(Dow Jones Newswires circulated the following story by Doug Cameron on March 6.)
NEW YORK — The largest U.S. railroad operators will on Friday face the first court test of allegations they illegally inflated fuel surcharges by billions of dollars over the past five years.
Lawyers representing a group of freight shippers will ask a U.S. court to consolidate 13 complaints filed last year into a single class-action lawsuit against five rail operators and the industry’s trade association.
The rail industry vehemently denies the charges, but the hearing comes at a sensitive time as operators seek to re-negotiate freight contracts amid rising fuel prices and continue a congressional battle against re-regulation of the industry.
“The surcharge is a hot topic, and a topic of frustration (among shippers),” said Gilles Roucolle, director of the surface transportation practice at consultant Oliver Wyman.
Fuel surcharges have been a key component in the so-called “rail renaissance” since 2004, which has seen industry profits climb amid surging demand and tight capacity. Analysts said this had provided operators with pricing power despite the weakening domestic economy.
The surcharge system introduced in mid-2003 has mitigated the impact of rising diesel costs, and suits filed in six U.S. district courts allege operators colluded through the Association of American Railroads, or AAR, to boost revenue through coordinated programs and rate increases.
“There is a widening suspicion as to what’s going on,” said Benjamin Brown, an antitrust partner at law firm Cohen, Milstein, Hausfeld & Toll in Washington, D.C., which is seeking co-lead counsel status in a consolidated rail case. “The number of companies affected by any conspiracy to fix railroad charges is enormous.”
Brown’s firm was head counsel for a class-action suit involving fuel surcharges in the airline industry launched in 2006. Carriers including British Airways PLC (BAIRY), Deutsche Lufthansa AG (LHA.XE) and Korean Air Co. ( 003490.SE) have so far paid more than $1 billion in damages after admitting illegal fuel surcharge-related price-fixing in the passenger and cargo sectors. More fines and damages are expected from ongoing litigation.
The AAR is named as a defendant in the rail suits alongside the five largest U.S. railroad operators: Burlington Northern Santa Fe Corp. (BNI), CSX Corp. ( CSX), Kansas City Southern (KSU), Norfolk Southern Corp. (NSC) and Union Pacific Corp. (UNP).
The complaints have been brought by a variety of shippers, including Dakota Granite, a Millbank, S.D., monument manufacturer, and Dad’s Products Co., a Meadville, Pa., pet food producer.
The AAR has already fended off allegations about inflated fuel surcharges, though critics said it reflects wider disquiet among some customers. The American Chemistry Council, a trade organization, last year claimed railroads had overcharged customers by $6.4 billion through surcharges over the past four years.
The AAR described the claim as “absurd” and pointed to a review by the Surface Transportation Board, or STB. The association said the main industry regulator found no evidence of “overcharging.”
The STB last year barred operators from calculating surcharges as a percentage of their standard, or base, freight rates, which had been common industry practice. To the dismay of some shippers, the STB took no retroactive action despite ruling the practice as “unreasonable.”
“They are going to try and take cover behind the STB,” said Brown, of the industry’s expected defense.
The AAR said Thursday that all its activities “have been carefully conducted with antitrust laws foremost in mind.
“AAR is confident it has fully complied with all antitrust laws and regulations,” the industry group said in a statement emailed to Dow Jones Newswires. “The allegations in class action laws are completely without merit.”
The request to consolidate the existing cases will be heard by Judge Paul L. Friedman in the district court for the District of Colombia.