(Reuters circulated the following article by Nick Carey on May 7.)
CHICAGO — The resurgence of the U.S. railroads has investors laughing all the way to the bank, but rail customers are far from happy about steep energy surcharges they claim are fueling railroad profits.
“I don’t like using the term, but it feels like price gouging,” said Bob Zelenka, executive director of the Minnesota Grain & Feed Association.
Over the past three years, railroads have benefited from rising U.S. imports and growing demand for coal from utilities. Higher fuel costs and a driver shortage in the U.S. trucking industry have pushed more freight onto rails.
As a result, share prices of most big U.S. railroads have soared since 2003 on the back of record profits.
But just as consumers facing $3 a gallon for gasoline complain of price gouging by oil companies, U.S. shippers say railroads are profiting unfairly by adding unnecessarily high surcharges to offset their rising diesel fuel costs.
For the two largest U.S. railroads, Union Pacific Corp.
“This is a concern for us and we would strenuously oppose any effort by the railroads to increase their profits through surcharges,” said Jim Owen, a spokesman for the Edison Electric Institute, a trade association for electric utilities.
Railroads contend that they do not profit from the surcharges.
In response to customers’ complaints, the Surface Transportation Board (STB), the federal regulator that oversees rail rate and service disputes, will hold a hearing on May 11 to examine the “manner in which fuel surcharges are calculated and charged by railroads.”
Representatives for the shippers, their trade associations and the railroads are all scheduled to speak.
RAILROADS SAY NOT PROFITING FROM SURCHARGES
The railroads say they are not fully recovering their costs from the surcharges, let alone making a profit from them, and are confident the STB will reach the same conclusion.
“We are currently recouping only 90 percent of our extra fuel costs,” said Jim Young, chief executive of Union Pacific. “We are definitely not profiting from surcharges.”
Union Pacific’s stock price has nearly doubled since May 2003. Shares of the other big U.S. railroads — Burlington Northern, Norfolk Southern Corp.
Fund managers say surcharges reflect the railroads’ ability to dictate prices amid tight capacity after two decades of stagnating rates.
“After lean times in which many railroads went broke or were consolidated, the rail companies are now finally able to raise prices and apply surcharges,” said Craig Hodges, portfolio co-manager at Hodges Capital Management.
Hodges’ firm manages nearly $1 billion in assets and holds stock in Union Pacific, Burlington Northern, Norfolk Southern and Canadian National Railway
“The railroads are in business to make a profit one way or another and that’s why we own them,” he said.
Shippers complain they have been left in the dark about how most surcharges are calculated.
“We don’t know for sure, but we think the surcharges are a profit center for the railroads,” said Stephen Pocsik, a vice president at Total Petrochemicals USA Inc., a unit of Total SA
Most railroads levy fuel surcharges calculated on top of the base rate charged for moving goods.
Burlington Northern, the second-largest U.S. railroad, has introduced a mileage-based approach, which Chief Executive Officer Matthew Rose said is the “fairest system available.”
Steve Strege, executive vice president of the North Dakota Grain Dealers Association, said Burlington Northern’s system is an improvement, but still leaves questions unanswered.
“We are glad to see (BNSF) do this but we are not convinced it is based on real fuel costs,” he said. His group wants to know why the surcharge is 22 cents a mile for coal, but 33 cents a mile for grain.
Analysts say assessing fuel surcharges is complicated as it is difficult to distinguish between them and revenue.
“The full impact of the surcharges is hard to calculate as the lines between revenue and surcharges are blurred,” said Stephen Brown of Fitch Ratings. “As railroads renegotiate contracts with customers, those lines are becoming more blurred as base rates and surcharges are negotiated together.”