In July 2021, President Joe Biden’s administration issued a landmark executive order instructing federal agencies to crack down on monopolies. The White House singled out the Surface Transportation Board (STB), a sleepy bureaucratic backwater with the final say over railroad mergers. More recently, the Department of Justice’s Antitrust Division added its voice, writing to the STB that it should “carefully consider the competition impacts of further consolidation” in the railroad industry.
It’s no wonder Biden’s trustbusters are prodding the STB. Railroading has become one of the most monopolized sectors in an increasingly monopolized economy. Worse, in recent years, railroads have largely come under the control of Wall Street financiers who have boosted short-term profits by degrading service, squeezing workers, and compromising safety. These actions have enormously contributed to the nation’s supply chain problems and may be implicated in the recent toxic train derailment in East Palestine, Ohio. Since 2010, railroads have spent $46 billion more on stock buybacks and dividends than on maintenance and equipment. In 2020, they spent only 60 cents for every dollar of revenue they raked in, leaving them short on equipment, maintenance, and staffing. Unsurprisingly, they lost market share to trucks, which are worse for the environment, spewing out more carbon than the railroads and pounding roads, which causes woes for all auto traffic.
Yet despite this consolidation and its awful impact, the STB is considering approving the largest rail merger in nearly 30 years. The $31 billion deal would combine Canadian Pacific (CP) and Kansas City Southern (KCS) into a supercarrier with routes stretching from the Atlantic to the Pacific and deep into Mexico. Nonetheless, “I feel like it probably will pass,” said Dan Elliott, a former STB chairman appointed by President Barack Obama.
Why this is happening reveals much about how Washington works and why rolling back monopolies remains so difficult.
On a wintry evening in the southwest quadrant of Washington, D.C., a train’s horn echoes in the distance. Gusts of cold air blast down 4th Street SW as an Amtrak train barrels overhead. Spilling onto E Street, the winds sting the face of a passerby making his way through a dreary neighborhood of minor federal agencies banished to the wrong side of the tracks south of the National Mall.
This lonely stretch is the home of the STB, which is a remnant of the once-mighty Interstate Commerce Commission (ICC). In its glory days, the ICC regulated railroads and trucks and, by extension, much of the U.S. economy from its neoclassical headquarters in the Federal Triangle at the heart of Washington’s power corridor. But in 1980, Washington deregulated much of the transportation sector, stripping the ICC of nearly all its power before abolishing it in 1995.
Today’s STB is a vestigial five-member board with little staff and minuscule authority over railroad rates and terms of service.
However, the STB still has broad statutory authority to block any railroad merger it deems not in the “public interest.” After a flurry of rail mergers in the late 1990s brought severe service breakdowns, the STB used this authority in 2001 to tighten merger guidelines. As a result, there has not been a major rail merger since then. In 2021, when a different Canadian railroad, Canadian National (CN), tried to acquire Kansas City Southern, the STB rejected a key provision of the proposed merger, and CN walked away.
The STB has good reasons to be skeptical of rail mergers. Driven to maximize shareholder returns, the freight rail industry has removed nearly 100,000 miles of track since the 1980s, sacked 29 percent of its workforce in the last six years, turned away business from all but their highest volume, highest margin customers, and forced captive shippers to pay high rates for worse service. Just when we need railroads to help decarbonize America, rebuild domestic manufacturing, and strengthen brittle supply chains, a combination of deregulation and monopoly allows financiers to strip the value out of this essential national infrastructure.
CP is largely controlled by billionaire hedge fund investor William Ackman’s Pershing Square Capital Management. Along with other hedge funds, it pushes railroad management to maximize profits through cost-cutting and buying out competitors. By 2020, KCS had become accountable to more than 45 hedge funds who snapped up its shares, speculating that the STB might allow it to be bought at a premium by a larger railroad.
Consumers pay for these policy failures with shortages and inflation. In July 2021, Union Pacific (UP), beholden to Soroban Capital and other hedge funds that control much of its stock, suspended container freight service from West Coast ports to Chicago because the rail operator lacked the capacity to sort and redirect containers. Pallets piled up, ships waited to dock for days, and prices skyrocketed because UP had closed a central Chicago handling facility in 2019. Without the capacity necessary to keep up with a rebound in consumer demand, UP has repeatedly announced “embargoes” on accepting new shipments. With food prices rising, UP’s service failures threatened thousands of dairy cattle and millions of chickens with starvation. The railroad used the resulting supply chain disruptions as an excuse to hike rates even higher than necessary, bringing in record profits and revenues in 2022.
Given all this, how could the STB even consider approving the giant CP-KCS deal?
Proponents of the merger argue that the two CP and KCS networks lack overlapping routes and conclude that shippers would not see any loss of competition were the systems combined. They maintain that merging into one megacarrier makes for more efficient operations by eliminating the need to switch cars from one line to another.
While those factors might benefit some high-volume, long-haul shippers, the combined railroad would have incentives to charge other shippers more or turn away their business altogether. Railroads want to use their limited capacity to earn the highest possible margins, and that means favoring long-haul traffic over shorter hauls, which, thanks to deregulation, they are free to do.
Jim Peterson of the North Dakota Wheat Commission (NDWC), which promotes the state’s product, notes that the combined railroad would favor shippers moving wheat from Canada to Mexico rather than tie up its capacity serving, say, wheat farmers in the Dakotas shipping to destinations elsewhere in the United States. Jeff Sloan, a spokesman for the American Chemistry Council (ACC), agrees that the combined system would incentivize management to hike short-haul rates to free capacity for its lucrative long-haul business. So why don’t more shippers speak out?
Intimidation is a big part of the reason. Over three-quarters of all rail customers are served by a single line, giving them a reason to think twice before criticizing the local rail monopoly. These customers know that, under deregulation, there is little the government can do if railroads retaliate against a shipper’s criticism by raising prices or degrading service. STB Chairman Martin J. Oberman, a former Chicago alderman and Illinois Attorney General candidate, has expressed frustration about shippers coming forward. “There is at least a perception that, and I believe a reality, of a fear of retaliation if customers come forward and testify at a board hearing about their problems with a railroad,” Oberman recently complained before a meeting of the Midwest Association of Rail Shippers. Prosecutors who try mob cases can no doubt sympathize.
Trade associations representing shippers have also refrained from opposing the merger because their members are often divided. High-volume, long-distance shippers may support the merger, believing they have enough market power to ensure that any combined system will give them favorable treatment. Others oppose the merger because they fear becoming more captive to a monstrous monopoly. According to Sloan, the shippers who belong to his American Chemistry Council lack “universal agreement that the overall merger would be good or bad,” so the only consensus the organization can find is that “the [merger] poses potential competitive harms, and that conditions are needed to prevent those harms.” Similarly, Peterson says NDWC is not “100 percent opposed” to the merger because some of its long-haul shippers would benefit. Instead, it just seeks reassurance that the new system will treat all of its members fairly.
Potential public critics of rail consolidation are kept quiet through side deals. For example, rail labor unions, including divisions from the Teamsters and AFL-CIO, have remained silent on the CN-KCS proposed merger. They want the two rail giants and the STB to grant them labor protections, including the power to choose their preferred bargaining agreement. Meanwhile, Amtrak has supported the merger so long as STB requires the new system to live up to its promise not to delay its trains by making them wait for passing freight trains. Given that Amtrak uses tracks owned by CP and KSC to run throughout the South and Midwest, it speaks out at its peril.
To grease these deals, CP and KCS doubled their spending on lobbying to over $1 million in 2021, the year they announced their planned merger. In 2022, they hired firms like Mehlman Consulting, whose lobbyists have worked for former Chicago Mayor Rahm Emanuel and the late Senate Majority Leader Harry Reid. Because lobbyists can only talk to the STB through hearings and filings in the public record, they leverage their revolving door networks to enlist former elected officials who are not lobbyists to advocate on their behalf. After consulting with CP, Byron Dorgan, a retired U.S. senator from North Dakota, published his support of the merger in an op-ed.
A final talking point deployed by pro-merger advocates is that the STB exempted KSC from its stricter merger guidelines in 2001. At the time, the STB reasoned that KSC might be too small to survive as an independent railroad, given the mergers of the 1990s. But KCS is no Lilliputian amid giants. It has grown into a $3 billion behemoth by developing lucrative north-south lanes to and within Mexico and a high-volume “Meridian speedway” connecting Dallas and southeastern U.S. cities. Today, KCS is a highly profitable, “Class 1” railroad that is hardly in danger of failing unless it merges. Moreover, today’s STB is not bound by a two-decade-old finding. STB board member Robert Primus notes, “times have changed since 2001, and ALL the remaining Class I railroads today should be viewed as critical players in our national rail network.”
As this merger shows, the Biden administration must fight to de-monopolize the rail industry and the broader economy. Even though rail consolidation harms consumers and many producers, the STB can’t just put the brakes on this merger when its victims are either unaware or intimidated into silence. Ultimately, the STB must do what previous generations of Americans did when 19th-century railroad barons preyed on the nation: allow railroads to grow economies of scale but not to operate as powerful, unregulated monopolies.