PAS: Vermont Opposes G&W Control with Prejudice, Part 1

"The choice for Applicants is clear – present a truly competitive alternative, or face rejection of the application."

27.August, Montpelier VT – Vermont DOT (Vtrans, representing the State of Vermont) filed a stern Comment in Opposition to the CSX Revised Application to acquire Pan Am Systems. On the same day, Vermont Rail Systems filed their equally indignant Reply in Opposition to Pittsburgh & Shawmut’s (subsidiary of Genesee & Wyoming) Petition for Exemption to operate Pan Am Southern (PAS).

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.

VTrans and VRS have engaged in discussions relating to the acquisition since December.2020 (and we will assume that VTrans’s engagement has been roughly contemporaneous – Ed). From the beginning, all parties acknowledged that the divided ownership (CSX and NS) of PAS would necessitate the designation of an impartial, independent operator and agent on that line (see PAS map). Since the earliest discussions, VRS has emphasized their opposition to a G&W-affiliate to operate PAS.

Deaf, or just not listening?

CSX did designate a not-yet-trucked-up G&W affiliate (Berkshire & Eastern), despite numerous explicit anticompetitive and oppressive potential effects on VRS. CSX and the Vermont entities continued to negotiate a mitigation of the Vermont concerns. As late as 18.August, CSX sources assured ANRP that they were “optimistic that we will reach an agreement,” which based on a pattern of obtuseness, may be true. The effort failed by the following week.

(ANRP analyzed the anticompetitive issues that G&W’s designation potentially imposes on VRS in PAR Sale: Seeing the Fundamental Issue {ANRP, 18.June})

VTrans and VRS’s filings invoke substantially similar arguments, though with some distinctions of perspective. VTrans owns the lines on which VRS operates.

 

Can you hear me now?

In its 27.August filing, VTrans requests the STB to deny CSX’s Application as proposed on established statutory grounds in support of its explicated responsibility to the Vermont public interest:

“[State of Vermont] has consistently stated ever since the Applicants first presented any information about CSX’s proposal to expand its presence in New England and to re-arrange the railroad map to its advantage and that of its co-applicants, [that] the shipping public in Vermont will not only not see the advantages of the myriad proposals but will be distinctly harmed by the reduction in competition.” (emphasis added by Ed.)

Excerpted and edited from COMMENTS OF THE STATE OF VERMONT IN OPPOSITION TO THE APPLICATION (with Ed.’s interjections):

“[The CSX] control transaction and the B&E Petition are not consistent with the public interest because, if implemented, they will lead to a reduction in competitive alternatives for rail shippers in Vermont. [The] Board’s rules and case law [preclude approval of] a transaction that harms competition rather than promoting it.

“[There] is a way … to save the transaction. The Board could … protect competition at [key Vermont] gateways and corridors … by [designating] a carrier that is completely independent of both Applicants CSX and NS) … and of G&W and its affiliates.”

The song remains the same

At issue in Vtrans 27.August Comments are the same clutch of related problems identified in its 17.March “Opposition to Application and Preliminary Comments,” and again in its 22.March “Reply to Applicants’ March 18, 2021 Response to Initial Comments”:

“1. Applicants’ voluntary agreements failed to address the 2-to-1 reduction in competitive services the transaction would have in Vermont (March 22 Reply, at 3-4); and,

2. Applicants’ voluntary agreements alone do not overcome a 2-to-1 reduction and the factors that make such agreements acceptable do not exist here; and,

3. Applicants have not acknowledged or addressed the recent attempts by GWI  subsidiary New England Central Railroad (“NECR”) to render the existing trackage rights held by Pan Am Southern over NECR uneconomic, which if successful would have effectively reduced competitive services from 2–to-1 in the Connecticut River Line corridor. March 22 Reply at 4-5. By giving a GWI subsidiary operating rights here, GWI would find itself in a position where it could once again attempt to eliminate viable competition along this corridor.”

Chapter and verse

Vtrans Comments rest heavily on reading the Rules of the Game to the Board:

Citing Section 49 U.S.C. § 11324(d)

[In] a proceeding … which does not involve the merger or control of at least two Class I railroads … the Board shall approve such an application unless it finds that—

(1) as a result of the transaction, there is likely to be substantial lessening of competition, creation of a monopoly, or restraint of trade in freight surface transportation in any region of the United States; and

(2) the anticompetitive effects of the transaction outweigh the public interest in meeting significant transportation needs.

[The combination of transactions presented here will do precisely that // [and the Board must thereby deny the Application, or impose conditions to ameliorate the reductions in competition at key interchange points in Vermont.]

Citing Policy Statement 49 C.F.R. 1180.2(c)(i):

Prevent reduction of competition. [Even where] railroads [face] vigorous intermodal competition, mergers can deprive shippers of effective options. Intramodal competition can be reduced when two carriers serving the same origins or destinations merge. Competition arising from shippers’ build-out, transloading, plant siting, and production shifting choices can be eliminated or reduced when two railroads serving overlapping regions merge. Competition in product and geographic markets can also be eliminated or reduced by mergers, including end-to-end mergers.

Applicants shall propose remedies to mitigate and offset competitive harms. Applicants shall also explain how they would at a minimum preserve competitive and market options such as those involving the use of major existing gateways, build-outs or build-ins, and the opportunity to enter into contracts for one segment of a movement as a means of gaining the right separately to pursue rate relief for the remainder of the movement (emphasis supplied).

(Thus, failure of Applicants to propose remedies would constitute discrete basis for denial – Ed.)

“[The Board’s responsibility] to 49 U.S.C. § 11324 and 49 C.F.R. Part 1180 [manifests in scrutinizing] so-called “2-to-1” situations … It is the longstanding practice of the Board and its predecessor, the Interstate Commerce Commission (“I.C.C.”), to impose conditions or otherwise seek solutions to preserve [competitive] service where it exists.

“[Precedent exists where] … a cogent argument [is presented] that a 2- to-1 situation exists and that the Board can remedy the situation [by imposing] conditions on the merger to avoid such anticompetitive effects.

In a nutshell

Vtrans Comments include as Exhibits Verified Statements by DD, and Cunningham. These several excerpts from Cunningham’s VS clarify the State of Vermont’s assertion that the regional benefits of the Transaction, as proposed in the Application, do not outweigh the detriments to Vermont:

33. The applicants and witness statements in this filing have made two arguments in an attempt to relieve the concerns VTrans has with GWI operating PAS. The first is that the voluntary conditions agreed to between GWI, CSX and NS (“The Parties”) will preserve competition for Vermont shippers and VRS. The second is that the 3 parties have a vested interest in preserving the viability of the PAS as their operations depend on the line and the Class I’s collectively own the line.

34. These conditions may seem compelling on their face but in practice I see several issues with their ability to preserve competition and optionality. First, the conditions in the Term Sheet governing GWI’s operation of PAS independently are circumvented by Section V.(6) which discusses GWI’s and the Class I’s acknowledgement and acceptance of GWI’s ability to intertwine PAS’s operations with those of GWI’s other railroads in the region. This leaves the door open for GWI to combine operations between PAS and NECR for instance (absent conditions imposed on them by the STB).

35. In another commitment made to appease shippers and connecting carriers of GWI and PAS, conditions requiring GWI to set rates in an indiscriminate manner are caveated with the ability for GWI to discriminate based on, “mileage, density and similar operating characteristics.”[footnote omitted] Should VRS “density” or volume not adhere to GWI’s metrics (or the metrics CSX and NS impose on them), GWI will have the ability to change rates or levels of service. If this happened today, VRS would have a third-party competitor to rely on in the alternative but should the transaction take place as proposed, VRS’s recourse is only to turn to another GWI subsidiary or an inefficient and more costly route via CP. In other words, the delicate competitive balance that has been established and is working well is now destroyed beyond redemption.

36. The Parties also have committed to allow B&E to establish rates on existing lanes for customers at current levels as of the date of the proposed transaction. [footnote omitted] It’s unclear to me how this will be established from the descriptions filed but in interviews with VRS management they discussed how volumes have been depressed over the last several months as interchange frequency has dwindled on the PAS, presumably due to resignations accompanying the news of the pending takeover. In addition, the Covid-19 pandemic has taken a toll on various commodities over the last year and a half. Taking a snapshot of commodities and volumes at the time of the transaction hardly seems like a fair way to ensure pricing competition between two railroads operated by the same owner. Will artificially lowered volumes over the last year and a half cause artificially high rates that VRS is stuck with going forward? How will GWI ensure pricing competition on new lanes or volumes over and above those captured at the time of the transaction? And what incentive does GWI have to compete with itself on the Patriot Corridor and, in particular, along the Conn River line where VRS enjoys two interchange carrier today? These issues illustrate the incomplete and/or inadequate remedies proposed to alleviate the competitive concerns of VTrans and its operator.

37. Regarding the vested interests of the Parties to keep PAS viable, data shown in Tables 14 and 15 of Dr. Reishus’ statement show that the majority of traffic operated on PAS today is haulage service on behalf of NS. Since that proffered volume of traffic alone is sufficient to make PAS viable, even absent any revenue derived from adequate service to connecting carriers like VRS, it is pretty apparent that the applicants could care less about the competitive framework established as a result of the transaction and whether or not VRS can remain viable given the unlevel playing field that is its inevitable result.

38. The proposing parties make no attempt to address the competitive issues related to GWI enjoying a near monopoly on interchange with VRS in contrast to the status quo that their proposed transaction would create. Today, VRS has the ability to route traffic to/from Hoosick Jct. to connect with PAS for furtherance to/from NS and CSX. The competitive status quo gives VRS the ability route commodities that it competes with NECR on through channels that don’t allow direct competitors to see volumes and, in some cases, rates. In contrast, if GWI takes over the operations of PAS, it leaves VRS with only less efficient routings via CP to prevent GWI from exploiting its access to competitive information. This is particularly concerning as the best predictor of the future is the past. As I mentioned above, GWI attempted to gain competitive information on interchanged volumes to/from VRS when re-negotiating its trackage rights agreement with PAS in 2014. This seems akin to NS having to interchange all of its traffic with CSX to get to BNSF or UP in the west. In this hypothetical, CSX would not know the rates under which NS traffic was moving but it would see the commodities and volumes to obtain a much better picture of the overall market. NS would never tolerate that commercial disadvantage and neither can VRS. But, in fact, VRS is being asked to tolerate an even less competitive commercial marketplace, one in which its competitor will have access to its rates. That combination of market disadvantages, which will be inevitable if the proposed transaction is consummated as proposed, is highly detrimental to competition and the vital piece of Vermont’s economy dependent on its state-supported rail infrastructure.

39. In the applicants’ Statements, much is made of the end-to-end nature of the transaction and the competitive benefits of the proposed merger supposedly flowing from single line service. While my focus was specific to the “Related Transactions,” in reviewing the documentation I can see several advantages associated with the merger to go forward. Much like the prior transaction, facilitating joint operation of PAS between NS and B&M several years ago, I can see many aspects over the overall transaction benefiting the New England region and increasing competition. CSX’s concession to find a third-party operator I see as a sound remedy to preserve competition between NS and CSX. They’ve addressed 2-1 shipper concerns in the Boston area and they’ve given GWI another railroad to operate in the New England area (should the related transaction be completed).

40. In short, they’ve addressed the concerns of interested/concerned parties in many/most cases. However, they have not done anything to preserve competition in connection with the State of Vermont, VTrans or its contract operator, VRS. In fact, the opposite. The proposed transaction would not only reduce competition throughout Vermont, rail competition would be worse post-transaction than it was before ever NS invested in the PAS. Choosing GWI as the third party is the wrong choice. It gives the world’s largest shortline and regional railroad holding company another puzzle piece in the New England area where its presence is already one of, if not the, largest. Other shortlines and shortline holding companies that have the ability and credentials in the industry to operate the PAS in a truly independent manner. By choosing GWI, CSX and NS have solved one problem by choosing the course of least resistance but creating another which can only be fixed by selecting another operator of PAS.

 

Salvation at hand

“Remedies available to avoid 2-to-1 reductions include imposing conditions requiring the merging railroads to grant trackage rights to a viable competitor or, less commonly, ordering divestiture of parallel tracks owned by one of the two merging railroads. For example, in the [1998 Conrail] acquisition proceedings …, the Board [required] CSX [to contract with CN for certain rights] over the east-of-the Hudson line.

To avoid the harms that the [CSX-PAS] transactions as proposed would [visit on Vermont shippers] this Board should … require the Applicants to [designate a capable, disinterested,] independent carrier [to provide] a viable competitive alternative for interchange with the Vermont Rail System carriers to move traffic to and from Vermont.

“[Precedent invokes the Board to decline the approval of the transaction] where conditions or other remedies cannot be fashioned in a manner satisfactory to both the Board and the merging railroads to resolve the anti-competitive effects of 2-to-1 reductions.

“Thus, the choice for Applicants is clear – present a truly competitive alternative, or face rejection of the application.”