B&E: Expert Assures Enhanced Competition

Competition will be enhanced by ensuring the independence and neutrality of PAS from CSXT as a means to reach New England rail shippers

In his Amended and Supplemented Verified Statement, William F. Huneke, former STB Chief Economist and a recognized consulting authority on railroad economics, presents his determination that Berkshire & Eastern (subsidiary of Genesee and Wyoming) will improve and enhance competition on the Pan Am Southern lines, as their dedicated contract operator. For Huneke’s discussion of four points underpinning his belief that CSXT’s acquisition of PAR will be strongly pro-competitive that will “ensure and enhance] sustainable and competitive freight rail and transportation in New England,” go to the Amended and Supplemented Verified Statement of Dr. William Huneke.

Huneke asserts that B&E, an operating entity of G&W’s Pittsburgh & Southern, will bring to PAS the extensive and generally successful operating experience that G&W railroads are known for. This includes considerable corporate support in the forms of nationwide operating experience, a well-maintained asset base, strong policies, technology implementation, management development, etc. Backed by shared ownership between CSX and NS, B&E rightly can be expected to operate PAR as a more reliable, safe, and consistent railroad than was possible under PAR subsidiary Springfield Terminal (ST). In their Settlement Agreement, CSX and NS have enshrined numerous safeguards to ensure that B&E operates PAS in a neutral manner, that will preclude any concerted competitive action with the other G&W railroads served by PAS. In particular, B&E will ensure Vermont Rail System will enjoy the same qualities of PAS service, pricing, and access as currently under ST. Most importantly, B&E will operate PAS such that shippers and connecting carriers can take full advantage of CSX’s and NS’s deep reach into national markets. G&W is widely considered to be a highly professional organization, and there is no reason not to expect B&E to apply its advantages evenly and meet its contracted assurances .

From the Verified Statement:

[Point] 4. PAS will be strengthened by B&E’s operations 

“CSXT and NSR have agreed that … the B&E will replace Springfield Terminal as the contract operator and rate-setter of PAS. The operation of PAS by B&E will enhance competition in several ways.

First, PAS is currently operated by Springfield Terminal (ST), which also operates and sets prices for movements on PAR. When B&E replaces ST … operating and marketing attention will be exclusively focused on PAS … . B&E will be obligated under the contract with PAS to operate, price and market PAS in the interest exclusively of PAS as an independent entity. B&E will be required to set rates that are “competitively neutral” and not discriminate in favor of any carrier, including B&E’s G&W affiliates. Competition will be enhanced by ensuring the independence and neutrality of PAS from CSXT as a means to reach New England rail shippers.

Second, adequate maintenance of PAS lines will be ensured by the replacement of PAR by CSXT as a 50% owner of PAS. Adequate maintenance of the PAS lines is essential to the availability of PAS as an independent competitor, as the STB acknowledged when PAS was formed. The STB [then] noted that the creation of PAS ‘would significantly increase competition …’  Under the existing arrangements, ST is responsible for maintaining PAS. But … ST also has the responsibility for operating PAR lines, creating potential distractions and conflicts for ST’s maintenance of PAS. But B&E will focus its attention exclusively on the maintenance of PAS. Moreover, adequate funding of maintenance is assured because the two owners of PAS will be large Class I carriers that are committed to maintaining PAS as a viable and independent rail route into New England, and who have reserved the right to perform capital maintenance work of the PAS lines.

Third, B&E is owned by G&W, and G&W has proven expertise in operating regional railroads. Separating PAS operations under B&E from operations of PAR will make PAS more efficient and cost-effective in many ways. For example, the overhead costs of operating PAS are incurred today by ST which also incurs overhead costs for operating PAR. Since a portion of the combined PAR/PAS overhead costs must be allocated to PAS, PAS’s overhead costs are now influenced by costs associated with PAR operations. This creates potential volatility in overhead costs, where cost changes are driven by events and circumstances on other lines, i.e., on PAR. It is also much harder to manage overhead costs when those costs are part of a larger rail network because those costs are not strictly linked to operations on PAS. B&E will be able to manage and control overhead costs much better with PAS operated separately from PAR.

PAS will also be more efficient in the areas of pricing and operating decisions. Under the current PAS structure, ST makes all decisions regarding PAS pricing and operations. For Movements that use both PAR and PAS, there is currently a formula for allocating the through revenue between PAS and PAR. As an independent operator of PAS, B&E will be able to efficiently price movements on PAS in the interest of PAS as an independent rail carrier, subject to the commitments the PAS co-owners have made to shippers and connecting railroads. Similarly, as to operations, B&E will be able to make operating decisions, including the many factors that influence efficient operations like maintenance, based solely on the needs of PAS and its customers (as well as passenger carriers with which it shares facilities).

B&E also can be expected to improve PAS operations because it is part of a larger corporate family that has broad experience in running smaller railroads in different regions, including New England. The safety and operating record of G&W railroads is very encouraging. The G&W railroads operating in New England (NECR, St. Lawrence & Atlantic Railroad, Providence and Worcester Railroad and Connecticut Southern Railroad) had an FRA reported injury ratio of [REDACTED]. In comparison, PAR’s combined ratio was [(presumably higher – Ed.)] for the same period. Improved operations on PAS will make PAS a more competitive route for traffic into and out of New England.

Fourth, as Dr. Reishus has pointed out in his statement (link), PAS will remain viable even with the diversion of NSR intermodal trains to CSXT’s line. Indeed, PAS’s financial condition is likely to improve. As Dr. Reishus explains, the diverted NS intermodal traffic generates only [REDACTED]. Moreover, all NS intermodal and automotive traffic will still come to Ayer and PAS will receive compensation for handling this traffic. PAS will also receive an increased reciprocal switch fee for certain traffic in the Ayer switching district. Finally, under Term Sheet Agreement (Section III.1), B&E will charge PAS a fixed rate to provide equipment and certain corporate services that will give PAS the opportunity to substantially reduce PAS costs.”