New pricing regulations for railroads delayed

Union Pacific and Norfolk Southern will likely continue to enjoy their higher rates for an additional year or more.

By Trefis Aug 2, 2012 12:27PM
trefisImage: Railroad Crossing with Train (© Edmond Van Hoorick/Photodisc/Getty Images)Railroad companies such as Union Pacific (UNP), CSX Corporation (CSX) and Norfolk Southern (NSC) were charged with claims that they colluded to inflate fuel surcharges that were largely unrelated to fuel costs, thereby collecting billions in unwarranted charges. The litigation was converted into class-action status.

Recently, the Surface Transport Board (STB), the regulatory body that oversees railroad transportation, announced initiatives in response to 2011 hearings. However, the final regulation will undergo substantial public comment and analysis and could be changed in the process. The entire proceedings could take longer than a year and the regulations are likely to be imposed by 2013 or even later.

In 2005, railroad companies instituted a fuel surcharge program after which their profits started to soar. Over the past five years, their margins have continuously increased. This trend could see a change going forward if STB tightens the regulations.

STB recently announced two initiatives to resolve the fued between railroad companies and shippers. One is to reform its rules on resolving rate disputes and second is to make policy changes for captive shippers, who are within 30 miles of a working interchange with a competing railroad, to get better rates.

There are potentially two impacts of the rulings of the STB. First, if the allegations are proved to be true, the railroad companies will need to shell out penalties, which will hamper their cash position as well as valuation. Second, if the exemptions over fixing railroad service rates are waived off, the companies will see their margins sliding south. However, since the procedures towards policy making are lengthy, it would be long before the regulations are put into effect. This will allow railroads to continue to enjoy better pricing and improvement in margin in the near term.

Union Pacific EBITDA Margin

More from Trefis

Tags: csxNSCUNP
Aug 2, 2012 9:50PM

Isn't baffoon Buffett ( you know, the guy forever visiting the WH and supporting Nobama's "tax the rich" agenda) a very large stock holder of these rails ? The same guy who won't pay taxes on previous profits (in court w/ the IRS) ?   That would be him. Such a coincidence.....

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