, competitive pricing, and open access provisions, shippers are reluctant to see additional consolidation in the industry.

The Freight Rail Customer Alliance, an umbrella group of trade associations that represent captive shippers, mostly coal producers, electricity utilities, and agriculture interests, had serious reservations about a CP-NS merger.

“The [alliance] remains concerned about rail mergers and their potential negative impact on pricing and access,” says Ann Warner, the group’s executive director. “At this point, CP has not provided enough detail on its ‘open access proposals’ allowing us to comment specifically.”
The Steel Manufacturers Association, which represents 30 North American steelmakers, opposes rail mergers.

“We would consider this problematic for rail competition,” says Adam Parr, the group’s vice president of policy and communications. While the steel group is among the shipper associations that has been pushing for reciprocal switching — and most of its members are captive shippers — Parr says it’s not clear that what CP is proposing would offset the impact of further consolidation in the rail industry.

“We do want to see a healthy, successful railroad industry,” Parr says. “But it shouldn’t come at the expense of steel manufacturers and shippers.”

To win the backing of shippers and regulators, CP says the combined railroad would provide a certain level of open access. If the combined CP-NS system failed to provide adequate service or competitive rates, it would allow another railroad to serve affected shippers.

Speaking at an investor conference in Toronto on Tuesday morning, just hours before the deal was announced, CP President and Chief Operating Officer Keith Creel said the railroad would not fear some form of open access. “If I can’t serve a customer in my backyard...then shame on me,” Creel said.

Shippers have long sought reciprocal switching agreements and other forms of open access through legislation or regulation. The railroads have vigorously opposed what they call “forced access.”

“Consolidation with regulated access will degrade rail service and have a negative long-term impact on the U.S. economy,” UP spokesman Aaron Hunt says. “It wastes capacity and does not increase it. It is inherently inefficient. It increases overall costs. It reduces a railroad’s ability and incentive to make capital investments.”

Neither the Association of American Railroads nor the other Class I railroads would comment on CP’s open access proposal. But in May, AAR President Edward Hamberger told a shipper conference that bills in Congress that would force open access would harm the industry, reduce revenue, complicate labor agreements, and discourage capital investment.

While the railroads have opposed government-mandated open access, does the equation change if a railroad offers its tracks to competitors? Robert Gallamore, a noted transportation expert and railroad economist, thinks so.

“It is a major difference,” Gallamore says. “Although I haven't seen and analyzed the CP proposals in detail, I think the major difficulties with open access remain as they were: Who is allowed access, where (i.e. which shippers should benefit and why), and what rules for operations, safety, and payment to the host should govern?”

Gallamore also questioned the rationale for a combination of the CP and NS systems.

“These issues aside, the trans-border, trans-continental implications of the CP proposal are difficult and troubling,” he says. “The very marginal benefits of such a large and risky transaction ought to cause regulators to pause, and to ask why is this needed, where is it leading, and is it in the collective public interest?”

CP CEO E. Hunter Harrison is scheduled to speak at an investor conference in Florida tomorrow afternoon, where he is expected to pitch the benefits of an NS acquisition.
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