DOJ Asks Surface Transportation Board To Scrutinize $31B Rail Deal

The US Department of Justice’s (DOJ) Antitrust Division on Jan. 24 reaffirmed its “support for the [Surface Transportation] Board’s review process and careful scrutiny of the competitive implications of the proposed transaction” that would merge Canadian Pacific (CP) and Kansas City Southern (KCS). The railroads respond.

The two Class I railroads agreed to merge in September 2021; two months later, the STB accepted for consideration their merger application. The combined network, to be called CPKC (Canadian Pacific Kansas City), would extend from Canada, through the U.S., and into Mexico, and include approximately 20,350 miles of track, some 8,600 miles of which is in the U.S.

The STB in fall 2022 held public hearings on the question of whether CP and KCS should be permitted to combine, and under what conditions. A decision is now pending, following the upcoming release of the final Environmental Impact Statement from the STB’s Office of Environmental Analysis.

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The DOJ reported in its Jan. 24 filing (download below) that its interest in the merger proceeding stems from its mission “to promote competition in the American economy and because of the Attorney General’s statutory right to intervene in Class I merger proceedings.” It told the STB that it was writing “to emphasize the importance of protecting and promoting competition in the railroad industry, and to clarify the Department’s position on the proposed merger. …”

During the STB’s Sept. 28, 2022 hearing, “the applicants argued that the Board should infer that the Antitrust Division does not believe the transaction has the potential to cause harm,” the DOJ wrote. “No such inference should be drawn. In its initial comment [on the merger submitted to the STB in April 2021], the Antitrust Division encouraged the Board to ‘thoroughly examine the competition concerns raised by commenters.’ That filing made clear, among other things, that the Antitrust Division shares the Board’s serious concerns about increasing consolidation in the industry.

The consolidation of Class I railroads presents substantial concerns, including: (i) lessened competition among Class I railroads to attract new industry locations; (ii) reduced incentive to invest in research and implementation of important new technologies such as Positive Train Control; and (iii) the danger of industry-wide understandings and agreements that become more likely as the industry becomes more concentrated. The Antitrust Division emphasizes that the Board should not interpret the Antitrust Division’s absence from the Board’s September 2022 proceedings to imply otherwise.”

According to the DOJ, the President Executive Order on Promoting Competition in the American Economy “directs all agencies with authority over mergers to consider their role in promoting competition. Class I freight rail was a significantly concentrated industry before the proposed transaction. In light of the trend toward concentration in the industry, the Board should carefully consider the competition impacts of further consolidation. This is especially relevant in light of the recent supply chain disruptions that have wreaked havoc on American consumers and businesses. Freight rail connects us, from farms to cities, and from the ports through the heartland, and carries the goods that Americans depend on. Competition in this critical infrastructure is essential. The Board should scrutinize any transaction that could weaken our freight rail system.”