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Sen. Franken Urges Key Railroad Oversight Board to Protect Farmers and Businesses from Paying for Berkshire Hathaway's Purchase of BNSF

Senator Pushes Surface Transportation Board to Ensure that $8 Billion Acquisition Premium isn't Passed on to Customers

Friday, March 23, 2012

WASHINGTON, D.C. [03/22/12]-Today, U.S. Sen. Al Franken (D-Minn.) pressed a key federal railroad oversight board to prevent Berkshire Hathaway Inc. from passing on the costs of its purchase of BNSF Railway to farmers and businesses in the form of unfair rate hikes. Berkshire Hathaway's 2010 purchase of BNSF included a roughly $8 billion acquisition premium, and the company may raise its rates to pay that premium.

"BNSF is the second-largest railroad company in the U.S. It controls 37 percent of the rail industry and owns 23,000 miles of track. And for many shippers in Minnesota, BNSF is their only option for getting their goods and services in and out of the state," Sen. Franken said in testimony before the federal Surface Transportation Board (STB). "If this premium is included in the railroad's asset base, I fear it will send a message to the railroads that they can artificially inflate their assets to get around the Board's rules. And I fear it will send a message to shippers that the Board does not care about them, and isn't worried that they may face higher rates."

Last March, Sen. Franken led a bipartisan letter to the Chairman of the STB, telling him that unless the Board took action on BNSF's proposed rate hikes, many industries would be forced to pay unfair rates to ship their goods. Last year, Sen. Franken successfully urged the STB to cut the cost of filing a complaint against unfair anti-competitive railroad industry practices.

The full text of Sen. Franken's testimony is below.

Remarks Before Surface Transportation Board
As prepared for delivery

Chairman Elliot, members of the Board, thank you for holding this hearing on the acquisition premium that Berkshire Hathaway paid to acquire BNSF Railway in 2010. I also want to thank you for being so flexible with my schedule-and allowing me to testify before your other witnesses this morning.

Rail-to-rail competition is an issue I care about tremendously, and as you may recall, I was last before you in June to urge the Board to do more to spur competition in this very concentrated industry.

I routinely hear from shippers in Minnesota that they do not feel there are real choices when it comes to shipping their goods by rail-and they don't feel they get a fair shake from the major railroads.

Whether you're talking about our agricultural producers, electric utilities, or manufacturers-they all depend on rail for shipping. And as I have said before, I think it's critical that we have a competitive rail industry that provides affordable rates and reliable service for America's shippers-both to keep jobs here in America and to keep American industries competitive in the global marketplace.

This issue is deeply personal for me, as the Board knows, because my family saw firsthand how much power a railroad has to make or break a company. My dad moved our family from New Jersey to Albert Lea, Minnesota when I was four years-old to start a quilting factory. He picked Albert Lea because the railroad went through Albert Lea. But unfortunately, the railroad also refused to stop in Albert Lea, and the factory failed just two years later.

I tell that story-which is now 55-years old-because I don't think much has changed for captive shippers like my dad over the last 55 years. If anything, things have only gotten worse.

BNSF is the second-largest railroad company in the U.S. It controls 37 percent of the rail industry and owns 23,000 miles of track. And for many shippers in Minnesota, BNSF is their only option for getting their goods and services in and out of the state. According to a recent report by Escalation Consultants, 73 percent of Minnesota's 800 rail stations are served by a single railroad. And nationally the numbers are even worse-78 percent of all rail freight stations-or 21,466 stations in the United States are served by a single railroad.

Now I realize this isn't the focus of your hearing today, but I think it is important to highlight, because for many shippers-especially farmers in my state-rail is their only option. It isn't realistic for those farmers to load trucks up with oats, beets, or corn and transport those products across the country. That may work for short distances, but rail is really the only option for long distance shipping of agriculture. And that means those shippers are for all intents and purposes "captive" to the railroads-even if the Board doesn't consider them to be captive for purposes of challenging their rates.

Now what does that have to do with what Berkshire Hathaway paid for BNSF?
These two issues are linked, because how Berkshire Hathaway accounts for its acquisition premium will directly impact when and how captive shippers can challenge rates before the Board. And there are many shippers-like the Minnesota farmers I mentioned-who may be completely out of luck and unable to challenge rate increases because they aren't considered captive by your standards.

I led a bipartisan letter about this issue with nine of my colleagues back in March of last year because I am concerned that Berkshire Hathaway may be able to pass on this acquisition premium-roughly $8 billion dollars-to its customers in the form of higher rates.

Now I understand that the Board has previously allowed railroads to include the acquisition premium that was paid when calculating the total assets of a company following a merger. But that was only when two railroad companies were merging, or one company was acquiring another rail company. In this instance, you have a major capital investment fund acquiring a railroad company. There is no possibility of generating new rail efficiencies with this merger-and hence there is no reason why this premium should be calculated into BNSF's asset base.

If this premium is included in the railroad's asset base, I fear it will send a message to the railroads that they can artificially inflate their assets to get around the Board's rules. And I fear it will send a message to shippers that the Board does not care about them, and isn't worried that they may face higher rates.

I also can't leave here today without noting for the record that on the date that Berkshire Hathaway paid an $8 billion dollar premium-more than 30 percent above the trading price of BNSF's shares-BNSF was considered by this Board to be revenue inadequate. If Berkshire Hathaway is able to amass capital to pay such a hefty premium, how could the Board consider this company to be making less than adequate revenues? That makes no sense to me-and it troubles me that the Board still considers BNSF to be revenue inadequate today. This is even after Warren Buffett has sent shareholder letters in 2011 and 2012 noting the strength of BNSF's financial performance over the last two years.

This is not right. And you don't need to be an economist or have Warren Buffett's financial expertise to see that. Most shippers have absolutely zero bargaining power to negotiate with the railroads when they face a rate increase, and very few are able today to meet the incredibly high threshold of 180 percent of revenue to variable cost that the Board requires to bring a rate case. If this acquisition premium can be folded into BNSF's assets, an even smaller number of rate customers will be able to bring an action-or make a credible threat that they plan to challenge the rate.

Most shippers facing this situation don't want to say anything publicly because they fear retaliation-and realize it would be a fight between David and Goliath. In my view, that's one of the most telling signs that we do not have a competitive rail industry in America today. And that is why I wanted to come here today to make the case on their behalf.

It's the responsibility of this Board to protect shippers from anticompetitive practices in the rail industry. Congress has given you broad authority and the flexibility to take action. It's time to examine the STB's policies and make this small change to protect shippers from unreasonable rate hikes.

Thank you again for the opportunity to testify. I hope to see the Board take action very soon on this issue.

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