Fuel Surcharge Suit Could Take a Big Bite
A somewhat obscure law suit earlier this year, by an even more obscure and dubious plaintiff, charged the rail industry with illegally benefiting from fuel surcharges. That suit was given a boost this month when a study commissioned by the American Chemistry Council estimated that railroads had conservatively overcharged shippers on fuel surcharges by $6.5 billion from 2003 thru Q1 2007 (see American Chemistry Council Report Charges Railroads With Overcharging on Fuel Surcharges to the Tune of $6.5 Billion Since 2003).
The original suit was filed by a small, closely held company named Dust Pro (Phoenix, AZ), which ceased operations of the relevant business in late 2005. Finding information on the company via web searches is difficult.
The suit had the characteristics of an action filed on behalf of one dubious victim with the intent of dragging other shippers in later in a class action status. Some observers doubted the attorneys for DustPro would succeed in gaining class action status, or that major shippers would join the action even if it did. But the research from the Chemistry Council, and aggressive language from its leadership, makes it seem likely that industry’s shippers and those from other sectors will take legal action.
Jack Gerard, president and chief executive of the ACC, said after the study was published that, "This is the greatest train robbery of the 21st century."
Were Profits based more on Surcharges than Operations?
To put the ACC report (actually developed by research company Snavely King) in perspective, Burlington Northern Santa Fe reported profits in 2006 of about $1.87 billion dollars. The Snavely King report estimates that BNSF “over recovered” $925 million in fuel surcharges that year – which, if true, would mean more than half of BNSF’s profits came not from operations but surcharges (the railroads dispute these overcharge claims).
Below is a chart showing the ACC/Snavely King estimates of excess fuel surcharges and reported carrier profits for 2006 (the highest year of estimated over-recovery, according to the ACC study):
Percent of 2006 Rail Profits as from Alleged
Fuel Surcharge Over-Recovery |
Carrier |
2006 Profit |
Alleged Fuel Surcharge Over-Recovery |
Percent of 2006 Profits from Alleged Over-Recovery |
Burlington Northern |
$1.87 billion |
$925 million |
49% |
CSX |
$1.31 billion |
$842 million |
64% |
Norfolk Southern |
$1.48 billion |
$890 million |
60% |
Union Pacific |
$1.6 billion |
$1.169 billion |
73% |
Kansas City Southern |
$108 million |
$79 million |
73% |
If the ACC allegations are even remotely accurate, it means rail profits (and stock price) were tremendously inflated by fuel surcharge profits – with as much as 73% of profits coming from surcharges in 2006 for some carriers. It also means that success of the current or future law suits over the surcharges would have a huge impact on rail carrier financial results.
With major investments needed for rail infrastructure, this issue makes understanding rail carrier economics much more difficult than before. Rail carriers have traditionally had among the lowest returns on invested capital of any industry – one reason why infrastructure developments were slow to come. Lately, investment plans have been accelerated, based on rising demand and improving returns, but perhaps the real returns were masked by surcharge profits.
Anti-trust Exemption under Attack
US rail carriers are among the handful of industries (such as Major League Baseball) that enjoy anti-trust protection for monopolistic conditions. Many rail routes are served by only a single carrier, and rarely is a route served by more than two.
Last week, the Senate Judiciary Committee held hearings to discuss “The Railroad Antitrust Enforcement Act of 2007,” which would repeal the rail carriers’ anti-trust exemption in an effort to increase competition. There is a similar bill being developed in the House.
The bill would allow suits against railroads for anti-competitive conduct – for which they have been immune for decades.
Railroad groups argue that the effort to remove the anti-trust exemptions is unneeded – in part because most areas that fall within anti-trust exemptions are subject to regulation by the Surface Transportation Board (STB).
A statement from the Association of American Railroads says, “Freight railroads are subject to most anti-trust laws, including those that prohibit agreements among railroads to set rates, allocate markets, or unreasonably restrain trade. The few, very limited anti-trust exemptions applicable to railroads pertain only to conduct for which the Surface Transportation Board has regulatory authority over the railroads.”
From our view, an end to the anti-trust exemption would mean little to shippers directly – the facts of the rail infrastructure mean that real competition, in the sense of say the trucking market, just isn’t realistic. STB does regulate the rails, and much of the calls for the end to the anti-trust protection are coming from quarters simply unhappy with STB policies.
If that exemption were to be eliminated, most of any resulting changes in the rail industry would come as the result of a slew of lawsuits suddenly targeted against the industry. Whether that is, in fact, good for shippers in the end is far from clear. |