THEY'RE STILL PLAYING RAIL BARON WITH REAL TRAINS.

The merger of Canadian Pacific with Kansas City Southern has taken place, and the Roodhouse Doodlebug Line is still, by virtue of Illinois Central Gulf having sold off that bit to a company that became part of Kansas City Southern, part of the new all-continent railroad.  If you're a rent-seeker, you still seek rents, even if that means going back to court.

Chicago commuter operator Metra has become the third entity to sue over the Surface Transportation Board’s approval of the Canadian Pacific-Kansas City Southern merger.

In a single-page filing with the board, Metra notified the STB today (Wednesday, May 17) that it had initiated a suit on May 12 in the U.S. Court of Appeals for the District of Columbia, seeking review of the March 15 decision creating Canadian Pacific Kansas City. Metra’s court filing calls the board’s decision “arbitrary, capricious, an abuse of discretion, an otherwise not in accordance with law or supported by substantial evidence.” It offers no specifics.

The language is identical to earlier suits filed by Union Pacific [see “Union Pacific challenges STB’s Canadian Pacific-Kansas City Southern merger decision,” Trains News Wire, May 5, 2023] and the Coalition to Stop CPKC, a group of Chicago suburbs [see “Chicago suburbs sue over CPKC merger,” News Wire, May 12, 2023].

The suit asks that the appeals court send the matter back to the STB “to correct its legal deficiencies.”

Metra's immediate objection is to the possibility of freight train interference, something they have lots of experience with as a tenant at Chicago Union Station and on several of the lines they operate.

Metra strongly opposed the merger, contending it will have a negative effect on commuter operations on two lines shared with CPKC, and sought significant conditions to mitigate those impacts. None were granted.

Perhaps most significantly, the commuter agency asked for dispatching control over the two shared routes. They are currently dispatched by the freight railroad in an agreement dating to the demise of the former owner, the Milwaukee Road. In a post-merger press conference, STB Chairman Martin J. Oberman said the board did not order the change “because we do not think the data requires it or supports it, and it would cause us, in effect, to break a contract.” [see “Metra, Chicago suburbs see few concerns addressed …,” News Wire, March 15, 2023].

In today's railroading, the most direct route between cities is not necessarily the fastest route, particularly as traffic builds.

Metra’s opposition reflects, among other issues, disagreement with traffic modeling used by CP and KCS in their merger application. Metra’s own modeling indicated post-merger traffic growth would “break the rail system” on a single-track portion of the direct CPKC route between Minneapolis-St. Paul and Kansas City, leading trains to be rerouted through Chicago, to the detriment of the Metra Milwaukee-North and Milwaukee-West lines.

That direct route, which runs along the west bank of the Mississippi River from the Twin Cities to the Quad Cities by way of La Crescent, Minnesota, and Dubuque, Iowa, was a freight-only secondary line for much of The Milwaukee Road's recent history, but now it competes with Burlington's, er, BNSF's, similarly indirect line from the Twin Cities to Kansas City by way of Galesburg and Quincy.  The traffic volume?  It approximates to a busy operating session at the Fox Valley O Scalers, which models a portion of the line from La Crescent to Green Island, Iowa, back in the day when meat trains out of southwestern Minnesota and western Iowa got onto the line at Marquette, Iowa.

Sometimes, that competition turns unpleasant.

We'll return to the exegesis of the litigation after a brief interlude at Savanna, Illinois.

I was there last Monday to do some train spotting.  Much of downtown Savanna had a bit of the Mississippi River on the streets until recently, and the city crews were picking up driftwood.  The unpleasant bit of the competition manifested itself around 3 pm.

That BNSF intermodal showed up around 3 pm, waiting at the home signal where the former Milwaukee Road line crosses.  The train had a lot of UPS and Yellow trailers on it, suggesting it's the train Burlington guys refer to as "precious," and it's waiting because a CPKC train got on the circuit first.  Apparently the circuit, for trains arriving from the Iowa side, begins at Sabula in order that a train doesn't get laid out on the swing bridge over the Mississippi River.  No more tower operator to exercise judgement when the train that is approaching is reversing, without benefit of a caboose or a man with a radio riding the hind end, and it has some pickups and setouts to make, occupying the diamond the whole time.

Yes, I was also recording, and there will be, if all goes well, a You Tube with time stamps telling the whole sordid story, ending when the Burlington gets the board around 4 pm, and two more Burlingtons (there was a third, but tiredness and a long drive home won out) followed it.  Meanwhile, the CPKC was batting cars out in Savanna, preparatory to continuing north.

They're not going to be happy in Fort Worth with that intermodal, plus a follower, laid out while The Milwaukee Road's version of the harried model rail yardmaster holds everything up until he's good and ready.  The other railroads filing lawsuits also have their interests to protect.  Railway Age contributor D. P. Alan breaks down the rent-seeking.

“The Board recognizes that some in the shipping community and among antitrust commentators are not satisfied with the consolidation among Class I railroads that occurred following the Staggers Rail Act of 1980, and the Board itself has done its best to address how the Class I railroads behave today. Indeed, there is an ongoing debate about whether there has already been too much consolidation in the rail industry. Regardless of which side one takes in that debate, the Board is charged by Congress with reviewing the proposed merger in light of the state of the industry as it actually exists. Given the current realities and the limited opportunities to provide meaningful competition for the largest Class I railroads, as outlined above and discussed at length in this decision, the Board concludes that this transaction should improve rather than degrade the performance of the industry. It is for these reasons that the Board approves the merger.”

It's not the mergers that have degraded the performance of the industry, it's the tyrannies of the operating ratio and the quarterly stock performance, and there are people who have recognized that the Maximum Principle does not mean hitting the local maximum for the next day, week, or quarter.

Mr Alan's essay relies heavily on a statement by Board member Robert Primus, who, in turn, relies heavily on the old Structure-Conduct-Performance paradigm of industrial economics.

Primus then summarized his objections to the transaction: “Given this fundamental problem, my objections to the transaction approved today are threefold. First, the transaction will further concentrate control over the nation’s railroads, which have already experienced massive consolidation in recent decades—a development that has not been favorable to rail customers or the network as a whole. Second, in the absence of a service assurance plan (which would have been required under the current rules), the decision does not adequately guard against merger-related service disruptions, at a time when rail service in general has been historically poor. Third, the transaction will harm communities along the path of the newly combined network. Because these detriments to the public interest outweigh the expected benefits, I dissent” (Id.).

He went on to explain the problems associated with increasing concentration in the railroad industry (at 177-81) with a look at vertical mergers, which he warned expand a railroad’s monopoly power in the region where it operates. Addressing “Concentration of Market Power” (at 179-81), he said: “The Biden Administration has raised concerns about concentration of market power in U.S. industries and called on agencies to be more active in guarding against excessive concentration. Executive Order 14,036, Promoting Competition in the American Economy, observes that ‘decades of industry consolidation have often led to excessive market concentration,’ that the consolidation has been harmful to workers and consumers, and that ‘Federal Government inaction has contributed to these problems’” (at 179, citation omitted).

The title of that Executive Order bespeaks the reality that the mind-set of the Carter administration is rattling around in whatever remains of Dementia Joe's brain, or perhaps to the reactionary technocratic impulse of whoever drafted the order.  On the other hand, there might be a lesson learned for law and economics types.  We have the Merger Guidelines in train of legal derailments such as Brown Shoe acquiring Kinney (which was subsequently sold off to Woolworth) and Pabst acquiring Blatz (which meant there was a German band and a trademark to sell off to Heileman afterwards).  Not so, though, with the railroad merger.  "In practice, it seems 'impracticable' to break CPKC up and restore CP and KCS (which no longer exists) to the way they were. Even if the court were to hold that the merger contravened public policy and/or that the STB exceeded its authority, it is difficult to see how the judges could fashion a remedy."

Oh, if you could paint NYC and PRR reporting marks on Conrail rolling stock, prior to divvying up the assets among the acquiring railroads, or if you could make Gateway Western or other short line companies designated operators for bits of the Rock Island, you could fashion a remedy.  I mean, Iowa Interstate interchange with the former CPR part of The Milwaukee Road, and there's a new version of the Rock Island Lines in Mississippi that connects with the extended Kansas City Southern.  Save time and money by missing bedlam and confusion indeed!

The design flaw, though, is with the administrative state.

Administrative law is a relatively new field. Prior to the Great Depression of the 1930s and President Franklin D. Roosevelt’s efforts to mitigate its effects through his “New Deal” legislation that expanded the public sector by establishing new regulatory agencies, there were few such agencies. The STB’s predecessor, the Interstate Commerce Commission (ICC), was the first, founded in 1887 to regulate railroads. Then came the Federal Trade Commission (FTC) in 1916, and the Federal Radio Commission in 1927. The latter was created to curb new entrants into the broadcasting field because so many stations had been interfering with signals from other stations.

I'll leave the cracking wise about cartels and regulatory capture for now: the design flaw is in hoping that Wise Experts can improvise in a way consistent with the (chimerical) public interest without having to make a federal case, let alone requiring an Act of Congress, to continue train service to Amboy, Illinois.  Let the fun begin!

As regulatory agencies have proliferated since then, Congress and other policymakers have relied increasingly on those agencies’ expertise in their fields when promulgating policies, and have left much of the policy-making authority to the agencies themselves. The Court has often gone along with that scenario, as shown in Chevron USA, Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984). That case established the doctrine of “Chevron Deference” where courts recognize the expertise that agencies possess and defer to that expertise when the statute at issue unambiguously calls for that treatment. Courts have more discretion when a statute is unclear, ambiguous or lacks direct language.

The Court’s attitude toward Chevron Deference may be changing. Justices Clarence Thomas and Neil Gorsuch have written opinions opposing the concept, saying that it improperly takes authority away from judges and gives it to administrative agencies. There are cases before the Court that challenge Chevron Deference, and some states have abolished or restricted its use in the courts within those states.

Looking at the near future for the Court concerning administrative agencies, UP’s challenge might end up becoming a footnote to the history of administrative law, unless the Court decides to say something more substantial than it is expected to say within the next month or so, or at least before the end of next June. With or without an opinion from the Court on the matter at issue, there could be serious repercussions for agencies like the STB and the FRA, no matter how strong their technical expertise or their intentions to make life easier for the likes of freight shippers, railroad passengers or communities.

We seem condemned to repeating the past, in which regulatory overreach, or was it regulatory sclerosis, that led to the consumer welfare standard in antitrust, and to deregulation. Malaise days are here again. "Robert Primus seems to be holding the torch for regulation in the public interest. In his dissent, he noted how the level of concentration in the railroad industry has increased sharply since the year Amtrak was founded."

I threw away all my old regulation and structure of industry notes years ago, and sold or gave away the books.  For a cup of strong coffee, or a Maß of proper beer, I could be induced to provide some background on those old debates.