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U.S. Supreme Court Denies BNSF Railway Appeal 05-20-11

Letter to Cynthia T. Brown

Surface Transportation Board (STB)

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May 20, 2011

Cynthia T. Brown
Chief, Section of Administration
Office of Proceedings
Surface Transportation Board
395 E Street, SW
Washington, DC 20423

Re: STB Finance Docket No. 35506, Petition for Declaratory Order

Dear Ms. Brown:

The Edison Electric Institute (EEI), the National Rural Electric Cooperative Association (NRECA), the American Public Power Association (APPA), and the National Association of Regulatory Utility Commissioners (NARUC) respectfully urge the Board to give full and fair consideration of, and promptly act favorably upon, the above-referenced petition.

EEI, NRECA, and APPA represent virtually all of the U.S. companies (private, public, and non-profit) that provide electric power to the nation’s businesses, farmers, and individual consumers. NARUC represents state public utility commissions serving all states and territories that regulate the retail rates and services of electric utilities. Coal remains a baseload fuel used to generate over 50% of the country’s electricity supply, and most of that coal moves from mine origin to plant destination by railroad.

EEI, NRECA, and APPA have consistently taken the position that for regulatory costing purposes and in determining revenue adequacy and other measures of railroad health, the value of railroad assets should not be increased to reflect any acquisition premium. The U.S. Department of Agriculture and the U.S. Department of Transportation have proclaimed in the Study of Rural Transportation Issues (Apr. 2010 at 263) that the railroads are the only regulated industry that is allowed to add merger premiums into its rate base. In the regulated portions of the electric utility industry, such premiums are excluded by general rule from being included in the rate base.

The Western Coal Traffic League recently filed a petition seeking a declaratory order that would bar the $7,625,000,000 write-up in BNSF Railway Company’s (BNSF) net investment base resulting from Berkshire Hathaway’s acquisition of BNSF in 2010 (as recently reported in BNSF’s financial filings) from being included in the Board’s costing programs used to develop variable costs of service and maximum reasonable rates. We understand that the Berkshire-BNSF transaction and the acquisition premium issue were not subject to prior STB regulatory review.

We urge the STB to implement the approach of all other regulatory bodies and refuse to apply an acquisition premium for regulatory costing purposes, and to use all of its powers to ensure that rail consumers, and ultimately electric utility ratepayers, are protected against the prospect of any such acquisition premium pass-throughs. We thus urge the STB to grant this petition at this time.

Sincerely,

Thomas R. Kuhn, President
Edison Electric Institute

Charles D. Gray, Executive Director
National Association of Regulatory Utility Commissioners

Glenn English, Chief Executive Officer
National Rural Electric Cooperative Association

Mark Crisson, President and Chief Executive Office
American Public Power Association

cc: The Hon. Daniel R. Elliott III
The Hon. Ann D. Begeman
The Hon. Francis P. Mulvey

Letter to Warren Buffett

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May 12, 2011

Warren Buffett
Chairman & CEO
Berkshire Hathaway, Inc.
1440 Kewit Plaza
Omaha, NE 68131

Dear Mr. Buffett:
We are writing to you not just on behalf of the Missouri Basin Power Project and the more than 3 million electric consumers we serve throughout the Great Plains, but rural consumers who rely on affordable rail transportation services from BNSF Railway Company (BNSF). Since April 2010 we have had numerous conversations with our representatives and senators in the U.S.
Congress regarding the purchase of BNSF by Berkshire Hathaway (Berkshire), and our concerns about its effect on railroad shipping costs. Given our past communications on this matter, we feel it is appropriate to share our concerns directly with you, since we believe this matter involves the core values you have established for Berkshire.

Clearly Berkshire’s purchase of BNSF has been a great investment, providing $2.25 Billion in dividends in the first 13 months of BNSF ownership. Berkshire voluntarily paid a sizeable premium for this purchase. In our estimate, BNSF has written-up its net investment base by approximately $7.6 billion due to the Berkshire Hathaway acquisition, a cost that could potentially be passed on to BNSF’s tariff customers. The federal Surface Transportation Board is the only regulatory agency that has permitted including such premiums in the regulatory rate base, although those were under disparate circumstances. We believe increasing shipping rates for rail customers, particularly captive customers, in this fashion is not consistent with Berkshire’s values and its historic reputation for making fair and moral business decisions. The acquisition premium is an ownership cost that is unrelated to rail service provided to shippers.

In your July 26, 2010, memo to Berkshire’s managers, you stated “…We must continue to measure every act against not only what is legal but what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.”

We do not think this action meets that test, nor do we think the citizens and communities affected by this rate treatment will think so either. It will have significant cost implications for millions of people served by BNSF, far beyond our electric ratepayers. Higher transportation rates caused by the acquisition premium mean lower net prices to farmers and higher production costs, and can significantly impact the economic livelihood of rural America.

In this respect, we request that you advise us whether BNSF, in cooperation with Berkshire, will commit itself to taking all appropriate actions (regulatory or otherwise) to ensure that the investment and depreciation acquisition premiums paid by Berkshire for BNSF are not included in BNSF’s regulatory rate base, and that the premium is excluded from BNSF’s operating
expenses and net investment base in the STB’s determination of BNSF’s return on net investment.

Thank you for your time and consideration. We look forward to your response.

Sincerely,

Ron Harper, Basin Electric Power Cooperative
Ken Anderson, Tri-State G&T Association
Mike McDowell, Heartland Consumers Power District
Thomas Heller, Western Minnesota Municipal Power Agency
Kevin Wailes, Lincoln Electric System
Larry LaMaack, Wyoming Municipal Power Agency
Duane Richards, Western Fuels Association

Letter from STB to Senator Franken (response)

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March 28, 2011
The Honorable Al Franken
United States Senate
Washington, DC 20510

Dear Senator Franken:

Thank you for your recent letter regarding the Surface Transportation Board's treatment of acquisition premiums and how that treatment might affect the Board's ability to regulate the Class I rail carriers effectively. Class I rail carriers are required to submit to the Board annual financial data, including costing and revenue data, for the previous year by March 31. These data are often referred to as the rail carriers' "R-1 data." The R-1 data generally value the carriers' assets based on the original cost or "book value" of those assets, depreciated over time.

As you noted, Berkshire Hathaway acquired BNSF Railway last year and paid substantially more than the depreciated book value for those rail assets. The Board had no formal merger oversight of the transaction. Because Berkshire Hathaway paid more than the book value, however, the Board's regulations currently in place require BNSF to adjust the book value in the R-1 data to reflect the fair market value of those assets. That is because, since the late 1980s, the agency has required railroads to follow purchase accounting principles, in accordance with Generally Accepted Accounting Principles (GAAP). The stated objective of the regulations requiring adherence to GAAP was to ensure that the railroads use the most accurate information about fair market value in reporting on their rail assets.

I understand your concerns that our accounting regulations not be manipulated to permit an investor to pay an inflated price for railroad assets, and then try to pass that inflated cost back to captive shippers in the form of higher transportation rates. I likewise appreciate the concern of the effect that purchase accounting may have on our other regulatory policies, such as the determination of revenue adequacy. When the agency adopted purchase accounting, it advised the industry that it will not automatically accept the sale price of rail assets as a substitute for book value, and that use of acquisition costs for regulatory purposes might not be appropriate if an acquisition price were inflated or depressed by government action or policy. Accordingly, when BNSF submits its R-1 data to the Board, our in-house auditor will review the information for compliance with GAAP and agency precedent. If the Board determines that the R-1 data does not comport with GAAP, or that the acquisition price has been inflated and does not accurately reflect the fair market value of these assets, the Board will take appropriate action.

Thank you for your interest in the Surface Transportation Board. I will be sure to keep you updated on this issue. Please do not hesitate to contact me if you have any questions.

Sincerely,
Daniel R. Elliott, III
Chairman

Letter from Sen. Franken and other signatories to the STB

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March 22, 2011

Daniel R. Elliott, III
Chairman Surface Transportation Board
395 E Street, S.W.
Washington, DC 20423-0001
Dear Chairman Elliott:

We write to express our concerns with the Surface Transportation Board's treatment of acquisition premiums when assessing the asset base of a Class I rail carrier. As you likely know, Berkshire Hathaway recently acquired BNSF Railway for approximately $7.3 billion over the company's book value. Allowing this and future acquisition premiums to be included in a railroad's regulatory rate base raises a serious concern for captive rail customers. Put simply, Berkshire Hathaway could pay an inflated price for BNSF, and then pass that cost on to its captive customers in the form of higher rates. We urge you to reexamine STB accounting policies to protect shippers against such practices.

More generally, we are troubled by the STB's practice of permitting the inclusion of acquisition premiums in its evaluation of a railroad's revenue adequacy. Over the last fifteen years, the STB’s accounting method has never once found the railroad industry as a whole to have adequate revenues, and only a very small number of individual Class I railroads have been found to be revenue adequate in a given year. Prior to 1990, the STB's predecessor agency, the Interstate Commerce Commission (ICC), relied on book value, rather than acquisition cost, when determining revenue adequacy. The STB started using acquisition costs in 1990, in part because some railroads were acquired by other railroads for substantially less than their book value. The ICC noted at the time that this policy could change on a case-by-case basis and should depend on what is the most accurate and reasonable valuation in each particular case. We urge you to consider returning to this model.

Additionally, by including an acquisition premium in the capital asset base, a railroad is able to inflate artificially the revenue-to-variable cost ratio of 180 percent that is required by statute for a shipper to bring a rate dispute before the STB. The Board is necessarily limited in its ability to determine when a rail rate is unreasonably h.igh, but we are concerned that the inflation of this congressionally established threshold will ultimately mean only a very small number of shippers are able to challenge rates before the STB. If the purchase of a railroad includes an acquisition premium over book value and the railroad is allowed to revalue its property and equipment costs upward to reflect that premium, then the variable cost calculation will increase and the likelihood that shippers will be able to show that rates exceed 180 percent of variable costs will decrease. We do not think this is what Congress intended when it established this threshold.

Unlike other railroad mergers, the Berkshire/BNSF transaction did not involve the merger of two railroads, and hence there can be no hope that this transaction will increase rail efficiencies that might justify the premium paid. In this case, if BNSF is able to include the acquisition premium in its investment base, it will decrease BNSF's return on investment, which may provide the appearance of a justification for a rate increase that the STB would be powerless to halt. Furthermore, Berkshire Hathaway’s acquisition of BNSF was not subject to pre-approval by the STB, and thus the possible impact of the acquisition premium on the railroad industry, shippers, and the economy has not yet been subject to any prior Board review proceedings.

We understand that the STB is required to adhere to generally accepted accounting principles to the maximum extent practicable. But Congress has also required that the STB "shall periodically review its cost accounting rules and shall make such changes in those rules as are required to achieve the regulatory purposes of this part." See 49 U.S.C. § 11161. We urge the Board to examine this accounting issue, and at a minimum, initiate a proceeding to investigate the impact of including acquisition premiums when assessing the asset base of a carrier. We also understand that no other federal regulatory agency allows this practice, and we urge the Board to consider this when examining its current accounting practices.

Thank you for your prompt attention to this matter. We look forward to your response.

Sincerely,

Al Franken, United States Senator
David Vitter, United States Senator
Tom Harkin, United States Senator
Herb Kohl, United States Senator
Tim Johnson, United States Senator
Mary L. Landrieu, United States Senator
Mark L. Pryor, United States Senator
Michael B. Enzi, United States Senator
Amy Klobuchar, United States Senator
Jon Tester, United States Senator

Letter to Sec. Vilsack

February 4, 2011

The Honorable Tom Vilsack
U.S. Department of Agriculture
1400 Independence Avenue, SW
Washington, DC 20250

Dear Secretary Vilsack:

Thank for responding to my October 5, 2010, letter regarding Berkshire Hathaway's acquisition of BNSF, and its affect on rail rates. It appears from your response that the question of the Berkshire premium is being portrayed as a discrete issue affecting only Basin Electric's rate-paying customers. That couldn't be further from our view of this situation. This is an issue that has a direct, across the board, impact on businesses and consumers throughout the United States and a heightened impact on shippers of agricultural commodities in the Nation's core farming regions.

I just returned from Washington, D.C., where I visited with several Members of Congress and captive shippers about this very issue. I also had the opportunity to meet with RUS Administrator Jonathan Adelstein, Nivin Elgohary, and Jim Newby. One question I asked senators and representatives in my meetings with them is "Should citizens be asked to cover investment risks
when one business acquires another, or should those risks be borne by shareholders?" I believe this to be a philosophical fairness issue for Rural America.

Your department's Study of Rural Transportation Issues shows the latter is the correct answer. If the Surface Transportation Board allows the premium to be passed through, nearly everyone in rural America that depends on BNSF service in one way or another will see their costs increase. Farmers, ranchers, ethanol producers, manufacturing, and small businesses will all be paying
higher rail rates, just because one man decided to invest in and pay a premium for a railroad on which he seeks a guaranteed return from federal regulators.

I have attached a fact sheet we have developed on the premium that provides a little more detail on how agriculture would see their rates impacted. As you pointed out, much of rural America is already captive to the railroads. By our calculation, this premium would amount to a 10 percent across the board increase above the already high captive shipping rates. For me, this is not just a
matter of trying to protect the customers of the Laramie River Station from higher rates. It's about fairness.

I am encouraged by the response we have seen from our representatives on Capitol Hill so far, and in the coming weeks I hope that more shippers will start making the same case. We should know by the end of March just how much of this premium BNSF wi" seek to recover when it files its financial reports with the STB. While I know your department doesn't have a direct role in that effort, as you know, the USDA has a special statutory responsibility when it comes to shipper protection issues.

See 7 U.S.C. 16220) (directing the USDA to "assist in improving transportation rates and services" in proceedings at the STB) - a role that no other federal agency has to my knowledge. I hope that I can reach out to you and your staff in the future on this important consumer protection matter of importance to agriculture and all commodities as we come to understand more the effect this premium will have on rural businesses.

Thank you again for interest.

Sincerely,

Ronald R. Harper
CEO/General Manager
Basin Electric Power Cooperative

cc: The Honorable Dallas Tonsager, U.S. Department of Agriculture
      The Honorable John D. Porcari , U.S. Department of Transportation
      The Honorable Jonathon Adelstein, Rural Utilities Service
      Mr. Jim Newby, U.S. Department of Agriculture
      Mr. Glenn English, National Rural Electric Cooperative Association
      Mr. Mark Crisson, American Public Power Association
      Nivin Elgohary, Acting Assistant Administrator
      Basin Electric Power Cooperative Directors

Letter to Sec. Vilsack and Sec. LaHood

October 5, 2010

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The Honorable Tom Vilsack                      The Honorable Ray LaHood
U.S. Department of Agriculture                   U.S. Department of Transportation
1400 Independence Avenue,                      SW  1200 New Jersey Avenue, SE
Washington, DC 20250                              Washington, DC 20590

Dear Secretary Vilsack and Secretary LaHood:

I want to thank you for the time and effort put into the Study of Rural Transportation Issues (USDA/DOT Study) your departments completed last spring. Basin Electric is a generation and transmission cooperative whose members serve 2.5 million consumers in the states of South Dakota, Wyoming, Colorado, Minnesota, North Dakota, Iowa, Nebraska, Montana, and New Mexico. Therefore we are keenly aware of the problems caused by the unrestrained monopoly power of the railroads. As you may know, in 2009 the Surface Transportation Board (STB) ruled in Western Fuels/Basin Electric v. BNSF Railway Company that the railroad had set rates above a reasonable level for coal shipments to the Laramie River Station in Wheatland, Wyoming.

The Laramie River Station is a consumer-owned power plant. The six member-owners of the plant are rural electric cooperative, municipal, and public power electric systems. This partnership was established in 1974 to provide an adequate wholesale supply of dependable, low-cost electric power through a membership distribution chain designed to serve every home, farm, ranch and business within each of the partners' service territory. Many of these areas at one time had extreme difficulty in receiving electricity, as investor-owned utilities did not want to serve the low-density rural areas that offered less attractive economic returns. This ruling was a significant victory for rural America, providing substantial rate relief for rural electric consumers and rate certainty through 2024.

However, this important consumer relief is now threatened by Berkshire Hathaway, Inc.’s (Berkshire) proposed accounting for its acquisition of BNSF Railway Company (BNSF). The USDA/DOT Study identified as a critical problem the STB’s prior sanctioning on the facts presented of the pass-through of merger acquisition premiums on railroad customers (a practice not allowed elsewhere at other agencies). Study at 263. When announcing the Berkshire acquisition, BNSF represented that the transaction would be in the “best interests of all of our constituents including our customers.” We are very troubled by recent efforts by BNSF and Berkshire that indicate they intend to try to pass the premium costs on to consumers.

Berkshire/BNSF’s recent financial statements filed with the SEC show that BNSF’s property accounts have been written up in a manner that could result in BNSF attempting to place a more than $7 billion asset write-up premium on the regulatory rate base and seek to apply it to the prescribed maximum rates applicable on our traffic. Chairman Dan Elliot with the STB recently testified before the Senate Commerce Committee that BNSF may indeed seek to pass these costs on to its customers, and that the issue is likely to be a matter considered by the STB in the near future. If this write-up is permitted and then approved for application to our prescribed rates (which
it should not be), it would have an immediate, adverse impact on our electric rate-paying consumers who would face more than $60 million in railroad rate increases (between 2012-2024), or an approximately 11 percent increase above the level prescribed by the STB in its 2009 decision. This is also a question of regulatory fairness. Should the American public be required to pay increased costs simply because an investor knowingly chose to pay a premium on a business transaction?

This is a matter of great importance that goes beyond our electric ratepayers. For example, any higher transportation rates caused by the acquisition premium mean lower net prices to farmers and higher production costs, and can significantly impact the economic livelihood of rural America. The National Association of Attorneys General has twice authored a letter on the threats to consumers posed by railroad monopoly power, and a bi-partisan group of senators and congressmen have long advocated for comprehensive rail reform. Given the difficult state of the economy, do we really want to further impose costs on utilities, farmers, and other industries simply because ownership of a company has changed hands? Raising consumer rates to pad the pocketbooks of stockholders at the expense of consumers is yet another example of an industry deserving of greater scrutiny.

Now that the possible impacts of the Berkshire Hathaway acquisition premium have been defined, and with the USDA/DOT Study highlighting the significant consumer harms that would be caused by allowing further merger/acquisition premiums to be included in the rate base, we would respectfully request that now is the time for USDA and DOT to step forward and take all appropriate actions, including prominently raising this issue with policymakers (including Congress and the STB), in an effort help to close regulatory loopholes.

Please be assured that rural consumers are not asking for preferential treatment from the railroads, just fair treatment. However, given the widespread effect this issue could have throughout the Great Plains and beyond, I urge you to support all efforts to ensure these costs are not shifted to the backs of rural consumers.

Thank you for your attention to this important matter.

Sincerely,

Ronald R. Harper
CEO & General Manager

cc: The Honorable Dallas Tonsager, U.S. Department of Agriculture
The Honorable John D. Porcari, U.S. Department of Transportation
The Honorable Jonathan Adelstein, Rural Utilities Service
Mr. Jim Newby, U.S. Department of Agriculture
Mr. Glenn English, National Rural Electric Cooperative Association
Mr. Mark Crisson, American Public Power Association

Letter to Rep. Collin Peterson

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September 10, 2010

The Honorable Collin Peterson
2211 Rayburn House Office Bldg.
United States House of Representatives
Washington, D.C. 20515

Dear Congressman Peterson:

On behalf of the 1.8 million electric consumers we serve in your Congressional District, Minnesota, and across the Great Plains, we are writing to you concerning an important matter related to Berkshire Hathaway Inc.’s (Berkshire’s) acquisition of BNSF Railway Company (BNSF).

When announcing the Berkshire acquisition, BNSF represented that the transaction would be in the “best interests of all of our constituents including our customers.” (BNSF Nov. 3, 2009 ‘News Release’). In this regard, we understand that BNSF has recently represented to you that the premium paid by Berkshire for BNSF will not adversely impact rail customer freight rates. We are very concerned that BNSF’s recent actions suggest otherwise, and that it intends to attempt to pass-through the premium costs on consumers.

Berkshire/BNSF’s recent financial statements filed with the SEC show that BNSF’s property accounts have been written up in a manner that could result in BNSF attempting to place a more than $7 billion asset write-up premium on the regulatory rate base and seek to apply it to the prescribed maximum rates applicable on our traffic. If the write-up is permitted and then approved for application to our rates, it would have an immediate, adverse impact on our electric rate-paying consumers who would face more than $60 million in railroad rate increases (between 2012-2024), or an approximately 11 percent increase in transportation rate pass-throughs. We would, of course, oppose any such efforts by BNSF. Obviously, our rates that are paid by cooperative and municipal public power system electric consumers in your District and beyond should not increase simply because BNSF has a new owner.

At this time, we would appreciate your assistance in obtaining written confirmation from BNSF that it will not seek to include the asset write-up premium in the regulatory rate base and will not seek to apply it to our prescribed rates nor the rates of any other regulated shipper.

We appreciate your assistance with this important matter.

Ronald R. Harper
CEO & General Manager
Basin Electric Power Cooperative

Ken Anderson
Executive VP & General Manager
Tri-State G&T Assoc., Inc.

Mike McDowell
General Manager
Heartland Consumers Power District

Thomas J. Heller
CEO
Western Minnesota Municipal Power Agency

Kevin G. Wailes
Administrator & CEO
Lincoln Electric System

Larry LaMaack
Executive Director
Wyoming Municipal Power Agency

USDA study: railroad shipping costs

April 27, 2010: Case for reform: new government study says railroads profit at expense of consumers, shippers and some farmers coalition says rail relief is overdue, calls for action

Source: CURE

WASHINGTON, D.C. - A detailed new report on rural transportation issues released today by the U.S. Department of Agriculture includes dramatic findings about the cost to American farmers and consumers from the lack of competition in the freight rail industry, and "considerable evidence" that freight rail companies used excessive fuel surcharges to artificially boost profits.

Bob Szabo, Executive Director of Consumers United for Rail Equity (CURE), a coalition of freight rail customers seeking changes in federal law to allow for more competitive railroad pricing and reliable service, issued the following statement about the report:

"This study shows once and for all that the current lack of protections against monopoly pricing by freight rail companies is hurting our economy, raising prices and affecting job creation. Bipartisan legislation is pending in Congress that will provide much-needed relief for America's farmers and consumers, and we call on Congress and the President to enact it into law this year."

Key report findings include:

"The rapid consolidation of the railroad industry through mergers has resulted in a decrease in the unrestricted interchange of traffic, routing choices, and the level of competition among railroads."
"Railroad service problems and high rates can directly impact rural consumers by pushing up electricity rates."
"Almost 75 percent of agricultural areas lost rail competition from 1992 to 2007."

"There is considerable evidence that railroad fuel surcharges recovered more than the additional cost of fuel, artificially boosting railroad profits. From 2001 to 2007, surcharges were 55 percent higher than the incremental increase in the cost of fuel."

Points of interest

Alliance for Rail Competition (external Web site)
The Alliance for Rail Competition (ARC) is a diverse group of shippers and industry trade associations formed in response to growing concerns over deteriorating rail service.
Consumers United for Rail Equity (external Web site)
Consumers United for Rail Equity (C.U.R.E.) is a coalition of captive rail customers focused on congressional and administrative policies that affect the development of competition in the freight rail industry.

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