Following the submission of the application regarding the proposed $85 billion historic merger between Class I railroads Union Pacific (UP) and Norfolk Southern (NS), which was filed in December with the Surface Transportation Board (STB), two other Class I railroads, BNSF Railway and CN, have respectively filed motions, calling on the STB to require UP and NS to provide additional details in the merger application they say is needed.
CN said in its motion that UP and NS have not been upfront with their assessments and have failed to outline the full extent of competitive harms as a result of the merger.
“Given the scale and stakes of the proposed combination, the applicants must meet the highest standard of transparency and compliance,” said Olivier Chouc, Senior Vice-President and Chief Legal Officer, CN. “The information the applicants refuse to disclose is critical to understand their perspective on anticipated competitive harms and inform the Board’s public-interest and competition analyses. Rather than hide behind an inapt legal argument, the applicants should welcome the opportunity for a transparent and fulsome discussion about the merger’s impact on competition. Rather than trying to convince everyone that there is ‘nothing to see here’, the applicants should instead be focused on meeting the rigorous and heightened standard called for by the new merger rules.”
CN highlighted various gaps in the UP-NS application, including:
- Incomplete market analyses: Applicants neither disclosed the methodology and data underlying their claim that only three 2‑to‑1 shippers exist nor provided the full lists of 2‑to‑1 and 3‑to‑2 points as stated in the STB’s requirements;
- Missing projections for market shares by revenues and traffic volumes: Applicants did not provide required market share projections and omitted key traffic data in their analyses, undermining the traffic inputs for their Operating Plans;
- Incomplete network map: Applicants maps failed to depict certain trackage and haulage rights, including segments showing direct parallel or overlapping lines in watershed states, in what appears to be an effort to misportray the transaction as “end-to-end” and deprive the Board and parties of essential competitive context. Applicants have since conceded their error and have filed a new map; and
- Failure to propose competitive enhancements – Applicants claim this issue should be dealt with at the merits stage. While adequacy of proposed remedies might be a merits issue, the failure to meet a basic regulatory requirement is a completeness issue. Applicants offer nothing to enhance competition and their application should be deemed incomplete.
In its motion, BNSF explained that if the proposed transaction proceeds, it will irreversibly shape American railroading for decades, adding that UP and NS want exemptions from the most basic discovery obligations and have not provided basis information that stakeholders and the STB need to test UP and NS’s contentions, including board materials, banker, presentations, and relevant internal e-mails.
“In other words, UP and NS are blocking efforts to see what they actually believe and discuss internally: whether the merger will hurt competition by reducing service or leading to higher rates for shippers; whether the executive teams actually believe the merger will enhance competition; where the integration could go awry and cause disruptions; and whether the purported benefits are achievable at all, or alternatively, achievable absent a merger,” said BNSF.
The BNSF motion added that despite months to prepare, UP and NS have collectively produced 1,653 documents, noting that much of UP and NS’s productions to date concern lease agreements and contracts with regional or short line railroads—not the core materials that are needed to test the contentions in the Application.
In a customer advisory, Tom G. Williams, BNSF Executive Vice President & Chief Marketing Officer, explained that the merger poses serious risks to competition, service, and shippers’ supply chains, including:
- Unrealistic Growth Promises—The combined volumes of UP and NS have declined by 13% over the past decade. Yet UP now promises 12% volume growth in just three years, almost entirely from converting truck shippers to rail shippers. STB statistics show that UP already gets more of its revenue from high rates than any other Class I railroad. When this truck conversion growth doesn’t materialize, you will pay their merger premiums with higher rates;
- Gateway Commitments That Don’t Deliver—UP’s proposed protections are a Trojan Horse designed to get their application approved. BNSF’s customers have learned firsthand that CPKC gateway conditions are not effective. And the Committed Gateway Pricing concept proposed by the UP excludes almost all shippers—only 0.4% of all rail freight would be eligible. Plus, it expires within a few short years, leaving you vulnerable to monopoly pricing; and
- Integration Risks—Every major rail merger has caused service disruptions. UP and NS’s “trust us” approach offers no fundamental safeguards against severe supply chain disruptions on a much larger scale. The last time UP led a merger integration in 2008, the STB had to extend its oversight period twice due to the congestion issues it caused in Chicago.
In a research note, Jason Seidl, TD Cowen analyst, wrote that in a railroad roundtable his firm hosted that participating roundtable panelists expect the UP-NS merger application to pass STB review, with delays in the process not viewed as surprising.
“Even panelists that expressed concerns believe the application will ultimately pass,” wrote Seidl. “Our large shortline panelist thinks additional detail is necessary for him to get confidence on competitive impacts, especially as it relates to the proposed Committed Gateway Pricing (CGP). Similar pricing schemes on the I-5 corridor have had very little uptake from. As such, delays in the review process would not be surprising though we note that the panelist did not explicitly speak to the application being returned in entirety to the Class Is. Both shippers concurred that more detail on CGP is necessary as both ship carload/manifest and maintained that the benefits to them are not as obvious as those for their auto and intermodal counterparts.”
