Railway Proposal Derailed

January 7, 2008
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GRAND RAPIDS — The Surface Transportation Board recently denied a proposal by Norfolk Southern to transfer operation of nearly 400 miles, or more than 60 percent, of its rail line in Michigan and Indiana to Kansas-based short-line operator Watco Cos., a move that would have created a new regional freight rail service called Michigan Central Railway. 

The STB action also brought an end to the proposed Amtrak/Watco agreement that would have guaranteed $23 million in maintenance and infrastructure improvements on main passenger routes. Norfolk Southern said the federal board’s decision signaled a “lost opportunity” for this region’s shippers, passengers and communities.

Norfolk Southern is reviewing the decision to determine what its options are, said Rudy Husband, director of public relations. Husband said the company had been analyzing those rail segments for several years and considered a variety of alternatives — including further downgrading of the lines or discontinuation of service on some of them — because of current light volumes of business.

Demand for freight rail service has declined due to Michigan’s flagging economy and the closure of automotive manufacturing plants, and maintaining the status quo on those lines was not an option, Husband told the Business Journal. He said the volume capacity of the lines, coupled with Watco’s marketing resources and expertise, would have offered them the best chance for future success.  

“The proposal was a creative, farsighted response to the long-term trend of shrinking volumes in the region,” stated Norfolk Southern CEO Wick Moorman in a Dec. 12 press release responding to the STB action. “It was designed to spur infrastructure investment and leverage the talents of an experienced short line operator — all to the benefit of the state, its freight rail customers and rail passenger service.”

Norfolk Southern said it will continue to look for options for the lines. However, “because current traffic on certain rail segments does not justify additional investment by Norfolk Southern, some areas may see curtailment of service,” the company indicated. 

Under the original plan, Norfolk Southern would have “contributed” most of its rail line segments, trackage rights and related assets in Michigan west of Ypsilanti to Watco in exchange for a 33 percent membership interest in Michigan Central Railway, committee voting rights and a majority share of MCR’s profits. MCR was to operate freight rail line segments between Ypsilanti and Kalamazoo, between Jackson and Lansing, and between Grand Rapids and Elkhart, Ind.

The deal would have included trackage-right agreements Norfolk Southern has over the Amtrak line between Kalamazoo and the Indiana border. MCR had agreed to invest more than $20 million in the lines over the first three years, to “provide responsive service” to local shippers and to develop a new traffic base.

Under the terms of the proposed transaction, Norfolk Southern would have retained extensive control over the lines, including significant ownership interest in MCR, according to STB. The STB ruled that Norfolk Southern’s influence over MCR “would far exceed what would be expected of a minority investor” because Norfolk Southern would retain the right to veto “almost all of MCR’s significant financial and operational decisions,” including: major asset sales, actions that would dilute its share of ownership or profits in MCR, investment of funds, annual budgets and business plans, certain operating or capital expenditures, and material modifications to employee benefit plans, among other things. 

“These provisions would give Norfolk Southern the ability to prevent MCR from taking the kind of initiative and action ordinarily associated with ownership, and Norfolk Southern’s veto power would be perpetual,” the STB stated in its decision document.

Norfolk Southern said the transaction was supported by rail freight customers, Amtrak, short-line railroads and a number of state and local officials. Several House Democrats, however, had questioned Norfolk Southern’s proposed transfer of the lines, voicing concerns about whether Watco, a Class Three operator, would be capable of upholding the current lines’ safety and maintenance standards at the same level as Northfolk Southern, a Class One railway operator. They wanted assurance that freight rail service would remain as reliable, timely and cost effective as before, and the Michigan Department of Transportation shared those concerns, according to spokeswoman Janet Foran.

The STB decision document shows that four rail labor organizations objected to the deal, too, because labor protective conditions wouldn’t have applied to MCR under the proposed transaction terms. The labor interests also maintained that the transaction was a “sham” and that its true purpose was to reduce labor costs through reduced employment.

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