Logistics news: STB reverses 2007 ruling, BNSF to pay
By Jeff Berman, Group News Editor -- Logistics Management, 3/1/2009
Washington and Fort Worth Texas — More than 15 months after the Surface Transportation Board (STB) issued a decision in favor of Class I rail carrier Burlington Northern Santa Fe (BNSF) regarding a pricing challenge from two utility shippers, the STB has reversed course and ordered $345 million in reparations and reductions from BNSF to the shippers.
Western Fuels Association Inc. and Basin Electric Cooperative Inc. had initially challenged the railroad transportation rates charged by BNSF to haul 8 million tons of coal each year from mines in Wyoming's Powder River Basin to their electric-generating plant in Moba Junction, Wyo., said STB officials. The STB noted that this utility plant is captive to BNSF and provides electricity into grids serving customers in nine Western states.
The STB said it found "the transportation rates BNSF charged the Utilities...to be unlawfully high." The decision also stated that BNSF was ordered to lower its transportation rates by approximately 60 percent. The STB stated that this represents the single largest award to a captive shipper, with BNSF obligated to reimburse the shippers for approximately $100 million in overcharges from 2004–2008.
The $245 million balance of what BNSF will pay out will come from an STB edict ordering BNSF to lower its current rates to the revenue-to-variable cost (R/VC) levels ordered by the STB in this decision and keep these rates below the R/VC ratio of 240 percent through 2024.
BNSF said it "strongly opposes the STB decision on its merits and believes the process used to arrive at this result is unfair." The company added that the case is a manipulation of the new rule and represents an outcome-oriented decision in favor of these shippers and maintains that the rates charged to the shippers are reasonable from both a market and regulatory perspective.
A noted railroad analyst told LM this decision may ultimately do more harm than good for railroad carriers and shippers.
"It is a bad decision that comes at a time when rail transportation is being encouraged, as well as [a push] to take trucks off the highways," said Roy Blanchard, president of Philadelphia-based railroad consultancy The Blanchard Group. "The potential implications of this are horrendous, because the minute you start regulating what somebody can charge for a line of service, you limit your ability to provide that service."
Morgan Stanley analyst William Greene wrote in a research note that the while the STB's decision is not a game changer for rail rate regulation, it demonstrates that there are political pressures to curb rail pricing, and the STB is sensitive to these concerns. "The more the STB demonstrates a balanced approach to rate regulation, the more likely calls to re-regulate railroads lose urgency in Congress," wrote Greene.
That said, as captive rates move higher, shipper wins in rate cases could become more common leading more rails to settle at regulatory limits rather than face the cost of litigating a rate case," said Greene
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