In recent months I've written about Warren Buffett's Berkshire Hathaway investing heavily in railroading. They've spent significantly to buy into BNSF. You can tell that was a right decision when USA Today writes a half page article on rail customers complaining about high rates and poor service.
The September 27th, 2007 article written by Paul Davidson outlined significant pricing differences between movement of goods via captive lanes where one railroad exclusively serves a market, vs non-captive lanes where multiple rail alternatives exist. Frankly, there is a big demand for rail services in the energy, chemical, grains and other bulk commodity markets. Demand drives pricing. In areas where there is limited capacity and/or limited competition rates are going to be high.
The railroads are said to be "pulling hard on the pricing lever" this year. Progressive Railroading magazine recently had an article that said much the same. While the railroads are squeezing revenue from customers who are bitter about the exercise, the customers are also seeking other modes of transport. Trucking and to a lesser extent, pipeline are seeing increased traffic as a result.
In due course, alternative modes will provide a limited alternative, but more likely what is going to happen is that Congress is going to get involved in preventing perceived pricing abuse, especially when it concerns energy movement. The USA Today article pointed out that to challenge a rail rate at the US Surface Transportation Board costs $178,000.00 just to file a rate case. After which the burden of proof to prove the abuse largely amounts to proving that you could build a railroad without charging a similar price. (can you say "high barrier to entry?"...no wonder the Robber barons were railroad guys.)
The impact to the public on rail rate increases is measurable. Dairyland Power Cooperative in Wisconsin, raised rates on each of its 500,000 customers $11.00 a month as a result of a 93% rate increase that BNSF put in place in 2007. The total tab for the coal itself is about $40 million. The rail cost to transport it...$75 million.
On the basis of the above, I think Warren Buffett is smart to invest in railroads. I personally hope the Congress regulates increases. Otherwise, we have Robber Barons part Deux.
Eric
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