Stakeholders Detail Worries, Support On CSX Plan To Acquire Pan Am Railways

Ensuring competitive access and fortifying passenger rail service are two of the goals that stakeholders want the Surface Transportation Board to achieve as it mulls CSX's proposed acquisition of New England short line Pan Am Railways.

Opponents and skeptics about the acquisition want STB to make CSX (NASDAQ:CSX) fulfill a number of conditions as part of its approval — if the board approves the application at all — according to their recent filings.

Canadian Pacific is seeking to preserve the Hoosac Tunnel, located in western Massachusetts and owned by Pan Am Southern (PAS), a subsidiary of Pan Am Railways. The tunnel route serves as a gateway to PAS' western gateways, including the Mechanicsville Gateway with CP (NYSE:CP), and it provides what CP says is the "only viable competitive alternative to CSX for most New England rail traffic," according to a filing submitted by CP's attorneys and James Clements, CP SVP of strategic planning and technology transformation.

CP expressed concern that CSX, which would be a part-owner of the tunnel with Norfolk Southern if the acquisition is approved, would not have an incentive to maintain the tunnel because it competes against CSX single-line routes. Furthermore, the acquisition calls for a significant portion of the Norfolk Southern (NYSE:NSC) traffic supporting the tunnel route to be diverted to the CSX route under the CSX-NS settlement agreement over PAS, which would reduce NS' incentives to support the continued viability of the tunnel route, CP said.

CP also said the appointment of Genesee & Wyoming as the third-party operator of PAS would not ensure the line's competitive viability because G&W has conflicting interests in New England as an operator of a number of short-line railroads in the region.

CP wants STB to ensure that the owners of the Hoosac Tunnel and the route sufficiently invest in the upkeep of the tunnel and related infrastructure, as well as require that PAS provide service levels that would promote competition within the region.

"The Transaction marks a fundamental restructuring of the competitive incentives relating to the entirety of the New England rail map," CP said. "The Board should proceed with great caution here, and condition the Transaction in a way that preserves the long-run incentives of the various parties to invest in and operate PAS's Hoosac Tunnel Route as a no-less viable competitive alternative than it would have been absent the Transaction."

The U.S. Department of Transportation and the Federal Railroad Administration also weighed in on CSX's proposed acquisition of Pan Am Railways, saying that although DOT doesn't take a position on the transaction, it wanted to highlight issues that are of particular interest to DOT.

Those issues include safety assurances, enhanced competitive options, and the upholding of access to commuter rail and Amtrak, as President Joe Biden wants many of those issues examined, per his executive order in July.

"DOT recognizes the efforts that the applicants have made to identify competition concerns and to propose remedies and solutions, particularly to help alleviate any potential adverse effects upon shippers and other stakeholders. These include arrangements to preserve specified rates and services at current levels, subject to certain conditions," DOT said in a filing on Friday. "We also appreciate the applicants' efforts to work collaboratively with stakeholders to anticipate and address their concerns.

"Nonetheless, DOT urges the Board to examine these issues carefully in its review of the proposed transaction, consistent with the principles set forth in [Biden's executive order that mentions the rail industry], and should ensure that the promised public benefits of the transaction will actually be achieved if the proposal is approved," DOT said.

Vermont Attorney General Thomas J. Donovan Jr. said STB should deny CSX's application unless the board can apply a condition that would allow a freight carrier besides CSX and G&W access to gateways and corridors in and out of Vermont.

Vermont's Agency of Transportation "respectfully requests the Board to deny the Application as proposed. CSX and its partners have presented a web of transactions that will compromise Vermont's existing position, in which it benefits from true competition among rail providers," Donovan said. "In accordance with the Board's precedent, if an applicant fails to propose a means of mitigating the effects of a 2-to-1 reduction in service, the proposed merger transaction must be rejected.

"Alternatively, the Board should impose a condition to protect competition at gateways and corridors that are key to the movement of traffic to and from Vermont by requiring a carrier that is completely independent of both Applicants and their corporate affiliates, and of [G&W] and its numerous corporate affiliates, to have the right and ability to serve those gateways and corridors," Donovan said.

Meanwhile, Amtrak said it wants assurances that CSX will maintain and upgrade the existing infrastructure. The merger is one in which passenger trains account for the majority of trains operating on many of the involved rail lines, Amtrak said, and so as a result, public funding — not private investments like those of Class I railroads to their own networks — provides the capital for the maintenance and upkeep of these lines.

"Since the late 1990s, there has been an enormous investment of public money in the just over 1,000 miles of rail lines owned and/or operated by Pan Am. The majority of this funding was provided to support initiation or improvement of state-supported Amtrak services," Amtrak said.

Furthermore, the board should ensure that the acquisition wouldn't result in deteriorating passenger rail service, Amtrak said.

"Past railroad consolidations that have been approved without enforceable conditions for the protection of passenger rail have triggered service meltdowns that produced daily, multi-hour delays to Amtrak trains for extended periods, with inevitable declines in on-time performance (‘OTP') and ridership that have often taken years to recover, if at all; while deterioration in track conditions has jeopardized the continued operation of Amtrak trains," Amtrak said.

As some stakeholders raised concerns over the proposed acquisition, CSX says it has received more than 100 pro-merger comments from stakeholders, including Maine Sens. Angus King and Susan Collins, the Connecticut Department of Transportation, and the Northern New England Passenger Rail Association (NNEPRA).

"This transaction and the physical and operational improvements CSX has indicated it will make, has the potential not only to sustain and enhance the safe operation of passenger and freight rail service in Maine and New Hampshire but also to preserve and protect the substantial financial investments which have enabled NNEPRA and its partners to achieve success to date and set the stage for even greater economic opportunities and public benefits in the future," CSX quoted NNEPRA Executive Director Patricia Quinn as saying.

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