STB holds hearing on Berkshire Hathaway acquisition of BNSF, regarding acquistion premium

Last week, the Department of Transportation’s Surface Transportation Board (STB) held a public hearing to explore the impact of Berkshire Hathaway’s acquisition of the BNSF Railway Company on “certain costing determinations.”

Berkshire Hathaway acquired BNSF in February 2010 for $43 million, with the investor taking a write-up of roughly about $8.1 billion based on the acquisition premium paid by Berkshire Hathaway.

In filings leading up to last week’s hearing various rail shippers and rail shipper groups voiced their opposition to this acquisition, with many calling it “objectionable for many reasons.”

This public hearing followed a September hearing made by the Western Coal Traffic League (WCTL), a voluntary association comprised of consumers of coal produced from United States mines located west of the Mississippi River, filed a petition this week with the Department of Transportation’s Surface Transportation Board (STB) requesting that the STB issue an order that would adjust the Uniform Railroad Costing System (URCS) of BNSF.

According to the STB, URCS is its railroad general purpose costing system that is used to estimate variable and total unit costs for Class I U.S. railroads. URCS only develops costs for U.S. Class I railroads.

In the recent filing, the rail shippers stated that BNSF’s reliance on Generally Accepted Accounting Principles is flawed, citing BNSF CEO Warren Buffett as saying “managers who actively use GAAP to deceive and fraud,” although BNSF said in its opening comments with the STB that its shipments are not captive and unaffected by rate reasonableness standards established by Congress.

At last week’s hearing, Senator Al Franken (D-Minn.) made his case against the $8 billion acquisition premium paid by Berkshire for BNSF, saying that he is concerned that Berkshire may be able to pass on the acquisition premium to its customers in the form of higher rates. He explained that the STB has previously allowed railroads to take the acquisition premium that was paid when calculating the total assets of a company following a merger. But he said that was when two railroad companies were merging or one was acquiring another one, whereas in this case he said it is a major capital investment fund acquiring a railroad company—with no possibility of generating new rail efficiencies with this merger and subsequently no reason for the premium to be calculated into BNSF’s asset base.

“If this premium is included in the railroad’s asset base, I fear it will send a message to the railroads that they can artificially inflate their assets to get around the Board’s rules,” Franken said in his testimony. “And I fear it will send a message to shippers that the Board does not care about them, and isn’t worried that they may face higher rates. Most shippers have absolutely zero bargaining power to negotiate with the railroads when they face a rate increase, and very few are able today to meet the incredibly high threshold of 180 percent of revenue to variable cost that the Board requires to bring a rate case. If this acquisition premium can be folded into BNSF’s assets, an even smaller number of rate customers will be able to bring an action-or make a credible threat that they plan to challenge the rate. Most shippers facing this situation don’t want to say anything publicly because they fear retaliation-and realize it would be a fight between David and Goliath. In my view, that’s one of the most telling signs that we do not have a competitive rail industry in America today.”

Glenn English, chairman of Consumers United for Rail Equity (CURE), a rail shipper group, said that while Berkshire has the right to pay as much as it wants to buy BNSF, shippers should not have to underwrite the purchase.

“I strongly urge the STB to remove the acquisition premium from BNSF’s cost base to protect shippers and customers from those unfair and inflated costs in this already challenging time,” English said in a statement.

CURE officials added that BNSF’s cost base forms part of a formula used to set rates for captive shippers—with access to only one railroad—and including the $8.1 billion from the acquisition premium inflates the cost base which then increases the costs to ship manufactured goods, produce, and fuel.

A report from the National Industrial Transportation League said that BNSF rejected shipper arguments because it is BNSF policy to se rates on market conditions and not costs. What’s more, BNSF said that less than two percent of its customers would be affected by the premium with a negligible impact on shippers.

BNSF officials were available for direct comment at press time.

Anthony B. Hatch, principal of New York-based ABH Consulting told LM in a recent interview that BNSF is the only one of the seven Class I railroads that has been allowed to mark its assets for the market.

“Its cost base has been increased, whereas everything else kind of stays the same and has depreciated,” said Hatch. “This makes things more accurate and it makes BNSF different than the other carriers. It is part of the strangeness of the vestige of the regulatory world that would be best solved by removing all the regulation.”

What’s more, Hatch noted that BNSF and all the other Class I railroads continue to make major capital investments despite indifferent traffic this year and an uncertain outlook for next year and are highly unlikely to have any type of huge cutbacks in capital expenditures. And in order to do that he said that railroads need to have projections of improved returns of which improved rates play a big role in.