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VANCOUVER, British Columbia (Reuters) - Regulators approved on Wednesday Canadian National Railway's (CNR.TO) purchase of the Elgin, Joliet and Eastern Railway, a deal that had become mired in a political fight.
The U.S. Surface Transportation Board imposed several conditions on the purchase, including having CN pay a much higher than normal share of separating two road-rail crossings, but it said the purchase would result in transportation benefits and would not reduce competition.
The deal will also be subject to a five-year oversight period, and the board said it could impose new conditions if problems arise.
"Approval of this important railroad merger, with the conditions we have imposed, marks a significant step forward to alleviate rail and highway congestion," STB Chairman Charles Nottingham said in a statement.
Canadian National agreed in 2007 to purchase the Chicago-area line from United States Steel Corp (X.N) for $300 million, and faced an end-of-year deadline from US Steel to get regulatory approval to complete the transaction.
CN said it welcomed the decision but was disappointed the board increased the expected costs on replacing grade crossings. It expects to be able to close the transaction shortly after Jan 23.
The companies had originally expected the deal to be completed by mid 2008.
Canadian National operates 32,600 km (20,400 miles) of track in Canada and the United States and wants to use the 198-mile EJ&E to route freight trains around Chicago, where they now face lengthy delays in the congested rail hub.
But the plan has stirred up strong opposition in some wealthy communities west of Chicago, where critics complain increased train traffic on the EJ&E will cause safety problems at highway grade crossings and reduce property values.
The board, which was unanimous in its ruling, acknowledged the heavy public interest in the deal and said the transaction will have an adverse impact on some communities.
But Nottingham said the deal will also help some parts of Chicago that have been "disproportionally burdened for many decades" by heavy rail traffic.
The fight was being watched by the railroad industry, which is under pressure to increase capacity in North America but worried that efforts to do so will be blocked by local community opposition.
A coalition of communities opposed to the deal said it was disappointed in the ruling and criticized the board for releasing it on Christmas Eve.
"An announcement of this magnitude on a day where families are celebrating the holiday season and newsrooms are operating on a skeletal staff shows how disingenuous this process truly is," the group, called the Regional Answer to Canadian National, said.
The STB went beyond the recommendations of its own environmental review in saying CN must pay more than 67 percent of the cost of separating two highway-rail crossings that were expected to experience congestion problems.
Railroads have traditionally been required only to pay about 5 percent of the cost of grade-separation projects, and Canadian National had complained that critics were attempting to block the deal by making it too costly.
The board said the traditional allocation system does not apply in this case because CN is benefiting by converting the EJ&E from a railroad that concentrates on local freight traffic to one that facilitates longer-haul train movements.
Canadian National has said previously it will spend $160 million to upgrade the EJ&E, with $60 million designated for mitigation projects.
Reporting Allan Dowd, editing by Peter Galloway, Leslie Gevirtz