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Great Train Robberies
by Christopher Clukey

Ag shippers won a major victory last year when they proved major railroads were using fuel surcharges to gouge customers to the tune of $1 billion per year. Now they’re embroiled in another fight as proposed federal regulations threaten to make it impossible to challenge overcharging.

In 2006, the Surface Transportation Board (STB) held hearings after receiving numerous complaints from rail shippers in a number of industry sectors, and after four large groups of rail shippers had jointly funded a 2005 study that confirmed overcharging. Part of the federal Department of Transportation, the STB oversees rail service and rates. The surcharges in question were added to rail shipping bills to offset the higher price of diesel fuel. Industry representatives testified that all six of the Class I railroads had charged an amount far in excess of their increased expenses, and used methods that had no relation to actual fuel costs incurred while moving products.

Dan Mack, the chairman of the National Grain and Feed Association’s Rail Shipper-Receiver Committee, told the STB, “We conservatively estimate that shippers paying the full fuel surcharge on average were being overcharged by $10 to $80 or more per car during the fourth quarter of 2005, compared to base fuel costs.” The NGFA estimated that shippers on Norfolk Southern paid $79 or more per car above the increase in fuel costs and CSX customers paid at least $40 per car too much. Though these railways, based in the East, charged the most, Burlington Northern Santa Fe Railway (BNSF) and Union Pacific (UP) also overcharged customers $10 and $15 per car respectively. The NGFA also noted that both major Canadian railways—Canadian National Railway and Canadian Pacific Railway had reduced their surcharges. The American Chemistry Council submitted figures prepared by the consulting firm Snavely, King, Majoros, O’Connor & Lee which claimed an “over-recovery in the range of $1 billion for 2005.”

In addition, Mack said, “Those shippers paying the highest freight rates actually are being overcharged by a considerably greater amount.” Those paying high rates were usually small volume shippers who could least afford the added expense.

The STB came to agree with them. On August 3 they issued a ruling calling the fuel surcharge process an “unreasonable practice.” This placed the surcharges in a category separate from rail rates. If the STB had considered the surcharges as a part of rail rates, shippers hurt by them would have to file what the NGFA called “a costly, time consuming and futile rate challenge to prove that the carrier has ‘market dominance.’” Proving such market dominance would require the shipper to submit massive amounts of market data related to the offending railway and its competitors. The STB had decided that five of the six railroads had been guilty of unreasonable surcharges; BNSF was exempted because they used a mileage-based formula. The other large railroads had applied surcharges as a percentage of their base rate. Because of this, many fuel surcharges had no relation to the actual fuel costs incurred shipping the product.

The NGFA and other shippers hope the STB will eventually establish a “base fuel price” that every railroad could use to calculate surcharges. This price would rise and fall with the base cost of oil and would ensure that shippers whose product traveled on more than one carrier (about a third of all rail shipments) would pay the same cost for fuel.

In January the STB released a tough final ruling on the subject, and also banned “double dipping", the practice of assessing a fuel surcharge even if the base shipping rate had been raised because of rising fuel expenses. By the STB’s reckoning, this basically charged the customer twice for the same diesel fuel.

Commenting to Chemical & Engineering News about the ruling, Thomas E. Schick, the American Chemistry Council’s senior director for distribution, said, “Unfortunately, fuel surcharges are just the tip of the iceberg when it comes to unfair railroad business practices. We will continue to press Congress and all appropriate regulatory agencies for fairness in every aspect of our relationship with the railroads.”

The fuel surcharge controversy has already led to a lawsuit against five railroads. The plaintiff, Dust Pro Inc., a soil stabilizer provider in Phoenix, Arizona, filed suit in the federal District Court in Newark, New Jersey. The suit alleges that, beginning in 2003, BNSF, CSX, Norfolk Southern Corporation, Kansas City Southern and UP “moved in uniform lock-step” to fix the fuel surcharges. The complaint went on to charge that the point of the conspiracy was to cut down on competitive advantages based on efficiency: “In a competitive environment, free of collusion, carriers with lower fuel costs would impose a lower surcharge to obtain a competitive advantage.”

The STB doesn’t regulate the rates of rail shipping that is negotiated by private contract or other case-by-case means. This adds up to about 80% of all rail shipping, and these unregulated deals are what is addressed by the Dust Pro lawsuit. The plaintiffs hope to be granted class action status.

In a statement to the Reuters wire service, CSX spokesman Garrick Francis said he could not comment on the case specifically but said that CSX employees “comply with all applicable laws and regulations” including fuel surcharge practices.

Within days of the January ruling, agribusiness organizations were seeking further relief, moving to check an STB proposal to amend the system of “simplified guidelines” governing rail rate challenges. These guidelines were required by Congress when the STB was created in 1995 to replace the Interstate Commerce Commission.

However, the cost and difficulty of filing an appeal under the simplified guidelines is so great that only one case has been filed since 1996, and that case was settled in court before the STB ruled on it.

According to NGFA’s Mack, part of the vision of the 1980 Staggers Rail Act of 1980 was “to ensure that there is a financially realistic and worthwhile remedy available” to challenge rail rates that climb too high. The Act had established that a rate could be challenged if it were more than 180 percent of the railroad’s variable costs to move the shipment. NGFA and a coalition of other ag organizations argue that 7.5 percent of ag shipments are now charged at over 300 percent of variable costs and the number of cars shipping at over 180 percent is in the “tens of thousands” and “the number is increasing rapidly.”

According to a Government Accounting Office (GAO) study released in September, 2006, agricultural shippers have been subjected to frequent rate increases (including double-digit increases in recent years) while some non-agricultural sectors (most notably, coal and automobiles) have actually seen rate reductions. The GAO also found that most of the rail volume with rates over 300 percent of variable cost is in rural areas.

The STB proposal would establish three benchmarks based on the “maximum value of the case.” The first benchmark would apply to shippers whose case was less than $200,000 and the STB would have nine months to issue a ruling. Ag shippers oppose this benchmark and are calling for an increase because at the current level it would only help those shipping (as the NGFA put it) “miniscule amounts.” Moreover, the estimated cost for bringing such a case would be about $115,000 before the company’s internal costs are considered. Once legal fees are added to this total, Mack testified, “[this] virtually assures that the theoretical $200,000 maximum payoff from such litigation could not reasonably be expected to cover the expense of bringing a case.”

Shippers with a case between $200,000 and $3.5 million in value would fall under the “simplified stand-alone cost” benchmark. Under the old system, stand-alone cost cases required the shipper to study the cost of establishing a separate rail line on the same route, a process that could cost the shipper $3.5 to $5 million between the study and the complicated filing process and legal fees. The new process would still cost at least $1 million according to NGFA, making it “very unlikely” any shipper would seek relief from unreasonable rates. Moreover, rate relief from a successful filing would only last five years.

Larger shippers would be hit even harder under the proposed guidelines, since any case with a value over $3.5 million would have to use the old “stand-alone cost” system.

Agribusiness organizations filing a joint statement with the STB on rail rates included: National Grain and Feed Association, National Oilseed Processors Association, Corn Refiners Association, North American Millers Association, National Association of Wheat Growers, American Farm Bureau Federation, American Soybean Association, National Corn Growers Association, National Farmers Union, USA Rice Federation, National Sorghum Producers, National Barley Growers, National Council of Farmer Cooperatives, Renewable Fuels Association, Agricultural Retailers Association, Agribusiness Association of Iowa, California Grain and Feed Association, Colorado Wheat Administrative Committee, Grain and Feed Association of Illinois, Idaho Barley Commission, Idaho Wheat Commission, Indiana Grain and Feed Association, Iowa Soybean Association, Kansas Grain and Feed Association, Michigan Agribusiness Association, Michigan Bean Shippers, Minnesota Grain and Feed Association, Missouri Ag Industries Council, Montana Wheat and Barley Commission, Nebraska Grain and Feed Association, North Dakota Grain Dealers Association, Oklahoma Grain and Feed Association, Oklahoma Wheat Commission, Ohio Agribusiness Association, Pacific Egg and Poultry Association, South Dakota Wheat Commission, Texas Grain and Feed Association, Texas Wheat Producers Board, Washington Wheat Commission and the Wisconsin Agri-Service Association.

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