John D. Boyd | Sep 28, 2011 3:50PM EDT
Federal regulators are opening a public proceeding on whether the premium Berkshire Hathaway paid in 2010 to buy BNSF Railway should be deducted from the valuation base that shapes the carrier’s freight rates.
The Surface Transportation Board will take comments from other parties, likely other railroads and freight shippers, over a petition last May from the Western Coal Traffic League that asked the STB to disallow the Berkshire purchase premium. The issue will be examined over the next few months in all its implications for future mergers, rate-setting and several regulatory formulas the STB depends on to evaluate annual carrier costs and adequacy of pricing.
The STB said while this process is under way it will continue to operate on the basis of traditional policy, which incorporates merger or acquisition premiums in various agency reviews. “If the board later determines that the write-up is inappropriate, we will consider any necessary recalculation or revisions at that time,” the STB said.
Railroad mergers or acquisitions by other parties can indirectly affect freight rates on cargoes that fall under STB regulation, shippers say, since purchase premiums are then absorbed into a new valuation base. STB staff takes that valuation into account in a regulatory measure of railroad costs that include depreciation.
The WCTL argued the $7.6 billion premium over book value that Warren Buffett’s Berkshire paid for BNSF increased the railroad’s net investment base by 30 percent and affected the carrier’s annual depreciation figures.
BNSF opposed the coal group’s petition, saying that regulatory and court precedent has long allowed acquisition premiums to count in valuation. But the carrier said if the STB opted to pursue the issue, it should open the process to consider related topics including the regulator’s methods for measuring whether carrier revenues are adequate to cover their costs and draw investors.
So the STB’s proceeding, on whether to issue a declaratory order sought by the WCTL, will take public comment.
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