The Justice Department Is Warning About A Major Rail Merger. It Might Get Approved Anyway.

Canadian Pacific argues the rail merger will not impact competition, since it operates mostly in Canada and the upper Midwest while Kansas City Southern operates mostly in the South and in Mexico.

A federal agency controlled by President Joe Biden’s appointees could soon approve a merger between two massive railroad companies despite warnings from the Justice Department, a step that would further exacerbate the industry consolidation blamed for cost-cutting and safety failures.

The Surface Transportation Board is set to make a final decision soon on the $27 billion merger between Canadian Pacific and Kansas City Southern. The merger, if approved, would give the combined railroad control of lines stretching all the way from Canada to Mexico — a potential boon for Canada’s oil industry that raises the possibility of more oil-carrying trains running through American cities and towns.

Approval of the merger would go against both the Biden administration’s long-standing push to revive antitrust enforcement and its more recent invective against railroad industry power following the toxicderailment of a Norfolk Southern train in East Palestine, Ohio.

The timing and the final decision of the board remains up in the air, though antitrust advocates are increasingly fearful it will approve the merger — and Canadian Pacific executives are projecting confidence. 

The White House declined to comment. “We do not comment on pending decisions by independent agencies, including the Surface Transportation Board,” a White House spokesman said. 

Both Canadian Pacific and Kansas City Southern have stepped up their lobbying operations in recent months as they seek final approval for the merger, hiring former lawmakers and aides who worked on transportation issues. 

Freight rail was one of the first industries to experience rapid consolidation, following the deregulation of the industry in the late 1970s. There were 40 major railroad companies in North America in 1980. Today, there are only seven.

“We’re already at such a point of massive consolidation that we’re going to have a railroad that runs from Halifax, Nova Scotia, to Vancouver down through the Midwest and into Mexico,” said Phillip Longman, the policy director at the progressive antitrust group Open Markets. “It’s going to make the old transcontinental railroad look like a branch line.”

Progressives argue the consolidation, along with increased Wall Street investment and interest in the railroad companies, has given rise to cost-cutting, taking shortcuts on safety, and a culture that fights any attempt at government regulation. The result, progressives argue, is more risks, more derailments and more incidents like that in East Palestine. 

“The basic business model is ‘let’s shrink expenses faster than we shrink revenues,’” said Longman. “They are compromising safety all over the place.”

Canadian Pacific and Kansas City Southern are the sixth- and seventh-largest freight railroad companies in North America, and their merger would make the first of two Class I railroads — industry-speak for the largest companies — in 20 years. 

The companies have argued there is little threat to competition in the merger, since they operate in largely distinct geographic territory: Canadian Pacific in Canada and the upper Midwest; Kansas City Southern in the South, Texas and Mexico. They’ve also argued the merger will take more than 64,000 carbon-emitting long-haul trucks off the road annually.

“Our combination creates an unparalleled single-line network connecting three nations. It’s a once-in-a-lifetime combination to inject new competition into the U.S. rail industry, where every existing customer has more options, not one less option,” Canadian Pacific CEO Keith Creel said during the board’s hearing on the merger in September. “And, in fact, many shippers will have an alternative single-line rail option where today they only have one.”

Antitrust advocates have argued past promises that railroad mergers would take trucks off the road have been overblown and said further consolidation will only exacerbate existing problems.

“Lack of competition has allowed railroads to gut capacity, capture and extort businesses, fire thousands of workers, and threaten the integrity of America’s freight transport network and supply chains — all while extracting monopoly profits,” Rep. Katie Porter (D-Calif.) wrote in a letter to the board opposing the merger. 

The STB is independent of the Transportation Department, and Biden has appointed three of its five members. The board has the final word over railroad mergers and can deny any merger it decides is against the interests of the public.

In a filing with the board, the Justice Department’s antitrust division did not come out and directly oppose the merger. But it suggested further consolidation of the rail industry needed to be closely watched.

“The Board should carefully consider the competition impacts of further consolidation,” the department’s lawyers wrote. “This is especially relevant in light of the recent supply chain disruptions that have wreaked havoc on American consumers and businesses. Freight rail connects us, from farms to cities, and from the ports through the heartland, and carries the goods that Americans depend on. Competition in this critical infrastructure is essential.”

Board staffers released a hefty environmental impact statement on the proposed merger on Jan. 27, and federal law says the board must wait at least a month before releasing a final decision. 

The two railroads, combined, have spent nearly $2 million lobbying on the merger since the start of 2021, according to federal lobbying records, with $320,000 going to former Sen. Byron Dorgan (D-N.D.) and $440,000 going to former Rep. Jim Slattery (D-Kan.).

The Surface Transportation Board was one of dozens of federal agencies covered by Biden’s 2021 executive order directing the government to do more to promote competition and push back against monopoly power. 

And the board has taken a number of major steps to promote competition in an industry that is already heavily regulated: It has proposed a rule allowing so-called captive shippers — those who are only served by a single railroad — to request the services of another railroad on tracks owned by the monopoly railroad and adopted a rule giving shippers more leverage when challenging rates they believe are unreasonable.