The Rising Influence of Rising Affluence

[DewDiligence]

Railroads, Shippers Face Off

[This is politics as usual, IMO. US railroads, especially UNP, are beneficiaries of The Global Demographic Tailwind for the reasons set forth in the prologue of #msg-58573323.]

http://online.wsj.com/article/SB10001424052702303970604576402070526560698.html

›Freight customers complain of lack of competition, rising rates at hearing

JUNE 23, 2011
By JOSH MITCHELL

WASHINGTON—Freight railroads are raising rates and making big profits despite the fragile economy, drawing increasing scrutiny from federal regulators and the ire of shippers.

The Surface Transportation Board, the federal agency that regulates the freight-rail industry, opened a two-day hearing Wednesday to determine whether there is a lack of competition in the industry, responding to complaints by farmers, coal companies, manufacturers and other rail customers.

The proceeding became the venue for a clash between representatives of shippers, who say consolidation in the rail industry is driving up the cost of goods for consumers, and the chief executives of big rail-freight carriers who said tighter regulation could sidetrack billions in job-creating investment.

Among the shippers' proposals is a requirement that railroads be forced to link their facilities to competitors' rail lines.

Shippers say the change would give them greater access to multiple railroads on certain segments, taking away pricing power from railroads that shippers call excessive.

"Be careful," Kansas City Southern Chairman Michael Haverty said at the hearing. "The ancient oath of Hippocrates, 'First do no harm,' certainly applies to these proceedings."

Rail-industry profits have been booming in recent months. Kansas City Southern reported a 12% increase in revenue and an 18% increase in operating income for the first three months of the year. CSX Corp., Union Pacific Corp. and Norfolk Southern Corp. have all posted double-digit profit gains for five consecutive quarters. In the first three months of 2011, CSX earnings rose 30%, Norfolk Southern's climbed 26% and Union Pacific's increased 24%.

Union Pacific Corp. CEO James Young said new rules that cut into industry earnings could jeopardize investments to expand freight-shipping capacity [no kidding]. He said the rail industry invests a higher percentage of its earnings in capital projects, which lead to public benefits through new jobs and improved infrastructure, than other industries.

"The predictable decline in railroad earnings means that these policies would have a serious negative impact on our investment plans," Mr. Young testified. "Capital spending would decrease immediately just as our nation is looking to railroads to provide more transportation capacity. This would reverse the progress we've made during the last 30 years."

Shippers countered that the four dominant freight railroads are using their clout to raise rates unfairly and arbitrarily.

"The railroads are operating in a presumed deregulated environment, which works fine if the customer has access to competing options," Bob Szabo of Consumers United for Rail Equity, a lobbying group for rail shippers, said in an interview. "If we have to buy electricity from one company, then obviously in our society we regulate that price."

Peter Pfohl of the Western Coal Traffic League said rail-shipping rates in the Powder River Basin, a region in southeast Montana and northeast Wyoming, tripled in nominal dollars between 2003 and 2010 after holding steady for two decades.

He dismissed the notion that the price increases were put in place to cover increasing costs, and instead said a lack of competition in the industry has allowed rail companies to increase rates with shippers having little option but to absorb them.

"There's a substantial competitive problem involving the largest segment of Western rail commerce, and it needs [to be] addressed," Mr. Pfohl said.

Sen. Jay Rockefeller (D.,W. Va.), who is leading the charge for more industry regulation, said in a report last fall that Class I railroads have been raising prices by an average 5% a year above inflation since 2004. [Fuel costs have something to do with this; the formula-based fuel surcharges imposed by the railroads do not fully offset their increases in operating cost.] He said then the trend of increasing rates continued even during the recent recession as other freight-transportation modes cut prices.

The railroad executives said shippers have plenty of access to competitive modes of transportation, including trucks and barges. Railroads say the rate increases correspond to increased costs, including plans to rebuild and expand infrastructure and to hire more employees.

The rail industry is countering the shippers' lobbying efforts with ad campaigns and warnings that the industry would scale back hiring and billions of dollars in planned infrastructure investments if new regulations are put into place.‹