U.S. Senators Kent Conrad and John Hoeven wrote an April 18 letter to the U.S. Surface Transportation Board that fell a bit short of urging a decision by the board to not allow the “acquisition premium” that Berkshire Hathaway paid for BNSF Railway in 2010 to be passed through to BNSF’s customers through higher rates.
The senators were commenting in a case brought by coal transporters through the Western Coal Traffic League who say that extra money that Berkshire Hathaway (NYSE: BRK.A and BRK.B) paid for the BNSF would improperly be passed through to BNSF customers under current board policy under its Uniform Rail Costing System. The senators said it is important that the board carefully review this issue to ensure fairness for any existing or future rate threshold relief determinations.
Conrad and Hoeven noted that in 2009, Basin Electric Power Cooperative and its coal procurement agent, the Western Fuels Association, won a judgment from the board that ties future rates to BNSF’s variable costs. That case capped rates for the next 16 years. These rates would be impacted by the inclusion of the acquisition premium, they noted. “Because there is over $200 million in the form of future rate calculations, the pending decision would have a significant impact on the 2009 case, consumer electricity bills, and rail rates for North Dakota businesses and citizens,” the senators wrote.
Both senators are from North Dakota, with Conrad a Democrat and Hoeven a Republican.
Filed with the board on April 25 was a BNSF letter to Hoeven and Conrad dated April 23. BNSF referred to a March 22 board hearing on the acquisition premium issue. BNSF noted that as a panel of witnesses appearing for BNSF at the March 22 hearing explained, every Class I railroad merger or acquisition in the past two decades has involved a so-called “acquisition premium,” which, in each instance, has been recorded using purchase accounting as required by Generally Accepted Accounting Principles (GAAP). The STB has applied this method because it provides for the most economically accurate measure of a railroad’s asset value, BNSF argued.
“In this acquisition, BNSF’s assets and liabilities were properly valued using GAAP,” the railroad wrote. “Thus, we believe that in our case, the STB should follow its decades of established, judicially-affirmed precedent in following GAAP when railroads are purchased.”
BNSF added in the letter: “We appreciate and share your interest in a timely resolution of the issues raised in this proceeding and in the appellate remand pending before the Board in the Basin Electric/Western Fuels proceeding. In addition, the Basin Electric/Western Fuels maximum rate prescription to which your letter refers has the unique characteristic of pre-dating Berkshire’s acquisition of BNSF. While the minor regulatory effect of applying purchase accounting to the acquisition will result in no impact on the tens of thousands of rates that BNSF sets for its customers – BNSF sets rates based on market conditions and market demand, not regulatory costs – we acknowledged at the hearing that, because of the existing prescription, the Basin Electric/Western Fuels situation may warrant unique treatment by the STB. We specifically suggested to the STB at the hearing that some sort of bridging factor could be used to address the unique impact of purchase accounting on the Basin Electric/WFA prescription to ensure that the actual rate did not change.”
BNSF continued: “This is a remedy that could easily be implemented. For example, an adjustment to neutralize the effect of purchase accounting on the Basin Electric/Western Fuels prescription could be made by doing a calculation of the current Uniform Rail Costing System (URCS) with purchase accounting included (2010 URCS is the most recent), and then the current URCS with the purchase accounting effects taken out. The STB would then calculate an adjustment factor representing the difference.”
BNSF is one of two major western U.S. railroads, with the Union Pacific being the other. BNSF is the only one of those railroads with origin access to all of the mines in both the Wyoming and Montana ends of the Powder River Basin, by far the nation’s most prolific coal production region. UP only has access to a handful of Wyoming PRB mines on a “joint line” it shares with the BNSF.