(The following story by Dan Piller appeared on the Des Moines Register website on April 4.)
DES MOINES, Iowa — BNSF Railway Chairman Matt Rose doesn’t “stand in front of shippers and say, ‘Don’t worry, be happy.’ I know that nobody likes fuel surcharges,” he said.
Shippers are up in arms about rail fuel surcharges that add up to 25 percent to their freight bills, as carriers struggle to cope with diesel prices around $4 a gallon.
Those charges, which come as ethanol and biofuel shipments continue to grow, have kept alive a four-year-old movement to reimpose on rail carriers a rate regulation dropped 28 years ago.
A fresh challenge came two weeks ago when Archer-Daniels-Midland filed an antitrust suit in federal court in Minneapolis against BNSF and four other large U.S. railroads.
ADM, which has an ethanol plant in Cedar Rapids, along with corn-processing plants in Clinton and Cedar Rapids and oilseed processing plants in Des Moines and Clinton, accused the railroads of using fuel surcharges as a price-fixing mechanism.
“We think the suit is without merit, but will defend it vigorously,” Rose said during a visit to a transportation conference this week in Des Moines.
In 2007, BNSF moved 70,000 tank cars full of ethanol – each holds 29,000 gallons – from Iowa and the Midwest to major urban areas where ethanol is required as an environmental additive.
“The big challenge has been on the destination end, where there has been a need for blending facilities,” Rose said.
California and Texas were the early destinations for Midwest ethanol, but East Coast and Southeast markets have opened in the last year, generating early investigations of a $3 billion pipeline that would run from northwest Iowa to the New York harbor.
Rose shrugged at the possible threat to the rail business. “There’s a long way between a feasibility study and a pipeline ready for shipment,” he said.
BNSF operates a 32,000-mile rail network in 26 Western states. Its main line in Iowa generally parallels U.S. Highway 34 across southern Iowa, with a branch extending from Albia into Des Moines. Another major branch line runs from Council Bluffs to Bayard.
BNSF has told analysts it is expecting strong traffic in its mainstay coal and grain shipments. The switch by many utilities away from more expensive natural gas to coal has benefited BNSF and other carriers.
But at the same time, the slowdown in housing construction bodes ill for BNSF’s shipments of lumber from the Pacific Northwest, and a drop in consumer spending would threaten the railroad’s lucrative intermodal business.
While rising fuel prices have added to BNSF’s costs, they have driven business to the railroad as truckers have resorted to trailer-on-flatcar intermodal service for longer hauls.
“Of our top 10 customers, four are trucking companies,” Rose said.
As for the movement to reregulate railroads, Rose said, “I always ask people if they really believe that more regulation will cause railroads to invest in their infrastructure. We learned the hard way a generation ago that when railroads don’t earn money, they don’t invest in their systems, and that’s when you begin to see bankruptcies and lost service.”
That argument hasn’t made headway with Consumers United for Rail Equity, a nationwide group of mostly chemical shippers. CURE has pressed Congress the last four years for greater ability for shippers to protest rates.
“We don’t want to go back to the old days of regulation when the ICC (Interstate Commerce Commission) controlled everything the railroads did, but we want to give those shippers that don’t have competitive rail service a way to protest rates before regulators,” said Bob Szabo, executive director of Washington, D.C.-based CURE.
CURE, in a report last year, said railroad fuel surcharges have cost consumers $6.4 billion over the last four years. The railroads respond by pointing to record diesel prices, which have been hovering near $4 per gallon since the beginning of the year.
Railroads could for a time leaven the effect of higher diesel prices through long-term contracts and hedging. But Rose said that at present, only about 10 percent of BNSF’s diesel consumption is hedged.
“The markets have simply been too volatile to risk extensive hedging,” Rose said.
The old ICC and its rate regulation was put out of business by the Staggers Act of 1980, passed in response to the high-profile bankruptcies of the Penn Central, Rock Island, Milwaukee Road and other major carriers. At one time in the late 1970s, about 60 percent of Iowa’s rail system was controlled by bankrupt railroads.
But BNSF and other survivors of those tumultuous days have prospered. The Fort Worth-based carrier has been steadily profitable in recent years, earning $1.8 billion last year on revenues of $15.8 billion. Since 2004, BNSF’s earnings per share have climbed from $2.94 to $5.24 last year.
Omaha investor Warren Buffett took note and bought almost 11 percent of BNSF stock last year, choosing BNSF rather than his hometown carrier, Union Pacific Railroad, for his rail investment venture.