26.August, Washington DC – A Comment submitted by the U.S. Department of Justice under STB Docket #36472 conveys the Administration’s explicit distaste for a major part of CSX’s plan for Pan Am Railways, the carefully-crafted proposal for a G&W subsidiary to operate the Pan Am Southern system.
The Comment’s very first line cites the 09.July Presidential Executive Order on Promoting Competition in the American Economy as its impetus for cannonballing into the pool (See ANRP PREZ: Competition Order In the Wrong Lane). Justice lauds STB for already having applied unprecedented scrutiny to the proposed deal, but laments the Board’s 30.July Decision to accept CSX’s third Revised Application for Control and Merger, which includes what Justice considers to be this paradox: “complicated contractual [remedies for reduced competition along PAS, that in turn create …] entirely new [anticompetitive] issues on a different portion of the PAS line.”
The Comment focuses on the Application’s inside-out solutions for the deal’s potentially anticompetitive aspects, i.e., 1. that CSX would own in whole (Southern route, B&A) or in half part (Northern route, B&M) both of the region’s east-west main lines, and 2. putting PAS in the hands of a G&W subsidiary (Berkshire & Eastern) to alleviate that conundrum creates a similar domineering lock on regional north-south access.
“In the Department’s view, the proposed remedies do not accord with best practices, and … will not fully address the competitive concerns posed by the CSX-Pan Am transaction. The Department recommends that the Board instead consider … a carefully crafted divestiture. Unlike the complicated contractual arrangements proposed [in the Application and related filings, such] structural remedies tend to be cleaner, more efficient, more durable, and easier to enforce, and they reduce the likelihood of ongoing entanglements that can further harm* competition.”
(*Translation: DOJ sees the Application in its current form as anticompetitive -Ed.)
Excerpted and edited from the DOJ Comment:
Best intentions are the worst guarantees
“CSX and Pan Am have [contracted to allow] NS to access the [southern] track on a limited basis. Contractual commitments between merging competitors to reduce the harm from a transaction are at best a band-aid. [Such] commitments … can be breached, often without any recourse or remedy …
“[The] CSX-NS agreement includes imprecise [and] vague terms [that allow] CSX to delay or veto the … operation of NS traffic on the CSX route (see Application at 434-38), [and] compromises competition on this route by further entangling two close competitors [which] may lead to problems down the road, when it may be more challenging for the Board to address … . [In the event that CSX hardens the terms] harm will not just be to NS, but [also to] those customers who previously relied on robust competition … .
“Alternatively, CSX may use these entanglements to soften its competition with NS to the detriment of shippers … The two companies may … compete less aggressively, as they both stand to profit from higher prices and reduced service quality. Because customers have no alternative to the CSX-NS duopoly on this route, it is ripe for coordination and competitive harm.”
Recommendation: CSX divests its PAS share
“[DOJ prefers] a structural remedy involving the sale of Pan Am’s stake in PAS to [an alternative PAS operator]. Structural remedies … are clean and effective; [they] avoid ongoing government entanglement in the market, [and preclude imposition of] unnecessary risk to the viability of a remedy. [A] structural remedy would better preserve existing competition … by minimizing the need for [unclear contractual] arrangements.
“[DOJ’s concerns] may be alleviated by a sale of CSX’s stake in PAS … Indeed, [CSX and NS’s] agreement … contemplates such a sale to NS [by exclusive right] for seven years and an ongoing right of first refusal [thereafter]. A structural remedy at this juncture would merely accelerate this process while preserving current competition.
“[An alternate PAS] purchaser would also avoid creating new competition issues in the Knowledge Corridor. [A] buyer unaffiliated with G&W could maintain the independent competition between G&W and PAS on the NECR line.
“[DOJ] knows that, [if] the Board determines a remedy is required, … that a carefully crafted structural remedy has a much greater likelihood of successfully preserving competition than contractual or conduct commitments.”