Railroad shipping: STB puts NS, Watco endeavor to a halt
Jeff Berman, Senior Editor -- Logistics Management, 12/13/2007
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NORFOLK, Va.—Days after the Surface Transportation Board (STB) denied to provide regulatory approval for a joint venture between Class I railroad Norfolk Southern and Watco Companies, a railroad services provider with 16 railroads in 14 states, the STB’s decision was considered a disappointment by both companies. The proposed joint venture, entitled the Michigan Central Railway (MCR), would have been comprised of freight and passenger rail service for more than 384 route miles in Michigan and Indiana, according to NS. And the company added that this decision “represents a lost opportunity for the region’s shippers, passengers, and communities.”
The MCR would have preserved and grown freight service in the region, according to an NS statement, and Amtrak passenger lines would have benefited from an extended agreement that ensured continued maintenance and investment levels on the rail lines between Ypsilanti and Kalamazoo, Mich.
Had the proposal been approved by the STB, NS said it would have provided the MCR most of its rail line segments and trackage rights in Michigan west of Ypsilanti, which carry freight and Amtrak service. And Watco would have contributed $18 million in cash and locomotives to the MCR in exchange for a 67 percent ownership of the MCR, with NS being a 33 percent stakeholder.
The STB’s said in its decision that it deemed would have given NS too much control over the Michigan Central Railway and would have been more than a minority investor. The decision also stated that the NS’s “actual influence” over the MCR was heavily weighed, because it would have retained the right to veto almost all of the MCR’s significant financial and operational decisions, including major asset sales or encumbrances, actions that would dilute NSR’s share of ownership or profits, annual budgets, and business plans, among other factors.
Representatives from both Watco and the NS were disappointed with the STB’s decision, and told Logistics Management that they will examine other options on these rail lines.
“We think the STB is wrong,” said Ed McKechnie, Watco spokesman. “The next steps are to look into doing some sort of hybrid version of this [proposal] back to a traditional lease. The STB did not really understand what we were trying to solve…which was a large network that was underutilized.”
Indeed, one of the STB’s responsibilities, according to McKechnie, is to bring full utilization to the value of America’s rail network to its customers and the railroads. But decisions like this, he said “trap the United States into a 19th century mindset” about how railroads should function, which is a mistake.
What’s more, added McKechnie is that this stretch of railway is currently operating at ten percent of its capacity. And he added that the STB worried about parts of this transaction that were not necessarily germane to how the MCR would function.
“So what if we were paying a higher lease to the NS,” he said. “The NS is contributing $100 million in assets.”
Shipper impact:
This decision, noted Watco’s McKechnie, effectively “turns its back on Michigan-based shippers.” He considered it shocking that it went through, considering there was not a single rail customer that complained about this transaction.
“If you look at [rail shippers] by volume, 90 percent of them support the STB, and the STB turned their back on them, which is surprising,” he said.
NS spokesman Rudy Husband said that the proposed MCR created a very viable solution for declining rail traffic in southern Michigan, but the STB ultimately had some issues with the joint venture. “Now we are starting to study other options,” said Husband. “The simple fact is that the current carloadings on those line segments don’t have the lane density to support the maintenance costs. The STB’s decision does not change the economic conditions that led us into the joint venture to begin with.”
And Husband added that the current traffic volume on some of these proposed segments does not justify additional investment by NS and that some areas may have service discontinued.
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