DORGAN HOLDS SENATE HEARING

           United States Senator Byron Dorgan of North Dakota, Chairman of the Senate Commerce Committee’s Subcommittee on Consumer Affairs, held a hearing on the impact of Burlington Northern Sante Fe Railway’s inverse rail pricing plan in Bismarck on March 27.  Scheduled witnesses, included Steve Bobb of BNSF, Steve Strege of Grain Dealers, Jim Bobb of Southwest Grain Cooperative, ND Public Service Commissioner Tony Clark, Richardton, ND farmer Craig Fisher, and Upper Great Plains Transportation Institute Director Gene Griffin.  

            Dorgan opened the hearing with a strong statement questioning what the BNSF was up to with its inverse rates.  He said that in his view these kinds of rates didn’t make any sense at all.  He said that all signs point to Burlington Northern abusing its market power and that in the end, farmers, consumers and businesses are going to suffer and that is unacceptable. 

            The Senator displayed a large chart during the hearing, showing wheat shuttle train rates to the West Coast ranging from 76 cents per bushel at French, MN, near Fergus Falls, and increasing all the way to the Southwest Grain Terminal near Gladstone at $1.08 per bushel, lower rate for the longer haul and higher rate for the shorter haul.  Steve Bobb admitted that BNSF rates were substantially similar to what was shown on the chart.  At some prior meetings the BNSF would not even admit that such rates existed, describing them as “alleged” or “rumored”. 

BNSF

Steve Bobb defended his company’s actions by stating that more wheat was needed at the PNW and he had to lower the rates to reach farther east.  This point was strongly disputed by others, Grain Dealers and Southwest Grain Cooperative in particular, who said the stocks in Montana and western North Dakota were more than adequate, and that instead of distorting the market the BNSF should have let the market bid up the price to draw the grain from traditional sources. 

            Steve Bobb said the FOB market values of grain at the selected shuttle loaders with the secret inverse rates were within only a few pennies of values at neighboring elevators, and so no distortion between those competitors was taking place.  Further analysis revealed that the date selected for this comparison was hand-picked to show the lowest spread, and that the comparisons were being made on the tariff rate instead of on the inverse rate.  These discrepancies were pointed out in supplemental testimony of the Grain Dealers sent to the Senate Commerce Committee. 

            Under questioning from Senator Dorgan about who the BNSF had talked to prior to initiating the inverse rates, Steve Bobb said he had spent a lot of time visiting with people who wanted it.  He mentioned one major regional cooperative where, he said, some people favored it and others did not. He said he had also gotten the consensus from other exporters.  Senator Dorgan asked both Grain Dealers and Southwest Grain Cooperative if they had been consulted.  The answer in both cases was no.  Jim Bobb said he had asked for a reduction but was told no. 

            Steve Bobb said rail rates hadn’t kept up with inflation in the past 20 years.  He said the North Dakota 52-car wheat rate to the PNW would be $1.08 higher had BNSF simply passed on inflation.  On rates to Minneapolis the increase would have been 53 cents per bushel if the railroad had passed on inflation according to Bobb.  Strege said it would be more appropriate for the railroad to compare its costs with its rates.  Many shippers have made investments to make the railroad more efficient.  The railroad has trimmed its labor force dramatically over the past 20 years, abandoned or spun off unprofitable or marginal lines, and absorbed the benefit of other cost-saving measures.  There have been a great number of railroad mergers in the past 20 years.  In all or nearly all these cases the railroads have said that merging will allow them to gain efficiencies and hold down rates.  If this has happened, then the railroads should not now be complaining that their rates have not increased.  Revenue to variable cost ratios on North Dakota grain movements, especially wheat, remain extremely high.  This is a measure of the profitability of rail rates. 

            Steve Bobb said the PNW market is capped by the Canadian Wheat Board.  Senator Dorgan found this comment quite interesting, in light of the fact that the North Dakota Wheat Commission and others are engaged in a complaint about Canadian Wheat Board marketing practices.

            Part of Steve Bobb’s submitted testimony read as follows:  “What we do as a rail transportation provider is look at the difference between value of the grain at the origin and value of the grain at destination, and try to determine the level of charges or transportation with margin for the elevators to operate and make money.  Strege interpreted this to mean that the railroad is taking as much as it can out of the middle, without regard to its costs, and leaving only enough margin for the elevators to barely stay in business.  Efficiency improvements at the origin or destination are absorbed by the railroad rate as much as possible.  Strege said only a monopolist can price in this fashion.

GRAIN DEALERS

            North Dakota Grain Dealers Association Executive Vice President Steve Strege submitted written testimony and presented oral testimony which included the following – From the 2001 BNSF annual report we see that customers are listed first among the constituencies BNSF serves.  The others are owners, employees, and the communities they serve.  A few pages later we see in the annual report a tribute to Robert Krebs, retiring Chairman of the Board.  This is not said as disrespectful of Mr. Krebs, not at all, but the list of people paying compliments to him in this annual report are four analysts for securities firms, one union official, one professor, and one journalist.  There are no customers.  The people chosen for this page exemplify a major problem we have with BNSF, its major focus on Wall Street, but little attention to Main Street.

SWG

            Southwest Grain Cooperative Grain Department Manager Jim Bobb, a cousin of Steve Bobb, made an outstanding presentation with PowerPoint slides, handouts, and a pointed verbal account of what has happened.  Southwest Grain operates a shuttle facility at Boyle, ND (the actual name of its siding near Gladstone, ND) and is building another shuttle facility at Lemmon, SD.  SW Grain testimony stated that in 2001 the terminal at Boyle had loaded 4,023 carloads of wheat, with total freight paid to the BNSF of $13,452,838.  This included 19 110-car shuttle trains, 34 52-car trains, six 26-car trains, and 48 singles. 

            SWG said that the inverse rail-pricing scheme implemented by the BNSF is a symptom of a larger problem – wheat rates that are unreasonably high when compared to other commodities.  Its shuttle wheat rate west from Boyle is $3,901 per car.  For corn or barley it is $2,800.  This is a difference of $121,110 per train, but both of these shipments operate under the same ordering, loading, and billing programs offered through the BNSF.

            SWG testimony offered a “compelling argument” that the current wheat rates allowed the BNSF to implement its inverse pricing scheme at the expense of captive shippers.  The average BNSF revenue on all hauls in the United States for 2001 is $18.05 revenue per ton per 1,000 miles.  Operating expenses with interest are $15.77.  The revenue figure from Boyle to the PNW is $25.32, a 60% profit over BNSF’s operating expense with interest.  In comparison, the revenue per ton per thousand miles from French, MN, a shuttle loader receiving the secret inverse rate, is only $14.66, actually below cost.

            SWG’s presentation included a chart of track values for 14-protein wheat to the PNW.  It said that inverse procurement from the inverse pricing scheme – to the east of Boyle and into Minnesota – comes in direct correlation to lower prices at his station. 

            A mileage vs. rate chart was quite revealing.  Distance to the PNW from Boyle is 1,364 miles.  Rate is $1.05 per bushel.  The mileage goes up, but the rate goes down, as you move east to the selected shuttle loaders with the secret contract inverse rate.  At French, MN the mileage is 1,707, the rate is $0.76.  In rate per mile terms, the Boyle rate is 73% higher than the French, MN rate. 

            Going the other direction, the captive western shippers are at a similar disadvantage. 

Jim Bobb refuted Steve Bobb’s testimony that there just wasn’t enough grain to fill the PNW market demand without reaching farther east with the inverse rates.  In the seven county area served by Southwest Grain, wheat production in 2001 was 4% higher than in 2000.  But wheat cars loaded in the Oct. 01 – Feb. 02 period were down 21% from a year earlier.  Steve Bobb of BNSF countered that BNSF’s numbers show Southwest Grain wheat volume up from 2000 to 2001.  But that was not an apples to apples comparison of periods of time said Jim, and did not reflect the gross market distortion in post-harvest 2001.  During the peak harvest rush they got grain, but since harvest they’ve lost considerable volume.  Southwest Grain said its wheat margins for the six months ending February 28 were down from a usual 10 cents to around a penny.

            Southwest Grain included the following paragraph in its submitted statement: “It sure would be nice if the BNSF would admit that the driver behind the inverse rail pricing is the desire to only have shuttle originators.  The difference comes when comparing commodities hauled in shuttles.  Spring wheat has a lack of shuttle destinations.  Of the 35 destinations the BNSF currently has for shuttle trains, only a few handle spring wheat.  The only spring wheat destination currently bidding, on a daily basis, is the PNW.  Spring wheat shuttle facilities, at the current time, are totally reliant on export markets”.

FARMER

            Richardton area farmer Craig Fisher testified that Southwest Grain is his usual market, located approximately 20 miles from his farm.  But he hauled his grain 160 miles east to Jamestown for 34 cents per bushel more.  After deducting both fixed and variable costs he calculates a 14-cent per bushel net for himself by hauling grain east to have it shipped back west past his usual point of delivery.  He said this marketing “opportunity” is “an oxymoron in the fact that if the transportation rates were not inverted, the income I have made would be the same with very little expense.” He said that even though it was profitable for him to do this, for the agricultural community as a whole, it was “an unnecessary and counterproductive effort.” 

            Fisher’s contract was for 50,000 bushels.  He said this may not seem like much, but when multiplied by many producers having the same experience there is “a considerable amount of revenue lost by the local co-ops.”  He said he has no personal ax to grind with the BNSF railroad or with eastern elevators, but that it does seem like “an effort in futility for the grain industry as a whole.”

            Under questioning from Senator Dorgan about the Fisher situation, Steve Bobb said it is nothing new for the railroad to face truck competition.  He also said Jamestown denies buying wheat from Stark County. 

PSC

            North Dakota Public Service Commissioner Tony Clark said the inverse rates allow BNSF to shift its costs to the public sector.  In a non-competitive market this policy raises great concerns, as these are essential services.  He focused on the captivity of shippers, especially in western North Dakota.  He stated that the preferential rates “put western North Dakota shuttles and non-shuttle shippers at a disadvantage relative to their eastern counterparts, but they have an even greater impact on non-shuttle loaders in eastern North Dakota.”  He cited the increased spreads between non-shuttle shippers and the preferred shuttle shippers with the inverse rate.  He stated that railroads are exempt from federal anti-trust laws and other forms of regulatory relief are costly, slow, and largely unworkable.  “The rail industry has done a masterful job of stacking the deck in its favor,” he said.

UGPTI

            Gene Griffin, Director of the Upper Great Plains Transportation Institute at NDSU in Fargo, brought some interesting numbers to the hearing.  The revenue to variable cost ratio is a measure of railroad profitability.  At a level of 1.6, 160%, the railroad is said to be covering its fixed and variable costs plus a reasonable profit.  At a level of 1.8 or more, 180% or more, the shipper can challenge the rate as unreasonable.  A ratio of 180% or more does not necessarily mean that the Surface Transportation Board will find the rate unreasonable.  But it is a starting point.

            Average revenue to variable cost ratios for BNSF wheat shipments from North Dakota to Portland, according to the Institute are:

1.85 for single cars
2.44 for 26-car units
2.71 for 52-car units
3.07 for 55-car units
3.11 for 110-car units

The 55-car size is included for a comparison on 110-car co-loading by two stations.

            The average revenue to variable cost ratios for BNSF wheat shipments from North Dakota to Minneapolis are:

2.26 for single car
3.15 for 26-car units
4.04 for 52-car units

            All these rates could be challenged as unreasonable, the single car westbound at 1.85 only marginally so. 

            The Surface Transportation Board also has what it calls “simplified rail rate guidelines.”  The measures to establish the reasonableness of a rate consider the equity of similarly situated shippers, the revenue adequacy needs of the railroad, and the reasonableness of the carrier’s revenue requirements borne by a shipper or a group of shippers.  This process of measuring rate reasonableness includes what is called a revenue shortfall allocation method (RSAM).  RSAM measures the uniform mark up above variable cost that would be needed from every shipper of potentially captive traffic (traffic with revenue to variable cost ratios above 180%) in order for the carrier to recover all of its costs.  The RSAM recognizes the need for differential pricing by the railroad, and the railroad’s need for revenue adequacy.  After additional explanation of how this process works, the UGPTI testimony states as follows:  “This suggests that BNSF is charging an average rate to its captive shippers that exceeds the average rate necessary for the railroad to cover all of its costs, including a return on investment.  This would seem to indicate that the BNSF’s rates to many North Dakota shippers may exceed reasonable limits.” 

            Griffin stated that a major issue with the inverse rates is if they displace wheat from more traditional market territory in western North Dakota.  If they do, he said, such rates may be in violation of regulations governing rail rates.  Griffin also mentioned the concerns of Asian markets for specific milling and baking characteristics, and said that these markets have come to depend on quality and end-use performance traits associated with the hard red spring wheats produced in the drier, less disease-prone areas of western North Dakota and eastern Montana.  Under the inverse rate structure, spring wheats produced in the eastern part of the region are now more likely to move to move to PNW terminals for eventual shipment to Asian destinations.  Challenges in functionality and performance are more likely to arise he said.

            Southwest Grain Cooperative concluded in its written statement that the BN must stop, immediately (today), the destructive practice of using an inverse rail-pricing scheme in North Dakota.  Secondly, at the state and/or federal level, an affordable, timely and simplified rate relief process that all shippers of commodities, in captive markets, can access.  In simple terms – a rate relief mechanism without long litigation. 

OTHERS

            North Dakota Ag Commissioner Roger Johnson also testified.  He explained a resolution recently passed by the National Association of State Departments of Agriculture on the topic of rail rates and service.

            The North Dakota Wheat Commission also submitted written testimony and Commissioner-spokesman Larry Lee spoke briefly.  Excrepts of his remarks are elsewhere in this issue. 

            The North Dakota Farm Bureau and North Dakota Farmers Union submitted written testimony.  Unfortunately the clock ran out and there was no time for then to testify orally.

            The Montana Wheat and Barley Committee, counterpart to the North Dakota Wheat Commission and Barley Council, also submitted testimony for the Dorgan hearing.  Executive Vice President Jim Christenson said the rail transportation problems that North Dakota faces are identical to those confronted in Montana.  He addressed the concentration of railroads into a very few, that now have control over large geographic areas and industries.  Montanans are painfully aware of the inverse rates destroying traditional marketing patterns.  Christianson said inverse rate structures are glaring examples of how railroads are unfairly able to discriminate in their captive rail customers’ areas.  He said the nation’s output industries have a growing concern about monopolistic railroad behavior in both pricing and service.  He said there is inadequate regulatory protection from this monopolistic behavior.  “All farmers, regardless of geographic location, need the U.S. rail industry to provide competitive rail service, and inverse freight rates are a system of the railroad industry’s arrogance, not to mention a disservice to us all,” stated Mr. Christenson. 

DORGAN-FTC

            At the conclusion of the hearing Senator Dorgan stated that when the reauthorization legislation for the Federal Trade Commission comes through his Subcommittee he will try to give that agency some authority over railroad rates.  Mr. Dorgan has long been a critic of the Surface Transportation Board and the Interstate Commerce Commission before it, as inadequate protectors of captive shippers.