Minnesota and Louisiana industries that rely on the Burlington Northern Santa Fe (BNSF) Railway to get their products to market may have to pay an unfairly inflated shipping rate unless an independent transportation board intervenes, U.S. Sens. Al Franken (D-Minn.) and David Vitter (R-La.) said today. The senators released a joint letter they are sending to Daniel R. Elliott, III, Chairman of the independent Surface Transportation Board, urging the board to stop letting railroads pass along these "acquisition premium" costs to customers.
"Uncompetitive rail rates pose huge costs for Minnesota's grain elevators, and those costs get passed down directly to the farmers, whether they grow corn, soybeans, or wheat," said Sen. Franken. "The independent Surface Transportation Board exists to protect businesses from exactly this type of anticompetitive practice and I don't think it's been doing its job."
"The Surface Transportation Board needs to take a thorough look at whether this acquisition's premium was made knowing the cost could be dumped off on Louisiana businesses," said Sen. Vitter. "Captive shippers in Louisiana shouldn't be utilized as an inappropriate return on investment for an industry not subject to antitrust laws."
Under current federal regulations, financial company Berkshire Hathaway, Inc. which acquired BNSF Railway in 2010 for an estimated $7 billion more than book value, may be able to simply pass along that "acquisition premium" cost to its customers. Minnesota and Louisiana farmers, paper mills, ethanol producers, local utilities and others who rely on BNSF have no choice but to pay this added fee because they have no alternate way of shipping their goods. In their letter the senators expressed concern that these "captive customers" face a monopoly and need the federal board to protect them from these unfair fees.
Below is the text of the letter:
Daniel R. Elliott, III
Surface Transportation Board
395 E Street, S.W
Washington, DC 20423-0001
Dear Chairman Elliott:
We write to express our concerns with the Surface Transportation Board's treatment of acquisition premiums when assessing the asset base of a Class I rail carrier. As you likely know, Berkshire Hathaway recently acquired BNSF Railway for approximately $7.3 billion over the company's book value. Allowing this and future acquisition premiums to be included in a railroad's regulatory rate base raises a serious concern for captive rail customers. Put simply, Berkshire Hathaway could pay an inflated price for BNSF, and then pass that cost on to its captive customers in the form of higher rates. We urge you to reexamine STB accounting policies to protect shippers against such practices.
More generally, we are troubled by the STB's practice of permitting the inclusion of acquisition premiums in its evaluation of a railroad's revenue adequacy. Over the last fifteen have adequate revenues, and only a very small number of individual Class I railroads have been found to be revenue adequate in a given year. Prior to 1990, the STB's predecessor agency, the Interstate Commerce Commission (ICC), relied on book value, rather than acquisition cost, when determining revenue adequacy. The STB started using acquisition costs in 1990, in part because some railroads were acquired by other railroads for substantially less than their book value. The ICC noted at the same time that this policy could change on a case-by-case basis and should depend on what is the most accurate and reasonable valuation in each particular case. We urge you to consider returning to this model.
Additionally, by including an acquisition premium in the capital asset base, a railroad is able to inflate artificially the revenue-to-variable cost ratio of 180 percent that is required statute for a shipper to bring a rate dispute before the STB. The Board is necessarily limited in its ability to determine when a rail is unreasonably high, but we are concerned that the inflation of this congressionally established threshold will ultimately mean only a very small number of shippers are able to challenge rates before the STB. If the purchase of a railroad includes an acquisition premium over book value and the railroad is allowed to revalue its property and equipment costs upward to reflect the premium, then the variable cost calculation will increase and the likelihood that shippers will be able to show that rates exceed 180 percent of variable costs will decrease. We do not think this is what Congress intended when it established this threshold.
Unlike other railroad mergers, the Berkshire/BNSF transaction did not involve the merger of two railroads, and hence there can be no hope that this transaction will increase rail efficiencies that might justify the premium paid. In this case, if BNSF is able to include the acquisition premium in its investment base, it will decrease BNSF's return on investment, which may provide the appearance of a justification for a rate increase that the STB would be powerless to halt. Futhermore, Berkshire Hathaway's acquisition of BNSF was not subject to pre-approval by the STB, and thus the possible impact of acquisition premium on the railroad industry, shippers, and the economy has not yet been subject to any prior Board review proceedings.
We understand that the STB is required to adhere to generally accepted accounting principles to the maximum extent practicable. But Congress has also required that the STB "shall periodically review its cost accounting rules and shall make such changes in those rules as are required to achieve the regulatory purposes of this part." Sec 49 U.S.C. § 11161. We urge the Board to examine this accounting issue, and at a minimum, initiate a proceeding to investigate the impact of including acquisition premiums when assessing the asset base of a carrier. We also understand that no other federal regulatory agency allows this practice, and we urge the Board to consider this when examining its current accounting practices.
Thank you for your prompt attention to this matter. We look forward to your response.
United States Senator, Minnesota
United States Senator, Louisiana