From the TRAINS Newswire 04/26/06 (major talking points smilied):
MADISON, Wis. - We Energies, the marketing name for Wisconsin Electric Power Co., filed a federal lawsuit against Union Pacific Railroad on Tuesday, accusing the carrier of overcharging the utility by millions of dollars for transporting coal to its plants in Wisconsin and Michigan, according to an Associated Press story in the Duluth (Minn.) News Tribune. The utility said the overcharges have contributed to higher electric prices for Wisconsin consumers, a claim disputed by rail advocates.
The filing reflects dissatisfaction among some Wisconsin utilities and other businesses with the rail industry, which they claim has consolidated into a near-monopoly. The U.S. House railroad subcommittee was scheduled to hold a hearing Wednesday in Washington on the nation’s railway capacity.[tup]
“There’s really only one railroad for most businesses. That monopoly-type authority has allowed the railroad industry over the last two years to really reduce the level of service they provide,” said Pat Schillinger, president of the Wisconsin Paper Council. The council is a member of Badger-Cure, a coalition of utilities and forest-product companies that formed to counter railroad pricing policies.
Railroad advocates insist utilities and other businesses are looking for a scapegoat for their own rising prices.
“Who do they complain about? They’re going to complain about the railroad. There’s no sense in that at all,” said Tom White, a spokesman for the Association of American Railroads.[%-)]
According to the lawsuit, filed in U.S. District Court in Milwaukee, We Energies had a contract with UP that called for the railroad to ship coal from Wyoming and Colorado to the utility’s power plants in Michigan and southeastern Wisconsin.
But UP failed to deliver nearly 700,000 tons of coal from 2003 to 2005, according to the lawsuit. We Energies sent a letter to the company in 2004 tell
From a cursory review, and without all the facts, it seems that, unless the railroad had a contract contingency clause relative to the Utah matter, the railroad needs to just eat it.
In life, when allot of money is at stake … moral integrity is seldom a consideration or factor … It is very refreshing when it is, though.
Since it appears that various utilities are unable or unwilling to use increased coal costs to justify their rate requests, somebody has to be the whipping boy, and the big, bad railroad fills its historic role of being blamed for somebody else’s inability to make a buck.
If Wisconsin Electric wants a better rail rate for coal, how much are they willing to invest (or risk) in DM&E’S Powder River Extension project to get that rate?
For many years the C.& N.W. and Union Pacific systems were shuttling open-top hopper sets from Minnesota to Utah loaded with taconite pellets. After dumping, a Utah contractor would clean these cars and then they’d go as empties to a coal mine located somewhere between Provo and points south of Grand Junction, Colo. for a load of coal. The coal would move to a Wisconsin utility, get dumped, the cars then would get cleaned and returned to Minnesota for another load of taconite. It was terrific business for the railroads because each hopper car set essentially moved as revenue loads in BOTH directions!
Take away the taconite movement so that the cars move westbound empty and eastbound loaded and now the railroad has to re-price the service. Maybe that’s what Wisconsin Electric is griping about. Without the “taconite backhaul,” W.E. now has to pay for the entire movement - both loaded and empty!
Actually, if I read futuremodal’s article correctly, the issue is not so much what the ulility is currently paying for coal, it is the fact that the UP failed to deliver the agreed upon quantity, thus forcing WE to look elsewhere for it’s coal.
Remember a few months ago when WE was getting coal in by truck (there was a thread going about it, but I do not remember the name of it)? The coal was coming by ship, getting loaded into trucks at Jones Island in Milwaukee, then hauled to Pleasant Prairie? That was a partial result of the utilities inability to get enough coal.
The Public Utilities Commission, bowing to the public, won’t let the utility charge enough to cover its costs.
The utility company wants something for nothing from the railroad
No one is willing to pony up to increase rail capacity.
Is there something wrong with that analysis? Because it’s the same in most states, and the bottom line, my friends, is straight out greed on the part of the general public, and the utter failure of the public utilities commission to protect the utilities. Grr.
I know nothing about the actual contract, but surely if company A cannot honour a contract with company B, that is company A’s problem, and company B can’t be expected to bale them out ? Perhaps someone will explain, if my take on this situation is wrong.
Here’s something REALLY funny. I’m a WE Engergies customer. I’m sure many others here are as well. My utility bill goes to pay the WE Energies lawyers who are fighting this on the utilities part. The portion of my utility bill that goes to pay the UP freight charges for coal are also being used to pay their lawyers to fight against the utility. That means that me… and the rest of the WE Energies customers are basically financing both sides of the war. [:(!]
Ordinarily, when a company breaches a contract, they are liable for the damages they cause to the other contracting party. Is there a reason a railroad should be exempt from that perfectly ordinary rule of law?
From the SEC 10K form, 2005, WISCONSIN ELECTRIC POWER COMPANY:
"Our 2005 operations were also adversely impacted by limitations on deliveries of coal supply due to the failure of our primary rail delivery supplier to deliver contracted quantities of coal to our units. The largest limitation was related to critical rail track maintenance in the Powder River basin. This, in turn, resulted in reduced coal deliveries of the coal which primarily serves our Oak Creek and Pleasant Prairie generating units from June through December 2005. In response to the reduced deliveries, we limited the generating capability of these units in offpeak periods and purchased more expensive replacement power and, where possible, took measures to purchase and transport higher cost coal in place of contracted supplies. We estimate that this increased our costs by approximately $52 million in 2005.
"In July 2005, we received a letter from Union Pacific Corporation notifying us that a force majeure event requiring maintenance on a Union Pacific railroad line was expected to result in a 15-20% reduction in the amount of contracted deliveries of Powder River Basin coal to certain of our coal generating facilities from June 2005 through November 2005. In response, we reduced generation at certain coal fueled units, primarily during lower cost off peak periods, to conserve coal inventories. This required us to obtain additional megawatt hour purchases through other potentially higher cost generating resources in the MISO Midwest Market. In August 2005, we requested and received approval from the PSCW to defer incremental fuel costs associated with reduced coal deliveries. Through December 31, 2005, we deferred approximately $26.0 million of increment
What I read here is that the UP had a reduced capacity situation occurr and also lost a back haul. It appears from what has been reported and filed with the SEC that the loss of the back haul is not at issue. The failure to deliver the contracted volume is at issue.
It would, therefore, appear that the loss of back haul was a forseen possibility and delt with via the contract to the satisifaction of both parties. The UP is crying “sour grapes” and attempting to shift the focus away from where the real responsibility is. If I were the UP and looking at a 52 million $ bill, I would not be happy; but would have to pony up.
A smart move (both business and “moral”) would have been for the UP to arrange with WE to obtain replacement coal with the UP paying any excess in costs. Stick to your word. Let your Yes mean yes and your No mean no. If you can not comply with the terms of your contract, you need to arrange with the other party an alternate. To let it just go on … … people just get angry when you do that.
Union Pacifc failed to live up to the terms of their contact. Pretty simple situation. I have written many a contract. Obligations of both parties are built on good faith and reasonable efforts. Contracts are only required when all else fails then you have a legal recourse to settle a dispute with a court tested document. UP will end up paying.
Also companies sue each other all the time and it’s not unheard of for 2 companies to sue each other on the same day they announce a new joint venture. Corporate lawsuits serve as a way to prove to regulators, insurers, and investors that the company has done everything it could to recoup losses. Most larger corporate legal departments are staffed by salaried lawyers that don’t get a percentage of the settlement. This case may be yet another chapter in the PRB Orin sub problem discussed before. If UP losses they’ll likely sue BNSF.
As Michael would know, contracts usually have escape clauses defining the circumstances when either party may not have to completely fill the terms of the contract. Force majeure seems to be a key issue in this case, but it may be tough to prove.
It would be hard to predict just how far the litigation my go in the case, but it should be noted that the management of both parties have an obligation to their shareholders to press their position. Further, the power company is is also governed by regulations that basicly allows fuel costs to be passed on to customers provided the the utility can show a concerted effort to control those costs.
If you think this is a big deal, you should witness the hassles that go on between the coal companies and the utilities. By comparison, the $23 million at issue in this case is a drop in the bucket.
This method of suits and countersuits may seem counter productive and self serving but it sure beats the heck out of the early days of railroading when gangs of workers would square off with mallets or be armed with shotguns to ward off a competitor. Many a train would be parked at the location of a crossing to block a foreign road crossing their path. Granted this dispute is between a customer and a service provider but most times when these things are in litigation, ironically the findings are usually such that it is miscommunication between both parties led to the court action and both parties have failed to clearly speak to one another rather than any intent to defraud anyone.
There’s a little more history. UP has breached its delivery contracts a few times over the past few years. In 2003, it cost WEPC $2-3 million, nothing to do with the PRB line problems, and something like that in 2004. WEPC tried to negotiate with UP, being told in essence, 'YOU CAN HANDLE IT!" Not exactly the response you might expect from an old line American institution, steeped in the traditional values of honesty, fairness, and your word is your bond.
However, with that in mind, you might guess that 2005’s breach was enough of a doozy to go back and say to UP, you wouldn’t negotiate fairly over the smaller amounts, now we have enough to justify litigation to get your attention, because it’s big enough to affect our rate customers, especially big industries which were already struggling, and not only do we have a duty to them, as your railroad lawyers will tell you, they are third party beneficiaries of the solemn promises made by the Union Pacific Railroad.
Given the time of year, I would say UP lucked out. No severe or prolonged early winter weather. WEPC was trying to preserve its inventory against such an eventuality but even at that, without coal coming, it could have been a catastrophe. Had that happened, then you would have really seen a lawsuit.
Will this really matter in the end? LEt’s face it. The PRB needs another rail line. IF there were three railroads in there instead of two, maybe little tiffs like this would go away. (DME delivers to CP Rail delivers to both powerhouses). Suddenly UP goes from trying to cover costs in an unorthodox manner to trying to lure business away from CP Rail. I don’t think they will be able to do that if they use the tactic of breaching contracts with WE Energies. To sum it all up - we need more competition.
