PAR Sale: Seeing the Fundamental Issue

Giving New England's Class III railroads a stake in the revitalized rail network is not incompatible with CSX's strategic objective to complete a northeast land bridge between Port of Saint John NB and the interior.

On 25.May, the STB gave CSX a second Incomplete grade for its Application to acquire Pan Am Railways, forcing CSX to attend summer school and develop a third iteration of the Application to merge with Pan Am Railways. Will it yield the charm this proposed transaction desperately needs?

The Board’s explanation of the ruling provides a very specific list of what it still needs to see from CSX before it can dutifully evaluate the proposed transaction. The re-re-do assignment boils down to providing thorough analytical proof that competition and service will not suffer over what will be a quasi-monopolized New England rail network. The Board’s concerns seems primarily to be the Pan Am Southern routes that literally form the crux of the PAR system.

B&E’s (G&W) original 25.Feb Petition for Exemption proposed changes to current control of PAS lines.
LEFT: Currently, VRS enjoys seven interchange connections: three with PAS (Bellows Falls VT, Hoosick Jct. NY, and Whitehall NY (via BKRR to Eagle Bridge NY). VRS also interchanges with CP at Newport VT, and maintains three connections with NECR at Essex Jct., Bellows Falls, and Montpelier VT (Barre granite spur).
RIGHT: As proposed originally by B&E, six of VRS’s seven connections would be with G&W-controlled lines.

Stuck in a minor key?

CSX’s 25.Feb.2021 Application for a Minor Transaction nominated Genesee & Wyoming pup subsidiary Berkshire & Eastern (nee Pittsburgh & Shawmut) to succeed Springfield Terminal as the independent operator of Pan Am Southern. With B&E’s associated Petition for Exemption and other related filings, the Board received a thoroughly lawyered, rubber-stamp-ready document pile. The submission has met an unexpected level of scrutiny.

Will getting sacked twice open the necessary eyes in Jacksonville and Darien? Do they now see how the as-presented transaction threatens the competitive integrity of Vermont’s independent rail network, despite the many promises not to? Can they structure the transaction to be good for shippers and the Class III operators?

No-brainer

Apart from a few social media cranks and those with valid interests to protect, no one thinks branding the bulk of New England’s rails with the CSX logo is a bad thing, in any way. Pan Am is to be thanked, without irony, for saving New England railroading (while also making a pile of money), but the Guilford/Pan Am era has run its course, bereft of any vision or interest to meet the region’s trade/industrial revitalization.

Pan Am’s legacy makes it easy for CSX to be a hero to the region’s shippers, developers, and connections. Having come out the other side of PSR, CSX is a strong operator, committed to fulfilling obligations, maintaining a high state-of-good-repair (Can we just acronize this to “SOGR” from this point? – Ed.), and running well-maintained equipment.

As the PAS sheds its Patriot Corridor pretensions, it will revert to being the backbone of a low-density Class II railroad, with opportunities for growth. Such leftovers are top quality ingredients for making G&W’s alphabet-soup recipe, and objectively, it’s a perfect match.

And these two well-heeled players look great in the big picture. They will attack the vast stretches of class 3 or excepted Pan Am freight track that need to be completely rebuilt to truly integrate the region into the national freight network. Adequately funded, that investment will have profound effects on our region’s economy, and possibly reverse decades of deindustrialization and railroad demarketing.

So what’s the problem?

G&W’s 2016 acquisition of the Providence & Worcester Railroad established a dominating position over New England North-South rail traffic. But traffic between Connecticut ports and Quebec saw mills didn’t threaten to produce any vast fortunes, and the G&W New England “system” has more often stood ready for surging traffic than rushed to keep up with it.

No fault was found with the P&W acquisition, but by the 2018 sale of G&W to Brookfield Asset Management, Board Member (now, Chairman) Oberman commented apart from the majority, postulating that G&W’s diffuse mass qualified it as a heavyweight, overmatching the welter division it technically weighs into:

Because this transaction meets the [technical] requirements of … the class exemption process, I [vote to approve the transaction, but also] express my concerns with the use of the class exemption process for transactions of this magnitude.

GWI’s North American operations [span] 41 states with over 13,000 track miles … serving a large number of shippers and receivers [as] essential links in the national rail network. … [If] GWI were itself a rail carrier, its North American operations would clearly make it a Class I carrier …

… [This] proceeding raises significant questions regarding whether transactions of this magnitude were contemplated when the class exemption regulations were adopted, and … whether it is appropriate for such major transactions to be eligible under those regulations … . While I agree that … this transaction may proceed as a class exemption, I do think the Board should consider in the future whether the exemption process should be applicable to transactions of such scale.

B&E’s 26.Apr Amended Petition proposed granting haulage rights to VRS (green lines): 1. Between Hoosick Jct and Mechanicville/Rotterdam NY, 2. Between White River Jct VT and E. Deerfield Yard MA. VRS already possesses haulage rights on NECR between WRJ and Palmer (brown dotted lines).
The RJ/XO access would interchange directly with CSX (RJ) and NS (XO). The ED access allows VRS direct access to its stored propane inventory.

Missed signals

That CSX and G&W blew through that signal could be construed as arrogance, but more likely betrays an obtuseness that overlooks the peculiar stakeholder attitudes of the region. As if to make sure we knew that they didn’t get the point, G&W’s 26.April Amended Petition made only out-patient changes to B&E’s proposed control of PAS, granting certain haulage rights to VRS. We can only assume by their second “Incomplete” ruling on the Amended filings, that the Board found these concessions failed to allay concerns about diminished competition in Vermont, and access for VRS.

Hopefully CSX’s Revised Amended Application, scheduled to be filed by 01.July, according to a 28.May letter (but technically not due until 26.Aug), will fill in the missing information specified by the Board, including such hard questions as, how a two-to-one service reductions in Vermont don’t harm competition, and how a regional operator can perpetually equalize operating circumstances between its own and a competitor’s trains. Acceptable answers to those questions may arise from the greater rigor CSX is applying to the Revised Amended Application {Waybill Request WB21-39}. But can more research iron out the fundamental challenge? Namely that, the transaction as proposed spells doom for VRS.

‘Twas ever thus

Industries and markets thrive on competition. Corporations hate it, and eliminating it is their strategic priority. Today, tech companies “engage their peers;” in the railroad industry’s heyday, the same sentiment was more quaintly expressed as, “crushing our rivals.” In our time, the STB polices those impulses on an almost granular level, representing the opinions and objectives of the tiniest shipper, and metering the ambitions and arrogance of the biggest carrier.

The STB does an excellent job of maintaining a level playing field within the rights of way. But where a big corporation’s objectives are constrained, it finds other ways to press its advantage. Among the tools that make G&W such a successful railroad company are its ability to shift its superior physical assets and its broader base of expertise to provide a maximally efficient service where it is deemed desirable. For any company in any industry, that desired place is most often where there is effective competition. It’s not good or bad, it’s just business. G&W has built itself along a philosophy of conglomeration governed by coordinated decentralization. Among its chief characteristics are flexibility, adaptability, well-developed strategic purpose, and the patient ruthlessness that derives from detached ownership.

For all of its great customer relationships, extra miles gone, state partnership, salt-of-the-earth management, and local experience, VRS does not approach the level of corporate development that B&E will bring to its first-ever day of railroading as the operator of Pan Am Southern. On an open mat, VRS could hold its own against B&E, which is slated to be, effectively, a Class II carrier with Class I resources. But in a cage with G&W at six doors, VRS has no chance, no matter how much operational fairness is imposed by the STB.

Little bumpkin railroad B&E may hold its rates equal with VRS, but its G&W parent will rightly, always support its goals to offer shippers a product that is superior in less-tangible ways: superior resilience in harsh weather, more convenience in transacting business, single-line billing, car storage and access, etc. VRS won’t be driven out of business – the “independent competition” it presents will always be politically valuable – but it will be enthralled (literal use – Ed.) to G&W, and its prospects perpetually limited.

The blind men and the elephant

Can we see clearly now?

Giving New England’s Class III railroads a stake in the revitalized rail network is not incompatible with CSX’s strategic objective to complete a northeast land bridge between Port of Saint John NB and the interior. G&W is a logical choice to make a success of being New England’s Class II railroad. But these good things can’t come at the expense of the region’s Class III operators and opportunities. G&W could upgrade its concessions to VRS by granting direct access to East Deerfield.

And while we’re at it, CSX should allow VRS to acquire rights or ownership to Nashua (at least) to boost its New England Southern acquisition. And maybe a better idea of CSX’s plans to dispose of PAR’s Maine and New Hampshire branch lines.

Long-haul focused CSX makes considerable efforts to encourage independent Class III operators, and should do so in New England by guaranteeing direct interchange for VRS, and bestowing the Pan Am eastern branch lines with the benefits of local control and service. Will such a proposal be the charm on 01.July?