The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (7 page)

“Revenue adequate” is bureaucratese for “not charging high enough prices.” What could be sweeter to the ear of anyone in a regulated industry than to be told they should charge higher prices? Warren Buffett was presumably listening: within a year of hearing that the official line was that railroads were not charging high enough prices, he made his move to own all of BNSF.

WARREN WORKS THE RAILROAD

Mulvey’s remarks on revenue adequacy are consistent with how government agencies created to control rapacious conduct now regularly facilitate it. Looking over the backgrounds of appointees to a host of federal and state regulatory boards, strikingly few have any background as advocates for consumers, whether that consumer is Joe Sixpack or a mighty corporation that depends on a regulated industry for services. While industry-friendly regulators have always been around, when I started covering these issues in the late 1960s and on into the early 1980s, these boards typically included one or more people
not
beholden to the industry they were supposed to monitor. And more than a few of these boards had well-informed critics, some of them successful business owners and executives with no ties to the industry they swore to regulate in the public interest.

Congress knows all about this, but does nothing. Hurst, the Idaho grain farmers’ leader, pointed to studies by the Government Accountability Office, the investigative arm of Congress, from 1999, 2002 and 2006. He said they “all point to the same conclusion—that the [Surface
Transportation Board] is not adequately protecting large parts of the country from market abuse where no competition exists.”

This was not supposed to happen after Congress adopted the Staggers Rail Act in 1980. A related law, known as the Long-Cannon Amendment (named after senators Russell B. Long and Howard Cannon), required that railroads take steps to maximize competitive pricing. Together the Staggers Act and Long-Cannon were sold as ways to ensure competition and give shippers better deals. In some cases it has, but overall the Staggers Act has been a powerful weapon wielded against any hint of real competition, not least because it permits railroads to sign secret contracts with customers.

The Staggers Rail Act is to transparency in railroad freight rates as Wyoming clinker is to that ancient swamp. It acts as a rock-hard shield to hide the information that could lower prices and foster actual competition. Information, not secrecy, promotes competition. Secrecy enhances the power of monopolists. And monopoly power is money. As Toby Kolstad, president of Rail Theory Forecasts, put it: “In recent years, freight rate increases for coal shipments have provided much of the increased earning power of the railroad industry.”

Thanks to the Staggers Act, from the moment that coal is loaded onto the railcar until you pay your electric bill, every step of the journey is crafted to take as much money as possible out of your pocket by avoiding the rigors of market competition; inflating costs; avoiding taxes; shifting the costs of safety and environmental protections on to you; and making the billing as complex and incomprehensible as possible.

The demand for more coal to generate more electricity underlies a calculus that is, once again, complicated and yet not so hard to discern if you know how and where to look. At each step along the way, our government now helps rail and other companies pick your pocket by erecting barriers to complaints, as with the wheat farmers who are technically not customers even though they pay the freight. This makes it virtually impossible for consumers to bring rate cases. Then there is the growing practice of granting automatic rate increases under the guise of adjusting for inflation or imagined higher costs, while simultaneously stopping the collection of data needed to evaluate business practices.

Railroad price gouging is so out in the open that the industry’s own commentators write and talk about it freely. Few citizens, however, are aware of it because industry’s specialized journals attract few readers. Much commentary is also couched in dense bureaucratese, a language as alien to most people as ancient Greek.

Protecting railroads from competition has an obvious implication: every time you turn on a light in your home or buy a product made with the help of electricity, you’re paying more than you would in a competitive market. When a business has a monopoly, as railroads do in many parts of the country, regulation is supposed to act as a substitute for competition, a proxy for market forces. But that assumption breaks down when regulators identify with the industry more than with customers; then the captains of industry get both undeserved riches and the wherewithal to further the tilt of the system in their favor. Easy profits enable them to make more political donations and offer more jobs to former regulators and their spouses, some of whom know how to get politicians on the oversight committees to make sure that no matter what is said, nothing happens to harm the protected industries.

In a competitive market, when companies raise prices, they lose business as customers switch to other suppliers or cut back on spending. But a railroad with an iron grip on its customers will likely keep every one of them, even when prices go up. When an industry can raise prices in the absence of increased demand, it is said to have “market power,” and the result is usually twofold. First, it means more money for the railroad owners; second, it comes at a price to society that economists call a “deadweight loss.”

Government policy enables this subtle transfer of wealth from you and others to railroad investors. Here is what the Justice Department’s Antitrust Division told Congress about market power in the railroad industry and the shortcomings of regulation by the Surface Transportation Board:

This means the cozy duopolies—one in the West, one in the East—can escape the rigors of competition and enjoy what are in effect monopoly profits so long as each cooperates in keeping prices high and does
not compete for more business by cutting prices. Keep in mind that 44 percent of the tonnage hauled by railroads is coal. But the coal buyers are not a competitive group, either. The corporate-owned electricity business is also highly concentrated, if not to the degree of the railroads. Just fifty companies collected 95 percent of electric revenues in 2010, the year Buffett bought total control of the BNSF railroad. One of the biggest of those fifty electric companies was MidAmerican Energy Holdings. Its subsidiaries serve customers from Oregon and California east to Illinois. MidAmerican is owned, in turn, by Buffett’s Berkshire Hathaway.

Like most electric utilities, MidAmerican is not all that sensitive to the price it pays for shipping coal, whether it comes from its corporate sister BNSF or another railroad. That’s because state regulatory commissions let companies add to customer bills whatever they pay for coal and other fuels, as long as the price is deemed reasonable. Because “reasonable” means what other monopolies are charging, once again there is no downward pressure on rates paid to haul coal.

Owning complementary monopolies dovetails with Buffett’s announced policies to buy businesses with both minimal competition and the power to raise prices. Owning a monopoly is nice. Being able to leverage one monopoly, a railroad, say, with another, such as a coal-buying electric utility, is like winning the lottery every day. But what’s terrific for the winners is costly for those of us who pay the price every day.

Wall Street even measures companies by their success in creating barriers to competition. The investment research firm Morningstar rates companies using a “moat index” to measure success at avoiding the rigors of market competition. Pay close attention, especially to the last line, of what Morningstar candidly says:

There you have it—competition “eats up any excess profits.” And so what the serious investors want is to avoid competition, which in turn destroys the benefits of market capitalism that Adam Smith figured out back in 1776.

Another Buffett strategy is to earn profits today but pay taxes in the future. MidAmerican is a major beneficiary of Congress’s profit-now, pay-later corporate tax laws. In 2009 MidAmerican’s income tax bills, Buffett wrote in his annual letter to his shareholders, came to just $313 million on a pretax profit of $1,846 million. That is less than 17 percent—and less than half the posted corporate income tax rate of 35 percent, which MidAmerican gets to include in full in the price it charges every customer every month. That means customers of MidAmerican pay electric bills calculated on the assumption that the utility is paying 35 percent income tax, although in fact the government collects only half the money.

As a result of my work a few years back, Oregon passed a law requiring that electricity and natural-gas utilities taxes must be paid over to government or given back to customers. As soon as it was enacted, Buffett’s lobbyists began working to restore the system that let Berskshire Hathaway’s PacifiCorp electric utility in the Beaver State pocket taxes, diverting them from public coffers to Berkshire Hathaway’s accounts. In 2011 they had spread around enough money that the law was repealed. Once again, Buffett is profiting off taxes paid by his captive Oregon customers.

Despite owning a monopoly railroad in an industry that ships more than 40 percent of its freight to a small number of monopoly buyers, one of which is another Buffett company, Buffett argues that railroads are not monopolies. Indeed, he told Berkshire Hathaway shareholders in 2010 that his Burlington Northern Santa Fe Railroad faces intense competition:

By controlling, in effect, half of the rail traffic in the West, BNSF is by definition half of a duopoly, and BNSF’s circumstances a far cry indeed from intensely competitive. Although Buffett says he is worried about so-called monster trucks that could carry two-thirds more freight than the eighteen-wheelers on the road today, they would still be able to haul only about half what a railcar can carry. Plus it only takes a two-man crew to move a hundred or more railcars, meaning that moving the same weight by truck would requires two hundred drivers. That clearly doesn’t sound like a challenge in the making for BNSF.

That trucks work best for shorter hauls or goods that have to be moved faster than rail is a long-accepted fact (think fresh fruit and vegetables that need to get from Arizona or California to stores in Massachusetts or Mississippi before they rot). Likewise, it is a maxim of transportation that the freight put on a ship crossing the ocean gets moved for less than the cost of rail transit across the continent and that, in turn, is often less than the cost of trucking it to its final destination. But neither trucks nor ships pose a threat to the coal, grains and other freight that make BNSF so profitable.

Yet the American Association of Railroads also tries to sell this claim of intense competition to the public, noting that since 1980, when “deregulation” began: