(The following article by Chris Sorensen was posted on the Financial Post website on May 16.)
OTTAWA — Senior executives at Canada’s two largest railroads are defending the use of fuel surcharges in the face of mounting criticism from shippers and a hearing on the issue by U.S. regulators.
Both Canadian National Railway Co. and Canadian Pacific Railway Ltd. are watching closely for the outcome of a hearing that was held last week by the U.S. Surface Transportation Board.
The hearing was in response to complaints by shippers that they were being gouged by the fuel surcharges implemented by North American railroads in recent years.
Fred Green, the newly-minted CEO of CP Rail, said that the hearings were the result of “unsubstantiated” complaints from a handful of industries – namely coal and chemicals – that were trying to take advantage of railroads’ recent successes.
“We do not have a profit centre on fuel,” Mr. Green said during a investor conference yesterday held by Scotia Capital. “We haven’t even recovered all the costs that we’ve incurred.
“I’m very confident that this company is behaving appropriately.”
Like most railroads on the continent, CN and CP Rail have been enjoying what some analysts have dubbed a “railroad renaissance” that is related to a commodities boom, growing trade with Asia and relentless focus on efficiency.
With heightened demand for their services, railroads have been able to hike their rates and pass along increased costs to their customers – often in the form of fuel surcharges – leading to quarter after quarter of profits.
Rick Paterson, an analyst at UBS Securities, has even predicted that the sector will soon be in a position to earn its cost of capital – something he doesn’t believe the railroads have ever managed to do before.
That’s good news for the railroads, but some of their customers say they are feeling the pinch. Several businesses have complained that the fuel surcharges at some U.S. railroads are rising faster than energy prices, leading to concerns about price gouging.
However, Jim Foote, the executive vice-president of sales and marketing for CN, said some U.S. railroads were forced to raise rates quickly because many of their customer contracts are long-term and haven’t been updated for years.
Mr. Foote said he didn’t expect U.S. regulators to take drastic action, although he added there may be calls to make fuel surcharges more transparent.
He was unapologetic about the railroads’ actions.
“If we can’t use a fuel surcharge, we will just raise our rates,” he told the conference attendees. “We’re going to recover the cost of fuel.”