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Railroad Battle Brewing

The proposed merger of the DM&E into the Canadian Pacific and its entry into the coal rich Powder River Basin of Wyoming is sure to be opposed by the Union Pacific and BNSF, which now alone originate coal shipments there. The dispute will need to be resolved by the Surface Transportation Board. If the transaction is approved, the rates for transporting coal are likely to be reduced, favoring the construction of coal fired electric generating stations.

The Surface Transportation Board is about to be faced with as fierce a fight between the major railroads as it ever has had before it. The Dakota, Minnesota & Eastern Railroad Corporation, a regional railroad which for years unsuccessfully has attempted to secure the financing to extend its lines about 260 miles to reach the rich coal fields of the Powder River Basin of Wyoming , on September 4, 2007, announced that it had agreed to be acquired by the Canadian Pacific Railway Limited. The transaction will need to be approved by the STB.

The STB is the successor to the Interstate Commerce Commission, abolished in 1995, and is an independent agency housed within the U.S. Department of Transportation. Although railroads operating within the country largely have been deregulated, residual authority to pass on proposed acquisitions or mergers is vested in the STB. Its approval of railroad acquisitions or mergers exempts the transaction from the antitrust laws.

The STB sought to head off any contemplated acquisitions or mergers of the six of the largest remaining Class I railroads – Union Pacific Railway Company, BNSF Railway Company, CSX Transportation, Inc., Norfolk Southern Railway Company, Canadian National Railway and CP – when in 2001 the agency adopted strict policy guidelines which would need to be satisfied for a proposed acquisition or merger of two Class I railroads to be approved by the agency. The policy guidelines headed off a proposed unification of the CN and BNSF. Its provisions, however, would be inapplicable to the proposed transaction, because the DM&E is not a Class I railroad.

Coal is the single larges product handled by both the UP and the BNSF, accounting for about 20 percent of the revenue of each, and most of that coal originates in the Powder River Basin. While UP and BNSF largely have ceased cutting their rates to gain additional tonnage, the introduction of CP into the Powder River Basin is bound to have a profound effect upon coal rates to Midwestern utilities. When the UP’s predecessor, the Chicago & North Western Transportation Company, won the right to serve the Powder River Basin, which theretofore had been served only by what then was the Burlington Northern Railroad Company, coal rates dropped by as much as 25 percent.
The announcement of the proposed merger of the D&ME by the CP caused an immediate drop in the prices of the UP and BNSF shares of stock.

UP and BNSF, as well as CN, can be expected to oppose the proposed merger of the D&ME by the CP, but their arguments that a third railroad shouldn’t serve the mines of the Powder River Basin will not be well received. Indeed, the STB already has approved the construction of the D&ME’s extension. D&ME, however, has had difficulty securing the requisite financing. The Midwestern utilities, which should welcome the reduction in their coal rates, were unwilling to put money where their mouths were, and earlier this year the Federal Railroad Administration declined to underwrite D&ME’s extension.

The proposed transaction comes at a time when opponents of coal fired electric generating stations are beginning to make some headway. Coal fired electric generating stations are acknowledged to be significant spewers of greenhouse gasses and contributors to global warming. Power generating companies are increasingly reluctant to construct coal fired generating stations and are looking with greater favor at alternative sources to meet their power needs. The reduction in the rates for transporting coal which the proposed merger of the DM&E into the CP and the CP’s entry into the Powder River Basis undoubtedly will achieve will result in a tilt in favor of the construction of coal fired electric generating stations. A major battle looms before the STB, and as of this writing it is altogether too speculative how it will turn out.

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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