Yesterday, in a major development, which may have a far reaching consequence, the Oxbow Carbon & Minerals LLC sued two major U.S. freight railroads, Union Pacific Corp. (UNP) and Burlington Northern Santa Fe Corp. (BNSF). Privately heldOxbow, which mines and markets coal and natural gas, filed a lawsuit in the U.S. District Court for the District of Columbia, accusing the two large railroad operators for monopolization and price fixing to illegally increase freight rates of shipping coal and other products.
Oxbow claimed that since 2003 Union Pacific and Burlington Northern colluded to avoid direct competition with each other. Union Pacific refused to ship coal from its Oxbow's Elk Creek Mine in Colorado west, to avoid competing with BNSF. Oxbow further claimed that CSX Corp. (CSX) and Norfolk Southern Corp. Co. (NSC), the two other major railroads, were also a part of this price rigging and monopoly practice. However, the lawsuit refrained from naming these two entities.
For a long time, the pricing practice of the U.S. freight railroads becomes a major cause of tussle with captive shippers, who ship their products through railroad and do not have effective alternatives to shipping. These companies are predominantly from electric utilities, chemical, agricultural, and mining sectors.
Congress has discussed about railroad price regulation but so far did not approve any new rules. In September 2010, the U.S. Senate Commerce Committee presented a report in which it stated that the discretionary pricing power enjoyed by the Class I freight rail transport companies are putting excessive pressure on the freight customers.
The freight railroad operators are enjoying this pricing power since 1980 when the U.S. government adopted the Staggers Rail Act. The idea was to allow rail transporters to hike price on captive shippers like electric utilities, chemical and agricultural companies, in order to improve profitability of the struggling railroad industry.
The Senate Commerce Committee opined that the railroads have become financially stable. An improving U.S. economy, massive surge in automotive shipments, and a sharp rebound in many end markets are expected to fuel the future growth of this industry. However, due to the Staggers Rail Act, the railroads are hiking their freight rates by nearly 5% per annum and maintaining double digit profit margin. On the other hand, a higher transportation rate is actually trickling down the end users resulting in higher household expenditures.
The Association of American Railroads, the main industry trade group, argued that the allegation of exorbitant price charge is uncalled in view of massive capital expenditure that these companies need to undertake for building and upgrading railroad tracks.Investment by railroad operators for product and service improvement is far ahead than other transportation industries. Very few U.S. industries can match with the railroad operators with respect to high capital investment rate.
Fiscal 2010 witnessed a record breaking $10.7 billion capital investment, which is expected to grow by another 12%-13% in 2011. Investments in capacity, innovations and use of several state-of-the-art technologies have led to service improvements and enhanced reliability.
The U.S. Surface Transportation Board, the federal agency that regulates railroads, will discuss this issue on June 22, 2011. We believe if the regulators decide to scrap this act, the major freight rail carriers will be severely affected.
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