April 27, 2016
Written by David Thomas, Contributing Editor – Railway Age
Proposing a radical new business model, Quebec’s huge public pension fund announced April 22, 2016 that it will directly undertake construction and continuing operation of a 67-km (41.5-mile), double-tracked, electrified and fully automated rapid rail network, the Réseau électrique métropolitain (REM), which will transform commuting in Montreal and its immediate hinterland.
The REM, which will be an automated rapid transit system (though the city is calling it “light rail”), will serve 24 stations 20 hours a day, with departures every three to 12 minutes depending on route and time of day.
The Caisse de dépôt et placement du Québec pension fund will put up C$3 billion of the C$5.5 billion project, with the balance coming from the Quebec and Canadian governments as subordinate equity investors.
Because of its fiduciary responsibilities to protect old-age pension payouts, the deal will guarantee the Caisse first call on profits, with the two levels of government claiming their share only above an agreed-upon threshold. But the Caisse will not ask government to backstop its investment and will assume the business risks of ridership and revenue.
Thus, the pension fund, which last November acquired 30% of Bombardier’s global rail business, becomes a railway operator. Caisse CEO Michael Sabia was in the 1990s chief financial officer of Canadian National.
Quebec is the only Canadian province to run its own old-age security pension; the others are covered by Canada’s national pension system.
The REM will involve reconstruction and conversion of the existing AMT Deux-Montagnes line, which tunnels under Mount Royal to the city’s Central Station, as well as new right-of-way utilizing the existing Highway 40 route from the island city’s western tip to a connection with the Deux-Montagnes.
In addition, the REM will include a spur to Pierre Elliott Trudeau International Airport and will extend new trackage from downtown to the bedroom communities of the St. Lawrence River south shore via a new Champlain Bridge scheduled to open in 2018.
Overhead catenary will provide the power, with third-rail rejected because of Quebec’s icy winters. REM will be the third-longest driverless rail system in the world, after Dubai and Vancouver, and will employ 1,000 workers.
The initial fleet will consist of 200 150-passenger cars with open “boa” vestibules between them. Rush hour trains will consist of four cars, with two-car trains operating in off-peak hours.
The Caisse promises WiFi connectivity for all trains and live smartphone access to actual train times. Fares will be comparable to existing tariffs for travel on the existing commuter train and bus services.
Sabia says construction should start in Spring 2017 with the full system operational in 2020. Procurement and environment assessment hearings are to begin this summer.
Montreal Mayor Denis Coderre endorsed the project, assuring that rights-of-way and infrastructure currently belonging to the city’s’ transit system (not including the Montreal Metro, operated by STM, Société de transport de Montréal) will transition to the new REM. The project fits with Montreal’s declared ambition to convert its bus fleet to electricity and provide a network of vehicle charging stations for public use.
The ambitious timeline depends on agreement by the federal and provincial governments to join in the Caisse’s scheme for a “public-public” partnership in which future seniors are the primary equity holders. Sabia said the business model is “a virtuous circle in which profits from passenger fares will feed public pension payouts. Every time passengers use their new transit system, they will be helping to secure their future retirement.”
April 14, 2016
Are Canada’s rail-safety regulators in the pocket of a regulation-averse industry?
Paul Chiasson / THE CANADIAN PRESS
Smoke rises from railway cars that were carrying crude oil, after a derailment in LacMegantic, Que., July 6, 2013.
By: Bruce Campbell – The Toronto Star
Transport Minister Marc Garneau said recently that rail safety is his number one priority. The federal budget pledged an extra $143 million over three years to, among other things, “support new and expanded activities to strengthen oversight and enforcement” of rail safety.
While this is a laudable step, fundamental problems with the rail regulatory regime remain. Toronto mayor John Tory and 17 counsellors raised some of these in a letter to the minister.
Not mentioned was the issue of regulatory capture, which gained widespread attention during the U.S. subprime mortgage crisis. It is generally accepted that a major cause of the crisis was that regulators were in the pocket of a regulation-averse industry.
Capture exists where regulation is systematically directed to benefit the private interest of the regulated industry at the expense of the public interest. Characteristically, industry is able to shape the regulations governing its operations. It regularly blocks or delays new regulations, and seeks to remove or dilute existing regulations deemed be adversely affecting profits.
There is considerable evidence that regulatory capture of the rail regulatory regime played a role in the 2013 Lac Mégantic rail disaster.
Most importantly, why were these trains allowed to transport their massive oil cargo with only one crew member? Immediately after the accident, Transport Canada reversed itself, issuing an emergency directive requiring a minimum of two operators for trains carrying dangerous goods — an order which was subsequently entrenched in the Canadian rail operating rules.
Omitted from this narrative is how, several years earlier, the Railway Association redrafted the rail operating rules, notably introducing General Rule M, which enabled companies to implement single-person train operations for freight trains, under certain conditions, without needing a formal ministerial exemption. Transport Canada approved this rule modification, over the objections of the unions, without ensuring an equivalent level of safety.
Subsequently, the RAC lobbied hard on behalf of Montreal, Maine & Atlantic Railway — the first company to take advantage of the rule change; one with a poor safety record — to enable it to operate oil trains on its Lac-Mégantic line with a single operator.
Senior Transport Canada officials approved the MMA request despite opposition from within Transport Canada itself, and contrary to the advice of its own National Research Council-commissioned study.
A draft of the Transportation Safety Board (TSB) report, obtained by Radio-Canada, stated that the existence of a single operator was “a cause and contributing factor” to the accident. In the report’s final version this cause was curiously demoted to “findings as to risk.”
There is also evidence that the regulatory regime has not changed fundamentally since the disaster.
For example, the industry continues its knee-jerk defence of the Safety Management Systems (SMS) regime. This system was designed to give the companies greater responsibility for ensuring the safety of their operations. However, in an environment of regulatory capture, a SMS regime becomes highly problematic.
The industry claims that SMS is an effective additional line of defence. But that’s only true if government allocates sufficient resources, including on-site inspectors, for traditional oversight. Failing that, companies are in practice left to regulate themselves.
The sad history of MMA’s totally defective safety management system, and the failure of Transport Canada to do anything about it, is a case in point.
Several reports, including from Auditor General, have pointed out that SMS “contained serious flaws.” Safety Management Systems remain on the Transportation Safety Board’s watch list as “among those issues posing the greatest risk to Canada’s transportation system.” A vague TSB letter that there has been “satisfactory intent” to fix it, provides little comfort.
Furthermore, despite repeated requests from many municipalities, companies are still resisting making public their safety reports, risk assessments, and real-time information about their dangerous goods cargo.
There remain too many unanswered questions about the causes of that terrible tragedy, including the nature and extent of regulatory capture by industry. The people of Lac-Mégantic were victims of a regulatory regime that failed catastrophically. They should not be victimized again by a system that continues to obscure the truth about what happened and who was responsible — essential to preventing it from happening again.
Bruce Campbell is a visiting fellow at the University of Ottawa Faculty of Law, on leave from the Canadian Centre for Policy Alternatives. He received the 2015 Law Foundation of Ontario Community Leadership in Justice Fellowship.
April 11, 2016
By Jacquie McNish and Laura Stevens – The Wall Street Journal
CP says it sees ‘no clear path to a friendly merger’
Canadian Pacific Railway Ltd. abandoned its nearly $30 billion pursuit of Norfolk Southern Corp. on Monday after it was unable to overcome a wall of opposition from rival railroads, shippers and U.S. politicians warning the merger would diminish competition.
Canadian Pacific also has no plans to initiate merger talks with other competitors, Chief Executive Hunter Harrison said in an interview.
“I doubt very much we will be reaching out to anyone else. We fought the good fight; we tried to educate the public. But the political and economic environment was against us,” he said.
He said the Calgary, Alberta-based company’s board decided to withdraw from the takeover field over the weekend as it became clear that political and industry opposition was too great.
William Ackman, CEO of Pershing Square Capital Management LP and a major Canadian Pacific shareholder who actively backed the railway’s merger ambitions, approved the retreat, Mr. Harrison said.
A number of powerful interests including the U.S. Army and a top antitrust official with the U.S. Department of Justice recently raised concerns about the competitive effect of the merger. Canadian Pacific’s complex plan to hold Norfolk Southern in a trust until transportation officials completed a lengthy review of the proposed combination also drew opposition.
Virginia-based Norfolk Southern said its board was committed to “enhancing value for shareholders,” focusing on a five-year plan to eliminate $650 million of annual expenses. The U.S. railway ranks as one of the least efficient of North America’s major carriers.
“We are confident the continued execution of our plan will deliver superior value to all of the company’s stakeholders by best positioning Norfolk Southern to succeed,” the company said in a statement.
Canadian Pacific has been aiming to eliminate bottlenecks in busy rail hubs such as Chicago by merging with an Eastern-based railway to create the first transnational railway in the U.S.
The Canadian railway launched its Norfolk Southern pursuit in November, after a failed attempt in 2014 to combine with CSX Corp. As Norfolk Southern’s board and others voiced opposition, Canadian Pacific quietly—though unsuccessfully—tried to revive talks with CSX in January.
Some regulators, shippers and industry officials have raised concerns that any rail merger would trigger further consolidation, reducing North America’s current stable of seven major carriers to only a few. But with Canadian Pacific’s retreat on Monday, any further merger activity is likely now on hold for the near future. The U.S. Surface Transportation Board adopted rules in 2001 that place a heavier burden on merger applicants to show that a major deal is consistent with the public interest by enhancing competition.
Without the stimulus of a merger, Canadian Pacific faces pressure to boost its slumping earnings and stock price amid a commodity-price rout that has sharply reduced the volume of oil and mining products on the rails. Some analysts have predicted the railway will announce a significant share buyback.
Canadian Pacific reported lower fourth-quarter earnings and revenue in its final quarter of 2015, hurt by a drop in several key freight volumes. Its stock has also fallen sharply from a high of about $214 in October 2014.
Canadian Pacific shares were recently up nearly 4% at $140 in New York. Norfolk Southern shares declined more than 2% to $79.74.
Mr. Harrison had predicted that support for a transnational railway would increase as the U.S. economy pulls out of the commodity-price slump.
“When we have a rebound there will be problems. Where are we going to put all the oil? Are we going to put it on the highways?” he said.
April 8, 2016
By Nick Carey
CHICAGO (Reuters) – The U.S. military on Thursday raised concerns with a federal rail regulator over the voting trust Canadian Pacific CP.TO has proposed as part of its takeover bid for Norfolk Southern NSC.N and said the deal could adversely affect the country’s national defense.
In a letter to the U.S. Surface Transportation Board (STB) dated April 7, the Department of Defense said CP’s proposal to have its chief executive, Hunter Harrison, run Norfolk Southern as part of the voting trust “could prove to be untenable due to the appearance of common control” of the two railroads.
CP, which is Canada’s second-largest railroad, disclosed a $28 billion offer for Norfolk Southern in mid-November. The Calgary-based company has said a merger would result in savings of more than $1.8 billion annually.
Norfolk Southern has rebuffed all advances from CP.
The letter comes as a response to a March 2 petition from CP to the STB seeking a “declaratory order” on its voting trust proposal. The idea would be to place both railroads in a trust – if they agreed to merge – pending a review by the STB. Under the STB’s merger rules, common control is not allowed.
The Department of Defense said putting Harrison, a septuagenarian railroading legend, at the helm of Norfolk Southern while a review was underway would put him in a position in which he “must make business decisions with potentially competing interests.”
The Department said in the letter that “it is too early to determine” whether a merger would degrade national defense, but said “the potential certainly exists.”
Under the rules for a voting trust for a major railroad merger, there may be no collusion, joint decision-making or any other form of common control prior to regulatory approval. The two must continue to operate as separate entities until a merger gets the green light.
A spokesman for CP said the railroad looks forward to “providing a fulsome response” at the proper time to the department’s comments.
The U.S. military relies on rail networks to move defense-related cargo across the country, both during peace and times of war.
A number of major rail customers have recommended against any merger, citing concerns that CP’s plans to cut costs at Norfolk Southern would gut the railroad and harm service. They include package delivery company United Parcel Service Inc UPS.N, the single biggest customer of the major U.S. railroads.
Some U.S. politicians have also spoken out against a merger. Earlier this week, the chairman of the U.S. House Transportation and Infrastructure Committee said he did not believe a merger was in the interests of the U.S. freight transportation system.
April 8, 2016
Ross Marowits – MONTREAL — The Canadian Press
Big investments in both rail and marine infrastructure will be required to accommodate an acceleration in commodities shipments, particularly oil, over the next decade, says the Conference Board of Canada.
In a report released Thursday, the agency said annual tonnage of commodities shipped by rail will grow more quickly than in the past, rising 30 per cent to 260 million tonnes by 2025, up from 200 million tonnes in 2011.
The Conference Board said Canada’s shifting trade patterns are putting additional pressure on the country’s railways and ports to meet the growing demand for Canadian commodities.
Wheat, forest and energy products, especially crude oil, are expected to be the main growth drivers, with rising exports bound for Europe and Asia.
“Improving the performance of Canada’s transportation supply chain is essential to ensure that Canadian exports remain competitive in the global marketplace,” said the 135-page report, which didn’t put an estimate on the cost of upgrades.
Rail corridors between the Prairies and the United States and from the Prairies to British Columbia are expected to experience the most pressure from rising shipments. That will put pressure on Canadian National Railway and Canadian Pacific Railway to continue investing heavily in rail infrastructure to accommodate the increased demand, the Conference Board said.
The two railways spent, on average, more than $1.25-billion a year combined between 2005 and 2014 and appear to be focusing long-term spending in line with the report’s forecast, the board said.
The largest increase in rail volumes is expected to be for transporting energy products from Saskatchewan and Alberta to the United States.
The board said ports in Central and Eastern Canada have enough capacity, but that B.C. ports will need to be expanded to accommodate 7 million more tonnes of agricultural products by 2025.
April 6, 2016
David Morgan and Nick Carey – WASHINGTON/CHICAGO — Reuters
The chairman of the U.S. House Transportation and Infrastructure Committee announced his opposition on Tuesday to Canadian Pacific’s proposed railroad merger with Norfolk Southern Corp, dealing a fresh blow to the prospect of a deal.
“I do not believe it is in the best interests of the U.S. freight transportation system, railroad employees, rail shippers and the short line railroads,” Representative Bill Shuster, a Pennsylvania Republican, said in a statement.
“I believe it is time for all parties to move on from hypothetical merger proposals,” he said.
CP, which is Canada’s second-largest railroad, disclosed in mid-November a $28-billion offer for Norfolk Southern. The Calgary-based company has said a merger would result in savings of more than $1.8-billion annually.
Virginia-based Norfolk Southern has rebuffed those advances.
A number of Democratic lawmakers in Congress, including all the party’s representatives from Illinois and Pennsylvania, have spoken out against a merger.
Some customers also oppose it, including package deliver companies FedEx Corp and United Parcel Service Inc , out of fears the associated cost cuts would hurt rail service. UPS is the largest customer of the major U.S. railroads.
Shuster’s opposition could resonate with the U.S. Surface Transportation Board, a federal rail regulator that has said it will not approve a major railroad merger shown not to be in the public interest. CP and Norfolk Southern would have to agree to a merger prior to a review by the STB.
Shuster noted that Canadian Pacific had actively pursued a merger in the United States since 2014. An earlier bid was rejected by CSX Corp.
“A strong, healthy and well-functioning freight rail system is critical to the movement of goods in this country,” he said in his statement.
“However, CP’s pursuit of a merger over the last two years has done nothing but create uncertainty in the rail industry, and there continues to be no clear path forward for such an arrangement.”
A CP spokesman said in an email that a merger with Norfolk Southern would provide “better, faster service for shippers” at a lower cost.
“The end result would be a single-line, transcontinental option that improves market access and ensures the timely and efficient flow of freight,” the spokesman said.
Norfolk Southern shares were down 1.8 per cent in midday trading on the New York Stock Exchange, while CP shares were largely unchanged on the Toronto Stock Exchange.
April 6, 2016
CN announced yesterday that 15,000 employees have completed railway training at its two education campuses since they opened in 2014.
The milestone of 15,000 workers trained “reflects the re-engineering of how CN hires a new generation of railroaders and upgrades the skills of current ones,” said CN President and Chief Executive Officer Claude Mongeau in a press release.
“Sustaining a skilled employee base and instilling a strong safety culture in our ranks are critical priorities for CN as it builds for the future,” he added.
Also yesterday, the company unveiled plans to provide customer safety training under a new CN Campus Partnership Program. Starting in May, the railroad will offer safety courses to its largest carload customers at the training campus in Winnipeg, Manitoba. The courses will deal with track, basic rail safety and the requirements of safe switching operations.
In the near future, CN plans to roll out a similar customer program at its campus near Chicago. The target audiences eventually will include smaller carload customers, short lines and intermodal customers.
CN built the training centers — which cost of a total of $60 million in Canadian dollars — as part of a workforce renewal program launched six years ago. Employees receive hands-on training in learning labs with equipment such as locomotive, crane, and signal and communication simulators. Outdoor labs feature dedicated rolling stock and other equipment for field training.
“Quality on-boarding and employee training are essential to attracting, retaining and developing talented railroaders who will work safely and help CN maintain its leadership position for many years to come,” Mongeau said. “CN continues to innovate and adapt to changing forces and now we want our customers and other stakeholders to share how we think of and practice safe railroading every day of the year.”
April 1, 2016
Written by Carolina Worrell, Managing Editor – Railway Age
For the third week in a row, freight traffic shows no signs of growth. For the week ending March 26, 2016, carloads and intermodal units took another big hit, dropping 18.5% and nearly 15%, respectively, the Association of American Railroads (AAR) reported on March 30.
For the week, total U.S. weekly rail traffic was 470,271 carloads and intermodal units, down 16.5% compared with the same week in 2015.
Total carloads for the week ending March 26 were 232,348 carloads, down 18.5% compared with the same week in 2015, while U.S. weekly intermodal volume was 237,923 containers and trailers, down 14.5% compared to 2015.
Two of the 10 carload commodity groups posted an increase compared with the same week in 2015. They were miscellaneous carloads, up 18.5% to 9,629 carloads; and motor vehicles and parts, up 0.1% to 18,676 carloads. Commodity groups that posted decreases compared with the same week in 2015 included coal, down 37.8% to 66,281 carloads; petroleum and petroleum products, down 22.1% to 10,738 carloads; and grain, down 16.1% to 19,144 carloads.
For the first 12 weeks of 2016, U.S. railroads reported cumulative volume of 2,905,113 carloads, down 13.7% from the same point last year; and 3,085,831 intermodal units, up 2.2% from last year. Total combined U.S. traffic for the first 12 weeks of 2016 was 5,990,944 carloads and intermodal units, a decrease of 6.2% compared to last year.
North American rail volume for the week ending March 26, 2016, on 13 reporting U.S., Canadian and Mexican railroads totaled 316,443 carloads, down 17.8% compared with the same week last year, and 296,384 intermodal units, down 15.9% compared with last year. Total combined weekly rail traffic in North America was 612,827 carloads and intermodal units, down 16.9%. North American rail volume for the first 12 weeks of 2016 was 7,848,116 carloads and intermodal units, down 5.8% compared with 2015.
Canadian railroads reported 70,891 carloads for the week, down 13.8%, and 51,488 intermodal units, down 18.7% compared with the same week in 2015. For the first 12 weeks of 2016, Canadian railroads reported cumulative rail traffic volume of 1,540,562 carloads, containers and trailers, down 5.3%.
Mexican railroads reported 13,204 carloads for the week, down 25.1% compared with the same week last year, and 6,973 intermodal units, down 34.8%. Cumulative volume on Mexican railroads for the first 12 weeks of 2016 was 316,610 carloads and intermodal containers and trailers, down 1.6% from the same point last year.
April 1, 2016
By Ross Marowits, The Canadian Press
MONTREAL – Norfolk Southern Railway’s CEO is urging its employees not to support a motion urging the railway’s board of directors to enter into merger talks with Canadian Pacific Railway.
In a letter sent ahead of the railway’s May 12 annual meeting, chief executive Jim Squires said employees who are shareholders should vote against the motion, a move unanimously recommended by the company’s board.
“Every vote is important,” he wrote in the missive released Tuesday in a regulatory filing.
Squires said the Virginia-based railway has worked over the past months on a strategic plan to streamline operations, drive profitability and accelerate growth.
“We are improving our operations and positioning Norfolk Southern to be a fast, lower-cost, and more profitable railroad.”
Squires also urged employees not to let CP’s resolution become a distraction.
Norfolk Southern has refused to enter into negotiations on CP’s US$30-billion offer, calling it “grossly inadequate” and likely to face substantial regulatory risks.
However, after months of rejecting the Calgary-based railway’s overtures, Norfolk said in a proxy circular released late Monday that it was willing to enter talks if CP was prepared to “meaningfully increase” its bid and the U.S. railway regulator sanctions its proposed voting trust structure.
CP Rail chief executive Hunter Harrison said that the railway is pleased that Norfolk may now be willing to enter into direct face-to-face negotiations.
“CP has consistently stated that we are open to discussing all terms of a potential deal, including price, but we can’t negotiate with ourselves,” he said in a news release.
Harrison said last month that CP was prepared to walk away from a takeover bid if Norfolk Southern shareholders didn’t vote for negotiations. CP said Tuesday that it remains open to working with Norfolk Southern to successfully structure a transaction.
April 1, 2016
Canadian Pacific yesterday filed with the U.S. Securities and Exchange Commission a shareholder resolution that will ask Norfolk Southern Corp.’s board to engage in “good faith discussions” regarding CP’s proposed merger with NS.
CP also filed a letter that will be sent to NS shareholders in which the Canadian Class I describes what it believes would be the merger’s value to shareholders.
CP’s filings follow NS’ move to encourage its employee shareholders to reject CP’s resolution at the NS annual meeting scheduled for May 12. In a letter to employees yesterday, NS Chief Executive Officer Jim Squires noted the company’s progress toward its five-year strategic plan to streamline operations and increase profit. In the letter, Squires asked employees to vote against the resolution.
On Monday, NS also filed a proxy stating CP’s shareholder proposal is unnecessary because the NS board would be willing to start merger discussions if CP obtains a declaratory order from the Surface Transportation Board and is willing to increase its offer.
“CP has consistently stated that we are open to discussing all terms of a potential deal, including price, but we can’t negotiate with ourselves,” said CP Chief Executive Officer E. Hunter Harrison in a press release issued yesterday. “Given we have also asked the Surface Transportation Board for a declaratory order on the voting trust model we were pleased to hear that Norfolk Southern may now be willing to engage in direct face-to-face discussions.”