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The Surface Transportation Board (STB) has put the kibosh on Norfolk Southern Corp.'s and the Watco Cos. Inc.'s plan to launch a new short line in Michigan in the first quarter. Yesterday, the board denied the parties' application for an exemption to jointly form Michigan Central Railway L.L.C. (MCR) and change ownership of several lines because NS would have "sufficient control of MCR" despite owning only a third of the venture.

In July, NS and Watco announced plans to form MCR, which would have been headquartered in Kalamazoo and operated 384 track miles in Michigan and Indiana, including segments between Ypsilanti and Kalamazoo, Mich.; Jackson and Lansing, Mich.; and Grand Rapids, Mich., and Elkhart, Ind. The short line also would have acquired NS' trackage rights for an Amtrak-owned line between Kalamazoo and the Michigan/Indiana state line. Watco would have been MCR's parent company and operator, and NS would have been a minority investor in the venture.

However, "NS's influence over MCR far exceeds what would be expected of a minority investor," the STB ruled. NS would retain the right to designate two of the five people on MCR's management committee and one of three capital project committee members, providing NS influence "far beyond its committee voting rights" because the Class I would retain the right to veto "almost all of MCR's significant financial and operational decisions," according to the ruling.

"The [decisions] include: major asset sales or encumbrances; actions that would dilute NS' share of ownership or profits; investment of funds; annual budgets and business plans; operating or capital expenditures exceeding budgets by 10 percent; payment of dividends; borrowing in excess of $1 million; declaring bankruptcy; material modifications of employee benefit plans; and litigation where the amount at issue exceeds $1 million," STB members said in the decision. "These provisions would give NS the ability to prevent MCR from taking the kind of initiative and action ordinarily associated with ownership, and NS' veto power would be perpetual."

NS and Watco officials expressed disappointment with the ruling. They plan to take time to "thoroughly review" their options, said NS spokesman Rudy Husband.