Monday, November 09, 2009

Rail-customer advocates say BNSF deal highlights need for reform

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There was an almost euphoric tone to the news last week when the nation's beloved sugar daddy, Warren Buffett, sprung for the rest of Burlington Northern Santa Fe Corp., a big part of Lincoln's economy, Nebraska's and the nation's, the Lincoln, Neb., Journal Star reports. The guys on CNBC acknowledged they just couldn't get enough of their videos of BNSF trains chugging mightily across America's TV screens. A hard-headed business decision can pull at least a couple of carloads of railroad nostalgia, if the whistle is far enough away.

Some don't see the deal so fondly, though. Among them is Robert Szabo, executive director of Consumers United for Rail Equity, a coalition of captive freight rail customers seeking changes in federal law and policy that CURE says would require railroads to provide more competitive pricing and reliable service. CURE represents captive shippers, such as utilities, and those in agriculture, timber and other industries that have little or no option but to depend on railroads.

"The announcement of Berkshire Hathaway's purchase of BNSF highlights some of the key reasons consumers need rail reform now: The current oversight system is broken and railroad monopoly pricing results in excessive rates for consumers," Szabo said in a response to the BNSF deal.

Case in point: The U.S. Surface Transportation Board's decision in favor of Lincoln Electric System and its partners in the Laramie River Station, who accused BNSF of charging way too much to deliver coal to the captive generating plant. That's worth $119 million up front in rate refunds, plus $245 million in future rate reductions. BNSF is appealing in federal court.

Szabo went on: "The Surface Transportation Board recently found BNSF to be 'revenue inadequate,' meaning the board found that BNSF is not earning enough money to attract and retain adequate capital. "Despite the recent STB finding, America's savviest investor is not only purchasing BN stock, but purchasing all of BN's stock and at a 30 percent premium!

"Consumers suffer from this consistent STB record of underestimating the financial strength of the freight railroads, which results in board toleration of every escalating captive rail rate," Szabo wrote.

"If the BN becomes the first privately held large freight railroad in the history of the nation, BN will become even less transparent in its activities because it will not be required to file reports with the SEC," Szabo wrote. "The risk in a transaction like this is that consumers end up paying the premium paid for BN through excessive rates that BNSF can charge because of monopoly pricing protections."

Szabo said he hopes Buffett will put BNSF on a more pro-competitive and consumer-friendly path.

The American Association of Railroads challenged assumptions and criticisms made by the Consumers United for Rail Equity, a shippers advocacy group, in CURE's public response to Berkshire Hathaway's acquisition of Burlington Northern Santa Fe. In particular, the railroad industry group's spokesman, Arthur Holly, called attention to the reduction of railroad shipping costs.

"Average inflation-adjusted rail rates have dropped by nearly half since the Staggers Act partially deregulated the railroad industry in 1980," Holly said in an email. "That has meant billions of dollars in savings for American consumers every year."

He also questioned the logic of CURE's suggestion that BNSF, if and when its owner's stock is no longer publicly traded, won't be as transparent because it wouldn't report to the Securities and Exchange Commission.

"It is the Surface Transportation Board, an independent agency within the U.S. Department of Transportation, as the economic regulator of the railroad industry, with (rate) oversight here," Holly said. "The company's regulatory reporting requirements will not change as a result of the proposed transaction."

He also addressed CURE's suggestion that rates imposed on CURE's membership, captive shippers, pad railroad profits.

"While it is fair to say that railroad earnings have improved in recent years, they cannot reasonably be accused of earning excess profits," Holly said. "If you look at return on total capital - a common way to measure profitability - railroads are only now equal to the median for all other industries. Using return on equity, another common way to measure profitability, the rail industry in 2008 barely exceeded the average among all industries - for probably the first time in modern history."

Railroads are still below several of the highly profitable industries and firms represented in the CURE coalition, Holly said. Railroads since 1980 have reinvested more than $440 billion into their systems and vastly improved rail service - that's more than 40 cents of every revenue dollar, according to Holly.

"Unlike trucks, barges and airlines, America's freight railroads operate almost exclusively on infrastructure they have built, maintain and pay for themselves," Holly said. "These investments, made possible by improved railroad company earnings, are a positive development for America - they will ensure that when the economy rebounds, freight rail will be there to carry more people and the goods that we need."

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