Archer Daniels' Suit Ought to Give Railroads Pause

Archer Daniels Midland (ADM) has filed a price-fixing lawsuit against the 5 major railroads. This could snowball.... The lawsuit filed last Tuesday in Federal court in Minneapolis names Union Pacific (UNP), BNSF (BNI), CSX (CSX), Norfolk Southern (NSC), and Kansas City Southern (KSU) as the conspirators. It accuses the five railroads of setting fuel surcharges by working through the Association of American Railroads, which publishes the indices used by railroads to calculate rates. AAR's board includes the CEOs from the five railroads, according to the lawsuit.

ADM accuses UP and BNSF of agreeing to tie their surcharges to the same fuel price index, and to impose changes in the surcharge on the same day. While UP and BNSF locked their surcharges together in the territory they dominate, the Western U.S., ADM claims CSX, Norfolk Southern and Kansas City Southern did the same thing in the East.

The effect is that the railroads' fuel surcharges moved in unison, the lawsuit alleges.

Most railroads hedge their fuel purchases. This ought to mean that actual fuel spending should vary from one railroad to the next. If that is true, the fuel surcharges should have also varied, but they did not. In January 2007 the Federal Surface Transportation Board said railroads must link surcharges to their actual fuel costs.

ADM claims uniform pricing "could not have happened by chance or coincidence."

The railroads of course denied the charges saying they "have no merit" and that they would "vigorously defend them".

ADM says that it, alone, has paid more than $250 million in fuel surcharges since 2003.

Here is where this could get sticky for the railroads. While ADM is a major rail shipper, there are thousands of smaller shippers looking for ways to reduce or recoup transportation costs. If there is any light at the end of this tunnel as the litigation moves forward, expect a flood of lawsuits to follow. The suits may follow anyway to force a settlement.

What we will then end up with is a major class action suit against the railroads. In that instance the sums the railroads will be looking at will be in the billions of dollars (both in refunds and punitive damages). Considering the 5 railroads only made almost $7 billion between them last year, the outcome could seriously damage the industry.

Disclosure: Long ADM.

Comments

[think about it:]

Has anyone documented where locomotives were actually fueled? With Railroads sharing fueling facilities prices could reflect pricing paid to refuel at another railroad's facility

2008 Mar 31 10:36 AM

[Todd Sullivan:]

i do not think they share very many fueling centers.

they pretty much operate on their own tracks

2008 Mar 31 03:28 PM

[think about it:]

No the vast majority of railroad traffic is joint line and the initial locomotives are refueled along the way and the revenues are shared. If refueling is necessary, fuel is "bought and paid" to the owner of the facility. It may have been misleading to say they were shared facilities. I meant they allow other carriers to refuel and bill them for the service. Think about it Chemicals make up over 12% of the revenue and the majority of Chemical facilities are located in Texas which is served by Western carriers and the final destinations are served by Eastern carriers. The same is true of Agricultural products served by Western carriers with end users in the East. Add coal and you get the picture

2008 Apr 01 10:47 AM

[Ronald:]

ADM is becoming the nation's biggest whiners. They whine, they sue, they do whatever they think they can get away with because their management, past and present, has been a disaster. I think it was BNSF that I read about recently, uses about a million gallons of diesel fuel a day to run their trains. With the way fuels prices have gone up, is it any wonder they have a fuel surcharge? If they didn't they would go out of business. And ADM? Don't think for a second they haven't been passing the 'surcharge' espense on to their customers and have all along. This is just another ADM shakedown. It's not the first time.

2008 Apr 02 07:49 PM

[Ronald:]

I was wrong. I just did some research. BNSF uses FOUR MILLIONS GALLONS A DAY!!!

2008 Apr 02 08:01 PM

[Yeah Right:]

ADM- What do you think ADM does to it's suppliers?
They are a monopoly...The poor farmers that sell to ADM do not share in their enormous profits...Since they are big Bush supporters maybe they should talk to his administration about those fuel prices we all pay. I own railroad stock and for the first time in a long time it's doing well. I bought the stock for nostaglia from seeing those trains as a kid and I have made a little profit, that said we need the railroads strong because if oil keeps getting more expensive we will need them to transport our goods and maybe people as public transportation may be needed more in the future.

2008 Apr 20 12:02 PM

[rheostat:]

It is amusing (yet sad) to hear ADM whining. Of course in this day and age revenues booked through successful lawsuits are just as integral to a companies bottom line as payment for services rendered, but they are touching the third rail here, transportation is one of the most basic services to be (almost) almost guaranteed by the govt, and now that airlines are having to rethink air travel for the great unwashed masses, the govt may have to rethink and reemphasize rail and since direct subsidy is pretty much out of the question, indirect (and hidden) subsidy is the only way to guarantee transportation of goods and people. Count on more of this as the illusion of free enterprise is perpetrated by those it benefits most.

2008 May 27 10:26 AM