January 6, 2009 at 2:14 pm #3256
Rail shippers ask Congress to regulate freight prices
(The following story by Alex Roth appeared on the Wall Street Journal website on January 5, 2009.)
NEW YORK – A growing number of railroad customers, arguing that big rail companies have been raising prices unfairly, are pushing for the incoming Congress to reinstitute tighter federal regulation of the industry.
Companies that rely on railroads to transport their goods or supply them with essential commodities have accused railroads of gouging for almost as long as trains have operated. But the debate over pricing intensified in the past few years as rail companies finally started posting big profits after decades of declining volumes and flat or falling rates.
Railroads first gained a measure of pricing power in 2004, when the economy rebounded and demand for rail services exceeded capacity. Railroads began raising prices and “were literally shocked by their success,” said Rick Paterson, a UBS analyst.
Even as the economy sagged in the past year or so and freight volumes have declined, most railroads have been able to keep making money. The results have been fueled by industry consolidation, improved operating performance and the greater fuel efficiency of trains over trucks. But higher rates also have played a role.
Mr. Paterson said the biggest rail companies raised prices a total of 6% on average over the first three quarters of 2008, not including fuel surcharges. That rise compares with a drop in the cost of sending goods by truck and ship, and some rail customers have seen their rates increase by much steeper levels.
Seminole Electric Cooperative of Tampa, Fla., filed a complaint with federal regulators in October saying CSX Corp., one of the nation’s four major railroads, had doubled its rate for shipping coal. The energy producer said the move would boost electric bills by $100 million for the cooperative’s 1.7 million Florida customers.
Donald Kimball, chief executive of Arizona Electric Power Cooperative Inc., said Union Pacific Corp. has “nearly doubled” the electric cooperative’s rate for shipping coal.
The rate increases have prompted some big customers to fight back with the help of a group called Consumers United for Rail Equity. The group, whose president is Mr. Kimball, has been pressing Congress and regulators to make railroads be more competitive on pricing. The group includes trade associations for utilities, chemical companies, manufacturers and other industries.
Railroads defend their prices as producing fair returns after decades of losing business to the trucking industry.
Ed Hamberger, president of the Association of American Railroads trade group, said these profits are vital at a time when railroads need to spend $148 billion to accommodate an expected boom in rail volumes in decades ahead. He also cited a recent study, commissioned by the federal Surface Transportation Board, that concluded that rising rail rates in recent years largely have been “the result of declining productivity growth and increased costs rather than the increased exercise of market power.”
CSX has called Seminole’s new rates “fair and reasonable.” Its complaint is pending before the Surface Transportation Board.
The financial performance of railroads stood out in a year when the ailing economy brutalized other freight haulers, such as truckers and ocean shippers. Excluding factors such as one-time charges, each of the largest railroads — CSX, Union Pacific, Burlington Northern Santa Fe Corp., and Norfolk Southern Corp. — reported higher year-over-year profits for each of the first three quarters of 2008. Their total freight volumes, meanwhile, dropped almost every quarter.
Some analysts predict the industry might also report modest profit gains for the fourth quarter, even though rail freight volumes in November were down 10%, the largest single-month drop since the railroad association began tracking such data in 1997.
Advocates for stricter government oversight of railroad pricing predict an incoming Congress with a larger majority of Democrats will be more sympathetic to the idea.
Among the Democrats with more power will be Sen. John D. Rockefeller of West Virginia, who takes over as chairman of the Senate Commerce Committee. As senator of a state where coal companies rely heavily on railroads, he has been a vocal critic of the industry’s pricing practices. An aide to Sen. Rockefeller said “achieving competitive balance” between the interests of the railroads and their competitors will be high on the senator’s agenda.
Two pending bills would make it easier for customers to challenge railroad rates with the transportation board and subject the industry to stiffer antitrust scrutiny. Among the biggest proponents are the estimated one-quarter to one-third of rail customers known as “captive” shippers — those that can’t shop for lower rates because their facilities have access to only one railroad, according to Mr. Paterson, the UBS analyst.
Last month, the American Bar Association’s committee on antitrust law endorsed one of the bills.
The railroad industry says the pending legislation would amount to the re-regulation of an industry that was famously deregulated in 1980, a time when railroads were hemorrhaging market share to the trucking industry.
“The railroads can yell re-regulation all they want, but guess what — that’s not a bad word today,” said Robert Szabo, executive director of Consumers United for Rail Equity.
The railroad association’s Mr. Hamberger acknowledged that Congress will likely show “renewed interest” in the pending rail bills as a result of Sen. Rockefeller’s position, but said such legislation would be a big mistake. The industry needs funds over the next two decades to install new tracks and otherwise expand capacity. Given that a freight train can haul a ton of freight 436 miles on a gallon of fuel, Congress should be nurturing the industry, not hurting it, he said.
“As Congress is wrestling with how to lower the nation’s carbon footprint, we’re part of the answer,” Mr. Hamberger said.
Monday, January 05, 2009
January 6, 2009 at 2:18 pm #6370
FYI – saw this article on Rail regulation request in the WSJ yesterday and tracked down electronic version ( http://www.ble.org/pr/news/headline.asp?id=24794 ).
It figures the Govmt. might pick the wrong thing to look at re-regulating….. would make lot more sense to do Nat Gas or Power (only on better regulation basis) than freight. But this would seem to line up with the “Infrastructure rebuild” pattern of incoming admin.
Even though US coal utilities have minimized lot petcoke burn due to spike in Petcoke prices, they remain one largest consumers of domestic fuel coke next to cement industry. And anything that impacts coal freight would go double for petcoke since they are unable to move unit train volumes.
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