Electric Utility Win Against Unjust Railway Rates Could Benefit Other Industries

It took over ten years, but the dispute over coal transportation costs between Berkshire Hathaway-owned BNSF Railway and the regional utilities associated with the Laramie River Station (LRS) in Wyoming, including Lincoln Electric System (LES), has finally been settled. Now the highly profitable U.S. railway system, which many industry analysts consider operating in somewhat of a renaissance, may be facing more organized customers who consider the victory against BNSF as a rallying cry in a battle against what they consider unfair rates and less-than-satisfactory service from their own railway service providers.

The Freight Rail Customer Alliance seeks to reform federal regulatory policies that apply to railroads they think are taking advantage of captive customers in all industries.

David Sauer, who is president of the alliance and also chief operating officer and senior vice president of Dakota Gasification Co., a North Dakota subsidiary of Basin Electric Power Cooperative that serves parts of Nebraska and other states, described the alliance’s mission:

“The lack of competitive transportation options for rail-dependent shippers has forced them to pay monopoly rates and often receive unreliable service. The costs of rail shipping have skyrocketed, particularly for those shippers served by a single railroad. In fact, since 2003 – through one of the nation’s worst economic periods – freight rail rates in general have increased two and a half times the rate of inflation and two and a half times the level of truck rates. Rates for individual shippers served by a single railroad have increased even more. These unreasonably high rates are hurting our national economy by rendering certain producers and manufacturers uncompetitive, reducing the profits of American companies and driving up the costs of everything consumed by Americans from electricity to cereal.”

The BNSF dispute started long before the acquisition of the railroad by Berkshire Hathaway, when it was still the Burlington Northern and Santa Fe Railroad. Basin Electric Power Cooperative is an owner of the Laramie River Station, a coal-based electric generating plant in Wyoming that is only served by BNSF. For 20 years, LRS had a contract with BNSF for transporting 8.3 million tons of coal annually from the Wyoming Powder River Basin. However, when the contract expired in 2004 and negotiations failed to produce a new contract, LRS’s freight rates more than doubled to four times BNSF’s average coal freight rate.

The rate increases would have amounted to $1 billion over a 20-year period. One official with 30 years in the business said he had never seen rate increases of the magnitude imposed by the railroad. And LRS had no competitors to turn to.

In 2009, LES and the other Laramie River Station partners won a Surface Transportation Board case challenging BNSF rates for shipping coal to the captive generating plant. That was worth $119 million in rate refunds, plus $245 million in future rate reductions. Over the following years, the case went up and down through federal appeals courts and the Surface Transportation Board; the $119 million sat in escrow. In 2010, Berkshire Hathaway, the investment vehicle of Warren Buffet, acquired BNSF in a deal worth $44 billion, a deal which Buffet touted as the largest in Berkshire history.

LES then joined a coalition that included the Omaha Public Power District, Nebraska Public Power District and the Western Coal Shippers League to petition the U.S Surface Transportation League to limit BNSF’s ability to collect from captive shippers money Berkshire Hathaway paid for the railway over and above its book value at time of acquisition. The coalition felt that the “acquisition premium,” implemented to pay Berkshire Hathaway all money spent to acquire the railroad, was something Berkshire shareholders should bear, not the utilities and their customers. Their complaint was filed on the basis that other federal regulatory agencies don’t allow that kind of premium to be built into base rates. This additional complaint stretched out the appeals process even longer.

Finally in 2015, the regulatory board decided that the railroad was trying to gouge its captive customers with rates that were 60 percent higher than justified. It was the biggest award in the board’s history.

The $119 million in escrow since 2009 has been released, and because LES is a public utility, ratepayers got to voice their ideas on how to use the funds in public hearings in September and October. The money could be used to buy down future rate increases, or to top off the rate stabilization fund used to buffer customers from unexpected events, such as an ice storm. Clean Energy Nebraska has also weighed in with its suggestion to use the funds to support programs to reduce the utility’s heavy dependence on coal as a fuel, stating that it would be “both poetic justice and sound business strategy for Lincoln Electric System to invest the funds received from the railroad overcharge settlement in strategies that will move LES towards a clean energy future.”

References

Captive rail customers reach for reform (Lincoln Journal Star, 12 September 2015)

Editorial, 6/3: A win for LES customer-owners (Lincoln Journal Star, 2 June 2015)

After a decade of conflict, LES, other utilities settle with BNSF (Lincoln Journal Star, 24 May 2015

Lincoln Electric System: Options for Investing Railroad Settlement Funds (Clean Energy Nebraska, 2012)

Lincoln Electric System vs. BNSF Railway — again (Lincoln Journal Star, 11 June 2011)

LES, others resist paying freight for BNSF acquisition (Lincoln Journal Star, 7 March 2011)

Berkshire Bets on U.S. With a Railroad Purchase (New York Times, 3 November 2009)

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