(The following story by Frank Graham appeared on the North Platte Bulletin website on November 20.)
NORTH PLATTE, Neb. —More than two-dozen customers of Union Pacific Railroad and the next four largest U.S. railroad companies claim in a lawsuit the railroads made billions of dollars by illegally fixing prices on fuel surcharges.
But lawyers for UP, Burlington Northern Santa Fe Corp., Kansas City Southern Railway Co., CSX Corp. and Norfolk Southern Corp. say the case should be thrown out for a lack of evidence. They say the railroads did not break any laws in creating a “price index” to pass on surging fuel costs to customers.
The collective decision by the companies to create the index “was lawful behavior,” said Kent Gardiner, lead lawyer for the railroads, at a hearing last week in Washington. The plaintiffs “don’t allege a restraint of trade” associated with the index, he said.
But the plaintiffs, direct purchasers of rail services and customers who contracted through intermediaries for shipping, say the companies colluded at an industry meeting in 2003 to fix surcharge tied to overall transportation costs rather than to actual fuel prices over a 3-1/2-year period.
Some of the plaintiffs include Archer Daniels Midland Co.; US Magnesium, a Salt Lake City-based producer of magnesium; Zinifex Taylor Chemicals Inc. of Clarksville, Tenn.; Dakota Granite Co.; West Alabama Sand and Gravel; and Strates Shows Inc., a traveling carnival based in Orlando, Fla.
Archer Daniels Midland also brought a lawsuit but dismissed it recently following a new “tolling agreement” with Norfolk Southern.
The railroad operators could pay billions of dollars in damages should a judge find they fixed fuel surcharges, according to counsel for the class-action suit.
“Based on what we know, we believe the damages could be in the billions of dollars,” said Stephen Neuwirth, a partner at Quinn Emanuel Urquhart Oliver and Hedges, one of two co-lead counsels for shippers involved in the class-action suit that consolidated most of the claims.
“We believe the plaintiffs have given you evidence of a plausible conspiracy,” which is enough to let the case go forward at this stage, Neuwirth told the judge.
Neuwirth pointed to a ruling last year by the Surface Transportation Board, which regulates some U.S. rail rates. The board found that the railroads used the surcharges to raise revenue on regulated freight, not just to cover increases in the price of fuel. He said this evidence alone is enough to allow the case to proceed.
On Oct. 7, U.S. District Judge Paul Friedman from the District of Columbia ruled that the case could proceed and denied the railroads’ motion for dismissal. The court found the case supported a “plausible interference” of certain anti-trust laws.
The national economy is in a serious slump. Airlines are charging fees for every service and the big three U.S. automakers are in serious trouble. Businesses have been squeezed by higher fuel costs for the past several years and housing has been hit hard.
Historically, those factors would drag down railroads as well, but this time they haven’t.
Rail freight’s big players have been racking up record profits, strong revenue gains and tremendous stock market returns.
Some economists credit the commodities boom with huge shipments of grain and coal offsetting deep cuts in lumber and autos.
Railroads have credited their diversified business mix and improved fuel efficiency.
But some of the railroads’ customers claim illegal surcharges have made the difference, sparking the antitrust class-action lawsuits and talk of re-regulating the industry.
Rail deregulation
In the 1970s, the railroad industry – then closely regulated by the federal government – experienced serious economic trouble from rising operating costs, financial losses and corporate bankruptcies. Congress passed the Railroad Revitalization and Regulatory Reform Act of 1976 and the Staggers Rail Act of 1980, which largely deregulated the industry.
Railroads and shippers were then allowed to enter into private, unregulated rail freight contracts.
Through mergers and buyouts, the railroad industry became highly concentrated after deregulation.
In 1976, there were 63 Class-I railroads operating in the U.S. Class I railroads. In 2005, there were seven, each with operating revenues in excess of $319.3 million.
A Class I railroad is a large freight railroad and classed based on operating revenues. Smaller railroads are classified as Class IIs and Class IIIs. The exact revenues required to be in each class have varied over time however they are now continuously adjusted for inflation.
By 2002, the Surface Transportation Board, which has some regulatory functions over railroads, imposed a moratorium on any more major mergers.
The five railroads named in the class action lawsuit – UP, Burlington Northern Santa Fe Corp., Kansas City Southern Railway Co., CSX Corp. and Norfolk Southern Corp. – account for more than 90 percent of all the freight shipped in the U.S.
The other two Class-I railroads, Grand Trunk Corp. and Soo Line Railroad Co., are not included in the lawsuit.
The case
All the railroads belong to the Association of American Railroads, a trade organization based in Washington, D.C.
In the fourth quarter of 2002, the AAR announced its members would separate fuel costs within shipping bills so they could add a separate fuel surcharge to the shipping price without having to negotiate a new contract, according to the lawsuit.
The lawsuit said the railroads’ plan would only work if all the railroads “played along and did not undercut each other.”
UP originally based its fuel surcharges on the West Texas Intermediate Crude Oil Index, the lawsuit said, while BNSF based its surcharge on the U.S. Department of Energy On-Highway Diesel Fuel Price Index.
But in June 2003, UP suddenly switched to the same index used by BNSF and moved in “lockstep” with BNSF “from then on.” Both railroads administered and calculated the index in precisely the same way, according to the lawsuit, even down to the dates on which the surcharges would become effective.
CSX and Norfolk Southern also coordinated their surcharges, the lawsuit said, and were identical starting in February 2004.
The lawsuit said given the convergence of the arbitrary surcharges, the myriad differences in economic factors, business demands and requirements between the railroads, it is nearly impossible they would independently arrive at the same conclusions about which indexes to use, calculation of surcharges, dates of the surcharges and amounts.
The railroads operate geographically dispersed, multibillion-dollar corporations and have massive fuel requirements they must supply at different prices at different times to meet various business requirements, the lawsuit said.
“The parallel behavior could not have resulted from chance, coincidence and independent responses,” the lawsuit said.
The conspiracy
In late March 2003, the lawsuit said, top executives of the five railroads named in the lawsuit attended the spring 2003 National Freight Transportation Association meeting at the Greenbrier Resort in West Virginia, owned by CSX.
The lawsuit said the object was to “provide a forum for transportation executives of industrial firms and transportation companies to consider and discuss” various developments in the industry.
The NFTA meetings allowed railroad executives “ample cover to meet and conspire at meals, on the golf course and at other resort facilities,” the lawsuit said.
The meetings “provided numerous opportunities for top executives to discuss and agree on the specifics of the rail fuel surcharges that were then implemented in or around July 2003.”
The lawsuit said the railroads “fixed the price of the surcharges to fix the prices of rail freight” and said the surcharges were not a cost recovery mechanism but a “revenue generating profit center.”
The railroads allegedly coordinated their collusion of pricing for 38 months, according to the lawsuit.
In January 2007, the STB concluded that computing the surcharges as a percentage of the customer’s base rate was a “misleading and ultimately unreasonable practice.” The STB directed the railroads to stop the practice.
The lawsuit said that while demand for freight services grew during the period of the alleged conspiracy, the railroads. market shares remained relatively constant, proving that the railroads agreed to fix prices rather than compete for new customers.
According to the STB, class-I railroads generated operating revenues that reached more than $52 billion in 2006.
A New Jersey Grand Jury also reviewed documents of the rail fuel surcharges after a request by the New Jersey Attorney General, according to the lawsuit but no indictments have been returned.