WASHINGTON — BNSF Railway has urged federal regulators to take steps to protect cross-border traffic to and from Mexico as part of any approval of the proposed Canadian Pacific-Kansas City Southern merger.
But BNSF dropped its plan to pursue trackage rights over KCS to the Laredo, Texas, gateway in its Monday regulatory filing, which was posted to the Surface Transportation Board website on Wednesday.
Two-thirds of CPKC’s projected traffic growth is expected to come from cross-border traffic to and from Mexico, BNSF notes.
“The increasing importance of Mexican trade means that now more than ever U.S. farmers, industries and consumers need to be assured of fair and competitive access to Mexico over U.S. rail carriers,” BNSF says. “The Board must make sure that the Transaction, with the creation of a new Class I Mexican access juggernaut in the combined CP-KCS system, does not diminish that important access to Mexico for U.S. rail shippers.”
To meet merger-related volume and revenue growth expectations, CPKC will have every incentive to manipulate rates in an attempt to divert traffic away from competing routes, BNSF argues.
BNSF is concerned that CPKC control of KCS de Mexico would crimp interchange traffic bound to and from Laredo, the most important rail border crossing between the U.S. and Mexico.
“Foreclosure at Laredo is not an idle or theoretical concern,” BNSF warned. “Following the acquisition in 2005 by KCS of Tex Mex and the predecessor to KCSM, BNSF’s rail movements across the KCS-controlled Laredo border crossing dropped precipitously. Over time, BNSF has concluded that it has become virtually impossible to compete for certain Mexico business over Laredo if KCS can also serve the business on the U.S. side of the border.”
BNSF claims that KCS has used its control over pricing of cross-border movements to freeze BNSF out of the market. Mexican regulations require KCS de Mexico to provide non-discriminatory pricing for cross-border movements regardless of the U.S. railroad involved. BNSF contends that KCS raises its rates in Mexico on movements that could be handled by either KCS or BNSF, then reduces KCS’s rate for the U.S. portion of the move, effectively allowing the higher KCS de Mexico rate to subsidize the U.S. portion of its rail move.
Absent conditions to protect the Laredo gateway, the larger CPKC system will further lock BNSF out of Mexico, BNSF contends.
If conditions placed on the CPKC merger prove ineffective at maintaining competition at the Laredo gateway, BNSF says it will seek direct access to Mexico by competing for Mexican rail concessions. KCS currently holds the concession to operate KCS de Mexico. In 2027, however, the concession could be opened to competition.
For now BNSF scuttled plans to seek trackage rights over KCS between the current interchange at Robstown, Texas, and Laredo. “Since BNSF would only need the trackage rights under future conditions not known today, it would not be possible to prepare a detailed market analysis and operating plan necessary to satisfy the Board’s regulatory requirements for a trackage rights application,” BNSF explained.
Houston, we have a problem
BNSF warned that CPKC’s plans to double its traffic through the Houston terminal without proposing any capacity improvements is a recipe for trouble.
“To reach the Laredo gateway from the north and east, KCS must traverse Texas over a tangle of connected line segments owned, controlled and operated by some combination of KCS, BNSF, UP, and Houston Belt & Terminal Railway Co. This route requires movement through Houston itself,” BNSF noted.
BNSF reminded regulators that the Union Pacific-Southern Pacific merger resulted in gridlock in Houston that soon became a systemwide meltdown that eventually cascaded throughout the rail network in 1997-98.
CPKC could tie up Houston by routing an additional eight to 11 trains per day through the terminal complex, BNSF says, noting that much of CPKC’s new traffic will come at the expense of BNSF and UP routes that bypass Houston. “Yet Applicants have not identified a single dollar for new capacity that they propose to add in the Houston area to accommodate this substantial increase in traffic,” BNSF says.
“If Applicants’ plan is just to wait and see what happens, they are putting at risk the fluidity of a critical node in the national rail network at a time when supply chain congestion is a significant issue for the U.S. and global economies,” BNSF wrote. “If their plan is to try to make BNSF and other railroads – and by extension their customers – pay for the capacity that is needed to accommodate the increased CP-KCS traffic under existing cost-sharing arrangements for the lines at issue, their strategy is equally misguided.”
The STB should restrict CPKC traffic increases until the merged railroad identifies, funds, and completes capacity improvement projects on shared routes in Texas, BNSF says.
BNSF also raised concerns about capacity elsewhere on the CPKC system, including Ottumwa, Iowa, where BNSF’s Ottumwa Subdivision crosses CP’s Laredo (Mo.) Subdivision at grade. CPKC projects traffic would quadruple through Ottumwa, to a total of 18 trains per day. The use of longer trains would block BNSF’s line during crew changes, BNSF says, so the STB should require CP to shift its crew change point to eliminate potential interference with BNSF operations.
BNSF said a tripling of traffic on CP’s Davenport Subdivision in Iowa may hurt service on BNSF’s trackage rights over CP to reach Clinton, Iowa. BNSF asked the board to monitor the situation and reserve jurisdiction to address the issue.
And BNSF said CPKC would have to address the Neches River Bridge bottleneck in Beaumont, Texas. The KCS-owned span is also used by BNSF, UP, and Amtrak. West of the bridge, lines radiate to Houston, Fort Worth, and Port Arthur, while east of the bridge lines diverge to Shreveport, La., and New Orleans. CPKC’s merger application does not propose capacity improvements in the area despite projected traffic increases, BNSF says.
BNSF requests conditions
BNSF asked the board to impose several conditions on the CP-KCS merger. They include:
— CPKC must keep the Robstown interchange and Laredo gateway open on commercially reasonable terms and abide by previous agreements related to KCS’s purchase of the former Tex Mex Railway linking Robstown and Laredo.
— Require CPKC to adopt a fair rate-setting process that will ensure BNSF access to Mexico through Laredo.
— Require CPKC to fully fund merger-related capacity improvements on lines owned by BNSF or other railroads.
— Prohibit CPKC from increasing traffic across Texas without first funding and completing capacity projects on trackage rights routes.
— Shift CP’s crew-change location in Ottumwa so it doesn’t interfere with BNSF operations.
— Impose a five-year oversight period on the merger to monitor CPKC’s compliance with conditions.
— Require CPKC to report service metrics involving the Laredo gateway and at locations where significant traffic growth is expected.
— Reserve jurisdiction to impose further conditions, including trackage rights, during the oversight period if open gateway commitments aren’t working or if congestion or service problems arise.