April 5, 2016 / 2:27 PM / in a year

UPDATE 2-U.S. House Transportation chief opposes CP, Norfolk rail merger

(Adds comment from Canadian Pacific, background, stock moves)

By David Morgan and Nick Carey

WASHINGTON/CHICAGO, April 5 (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 percent in midday trading on the New York Stock Exchange, while CP shares were largely unchanged on the Toronto Stock Exchange. (Editing by Chizu Nomiyama and Paul Simao)

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