On Tuesday large eastern class 1 freight railroad CSX filed with the Surface Transportation Board for approval to acquire Pan-Am Railways, which runs through Pownal, Vermont, serves several customers in the Connecticut River valley and is Vermont Rail System’s largest freight connection at three points — at Hoosick Junction (just southwest of Bennington), Bellows Falls and White River Junction. As you can guess, the stakes are high for freight service to Vermont.

Pan-Am’s lines west of Ayer Massachusetts (including the Connecticut River line) have been run by Pan-Am since 2009 in a partnership with Norfolk Southern (the other dominant large class 1 freight railroad in the east). What to do with these lines presented a complication for CSX since it already has a mainline across Massachusetts and needed a restructured Pan-Am deal to appear not to be reducing competition. CSX needed a solution that Norfolk Southern would go along with. And that will create a future likely to impact Vermont.

CSX explored several alternatives but settled on assigning large shortline operator Genesee & Wyoming as an operator for Pan Am Southern while giving Norfolk Southern trackage rights on its own mainline via Selkirk to Ayer Mass. CSX and NS will continue to jointly own Pan Am Southern tracks west of Ayer retaining the current Vermont connections. Genesee & Wyoming will form a new subsidiary, “Berkshire & Eastern” for administration of the lines, legally separate from its wholly owned subsidiary New England Central Railroad..

Railroad mergers and re-alignments like this are real life incarnations of “Monopoly”, “Ticket to Ride”, “Rail Barron” or poker. One company makes its move, but it affects others on the map, blocking them or forcing them to pay when their traffic has to pass someone else’s square.

With this in mind, consider that this transaction reduces Vermont Rail System connecting carriers from 3 to 2. Certain markets (including the critical connections to CSX and NS) effectively go from 2 carriers to 1. If there is one thing certain about railroad rates it is that they go down in the presence of competitive alternatives. One thing certain about shortlines is they are stronger when they have multiple class 1 options, not only for rates but to be able to access more markets and to route around service issues on one carrier.

Seeking to remedy this situation, Genesee & Wyoming re-structured their bid slightly. As submitted Tuesday, G&W proposes to grant “haulage rights” to Vermont Rail System proposing three routes — from Hoosick Junction to Mechanicville (interchange with NS) — Rotterdam Junction (interchange with CSX), and also from White River Junction and Bellows Falls to East Deerfield, where the Pan-Am yard is used to store propane for winter use.

So what is the concept of “haulage rights?” It is an outgrowth of “trackage rights” where one company is granted rights to operate trains over another company’s tracks for a fee (using the tenant’s crews and locomotives, generally dispatched by the host railroad). Instead of “interchanging” freight with another railroad (which sets their own rates on that portion of the move). “Haulage rights” mean that the receiving railroad will haul traffic at a flat wholesale per car fee on a designated route. On the bill to the shipper, it is as if that railroad wasn’t involved. For billing purposes it would appear that Vermont Rail System directly interchanges with CSX and NS.

But haulage rights are not the same thing as direct access and they do not grant equal power. One issue is the fee. It’s fine to grant rights, but they are meaningless if they are not priced competitively. G&W has promised that the haulage rights they grant will be on commercially reasonable terms that will not unreasonably escalate. Promises like this keep lawyers in business afterward, but G&W does have a commercial incentive to maximize its haulage business.

Another concern: the service is provided as the hauling railroad sees fit. For example, cars for haulage have sat for days in Bellows Falls or White River Junction on Genesee & Wyoming’s New England Central Railroad. Plenty of railroads have been known to play games with neglect of service (a similar problem exists when host railroad dispatch tenant trains – such as Amtrak – according to their own priority and convenience). In this case in comparison it may simply be that Vermont Rail System prizes reliability and customer service higher than G&W, which as a publicly traded operation prioritizes efficiency and cost cutting (but sometimes suffers from staff shortages or other complications). Vermont Rail System trains are highly consistent (over decades) and shippers can count on them.

Vermont Rail System already has existing agreements providing “haulage rights” over the New England Central between Bellows Falls and White River Junction. They also have haulage rights on the same trackage using Pan-Am as the provider. Additionally, the VTR has haulage rights to Palmer, Massachusetts. Canadian Pacific has haulage rights over the Vermont Rail System from Whitehall New York through Rutland to Bellows Falls and then further south into New England via the New England Central Railroad.

Haulage rights allow a company like Vermont Rail System to market to the customer a move directly to NS and CSX with assurance of a consistent rate. Importantly, they do not have to share sensitive billing and customer information with G&W.

While haulage rights (assuming they are at a reasonable fee) do address the commercial concerns of Vermont Rail System and Vermont shippers in terms of rates, these rights will still mean that service choices at White River Junction and Bellows Falls go from 2 to 1 and will eliminate an outlet to reach NS and CSX. Vermont Rail System will be at the mercy of Genesee & Wyoming. G&W asserts and responds that its status as a contract operator to CSX and NS will mean it will be required to provide decent service.

For folks used to highways (or European railway networks) where one can simply go anywhere one wants, this grand life-scale monopoly game seems odd. The economic chessmatch is one primary reason that railroads are at a competitive disadvantage vs. trucks. It is a reflection of the private operation of American railroads, as compared with the socialist economy of highways or European railways. Our system certainly isn’t the only free-enterprise privately run model – the British franchise system has resulted in competing freight railroads (one owned by Genesee & Wyoming) with the rights to go anywhere. Airlines work the same way. Lack of competition exists because (much as in health care) it is most profitable to railroad shareholders to cling to monopoly rather than to operate with the best structure for shippers or the public interest.

In some regards, American freight railroads are the envy of the world and high profits have brought sustained investment in tracks and physical plant. On the other hand, American railroads have virtually abandoned shorter freight hauls,small shippers and a great many commodities. As in other areas of American life, we have as a country chosen to side with large corporations and investors, believing this will lead to efficiency. It probably has, and for quite some time it also led to falling freight rates. There was a profound economic reaction incurred from the government regulation of the ICC that drove railroads to near ruin in the seventies.

I write all this to help you understand the freight railroad world as it exists and is potentially changing, not because we are going to fix it today. Our interest is in keeping you informed on developments that will impact Vermont railroads and our state economy.

This pending transaction now goes before the Surface Transportation Board, the federal replacement for the ICC, charged with regulating railroad commercial arrangements and ensuring competition. The filing is two documents of 80 and 450 pages. The original prior submission was objected to by Vermont Rail System and the states of Vermont and Massachusetts. This action resulted in a STB decision for more scrutiny requiring a subsequent secondary re-filing. There will be further opportunities for comment by the railroads, states, shippers and other parties.

If you want too see a map, go here: https://railvermont.org/go-by-rail/map/


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