(Reuters circulated the following story by Nick Carey on March 3, 2009.)
CHICAGO — The new U.S. Congress promises a fresh battle between major railroads and their customers over freight prices, which the railroads warn could lead to new regulations, reduce their capital expenditures and hurt their stock prices.
Some customer lobby groups argue — as they have for years — that the rails charge too much, and say oversight from regulator the Surface Transportation Board (STB) is too weak.
“The railroads have unrestrained monopoly pricing power and the STB protects the rails’ interests instead of their customers,” said Bob Szabo, executive director of customer lobby group Consumers United for Rail Equity (CURE).
Groups like CURE have promoted two bills — one introduced in January and one in the pipeline — they say will result in fairer pricing. And this new Congress may succeed in passing the bills, where Congress has failed in the past.
“This composition of this Congress provides our best chance in years of getting these bills passed,” Szabo said.
The railroads, on the other hand, say they have raised prices to lay new track, and their shareholders demand a sufficient return on investment. And they warn the legislation promoted by customer groups would force them to cut those investments.
For instance, Wick Moorman, chief executive of No. 4 U.S. railroad Norfolk Southern Corp (NSC.N) said his railroad spent $1.5 billion last year on revenue of $10.6 billion.
“If we are not going to be allowed to earn an adequate return, our shareholders are not going to allow us to invest 15 percent of our revenues in capex,” he said. “They are just going to say: ‘No, you can’t do that.'”
“And if we say we are going to do it, they will find someone else to manage the company who listens,” he said.
BILLS, BILLS, BILLS
Not so long ago, the rails were in a woeful state. After deregulation in 1980, the railroads saw dramatic consolidation via a spate of mergers as many operators were near collapse.
The remaining operators spent years pulling up track and shrinking operations. Then came the economic boom earlier this decade, fueled by soaring housing prices and easy credit, which resulted in rising freight volumes.
Improved technology and a new generation of managers also helped the rails to raise prices significantly for the first time since the 1980s. Despite declining freight volumes — the Association of American Railroads (AAR) said freight traffic was down 15.9 percent for the year up to February 21 — the big railroads have announced 2009 price hikes of up to 6 percent.
That angers customers like Don Kimball, CEO of Arizona Electric Power Cooperative (AEPC). This non-profit operation buys 1.5 million tons of coal annually, which is delivered by No. 1 U.S. railroad Union Pacific Corp (UNP.N).
Kimball said Union Pacific rate hikes meant he had to raise prices more than 20 percent last year. He has to do so again in 2009.
“If we want to remain a viable entity, we have to pass on these extra costs on to our customers,” he said. In some cases this will be one too many burdens for them to bear.”
AEPC customer Jerry Kempton, 60, owns a 1,300 acre farm in southern Arizona growing cotton and alfalfa, with 11 electric-powered wells irrigating his land. He is caught between lower commodity prices and higher utility costs.
“It took me 40 days to get approval from the bank for a loan for this year’s crop,” he said. “They couldn’t prove I’d make a big enough margin to make it worth their while.”
Union Pacific CEO Jim Young said he understands Kempton’s situation.
“I know price increases are tough for some people,” he said. “But the rates we had in place were unsustainable.”
Young said customers are right when they say the company’s profit rose 48 percent from 2003 to 2008. But, he added, so did investments, to $3.1 billion from $2.1 billion.
GIRDING FOR BATTLE
Groups like CURE welcomed the introduction into the U.S. Congress in January of the Railroad Antitrust Enforcement Act, which would remove antitrust law exemptions for railroads.
The House Committee on Transportation & Infrastructure is working on a new version of the Rail Competition and Service Improvement Act — the last Congress failed to pass the old version — which would change the way railroads are regulated.
Congressman Jim Oberstar chairs that committee. Senator Jay Rockefeller heads the Senate Committee on Commerce, Science, and Transportation. Both backed the competition act last time.
“The railroads got a bad shuffle of the cards this time round in Congress on the committee level,” said independent analyst Anthony Hatch. “But if any bill is put out to a vote, both bodies are more interested in the long-term health of the railroads.”
If the bills passed, investors would head for the door and push railroad stock prices down, Hatch added.
The rails argue that new regulations on pricing would force them to cut spending, though groups like the American Association of State Highway and Transportation Officials estimate the country must invest $195 billion in new rail over the next 20 years.
“I just hope Congress continues to recognize that if it ain’t broke, don’t fix it,” said AAR head Ed Hamberger.
Union Pacific’s Young warns that should Congress pass any measure to regulate prices “I will cut our capital spending.”
“We’re taking this threat seriously,” he said.