Christopher A. Mills
Slover & Loftus
1224 Seventeenth Street, N.W.
Washington, D.C. 20036
(202) 347-7170
Conference on the Proposed Conrail-CSX Merger
and Norfolk Southern's Response
March 6-7, 1997
Washington, D.C.
  • Overview of the Proposed Conrail-CSX Merger From the Standpoint of Coal Shippers

     Opportunities for positive effects

    • Positive effects claimed by merging railroads include increased operating efficiency and replacement of interline service with single-line service

    • Merger savings are not passed back to shippers in the form of lower rates

    • Possible market benefits:
      • New market opportunities for coal producers and new competitive sources of coal for utilities

      • Possible merger of the losing bidder with a western carrier, opening up new coal sources

      • Magnitude of the opportunity depends on where you are and what kind of coal you produce or burn
    Likely negative impacts
    • For utilities:
      • "2-to-1" coal shippers will suffer a loss of competitive options

      • Loss of origin competition
      • Loss of source competition

      • Increased concentration of market power
    • For producers:
      • Conrail-served producers in Pennsylvania will lose market share to CSX-served central Appalachian producers

    • Implications of the STB's recent decision in the "bottleneck" rate cases
      • Summary of STB's ruling

      • Status of bottleneck proceeding

      • A Conrail merger with CSX or NS will foreclose any possibility of obtaining a regulated rate for the Conrail portion of pre-merger interline coal movements with CSX or NS
    Evaluation of the Relative Merits of Conrail/CSX versus Conrail/NS
    • On balance, a Conrail merger with CSX would be somewhat more harmful than a merger with NS

    • CSX is a much larger originator of utility coal than NS, and a combined CSX-Conrail would control a larger share of the utility coal market than a combined NS-Conrail

    • The growth market for NS coal is more in the southeast than the northeast or midwest

    • Conrail-originated coal competes more directly with CSX-originated coal than with NS-originated coal
    Overview of the Standards Used by the STB to Evaluate Rail Merger Applications


    • Public interest balancing test
    • The STB is concerned only with the loss of existing competition

    • Conditions will not be imposed that increase a shipper's present competitive options.
    • Coal shippers who are not "2-to-1" shippers have had little success in obtaining meaningful conditions in recent rail merger cases

    • Coal shippers should not expect the STB to extend two-carrier competition to facilities that do not have it today
    • STB must also consider the total fixed charges that result from the proposed transaction (The premiums being paid over book value should not be recouped from captive shippers)
    Evaluation of NS' Competitive Response to a CSX/Conrail Merger From the Standpoint of Coal Shippers


    • Assuming CSX acquires Conrail, NS attempts to preserve competitive balance in the east should be supported by coal shippers

    • Institution of two-carrier service to the New York market is of little relevance for coal shippers
    • NS' position that line sales are better than trackage rights should be supported by coal shippers (Trackage rights involve control and cost issues that make it difficult for the tenant to compete with the landlord)
    Likely Parameters of a Settlement between CSX and NS


    • Preservation of a competitive alternative (NS) for 2-to-1 shippers

    • Trackage rights (and possibly some line sales)
      • Access to New York City

      • Conrail's West Virginia Secondary (Kanawha) Line

      • Conrail's line from Hagerstown to Harrisburg and eastern Pennsylvania
    • Shippers' ability to influence the terms of the settlement agreement (Largely a question of timing)

    • Politics are relevant

    The Bottom Line


    • Negotiate now, not later
    • Concentrate on influencing the terms of the CSX/NS settlement

    • Key elements:
      • Improved NS access to Conrail mines/customers via Hagerstown

      • Sale of key Conrail coal-carrying lines to NS
    • Use STB proceeding to request specific changes to the CSX/NS settlement


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