Kansas City Southern and Future Freight Rail Regulations
A potential "NAFTA super-railway" faces scrutiny from the U.S. government
America’s freight rail network has long been the envy of the logistics world—a collection of “Class I” railroads that move vast tonnage over wide areas. The system has benefited from the Staggers Rail Act, which in 1980 removed government control over rates and pursued other deregulation. And it has benefited from the North American Free Trade Agreement (NAFTA), which allowed more trade between Canada, the U.S. and Mexico—much of it by rail. But the system is still highly regulated, with the latest reminder being the anti-trust battle that may play out over two Canadian freight companies for the rights to Kansas City Southern (KCS).
KCS connects parts of the Midwest with Texas, Mexico and Panama. Founded in 1887, it has a market cap of $27 billion. Canadian National (CN) and Canadian Pacific (CP) are the two primary freight railroads in Canada, each with significant reach into the U.S. The companies are making competing offers to buy KCS, each hoping to dominate the market and touting the benefits of their network effects. Initially, CP was the only party, offering over $25 billion for the American carrier. But early in April, the Montreal-based rival changed the game with a competing $33.7 billion offer.
If either merger were to happen, it would create a “NAFTA super-railway” that connects KCS’ already-extensive network with Canada’s ports and heartland. But only if this pleases U.S. regulators.
The Surface Transportation Board (STB) is the main entity in charge of regulating freight railroads. While diminished in authority by the landmark Staggers Act, the agency can still prohibit freight mergers on behalf of antitrust goals, and has in fact put a moratorium on mergers since 2001. But in April, STB announced that it would make the approval process easier for CP to buy KCS. This angered CN, and the two Canadian companies are going back-and-forth about which of them should get federal approval from the U.S.
It also angered the feds themselves. The U.S. Department of Justice, which has its own authority in merger authorization, has urged STB not to allow the deal, calling it “a mockery” of government authority.
“It is the duty of the Board to determine whether a merger of two railroads would harm competition,” wrote DOJ in a letter.
Freight industry consolidation has long been a concern for regulators and politicians. Some of the earliest anti-trust cases in American jurisprudence tied back to complaints about high prices for rail, helping inspire the Sherman Anti-trust Act.
A previous attempt by CP to purchase another U.S. railroad, Norfolk Southern, was successfully opposed in 2016 by organized labor. The AFL-CIO called the merging efforts part of a trend that had a “devastating impact...on jobs, freight service and safety.”
Democratic West Virginia Senator Joe Manchin, whose state is served by Norfolk Southern, was also critical, calling for heavy federal oversight. The merger attempt was ultimately rebuffed by Norfolk Southern.
But railroad companies, investors, and deregulation supporters argue that the benefits of consolidation include greater economic and environmental efficiency. A Competitive Enterprise Institute brief calls the charges of an anticompetitive market inaccurate, noting that the number of “captive shippers”—those who cannot realistically use a competitive option—is very small. Brookings economist Clifford Winston argues that the STB itself imposes a greater burden on shippers by intensely regulating prices, and that rate regulation should be eliminated. Ethan Finlan, writing for Market Urbanism Report, found that post-Staggers, U.S. rail carries 81% more ton-miles of freight.
The decision that regulators make in this Kansas City Southern bidding war could have ramifications for railroad anti-trust policy, and the larger industry. In their zeal to prevent a handful of firms from capturing a subjective level of “too much” market power, policymakers squelch market forces overall. This fight between two Canadian firms that should be premised on competitive advantage instead hinges on lobbying and the whims of different bureaucracies. Meanwhile, U.S. history has shown—through the Staggers Act, NAFTA, and other policies—that the more the freight rail industry is liberalized, the better it does.
This article featured additional reporting from Market Urbanism Report content staffer Ethan Finlan.